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Cover Story | September 2017

Positive for coal, marginally negative for solar, wind

<span style="font-weight: bold;">Sabyasachi Majumdar, Senior Vice President and Group Head, ICRA Limited</span><br /> <br /> <span style="font-weight: bold;">What is the difference between the prevailing prices of various products before and after introduction of GST?</span><br /> In terms of impact of GST on the power sector, it is a mixed bag with the effect being positive for some and marginally negative for others. The reduction in tax rate on domestic coal will provide a relief to coal based power plants in the cost of power generation even after accounting for an increase in capital cost (due to higher tax rates in boiler, turbine, generator segment). <p></p> <p>On the other hand, for wind and solar energy sector, the impact is likely to be marginally negative due to increase in capital cost (with higher tax rates ), given that wind &amp; solar energy sector has been availing various concessional rates and tax exemptions already.</p> <p> <span style="font-weight: bold;">Is there any impact of GST on different sections in the power sector equipment vendors like manufacturers, utility IPPs, fabricators, assemblers, EPC contractors, distributors, SMEs, dealers etc.?</span><br /> Domestic coal will be taxed at 5% under GST (previous rate 11-12%) while imported coal will continue to attract basic customs duty (BCD). So the impact will be positive for domestic coal users and negative for imported coal users. It is estimated that power producers who use domestic coal will get a relief in variable cost of generation by about 3-4 paise per unit. However for power producers who use imported coal, the variable cost of generation would increase by 7 paise per unit.</p> <p>For domestic equipment vendors mainly wind operated electricity generator, its components and parts thereof including rotor and wind turbine controller suppliers, GST would be applicable at 5% (previous 3-4%). In addition to GST of 5%, the basic customs duty (BCD) on imported equipment would continue. The impact would vary depending on the VAT rate applicable in a state and mix of imported equipment.</p> <p> The overall impact including for balance of plant equipment and GST on service component is estimated to increase the capital cost for new projects by ~4%, assuming 30% imported components.</p> <p>For domestic equipment vendors including Boiler, turbine and generator (BTG) equipment for thermal power projects, GST would be applicable at the rate of 18% (previous 16%). In addition, the BCD on imported component would continue. The impact therefore would differ according to the state wise applicable VAT rate and the mix of imported equipment. The overall impact including for balance of plant equipment and GST on service component is estimated to increase the capital cost for imported BTG based projects by ~2%</p> <p>For solar IPPs, the GST impact is marginally negative. With 5% GST rate on solar PV modules, the impact on capital cost for new solar power PV based projects is estimated to be limited at about 6%, which would thus translate into an increase in levellised cost of generation by 11-12 paise per unit for such projects. With this, the developers who have already won solar power projects under the competitive bidding route especially in last six month period, where the execution is under progress would incur a higher capital cost as against the cost envisaged at the time of bidding. Given the fact that the competitively bid-based tariffs have significantly come down in the solar power segment over the last 4-5 month period, timely approval by regulators for pass-through of any higher cost incidence due to change in taxation which is permitted under change in law, remains crucial from developers' perspective.</p>
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17 Oct 2016
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