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Cover Story | February 2015

How the budget can fire power

On 28th February, when Finance Minister Arun Jaitley presents his second budget (after his Interim Budget 2014 in July) the power industry may expect some major policy relief as it will be the first full-fledged budget presented by the FM. In the Interim Budget last year, the FM managed to please the sector with some tax sops and big-bang project announcements. Now is the time for the FM to re-chart the fortunes of the power industry.

Over the last six months, there have been quite a few positive developments at the policy level for the power sector. Here are a few of the important ones: (a) favourable amendments so as to expedite environment clearance by MoEF; (b) notification of Coal Mines (Special Provisions) Ordinance within a month post de-allocation of captive coal blocks by the Supreme Court and (c) efforts being undertaken by the Ministry of Power towards the rationalisation of coal linkage to the power sector so as to optimise the logistics cost and improve coal availability.

Given the issues related to domestic coal shortages in the country, the GoI´s thrust to ensure overall coal mine allocation in a timely manner is also a positive for the sector. With about 63 coal blocks (28 for auction & balance 35 for allotment to Central/State government companies) earmarked for the power sector in the first phase of coal mine allocation, generation capacity is estimated to be benefited by about 66 GW, in our view.

Also, the reverse bidding approach approved by GoI with ceiling price kept at notified price of Coal India Ltd is favourable for the sector, especially key off-takers, i.e., State-owned distribution utilities, as generation tariff is estimated to remain lower than the same based on linkage route.

Besides the fact that the auction route would allow domestic coal linkage based projects especially in private IPP segment to mitigate fuel supply risks, such projects (which have Case 1 competitively bid PPAs where bidding assumed domestic coal availability & currently are facing risk of mismatch between fuel cost & recovery of the same through tariff due to dependence on costlier imports to bridge the domestic coal shortfall) also remain better placed to mitigate such price risk in auction route. However, ability of the bidders to keep their actual mining costs in line with the quoted bid price would be critical & any aggressive bidding approach if adopted, could lead to risk of under-recovery in variable cost.

Industry players also see significant investments by the utilities to continue in the transmission & distribution segment in the sector, given the increased focus by GoI to improve the distribution loss levels (which still remain high on all-India basis) as well as to ensure reliable power supply to rural households. This is also evident from the recent notification of (a) Deen Dayal Upadhyay Gram Jyoti Yojana (with estimated project outlay of Rs 430 billion) which has a main objective of separation of agriculture and rural household supply feeders, and (b) Integrated Power Development Scheme which also has a focus on investment schemes (with estimated project outlay of Rs 330 billion) to be executed in urban areas so as to control the loss levels. Also, overall demand outlook for investments in the renewable energy segment (both wind and solar) remains favourable, which is also aided by an increasingly favourable policy & regulatory support regime.

For the wind segment, re-introduction of accelerated depreciation benefit since July 2014 remains a key positive which is favourable for non-IPP segment and thus, expected to result in incremental annual demand at about 800 MW. In case of the solar energy sector, the solar PV segment is favourably placed in our view, which is also supported by its increasing cost competitiveness and also the fact that GoI has put in place large sized capacity addition programme of 15 GW by FY 2022 in Batch 2 of Phase 2 under the National Solar Mission (for which policy clarity is in place for the first tranche of 3 GW).

A recap To begin with, let´s take stock of what was announced in the earlier Union Budget 2014-15.

The proposal to streamline power supply to rural areas will boost industrial growth; employment of rural human capital being a positive by-product of this initiative. The earlier budget has focused on establishing the green energy corridor, setting up of Ultra Mega Solar Power Projects, undertaking a drive aimed at re-exploration of natural gas reserves coupled with certain other policy measures.

Power companies were struggling due to a shortfall in coal linkages which required them to augment their production. However, with the coal block auction in process, the availability of coal is likely to be in place in the next six months. (See exclusive interview of Anil Swarup, Secretary, Ministry of Coal, government of India) Meanwhile, due to specific industry demands, rationalisation of customs duties on various grades of coal has been carried out which will help such companies not only to overcome their shortfall but also put to rest the ambiguity over classification of various forms of coal due to difference in their duty rates.

