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Opportunities For Funding Players In The Power Sector Finance Essay

India is primarily a power deficit country. Traditionally the Indian power sector has had low private sector participation due to chronic problems of high AT&C losses, bankruptcy of SEB’s , high base and peak deficits and low PLF’s.

However the Electricity Act 2003 was a revolutionary legislation which sought to change the structure of the Indian Power Sector. Moreover other schemes like UMPP scheme, RGGVY and R- APDRP have sought to modernize a sector plagued by inefficiencies and government regulation.

These legislations and schemes have resulted in greater private sector participation and greater interest among financial institutions looking to fund players in the Power Sector. Moreover given the huge capacity addition required in this space there is tremendous scope for new players to enter this field.

For a financial institution looking to fund the power sector there are some problems which remain a cause for concern. The poor financial health of SEB’s, unavailability of fuel, reopening of PPA’s means that funding power projects may not prove to be a good investment.

Moreover power projects largely need long tenor debt. This is because setting up a power plant may involve huge capital expenditure and thus generating companies would require loans for a period of 15-20 years. Moreover shorter debt results in front loading of tariff and state utilities cannot afford very high tariffs.

However financial institutions are unable to provide long term debt due to the general concerns regarding the power sector and even more important the asset liability mismatches that are associated with long tenor debt.

Standard Chartered faces the same concern and thus would like to enter the power sector by funding the EPC players.

EPC stands for Engineering Procurement and Construction and this essentially means that a generating/ T & D company would give the contract for the installation and construction to another player.

Given the huge capacity addition that is taking place and set to take place in the power sector, there are lot of subsequent opportunities for EPC players as well.

Once the opportunities for EPC players have been studied, it is important to understand the kind of funding services that they would require on a typical basis from a bank.

Moreover Standard Chartered has its own set of policies and regulations which need to be taken care of while extending services to a company. Thus it is important to understand the risk matrix of the bank and thus try to identify the areas and kind of players the company needs to focus on.


About Standard Chartered Bank

Standard Chartered is a British Bank and has operations in over 70 countries. Even though it is primarily a British Bank most of its revenue comes from the emerging markets. Hence it is largely focused on the emerging markets of Asia, Africa and Middle East.

It is listed on the London Stock Exchange and The Hong Kong Stock Exchange and Tamasek Holdings is its largest shareholder.

It mainly operates under the two functions of Wholesale Banking and Consumer Banking with 80% of its revenue coming from Wholesale Banking.

Wholesale Banking mainly is a business to business based service where the bank serves corporate clients and looks to serve their financial needs

Wholesale Banking primarily offers services under the functions of Transaction Banking, Financial Markets, Corporate Finance and Principal Finance.

The Wholesale Banking Strategy consists of a primary focus on meeting the needs of basic lending of the clients first and foremost and also cater to the transactional needs of the customers.

Finally it is important to provide value added services to clients and develop customers who are strategic in nature and have long term relationships with the bank.

The bank’s strategy is to develop deep core banking client relationships with a local scale and a foundation of cross border capabilities.

Middle Markets is a segment that looks at clients who are in the middle income range of 100 to 1000 crore in terms of revenue.

It provides them with commercial services like short term / medium term loans, Working Capital Financing, Non fund based services like letter of credit and bank guarantee, hedging services among others.

Project Objectives

From the project point of view it is important to understand the following points

Current size of the industry and players in the EPC industry

Opportunities for EPC player in the power sector

Investment potential in states and the associated risks and concerns

Risk and concerns for a EPC player in power project

Contracts and clauses of liquidated damages

Delay Clauses and Escalation clauses

Type of funding needs

Different kind of services that can be provided

Understand role of different players like PFC and REC and understand their capacity

Understand the kind of clients Standard Chartered can serve according to its risk matrix

Analyze the specific sectors in which Standard Chartered can focus on

1.3 Literature Review

The 11th plan has a planned capacity addition of 90 GW and 12th plan close to 100 GW. Hence this translates into huge opportunities for the EPC players as well.

