The Indian power sector would not have expected more than what has been proposed in the Union Budget 2013-14.Finance Minister P Chidambaram has provided the tools required for growth of this sector over the past year. This year, the budget tries to maintain a balance between the imperatives of fiscal consolidation and political compulsions. Pradeep Pandey highlights the different facets of the budget and its impact on the sector.
The industry, waiting for some hard nosed reforms, perhaps got some short-term relief on one hand through extension of tax holidays till 2014, under sunset clause 80-IA, for the generation projects while on the other hand thermal power producers would have to pay high cost for coal import that may lead to high generation cost. Renewable energy sector has been pampered by reintroduction of provision for generation based incentives (GBI) for wind energy. However, solar energy has been left on its ongoing National Mission.
Nonetheless, the decision to promote PPP in coal mining by Coal India can bring in private sector expertise to enhance production but the absence of intact policy for execution of production plan and target achievements still maintained status-quo. Overall, the budget proposals are being considered to be neutral for the energy sector by the industry people and industry experts. Industry was expecting something more wrapped with a firm policy reform implementations that would reinstate the energy sector on its growth track. In the given economic scenario, the finance minister has done a very fine balancing act for the power and oil and gas (O&G) sector,said Hemal Zobalia, partner, KPMG India. He has provided the tools required for growth of this sector; however, lot would depend on right implementation of the policy proposals which will leverage this sector to the next level. The budget has rendered mixed sentiments among power sector players. Most demands of the sector have not been met and therefore, will not bring in major changes in the sector. The debt restructuring scheme was announced in September last year, and the government has not undertaken any new schemes for the sector in the current budget. There is no mention of the solar sector which is expected to share the burden with wind energy sector as the drivers for the renewable energy growth in the country.
Guidelines for financial restructuring of Discoms
The state distribution utilities were the most hit entities in the sector and the direction for financial restructuring would at least provide a lifeline for them as their health bothers the entire sector. This move will improve the financial health of state utilities, and the overall sector. Improvement of the Discoms shall have a cascading positive impact on the financials of power generation companies, since this announcement would enable an improved payment cycle (benefit from a shorter working capital cycle ) of power purchase by utilities, and hence a positive impact on the cash flow of power generation companies, says Amol Kotwal, associate director, energy & power systems practice, Frost & Sullivan, a global research firm.
According to the global research firm the debtor or receivable days of many power companies including Reliance Power and Torrent Power are approximately 150 days, whereas debtor days of NTPC stood at 69 days at the end of first six months of FY2012-13. Although this announcement looks optimistic and shall aide in improving the financial health of the DISCOMs, we have to wait for the actual restructuring to occur.
Tax Incentive under Section 80-IA for power sector
In the current environment of fuel shortage, delay in projects due to land acquisition and environmental clearances etc, the extension of sunset clause (in other words undertaking that generates power by 31 March 2014 should be eligible for tax holiday) to 31 March 2014, provides much needed fillip to the power generation projects expected to be commissioned in FY2013-14. Power generation capacity to the tune of 15 to 17 GW is expected to be commissioned in FY2013-14, and extension of the sunset clause benefits power projects operational in FY2013-14, from a lower tax outgo for the next 10 consecutive years.
PPP policy framework for Coal India
India is currently facing a coal shortage, since domestic coal production is far below the requirement, shortage of almost 20 per cent. Coal shortage has impacted the new power generation capacity build up. The lower supply of coal to the existing coal based power plants has resulted in power generation companies having to rely on expensive imported coal, thereby resulting in higher fuel input costs.
If the current trend of coal shortage continues, coal imports are projected to go up to 185 million tonne by the end of the 12th five year plan period in 2016-17. The PPP policy framework, with Coal India as one of the partners, would augur well towards ramping up coal production for supply to power producers and other consumers. PPPs in coal production may help reduce coal imports, and issuance of inflation indexed bonds may promote savings and also reduce gold imports," avers Prodipto Ghosh, fellow, TERI.
Increase in Customs duty on steam coal to 2 per cent
This announcement shall not augur well for the power generation segment, especially companies including Reliance Power, TATA Power, JSW Energy among others, relying on imported coal and having signed a fixed tariff under Power Purchasing Agreements (PPA) with utilities. With an increase in freight rates for coal announced in the railway budget and increase in customs duty announced in the Union Budget, total cost of coal based power generation is expected to increase to the tune of 6 to 8 paise per KwH.
