Letters of credit (L/Cs) to secure power purchases by India's state electricity boards (SEBs) are not assured as the Indian government looks forward to frame new legislation covering the electricity sector.

One of India's largest power producers, however, would like to see a secure future for L/C backed power deals.

Power review

For many years L/Cs have been central to agreements between India's power suppliers and purchasers, but a series of commercial disputes and political wrangling over electricity tariffs have cast a shadow over the practice.

India is currently reviewing the structure of its power sector so that SEBs no longer remain the sole customers of the central power sector utilities (CPSUs) that generate power.

Monopolies to fall

An open access regime is currently under consideration as India looks forward to passing a new Electricity Act. It is likely to break the state-by-state monopoly currently held by the SEBs.

Under the open access regime, a multi-buyer model would replace existing single buyer arrangements. This would mean that low-cost generators would benefit because they would be able to supply power to creditworthy consumers rather than having to supply SEBs.

L/C disputes

Hitherto, SEBs have used L/Cs to guarantee payments to power suppliers but there has been a history of disputed payments and problems with L/C backed power deals throughout India.

The long-running dispute between the Maharashtra SEB and the Dabhol Power Company has highlighted the problems of relying on L/Cs to guarantee power purchase agreements (DC World News 29 and 11 September 2003) but the problem is by no means confined to that state.

Poor payment

The National Thermal Power Corporation (NTPC), for example, says its two poorest paying customers are the states of Gujarat and Madhya Pradesh and the corporation has not always has a sufficient value of L/Cs to cover anticipated payments from SEBs.

In turn, this impacts on NTPC's ability to raise finance, which is of particular concern to the company as it looks forward to a probable initial public offering.

Political concerns

NTPC is worried about various state governments' policy to give free power to appease voters - there have been recent instances of state authorities promising free power to farmers for example. The financial performance of SEBs meanwhile has deteriorated significantly over the last decade.

On balance however the corporation's view is that the widely used tripartite agreements in which L/Cs from SEBs are guaranteed by state or federal governments, have improved its financial position and NTPC officials are concerned that the Electricity Act will disallow such mechanisms.

Adverse impact

"We cannot assure that the SEBs will always be required to, or be able to, establish L/Cs to secure their payments. A change in government policies could lead to a change in the requirement to establish L/Cs,'' one NTPC official said.

This change would adversely affect NTPC's ability to recover its dues from the SEBs and would also affect its financial position the official added.

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