India's state electricity boards (SEBs) may be asked to open letters of credit (L/Cs) in favour of independent power producers as the country looks towards the private sector once more to provide electricity.

The SEBs however seem apprehensive about the use of L/Cs and other financial instruments in power sector financings.

Problematic structures

India plans five huge independent power projects (IPPs) to meet burgeoning demand for electricity. Each IPP is expected to generate 8,000 megawatts.

But a crop of problems is surfacing about financing structures. One is the apprehension of the private sector developers who are concerned that the SEBs will not be able to pay for the power they take.

Payment security

Many of India's SEBs are currently in dire straits financially so, in order to secure private sector investor in this area of the economy, the government is planning financial structures to make recovery of dues from the electricity boards secure.

The multi-layered payment security mechanism now under consideration contemplates the use of escrow accounts created by the SEBs and from which the electricity boards will pay the power producers.

Essentially revenues from sales of electricity will flow into these escrow accounts and be collected by power producers.

Commercial concerns

The SEBs will also have to demonstrate they have enough cash revenues set aside to pay for the power they draw and provide letters of comfort to the IPP developers.

Additionally the SEBs will probably be asked to open L/Cs in favour of the developers.

SEB concerns

For their part, the SEBs are against creating an escrow account with a charge on revenues.

The electricity boards are also unhappy about signing power purchase agreements that stipulate they pay for power whether they use it or not.

L/C apprehensions

There are apprehensions about the use of L/Cs in power sector financings too.

Wrangling over L/C-backed guarantees by both the federal government and the Maharashtra state featured prominently in the 2001 failure of the one time Enron-led privately operated Dabhol Power Company. (DC World News, 11 May 2001)

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.