Since both kinds of coal are used in thermal power stations, there is a rampant misclassification. I propose to equalise the duties on both kinds of coal and levy two per cent customs duty and two per cent CVD, Chidambaram said in his speech. Increase in custom duty on coal would increase the cost of power as the present duty on steam coal was only one per cent,said L K Gupta, managing director of Essar Oil.
This comes as a burden for power plants run on imported coal by companies such as Tata Power, Adani and Lanco, among others. Thermal power plants using imported coal will therefore see a rise in their power generation cost by at least 5-6 paise per kWH. The ones more dependent on Imported coal will see a higher price rise than one based on domestic coal or with limited blending,said Debasish Mishra, senior director, Deloitte India. Under the Customs Tariff Act, coal has been classified as anthracite, bituminous, coking and steam coal. While steam coal is only used for electricity generation, most bituminous coal is used for sponge iron and as a partial substitute for metallurgical coal. Earlier it was just 1 per cent CVD which could be claimed back by the company importing the thermal coal, the coal used in power plants. Hence this budget there is a levy of 2 per cent additional customs duty and another 1 per cent CVD. Although CVD can be claimed back, the 2 per cent levy in customs duty will affect coal prices and power generation costs.
Reintroduction of Generation Based Incentives (GBI)
Re-instating this benefit provides additional revenue generation opportunities, over and above the tariffs provided by the utility, to the wind energy generators. Funds to the tune of Rs 800 crore would be provided to the Ministry of Non Renewable Energy (MNRE) for this purpose. However, the rate of GBI (that was earlier 50 paise per Kwh), is yet to be announced. Re-introduction of GBI will not only boost the wind power market in India but will also encourage more investments from both domestic and foreign independent power producers which will benefit the economy,said Kailash Tarachandani, CEO Kenersys India Pvt Ltd.
However, it remains to be seen whether there would be a capacity cap on the amount of incentive. In the previous scheme, the cap was Rs 62 lakh per MW. Another critical aspect of this announcement is clarity on whether the new scheme will be retrospective, that is, will it be in effect for projects from April 01, 2012 or only for new projects that would be operational from April 01, 2013.
Low interest bearing funds from the National Clean Energy Fund
Government will provide low interest bearing funds from the National Clean Energy Fund (NCEF) to Indian Renewable Energy Development Agency (IREDA) to be directed towards viable renewable energy projects. The low plant load factor (PLF) and high capex for renewable energy projects (in comparison to conventional thermal power plants) leads to a higher per unit cost of power generated from renewable energy. Additionally, the high cost of finance affects the project economics. The move to provide low interest funding to viable renewable energy projects augurs well for the renewable energy projects, since it reduces the debt servicing component and thereby, the overall project operational costs,says Kotwal.
Policy to encourage gas exploration and production
The current shortage of fuel availability, coal and natural gas, for power generation and industrial usage in India is hampering the country's economic growth. It is therefore important for the government to explore and exploit other fuel sources, besides renewable, to meet the rapidly increasing power requirement. The prevailing situation in India offers huge opportunity for exploiting shale gas. Shale gas has been a game-changer in the US by significantly reducing the country's dependence on imported LNG. With policy support and regulations if shale gas development in India progresses well, it could possibly turn out to be the game changer for India also. According to Kalpana Jain, senior director, Deloitte in India, the oil and gas exploration policy will be reviewed to move from profit sharing to revenue sharing. The current PSC based on sharing of profit oil & Gas involves a cumbersome and open to debate processof agreement on the costs to be committed and recovered thereafter between the Operator and the Government. A revenue sharing model would eliminate this and leave the work plan to the Operator's best judgement. It would eliminate the need for continued negotiationon cost escalation as well as change in work plan with the DGH,said Jain. It would leave the operator to optimize investment and operations on a prudent basis. For the government it would work well as revenue would flow to them with upon commercialization, rather than after cost recovery of the project. Globally, more matured E&P countries (UK, US, Canada) follow a revenue sharing regime, while developing E&P sectors follow a profit sharing mechanism (Oman, Kazakhstan, etc).
