Government plans two funds for power sector

Government plans two funds for power sector

Worried about a likely shortfall in funds to meet India’s ambitious power generation plans, the government is mulling setting up two new power sector funds to help fund projects.

India currently has a power generation capacity of 135,006MW. The 11th Plan (2007-12) has set a target of adding 78,577MW of power generation capacity, requiring at current estimates, some Rs10.31 trillion.

According to the power ministry, the government expects to face a Rs4.51 trillion funding shortfall.

For starters, proceeds realized through sale of government equity in the public sector power undertakings will be transferred to a separate power fund, which may total about Rs3,300 crore.

This amount is estimated to be around two times of the existing book value per share of power sector PSUs such as NTPC Ltd, Rural Electrification Corp., Power Grid Corp. of India and National Hydroelectric Power Corp.

“A standing group comprising the Union power minister and state power ministers, which has been formed at the behest of the Prime Minister, Manmohan Singh, is expected to take a call on this soon and work out the benefits that would accrue to the power sector," said a senior government official close to the development but who did not want to be identified.

Funds raised through disinvestment of any public sector enterprise are typically parked in National Investment Fund. However, 75% of the annual income of the fund is being used to finance social sector schemes in the areas of health, education and employment. Only the residual 25% fund can be used to meet the capital requirements of profitable PSUs or those government firms that can be revived.

Officials in the power ministry also say that, with the government looking to sell stakes in some power companies, those funds could be used for capital enhancements within the sector itself, with the fund being the first step to retain the money.

In another move aimed at helping the hydro power sector, the government has proposed a separate hydro power development fund. The fund will help subsidize project operations during their first five years as generation costs are comparatively higher in the initial years on account of higher capital costs.

A proposal made by the power ministry suggests that a component (which can be 25%) of the tariff for hydro projects during the first five years of operation is deferred and, instead, recovered from the buyers during the 11-15 years period.

The plan would need lenders to initiate a scheme to finance the deferred component of power tariff for the first five years.

This will also rationalize the gap between the tariff of hydro and thermal projects in the initial years of operations. According to power ministry officials , this can be taken care of by the hydro power development fund.

A hydro power development fund is in line with attempts by the government to correct the thermal-to-hydel mix in the country, thereby managing the peak load and deficits," says Abhishek Puri, an analyst with ASK Securities Ltd.