Uncertain fuel supply dents lenders confidence in power sector targets

Written by fe Bureau | New Delhi | Updated: Nov 21 2012, 07:48am hrs
Prevailing uncertainty on fuel supply has dented lenders confidence about the power sector, making it difficult for developers to achieve financial closure and get projects off the ground. The matter is also not being helped by the power ministry's holds-off approach. If situation does not improve soon, the power sector's capacity addition programme could go haywire.

Financing to the power sector, which grew at 50% annually between 2008-11, increased by just 5% in 2011-12, according to data compiled by the Reserve Bank. The situation seems to have further deteriorated in the current fiscal, with number of financial closures falling by more than 40% from the previous year, according to a senior official in SBI Capital Markets, a leading power sector lender.

Bitten by growing cases of default by power plants on loan repayment in the wake of fuel crisis, bankers are now insisting on a legally enforceable fuel supply contract rather than accept Letter of Assurance (LoA), a lapsable instrument, for lending to the power sector. After issuance of LoAs, fuel supply agreements have to be signed within two years, failing which the instrument will automatically become void.

Coal sector issues need to be sorted out so that fuel supply agreements could be quickly signed for 13 th Plan projects, said Shubranshu Patnaik, senior director, Deloitte.

Similarly, bankers are also insisting on statutory clearances like environment and forest approvals being in place for extending loans to power projects, in a departure from the earlier trend when project finances would be tied up while such clearances were still in process. The severity of investment slowdown in the power sector can be gauged from drops in orders for power equipment supply. On an average, orders for 25,000 mw equipment supply were placed annually between 2008-11. But orders for only 4,000 mw equipment were placed in 2011-12. This year the scene is slightly better with developers ordering equipment supply of 4,900 mw during the first half of current fiscal 2012-13.