Financial structure in the Indian power sector

In India, the private power initiative of 1991 has offered one solution to the financing problem the private financing of generation against long-term power purchase agreements. However, this approach encounters a major problem, the financial weakness of the purchasing agents, the state electricity boards, that play a dominant role in most state's power sectors. At present the SEBs are mostly loss making; even the best performers realize returns on assets well below the cost of capital that they now face. The situation is likely to become worse as costs rise, further weakening the ability of the SEBs to sign credible long-term power purchase contracts. The private sector has responded by trying to reduce its exposure to SEBs through obtaining guarantees from state and central governments. There are a number of responses to this problem. The SEBs could try to become financially stronger through both cost reduction and increased revenues from higher tariffs and better collection. However, to make the SEBs and EDs into credible long-term power purchasers, power sector reform and regulation is needed. As these actions will take time, other responses could be investigated such as reducing the role of state power utilities by, for example, giving private generators direct access to industrial consumers. The long-term solution requires more profitable SEBs, if these bodies are to continue to play a dominant role in state-level electricity provision. Profitable SEBs will have access to finance from a range of domestic and international sources. The article finishes with consideration of the factors that will affect the optimal capital structure for SEBs.