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Amended Mega Power Policy Potentially Unlocks Around INR40 Billion Funding to the Power Sector

Capital Market 

The extension by five years for complying with the Mega Power Policy 2009 norms will reduce contingent liabilities and free up banking limits to 25 mega power projects, thus granting them a fresh lease of life, says India Ratings and Research (Ind-Ra). Ind-Ra believes this will also in turn free up banks' potential exposure to the power sector by around 3.50% or INR40 billion, providing them additional headroom to lend to the power sector. This is applicable to 25 mega power projects of around 32,330MW of coal and gas based power plants which have provisional certificates, but are awaiting the final mega power status. The projects would have needed additional debt or the sponsors may have had to inject additional equity to settle the guarantee obligations, which would have devolved in the absence of an extension in timeline as per Mega Power Policy. While the extension is likely to provide some comfort in terms of lower finance costs, the lack of long term Power Purchase Agreements (PPA) may prohibit these plants from availing the full benefits under the policy. For many projects it is kicking the can down the road until long term PPAs become a norm again, which Ind-Ra believes is unlikely in the near term.

The Cabinet Committee on Economic Affairs has extended the timeline available for furnishing the final mega certificates (from the date of receiving provisional mega certificates) to 120 months from the earlier 60 months from the date of import to avail all the benefits under the policy. concession under the amended policy will be in the proportion of the long term PPA tied up, instead of requiring 85% or more long-term tie up (65% long term PPA by competitive bidding and 35% under regulated tariff as per specific host state policy for 15 out of 25 projects which have provisional mega status as per the earlier amendment). The proceeds out of the release of guarantees (submitted by the generators till the final mega status is received) have to necessarily be utilised towards reduction in project debt by the developer.

Most states have become averse to buying power on a long-term basis, since short-term tariffs are more economical.

Ind-Ra expects long-term PPAs to be scarce, given the weak industry demand. Ten major power consuming states (contributing 65% to power demand of all distribution companies) have signed contracts for higher than the current annual demand, Ind-Ra estimates this will lead to a consolidated power surplus of 18%. Extension of the timeline to tie-up long term PPAs in the current challenging market is a breather for all the power plants which have a provisional mega power status but are awaiting the final conformation.

Ind-Ra estimates that the total reduction in potential banking exposure across these 25 power projects due to this amendment will be around INR40 billion. As per Ind-Ra's sample set, guarantees submitted by these generators contingent on receiving the final mega status are on an average about 5.5% of the total project cost. Also, almost one third of project capacity of these 25 projects is tied up under long term PPAs and will be eligible for release of bank guarantees as per the terms and conditions of this amended Mega Power Policy. This amendment will reduce the contingent liabilities sitting on the balance sheets of these projects against the potential liability in the future. Freeing up of banking limits will also help these power plants to competitively bid for PPAs in the future.

Clarity however is still awaited in operationalising the policy, including aspects of reimbursements for taxes paid, treatment of PPAs (signed with home states for selling 35% power) which are not operationalised, among other details.

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(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Thu, April 20 2017. 12:16 IST