First on the generation scenario, huge capacity addition is taking place both on Case – 1 and Case – 2 bidding guidelines.

However the important thing to note is that a large number of new players are entering the market with primarily unrelated business. Their strategy is to enter the market by partnering with a known player in the field. Eg Dhariwal Infra has partnered with CESC in its 600MW plant in Maharashtra.

Hence there is significant uncertainty on their ability to execute projects and their project management ability. Most new players are poaching talent from existing players and on a large scale from state utilities.

Table 1: Break Up of New Capacity Addition

As can be seen in the figure above as much as 12% of the new planned capacity is being set up by new players.

Opportunities - Generation equipment players

In the Generation space EPC work can primarily be divided into various parts, BTG – Boiler Turbine Generator, BOP - Balance of Plant and civil works. For every MW of power generation capacity that is added there is a 2 crore opportunity that arises in the BOP space and 3 crore opportunity in the BTG space. The 11th plan has proposed capacity addition of close to 90 GW. Hence there is a huge opportunity for EPC players

11th Plan

10th Plan

Table 2 : Representation of EPC works in a Generation Project

Table 3: Market Share in BTG Segment

In the BTG space BHEL is the largest player having a market share of 54% with capacity of 10 GW presently and plans of ramping this to 12 GW and finally to 15 GW in 2 years times. However BHEL has a large order book and huge amount of orders pending. Hence its execution cycle is very long.

Rest of the market is largely dominated by Chinese and Korean Players like Dongfang, Doosan, Shanghai Electric Corporation. This is because of the fact that they have lower execution time and lower initial capex.

Not only are they executing standard plants of 300 to 600 MW but also have got UMPP under their kitty. Tata power has awarded its Mundra power plant to Toshiba & Doosan and Reliance Power has done so to Shanghai Electric Corporation.

Also there is no custom duty on imported Chinese equipment and 5% customs duty on Mega power plant equipment. Hence they turn out to be much cheaper than Indian equipment.

China supercritical equipments are 10-15% cheaper and are execution cycle is much lower and delivered faster by 10 months in comparison to BHEL.

Also installation of Chinese equipment results in a cost of 3.9 Cr/ MW to 4.8 Cr/ MW

However there are concerns about Chinese turbines and its efficiency. The installed turbines are mainly in the private space and their performance has not been tested thoroughly though CEA has certified their performance. They had observed that the Chinese equipment was equivalent to Indian equipment in terms of quality.

Also there is concern regarding long run maintenance of the equipment and the easy availability of spares.

Hence O& M services would be of prime importance in case the installed turbine is Chinese.

To counter the increasing penetration of Chinese players and try and create a level playing field for indigenous manufacturers, the government has stipulated that no electricity plant with foreign equipment would be given a coal linkage by state owned mines

Also the government has banned foreign equipment manufacturers who do not have manufacturing base in India from supplying equipment to ultra mega power projects

Also the proposed bulk tendering of 11 * 660 MW equipment with indigenous manufacturer is a further push towards domestic capacities

So lot of JV’s coming up in BTG space. L& T is already executing projects and has 5 GW capacity. Other players are also in the process of expansion.

Table 4 : BTG Planned Capacity Addition

As can be seen in the table above huge Capacity expansion in BTG is planned but it is expected to show impact only in FY 12, FY 13.

Hence as of now the entry barriers are low evidenced by the large number of foreign players and hence large number of JV’s being signed. However provided that the capacity addition takes place as planned, it is probable that in the 12th plan, entry barrier would increase and competition would intensify with execution abilities on test.

Initially till capacity expansion takes effect, BHEL and L& T are in strong position in supercritical space as the already have established capacities and satisfy prequalification criteria’s on almost all tenders being floated. On the other hand Chinese, Korean players would still dominate in Subcritical space.

BHEL would be at an advantage in comparison its competitors, as most of its capacity addition would be brown field expansion whereas its competitors are doing Greenfield expansions.