How the industry assesses the Budget
Adani Group: The Group chairman Gautam Adani terms the Union Budget proposal as a fine balance between austerity and profligacy with Infra-push. He supports the finance minister's approach that India should aim for higher growth that will lead to inclusive and sustainable development of the country. According to him the budget seems realistic, credible and is a sincere attempt towards achieving a fiscal consolidation with a heavy emphasis on the infrastructure sector. The capital intensive manufacturing and infrastructure will get a push on account of introduction of 15 per cent investment allowance, valid till 2015. The budget also focuses on measures that will facilitate corporates to access funds through tax free Infrastructure bonds for which the limit has been revised to Rs 50,000 crore. Extending the sunset for section 80 IA for two more years too will help the infrastructure developers. In addition to this the PPP model for improving domestic coal production, developing ports on the eastern coast of country and tenders for 3000 km of roads in the next six months, indicates a clear push towards propelling infrastructure development in sectors like roads, ports, coal mining and power.
However, there are some grey areas in the budget. For example, the upward revision of import duty, from 1 per cent to over 4 per cent on steam coal imports will adversely impact the power and steel industry as it will lead to an increase in the cost of manufacturing steel and power generation. This is little amusing as the country has huge deficit in coal and the government is trying minimize cost by augmenting coal supply through various initiatives for domestic production as well as opting for price pooling of domestic and imported coal, Adani added
Tata Power: Tata Power managing director Anil Sardana was of the view that the initiatives towards strengthening financial sector and the decision to extend tax holidays will positively impact capacity additions. The announcement to equalise the custom and CVD for steam and bituminous coal used in thermal power generation at 2 per cent each as this provides clarity to otherwise claims that got raised by customs department. While the budget has the welcome mention of investment on transmission network in J&K, there is need for several such incentives in other states. The decision to support the renewable and non- conventional energy sector by various initiatives is positive, however, the real boost for the sector would come by strengthening the Renewable Purchase Obligations (RPO) mechanism. In addition, a long term view needs to be taken to ensure energy security through the development of appropriate alternatives to conventional fuels and also to accelerate distribution reforms
CARE Ratings & Research:
While the Budget is not expected to bring about a sea change, it was hoped that there would be measures to spur investment. This has been done more on the expenditure side, by focusing on infrastructure, MSMEs and banking sector. Sectors such as power, cement, bricks, coal, electronics etc would be positively impacted, though the net impact of the higher freight rates due to the railway budget would finally determine the end impact given that the indirect rates have been more or less held stable. The relatively lower deficit number for FY14 looks credible and possibly will be achieved that will help the market proceed on this basis.
Kotak Investment Banking: The Union Budget FY 14 has announced several measures to support Infrastructure development in the country. Notable amongst them include proposed award of 3,000 km of roads by September 2013 and acceptance of a long awaited demand of road developers in the form of a carving out the regulatory function of NHAI into an independent body. Review of the Oil & Gas policy including pricing of natural gas would provide clear price signals to all the stakeholders and would likely lead to enhanced production of gas and gas based power generation. In addition, pooling of imported coal with domestic coal for power generation and PPP in coal mining with Coal India as the counterparty is expected to bring private sector expertise and efficiency in the sector thereby enhancing domestic coal availability. The Government has also announced its continued support to waste to energy projects for effective waste disposal through measures like viability gap funding, repayable grant and low cost debt etc. Financial assistance from National Clean Fund to IREDA for providing debt at low cost to renewable power projects is expected to provide impetus to renewable power capacity additions. However, relief on MAT for infrastructure projects was widely expected but did not materialize.
KPMG India: Given the backdrop of growing economic challenges due to stagnant economy, hopes built in when the finance Minister announced the mool mantra of Budget 2013 higher growth leading to inclusive and sustainable development' and the same have been fulfilled to an extent for the power and oil & gas sector.
Proposing low interest finance for IREDA to on-lend renewable energy projects, reintroducing generation based incentives for the wind sector will support the renewable energy sector. Announcing the government support to cities and municipalities to take up waste-to-energy projects in Public Private Partnership (PPP') mode will provide additional opportunities. As far as the conventional power sector is concerned, bold steps have been taken by increasing the import duty on steam coal and increasing the freight rate on coal, however, the same has been finely balanced by proposing a formulation of PPP policy with Coal India (thereby signaling the need for increased domestic coal production) and extending the tax holiday for another year, however, an extension for a 5 year period would have provided more certainty.
On the oil & gas sector front, a policy to encourage production of shale gas and clearance of NELP blocks, which were awarded but are stalled, will encourage the oil & gas sector. The finance minister also proposed that the oil & gas exploration policy will be reviewed to move from profit sharing contracts to revenue sharing contracts, which may increase the costs.
