The Rs 1,200 crore power project will be funded partly by the Power Finance Corporation (PFC), internal accruals and assistance from the state government.

Though the government approved the lease financing route for MSEB's power project last year. Earlier, MSEB was forced to withdraw its lease financing plan because it had selected a financial institution without inviting the bids from others which is mandatory for such bodies.

The new power project comprising two units of 210 mw each will be set up in three to four years period. For initially kickstarting the project, MSEB will use part of PFC's early loan, said a senior official, adding that PFC has agreed to fund up to 40 per cent of the project cost.

The coal-based plant is in the priority list of the MSEB's power projects for which land and water has already been made available and negotiations for coal are in the final stage, official said.

The lease finance mechanism is largely used for power plant equipment. In case of the Kaperkheda plant the requirement would be of around Rs 200 crore. "It is one of the ideal options specially when the state has to upgrade the power generation urgently, and it has also identified the possible projects, but the board does not have sufficient financial resources," official added.

Under this mode of funding the lessor buys the plant equipment and leases out to the project developer and avails himself of the depreciation benefits. On the other hand, the developer saves major expenditure on purchase of equipment. The lessee pays the lease amount for a certain period after which he becomes the owner of those equipment. The scheme widens the scope of such the assistance as any company can be a lessor, it does not have to be part of the power industry.

Once this project takes off, MSEB will use the same mode for other projects as well, official said, adding that that MSEB has decided to increase the generation capacity to more than 18,000mw by the end of ninth plan.