Once capacity expansion takes place what would differentiate each player would be the time required for execution. That would determine their market share to a large extent.

On the supplier side the biggest concern is regarding supply of long lead components like forgings and castings. Hence the BTG players need to develop their vendors as well

Companies like BHEL are taking advance manufacturing action for timely procurement of long lead items like large castings and forgings.

Opportunities – BOP & Civil construction players

BOP consists of several packages as under with key vendors listed along with it

Table 5: Type of BOP Packages

The BOP Segment is an unorganized segment with severe capacity constraints.

Traditionally contracts are structured to have a BTG and multiple contracts for BOP components.

In BOP there are ample opportunities but not enough capacity addition is taking place.Severe constraints exist in certain packages like Ash Handling package, Coal Handling Package.

In the 10th plan most delays in projects was due to the poor capacity of the BOP players.

Sufficient expansion is not taking place in this space because of the associated low margins and the weak bargaining power with the turnkey player. Moreover stringent qualifying requirements by state utilities mean that many players do not qualify for bulk tenders which are high revenue earners.

A new trend that has been observed in this segment is that new contractors are emerging who take up all the packages and then further subcontract them to various subcontractors. These contractors would definitely benefit from the huge capacity expansion planned in the power sector.

Since there are few players in this segment the next capacity addition would take place in BOP segment. Moreover the government is standardizing and easing the qualification requirements for state contracts which should encourage new players to enter the market.

Also capacity addition will take place in such a manner so that BOP player moves up the value chain to supplying entire package.

Also it has been observed that a Lot of single package BOP players is moving in to the EPC business to improve bargaining power. Eg BGR, Thermax

Opportunities – Transmission Equipment Players

India’s inter regional grid is divided into 5 regional grids: Northern, Western, Eastern, North Eastern and Southern. Mostly the power plants are located near the coal rich belts of eastern India, Hence power needs to be transmitted to the power deficit regions of North and Western India as these regions are heavily industrialized and thus require a lot of power.

In India there are 3 types of grids, Inter regional grids which are high voltage, state grids which are medium voltage and distribution grids which are low voltage. The inter regional grid is primarily PGCIL’s area of concern while the other 2 grids fall under the purview of the respective SEB’s.

India’s Transmission network is of length 6.94 mn ckt kms. Out of this 4.15 mn ckt kms consists of distribution lines.

Table 6 : Representation of Works in Transmission

Captive Power

Captive Power plants are those which are set up by Companies for their internal use. Usually captive power plants are set up as there is poor and infrequent supply from the grid. Moreover due to cross subsidization of power it is costly for industries; hence they set up their own power plants.

EA 2003 clearly states that “any person or industry can construct, operate and maintain a captive generation company and can set up dedicated transmission lines and would not require a license to set up and operate the same.

Captive power takes much lesser time than other plants because the private players are more prepared with clearances as timeliness is critical. They would only decide to set up a captive power plant because the loss due to irregular supply of the grid supply and cross subsidization is more than the capex for the captive power plant.


Standard Chartered is a foreign bank which has to follow certain mandated guidelines as per RBI guidelines for foreign banks. However given the huge opportunities in the power sector it has observed that the next huge funding opportunity lies in this sector. However given the chronic problems of this sector in terms of poor SEB financial status and land acquisition issues among others, investing in the sector is a concern. Moreover given the long tenor loans and Asset liability mismatch associated with it, project financing is not a very viable option. Even though the project finance team is involved in the power sector, the exposure to the sector is limited. However given the huge opportunity this sector offers, financing EPC players is a viable option for the bank and it wishes to explore the opportunity in the same.


The methodology employed would be a combination of

1 Secondary Research

Internet, Books

Database of the bank

Primary Research

Clients of the bank

Players in the Power Sector

In this context following interviews with the following players has been conducted




SBI Caps


Also a client meeting with ARYAN COAL has been conducted.

