Mumbai, Nov 2: Assailed by doubts over financial viability of power projects based on the single fuel option of naphtha, financial Institutions propose to insist on multi-fuel arrangements in their credit discussions for long-term funding with independent power producers (IPPs).

"With naphtha being widely considered a high-cost fuel, it makes sense to stress on funding power utilities with alternative fuel options. For projects only based on naphtha, we will have to take a close look at its viability and competitiveness before making any fund commitment," an FI source told The Financial Express.

As much as 40% of the total debt exposure of power utilities have to come from FIs, and lack of confidence on their part is all set to pose a major blow to proposed naphtha-based projects.

The FI decision to take a cautious approach about naphtha projects stem from the fact that the power ministry has already made a statement saying that after the first 11 power project sanctions for naphtha-based projects, no new approvals will be issued to projects based on the fuel.

The government is worried that in order to preserve returns, the power companies will pass on the high cost of power through their power purchase agreements to local State Electricity Boards, and through the SEBs, to the final consumers.

Some IPPs have sought to skirt the naphtha cost problems by locating their projects near the coasts, so that ports can be used to access international supplies.

But a flare-up in naphtha price during 1997 has practically put paid to hopes of cheap naphtha-based power.

West Asian suppliers have hiked naphtha prices signficantly during the year, and they have begun charging premia of around $21 per tonne over the benchmark prices than Asian buyers have quoted earlier. The naphtha supply shortfall is expected to decrease only marginally from 18 million tonnes in 1997 to 17 million tonnes in 1998.

IPPs have said in response to the government statement that while they are aware of the high cost of naphtha, they find it equally difficult to shift to other fuels, especially coal, because of the fact that Coal India Ltd supplies very poor coal at relatively high cost to them. In fact, CIL has also refused, despite the insistence of the power producers, to sign a fuel supply agreement where it would have to guarantee delivery both of quality coal and in required quantities.

Coal India Ltd supply slip-ups have often in the past created serious problems for state electricity boards, often even forcing power shortages.Meanwhile, however, experts suggest there will be a relaxation in the naphtha supply situation in 1998, following the implementation of several large capacities in south-east Asia, the biggest of which is being set up by Hyundai of Korea. The FIs are caught in a cleft, because while on the one hand the government has stipulated that at least 40% of the debt exposure of power projects must come through them, it appears to be denouncing the very basis of some of the projects that have already been cleared. The FIs are relying on negotiations with the promoter of the projects to ensure that more than one option is retained in deciding on the fuel base for the power projects.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.