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Coal-Fired Independent Power Production in Developing Countries

AUTHOR: Tim Crozier-Cole
DATE: April 1998

Independent power producers (IPP's) are playing an increasingly important role in providing new capacity in many developing countries. Particularly important markets for IPP projects are found in Asia and Latin America, although there is also IPP activity in Eastern Europe. A significant proportion of large IPP projects are coal-fired, particularly in Asia.

The main parties involved in IPP projects are the project company, the host, usually a utility, and third parties, the most important of whom are lenders. Projects can be structured in a variety of ways and may be transferred back to the host utility after a specified period. IPP projects are held together by a series of contracts, the most important of which are the power purchase agreement and the fuel supply agreement. The regulatory framework in place in the host country can strongly affect the prospects for IPP projects.

IPP projects generally rely on high levels of debt and are often financed through non-recourse or limited-recourse finance (often called project finance or off-balance sheet finance). For small or particularly risky projects, project finance may not be possible and on-balance sheet fiance or corporate finance may be used. Debt can be obtained from a variety of sources, and debt sources will be matched to the requirements of the project. Project risks include commercial, political and force majeure risks and are generally assigned to the party best able to deal with them.

IPPs increasingly have to source their own fuel. Fuel supply agreements are usually long-term contracts, typically lasting for the period of the debt repayments, and will include pricing mechanisms for coal. More IPP's are based on indigenous coal than on imported coal. Coal-fired IPP projects are generally based on pulverised coal combustion technologies, although some use atmospheric fluidised bed technologies. Technology choice is strongly affected by the capital costs and the stage of development of the technology.

The power markets in seven developing countries are examined in more detail in the report. These countries are:

  • China
  • India
  • Indonesia
  • Philippines
  • Thailand
  • Brazil
  • Colombia

Case studies of five coal-fired IPP projects are also presented.