Also a detailed analysis of the situation in the states is being carried out.

The project is largely focused on thermal power plants as new capacity is being set up primarily in this area. Moreover there would be greater focus on Generation EPC players.


Depending on the kind of player interviewed whether a generator or financier the following questions were asked.

Especially in case of the financing institution it was important to understand their strategy for the future and their capacity for funding the EPC player. This would help to finally understand the areas in which the bank needs to focus and the services it needs to provide.

Is it an Industry practise to have Delay liquidated damages? Are they enforced?

Are there any Escalation clauses or are contracts fixed price in nature?

Is there a practise of Performance LD’s and are there any Defect liabilities?

Which are the states in which there is a favourable environment for investment in the power sector and where are the opportunities for EPC players coming up?

What are the Risk, Concerns for an EPC player?

What is the cost and time lag of a thermal power plant?

What are the Termination clauses and are they enforced in the industry.

Are there any Bonus clauses in the contract?

What is the portion of EPC work in a typical power plant?

What are the kind of funding needs of an EPC player?

When are the funds required?

What is the government doing to encourage capacity addition in EPC segment?

What are the typical Clauses of the financing extended to the EPC players

Typically how long do the EPC players require funds?

What are the opportunities for EPC players in the captive space?

What is the difference in the risk and concern of the EPC player in case of a large power plant as compared to a smaller one?

What is the Situation in transmission space?

Has the government taken some steps to solve Right Of Way Issues and Land Acquisition Problems?


The data collection was in the form of interviews which were unstructured in nature. This was because of the variety of players interviewed. The questionnaire was formulated after a discussion with the project guide





PFC is a NBFC dedicated to power sector financing. It has also been designated as the nodal agency for development of the UMPP plants and for executing the R-APDRP programme.

PFC traditionally raises funds via bond issuance and term loans including short term loans. Moreover it gets an interest subsidy from the Government; hence it has access to cheaper source of funds.

In Feb 2010, RBI had stipulated that any NBFC with 75% of total assets in infra & net owned funds of Rs 300 Cr or above could turn into IFCs if they so desired to.

In coherence with the above PFC has expressed the desire to become an Infrastructure financing Company. This would benefit PFC as it would be able to increase private sector single & group exposure by 5%. The present regulation of NBFC category under which it lays it can lend 28% of net worth of Rs 12, 600 Cr to single private company & 35% to a group.

By doing so, it would be able to lend larger amount of funds and it wishes to lend larger amounts to the private sector as a large amount of capacity addition is planned in that space.

This is because PFC largely lends to the state sector as is displayed in the following graph.


Loan Break Up Sector Wise

The Company is Mostly into project financing which constitutes 85% of its loan portfolio


It has two services for equipment manufacturers

A loan for expansion of facilities

A short/ medium term loan for equipment manufacturer.

According to PFC the provisions of the loan are as follows


To give Short and medium term loan by way of rupee term loan

Eligible entities

Preference where payment for supplies is secured by Letter of Credit

For state sector contracts, where funding is tied up with other FIs / Banks or with PFC, Letter of Credit -not insisted.

Buyer CPSUs, where payment terms are acceptable to PFC, Letter of Credit is not required

Extent of assistance

State / central sector borrowers / AAA rated entities - up to 70% of eligible amount.

Others - 50% of eligible amount

Eligible amount for private sector borrowers shall be total contract value less advance payment to be received by the borrower under the contract subject to a maximum of Rs.100 crores in each case

In case of state / central sector borrowers the amount of support may be determined on case to case basis.

Minimum amount of support shall be Rs.1.00 crores

Security requirements

Assignment of contract

Assignment of Letter of Credit & insurance

Escrow on revenue account of borrower

Collateral security in the form of Charge on Assets (mortgage / hypothecation) of the borrower

Personal guarantee of Directors / Guarantors only in case of private sector.


