The Maharashtra government's plans to tap sugar factories as an alternative source of power to overcome huge power deficit to the tune of 5,000-6,000 Mw, are proving to be a damp squib due to the rising prices of steel and coal.

Last year, the state government, in association with Infrastructure Leasing Financial Services, launched Urjankur Needhi (Fund) of Rs 418 crore (Rs 4.18 billion) with much fanfare to tap the state's unconventional energy resources to meet the huge power deficit.

One of the major aims of the fund was to help sugar co-operatives in the state set up their co-generation plants based on bagasse (biomass of the sugarcane after sugar extraction process), during the crushing season.

However, since most of the sugar co-operatives are cash-strapped, a scheme was devised under which 100 per cent finance was to be provided from the fund to these projects. Out of this funding, 20 per cent would be in the form of equity and the rest would be debt.

Under the scheme, a special purpose vehicle was to be created which would own the plant.

Sugar factories had to only provide land for the plant and bagasse on which they were to get a royalty. After 12 years, when financial institutions had fully recovered their costs, the plant was to be handed over to sugar co-operative by the SPV.

The fund managers found proposals of 16 sugar co-operatives viable, which had the potential to generate 350 to 400 Mw of power. However, in the past one year, prices of steel have gone up by almost 20 per cent, making selling of power to the Maharashtra State Electricity Distribution Company Limited at Rs 3.05 costly.

The state's minister for non-conventional energy, Vinay Kore, said the rates for power from co-generation units were decided by the Maharashtra Electricity Regulatory Commission.

The steel component in a co-generation plant is almost 60 per cent and the cost of commissioning such a plant, at around Rs 4.5 (Rs 45 million) to Rs 5 crore (Rs 50 million) per megawatt, is almost equivalent to any other thermal plant.

"Now, we are considering to move a petition before the MERC asking for an increase in the price of power generated from the co-generation units," said Kore.