Background
India’s power sector
Under the Indian Energy Supply Act 1948, the Central Electricity Authority was created to
develop a national power policy and coordinate power development at the national level.
State electricity boards were set up to promote the development of the power sector in each
state. The Industrial Policy of 1956 explicitly placed responsibility for generation, transmis-
sion and distribution of power in the public sector. In theory, that responsibility was shared
jointly by the federal and state governments.
In recent decades power projects have been developed mostly by government utilities,
and financed through the government budget and credit facilities from commercial banks,
suppliers, and bilateral and multilateral agencies. During that period India has lived with con-
sistent power shortages because generation capacity has trailed behind demand. At the same
time the state electricity boards in the aggregate have earned a negative rate of return and
received poor credit ratings because of mismanagement, subsidised electricity rates and elec-
tricity theft.
Faced with both a shortage of generating capacity and inadequate resources to
finance new power plants, the Government of India opened the power sector to foreign
as well as domestic private investors through the Electricity Laws (Amendment) Act
- To meet existing shortages and demand, expected to grow at 9 per cent per year,
the government’s central planners set a target of 45,000 MW of new generating capacity
by 1997, which would be impossible to meet without the help of foreign capital. There
would be no limit on foreign equity ownership. Private-sector participation was intended
both to provide needed resources, and to promote efficiency and competition in the elec-
tricity sector.^2
Because India had no experience in private power development, the government did not
consider itself qualified to draft detailed tender documents. Further, the government wanted
to increase generating capacity as quickly as possible. It concluded that competitive tender-
ing was impossible at this early stage, particularly given the time pressures, and that the first
few ‘fast track’ independent power projects would have to be negotiated. In October 1991 the
government issued policy guidelines that were relatively thin in detail to allow flexibility as
it worked with investors and learned about the independent power business. In March 1992
the Ministry of Power announced a cost-plus approach to tariff formulation under which
developers would earn a set return on equity (ROE) invested and be reimbursed for fuel costs
separately.
In an article in the Journal of Structured and Project Finance(Spring 2002), an Indian
lawyer, Piyush Joshi, provided an overview of the legal framework governing independent
power producers (IPPs) in India. He explained that an IPP is allowed to sell electricity only
to the state electricity board in the state where its power plant is located, unless it is granted
permission to do otherwise, which is not easily obtained. To sell power to a different entity
within the same state, it must receive permission from the state government. To sell power to
an entity in another state, it needs permission from its own state government, the receiving
state government and the federal power ministry. Another important aspect of the legal frame-
work is that the IPP has no way to manage its credit exposure to the state electricity board.
An IPP is in effect a captive supplier, with nowhere to turn if the credit fundamentals of the
state electricity board deteriorate.
POWER PLANT