However the loan to Equipment Manufacturers in FY 09 was jus Rs 5 Crore and FY 08 was Rs 6 Crore. This is largely because equipment manufacturers are more focused on WC financing and because of stringent procedures adopted by PFC for sanctioning of loans

However it has recently given 1 loan for expansion to a BTG player and that would be a focus area in terms of services for equipment manufacturers. Equipment player capacity is a constraint to the meeting of targets in the 10th plan, hence focused on this front.

It Does not intend to focus on giving medium term loans to equipment manufacturers as they are primarily into term loans and they believe that WC financing and loans fall under a bank’s purview.



Rural Electrification Corporation is a PSU which was mainly constituted to promote rural electrification projects by financing them. They mainly provide financial and technical assistance to state electricity boards and are heavily involved in the Rajiv Gandhi Gram Vidyutikaran Yojana.

It is primarily into transmission and distribution projects and is increasing its portfolio to include generation projects as well.

Being a GoI company, REC is allowed to issue capital gains bonds which are tax free in nature. Hence REC is able to price such bonds at a lower rate of interest


It also offers short term and medium term loans to equipment manufacturers however it is not a focus area for the company.


It is largely into ensuring that the aims of RGVVY are fulfilled and more focused on village electrification and encouraging renewable sources of electricity. Funding Equipment manufacturers not a priority but capacity constraint in BOP is a concern

3.1.3 SBI CAPS


SBI Capital Markets Limited has been set up by SBI and was initially support by the Asian Development Bank; however now ADB’s stake has been purchased by SBI and thus it is a wholly owned subsidiary of SBI.

It is primarily investment and advisory service and helps its clients to raise funds and has been involved in large deals in the power sector. It has been the lead syndicator in many of the projects. It has been involved in the SASAN Ultra Mega Power Plant among others.


The company is mostly in the debt syndication market and is one of the largest players in this market. It primarily does financial appraisal and gets approval of funds from SBI


SBI Caps intends to continue focussing on the debt market because there are very few players in this market.

It may not give WC loans and non fund based services as that would fall under the purview of SBI, its parent body.

However it may give project based funding to EPC players; however it may give loans only if ticket size is greater than 300-400 Cr


Aryan Coal is a client of Standard Chartered Bank and is into coal beneficiation and washing. It is currently setting up a 270 MW power plant in Korba, Chattisgarh which is based on coal rejects.

It is also running a 30 MW plant in Chattisgarh which again operates on coal based rejects. It is also operating a 15 MW wind power plant.

The company is also involved in manufacturing of coal washing equipment and manufacturing of sponge iron

The client was able to give an overview of the power sector from an IPP generators perspective and its experience with EPC players in the power plants that it has set up.

3.1.5 NTPC

NTPC is a one of the largest players in the power sector and has the largest generating capacity in the country. It is mainly into thermal power generation but has also diversified into hydro power and equipment manufacturing among other things. It intends to integrate backwards as well as forward to become the largest fully integrated power player

The company gave an overview of the power sector from a PSU’s perspective based on its vast experience in the power sector and its experience with EPC players and how the industry has changed over the years.


In Private space what has been noticed is that DLD’s and PLD’s are stringently enforced. In case of NTPC DLD’s are rarely enforced because NTPC primarily dealt with BHEL hence DLD’s was not easy. Moreover judging responsibility of cause of delay in case of a CPSU like NTPC is difficult.

Also till recently NTPC used to have a clause that if the L1 is within 10% of BHEL- BHEL would get contract. Now the clause doesn’t exist.

Also out of the 11-12 supercritical plants NTPC intends to set up, at least 4 would be awarded to BHEL

Awarding bonus is rare in the industry, whether for performance or timely delivery because large amount of contracts in the state space and so they cannot afford giving bonus. Moreover even private EPC player like Reliance end up paying DLD’s so bonus is a stretch.

However in the captive space Thermax has been awarded bonus for its timely delivery.