Indian Metals & Ferro Alloys: Overall it is a pragmatic budget where the Finance Minister has tried to balance the need to boost growth with prudent fiscal policies. But it would have been nice to see some directional guidance and movement towards bold reforms. There is a stated intent to boost manufacturing growth but no significant measures have been taken beyond an additional investment allowance of 15 per cent for capex of more than Rs 100 crore and extension of 80 IA benefit for power plants for one more year. It may be too much to expect being the last full budget before elections but an emphasis on big ticket reforms would have been welcome. Also, the importance of infrastructure was mentioned but no significant measures have been taken in this regard although there are some positive indicators.
Techno Electric & Engineering Co Ltd: Allocation of Rs 800 crore for the Ministry of New & Renewable Energy, restoration of GBI is a good move for renewable energy industry. Finance Minister's move to provide low interest bearing funds from National Clean Energy Fund to IREDA for lending to viable renewable energy projects will further improve the sentiments. This will also help in lowering interest costs which will ultimately benefit the customer. In addition, the initiative on renewable energy will lower the coal import bill which has been one of the main reasons for high current account deficit as highlighted by FM. Investment allowance of 15 per cent on high value investments (greater than Rs 100cr) in plant and machinery would encourage companies to revive stalled projects and make new investments.
Supreme Infrastructure India Ltd: The announced on allocation of Rs 55 lakh crore in infrastructure sector for the 12th Plan of which 47 per cent will be shared by the private sector as an encouraging sign for the infrastructure sector. The decision to set up a regulatory body to address bottlenecks will help the industry to clear regulatory hurdles.
"Solar Industry Needs Incentive Based Initiatives''In an interaction with Pradeep Pandey CLP Power India's MD Rajiv Mishra provides an in-depth insight about the various facets of the Union Budget 2013-14.
How shall the extension of the tax holiday provision under 80A-I help power generation companies?
The extension of tax holidays is a welcome move for the power sector, since it will encourage more players to invest in energy and will also lead to capacity additions. For a country that is largely energy deficient and unable to meet the demand-supply gap, this move will provide a much needed boost to the sector and will help achieve the Planning Commission's target of achieving 30 GW by 2017. However, the industry was expecting it for more than a year as many projects in the country are delayed for more than one and a half year
After the reintroduction of generation based incentives for wind energy, do you see a revival in investor's interest?
Although many global investors have recognised the rich renewable resources available in India and the overall market potential, the industry needs regulatory incentives to fuel investments in this sector. With the accelerated depreciation' benefit being abolished, reintroducing the GBI assumes even greater importance than it has in the past. I am confident that, once operationalised, the generation based incentive will encourage investments and will promote other environment-friendly energy projects in the country as well.
Solar energy sector remained untouched in the budget, what kind of initiatives you think were required?
At present, renewable energy accounts for about 12.20 per cent of India's installed generation capacity of 2,11,766.22 MW. Much of this capacity is wind-based, with the share of solar power being only 980 MW as of December 2012. It is very important that the solar sector gets an impetus; else its growth will continue to remain marginal. Having invested in one of the world's largest solar photovoltaic plants in Thailand, we, at CLP, are also keen on making a meaningful contributing to the growth of this sector. However, for that and other investments to come in, the industry would need a few incentive based initiatives.
An initiative that could help the sector is creation of a separate low cost fund for solar power projects to reduce their tariffs and a step towards eliminating subsidy over time. This fund can allow developers to choose their suppliers and thus provide a competitive platform for Indian solar manufacturers to compete with global counterparts. A long term tax holiday should also be extended to the Solar energy projects that would promote the growth and development of the sector.
According to you, will discom's financial restructuring will help the industry in long-term?
I believe that the debt restructuring scheme announced in September last year will help reform the financial health of the discoms. The approved debt restructuring package for the State Electricity Boards of around Rs 2 lakh Crore will facilitate a turnaround for the discoms and will fund the operational performance. For the industry to function efficiently, it is also vital that the State Regulatory Commissions revise power tariffs on a regular basis. We also believe that there needs to be a collaborative effort from each state, along with government's support that will reduce the financial stress of power distribution companies.
Two states Punjab and MP are not ready to follow the trend of discom financial restructuring, in your opinion why they are not?
As I said, the government has taken a positive step in introducing reforms like the financial restructuring package (FRP) to improve the health of electricity distribution companies. However, the lack of acceptance from some states is primarily due to expectation of a separate or tailored reform for some of them, which seems very unlikely to come through. The respective state governments and electricity distribution companies need to work together and resolve specific issues or reservations involved.
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