The Indian authorities have defined the role letters of credit (L/Cs) will play in financing arrangements between independent power producers (IPPs) and the state electricity boards that purchase power from them.

The new financing arrangements accompany the revival of private sector involvement in the power sector. Previous attempts to introduce IPPs to India's power sector failed, in part due to inappropriate financing structures that also involved L/C arrangements.

Revolving L/C

Under the new arrangements, state power purchasers will have to put up a revolving L/C to cover payment for the power provided to them under the terms of their licence.

Extra security for IPPs is provided by giving them first right to revenue generated in a project via an escrow account that establishes the power producers' irrevocable claim to receivables of utilities.

Security of energy supply to consumers meanwhile is guaranteed by legislation introduced in 2003 that says if a state electricity distributor defaults on its payments to an IPP, the power generator will have to supply electricity direct to consumers.

Attractive

The new arrangements appear to be attracting IPPs eager to participate in the Indian power sector.

The 4,000-MW ultra mega power project, coming up at Girye in Maharashtra, has attracted the attention of 22 Indian and overseas power companies.

Past experience

Wrangling over L/C backed guarantees by both the federal government and the Maharashtra state featured prominently in the failure of the Enron-led privately operated Dabhol Power Company.

It walked out of its relationship with the Maharashta State Electricity Board in 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.