Contracts can be fixed price or price escalation based (linked to RBI indices), both are practised in industry. Payment is on percentage completion of project basis – industry practise

Termination is not strictly enforced both in the case of Private as well as state sector because of the huge investment in terms of time and money made by both the parties.

According to all the players the concerns for an EPC player are as follows

Manpower Constraints

Completion on time

Managing Insurance cover

Statutory Compliances

Environment laws


Payments not being paid on time.



Segments in Power Sector


Low Risk

Client ready with clearances

No concern regarding PPA's

Shorter execution cycle

Possibility of bonus payment


Many state govts encouraging CPP, though many taxing them

Non uniform tariff and tax structure across states

High wheeling losses

No coal linkages

Captive space dominated by Chinese players, though some players like Thermax operate in this space


Low Risk

Execution ability of Indian players established

Experience of Indian Players

Chinese players offering standardized products

Indian Players switching to standardized products


GOI support would not be present- greater focus on supercritical

Centre intends to phase out 500 MW subcritical power plants

MOEF to be advised not to clear any Coal based projects on Sub-critical technology. No coal linkages for Sub-critical plants for 13th Plan


Higher Risk

Execution ability of Indian EPC players untested

Do not have technology, increase imports and JV

Chinese Players have much better technology than India in supercritical with proven execution capability


Huge capacity addition in this space ; margins to take a hit due to aggressive bidding

Subcritical plant takes less time 33 months. More time for supercritical plants


Higher Risk

Apart from BHEL and L& T, supercritical equipment execution ability for such a large project untested. BHEL , long execution cycle

All 3 UMPP being made by Chinese players, no previous experience for domestic players

Possibility of single EPC contract low, contractual risk higher for developer , lower for EPC player


Subcritical plant takes less time 33 months. up to 50 months for supercritical plants

UMPP's take a long time to get finalized and a lot of UMPP are stuck in land clearances and others. FY 10 , only Surguja in Chattisgarh will be up for bidding

There are Huge opportunities for the bank in the subcritical, captive and T&D segments.

However factors like contract, SEB financial status will play a big role.

Clearly there are huge opportunities for EPC players in the Indian Power Sector as per the 11th and 12th plan. Subsequently there would be opportunities for funding them as well. The Opportunities for providing services exist in the following forms

Non Project Based

Finance Expansion Needs

Clearly the 10th plan capacity could not be achieved because of capacity constraints in this sector, Hence there needs to be huge capacity addition in this space. PFC has clearly recognized this opportunity and is already offering loans to equipment manufacturers in this area. Also there is huge capacity additions planned in the BTG space. Though low capacity addition in BOP space is still a concern. It is feasible for a bank to fund the expansion of Equipment manufacturers as the loan is not long term in nature and is usually medium term in nature, hence they would not face concerns of ALM.

Finance Changes in technology

Project based

Fund Based

Working Capital Financing

Clearly the biggest opportunity for the bank in this space lies in WC financing. Usually payments to the EPC player are against an invoice; hence an EPC player would typically have high receivables. Even for projects EPC players prefer WC financing rather than loans.

Short term Loans

EPC players do require loans to a certain extent while they are executing projects. This may especially be the case when the order is custom made in nature.

Loan/ Bridge Loan for Imported equipment

A lot of equipment manufacturers have a lot of equipment and supply which is imported in nature. Hence the bank can provide bridge loans to the equipment manufacturers. Also they could provide hedging services to reduce currency risk.

Non Fund based financing

Bank Guarantee on Performance

Typically a BTG player would have to give a bank guarantee for performance. Usually the generator would keep some retention money, typically 5 % from every bill for retaining in case of defects. Also in case the BTG equipment does not perform up to par they need to pay LD’s to the generator.

Bank Mobilization Guarantee

Usually the generator pays the EPC player 10 – 15% money in advance. Hence the EPC player needs to give a bank mobilization guarantee for the money that has been paid in advance.

Letter of credit

The equipment player may import a lot of equipment. Hence a letter of credit may have to be furnished.

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