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New project may have 90:10 debt-equity structure — Reliance mulls power at Rs 2 per unit

Balaji C. Mouli

New Delhi , April 21

IN a bid to deliver power at a competitive rate of Rs 2 per unit, Reliance Energy Ltd (REL) is attempting to structure its project on a 90:10 debt-equity structure. This heralds a significant shift from the traditional 70:30 debt-equity norm on which financial institutions have financed power generation projects in the country. Since debt is cheaper than equity, a project entailing a lower equity component will deliver power at a lower cost since the power tariff is largely an aggregate of the debt, equity and fuel costs.

However, the FIs' aversion to fund projects on a lower equity contribution is not far to see.

The fragile state of the state power sector does not enthuse much confidence in the investing community and hence the resistance to a higher level of exposure.

Recently, REL made a proposal to the FIs where it offered a `package' that would mitigate the additional risk that the FIs will be facing on account of a higher equity contribution.

As part of the 90:10 debt-equity proposal, it has offered to guarantee a year's debt service reserve besides a commitment to underwrite infusion of an additional 20 per cent equity at any point of time.

In contrast to the 70:30 norm, the 90:10 norm entails lower equity contribution on the part of the promoter, REL.

Therefore, the company can settle for lesser returns. From the point of view of the institutions, a higher debt exposure is secured through the commitments offered by the promoter, who has strong credentials. The FIs are currently studying REL's proposal.

REL is also exploring the possibility of obtaining export credit from foreign countries to fund its power generation project.

With the setting up of power regulators in most States, tariff scrutiny has become the order of the day. Several power firms are looking at reducing their tariff by attempting to reduce the equity contribution. So far, they have met with no success with FIs not agreeing to fund projects entailing a debt contribution of more than 70 per cent.

The Andhra Pradesh-based GVK Group is attempting to fund its 230 MW expansion project on near 100 per cent debt. Other attempts to reduce tariff include that of setting up projects using second-hand machinery.

The Essar group is planning to set up a 1,200 MW power project at its Vadinar refinery site with second-hand machinery imported form Scotland. In a recent communication to the Power Ministry, it has stated that power would be generated at Rs 2.35 per unit.

Power from the project would be sold entirely to the Power Trading Corporation.

REL's commitment to deliver power at Rs 2 per unit from its proposed 3,500-MW project in Uttar Pradesh reveals a highly competitive price.

Its proposed power tariff is cheaper than the cost of power produced from some of the existing power generation assets of National Thermal Power Corporation such as Kawas and Gandhar where the cost is Rs 2.40 per unit.

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