Further, concessions and benefits in customs and excise duties for the renewable energy sector will bolster confidence in the industry and have a far reaching impact on the generation of power through alternate sources of energy. On the income-tax front, extension of sunset clause for the commencement of business by certain power sector companies for availing deduction under Section 80IA has come as a major boost.

What India Inc demands
It´s obvious that the stake-holders in the power sector want more. The sector wants more modifications in the current direct as well as indirect tax regime that may help the sector to grow more in the coming year. In fact, the independent power producers (IPPs) in the country have shared a list of issues with POWER TODAY that has been shared with the Finance Ministry and are likely to be considered in the forthcoming Union Budget 2015 due on 28th February.

As things stand, it would be fair to say that the power sector has got all its hopes riding on the Union budget. With the ambitious growth targets being laid down by the government for the power sector, it´s the Finance Minister´s fiscal framework that will decide the actual implementation of projects and the success of the ´Power for all´ objective. For now, it´s over to the FM.

Factual enlightenment

  • 63 coal blocks to benefit 66 GW power projects.
  • CIL to increase its output from 500 mt to one billion.
  • 51 rail line projects identified for coal linkage.
  • Integrated Power Development Scheme with Rs 330 billion investment.

Custom duty benefit for Hydropower Projects - Electromagnetic Equipment
It is proposed that custom duty exemption benefits on imported electromechanical equipments may be restored for mega hydro power projects. The EM component in a typical hydropower project constitutes about 15 per cent of total project cost. Out of this, cost of imported component is about 20 per cent of the cost of EM component. The price of goods (EM) based on the cost incurred for hydro-projects is Rs 160 crore for a 1,000 MW hydro project. Since the customs duty rate is 23.02 per cent, and if the duty benefits are extended to the above goods, the project cost will proportionately be reduced, thus incentivising much needed hydropower generation projects in the country. For 1000 MW hydro project, project cost will reduce by about Rs 37 crore. Meanwhile, an excise duty cut (current 12.36 per cent) for EM components will benefit a 1,000 MW hydro project at least by Rs 93 crore.

Customs duty exemptions to mega power projects
The government of India has issued a Notification (49/2012-Customs dated 10.09.2012) to withdraw customs duty benefits from power project developers for new mega power projects. This would require amendment in Exemption Notification No 12/2012-Cus Entry No 507. It may be noted that the benefits accorded to Mega Power Plants were directly responsible for the massive generation capacity addition in the 11th Plan and the initial period of the 12th Plan. In view of the severe scarcity of power in the country and high cost of alternative sources of energy, till the time the country achieves sufficient capacity in thermal power, customs exemption should continue for mega power projects. It will give a fillip for the creation of new power generating capacity.

Extending GST to power industry
It was a long-pending issue that the power industry was demanding. However in the proposed GST regime, power industry has been kept outside its ambit. Under the present Indirect Tax regime, electricity is exempted from levy of excise duty, service tax and VAT. Since no taxes are levied on output, indirect taxes like VAT, service tax, excise duty paid on inputs become a cost to the power industry. In addition to the above, the power industry also pays electricity duty and tax on sale of electricity which gets added to the tariff cost. Excise duty, VAT, service tax paid on procurement/input services cannot be set off against the above levies since they are charged under a different law. Due to above cascading effect of indirect taxes the tariff rate of power goes up.

Capital Gains Tax for sponsors in InvIT
Sale of units of InvITs by sponsor should be exempt from Long Term Capital Gains (LTCG) tax in line with other listed real estate companies where LTCG tax is exempted where STT is paid. Promoters of listed companies are enjoying the benefit of LTCG tax exemption where STT is paid. If similar benefit is not extended to sponsors of InvITs it would not offer InvIT sponsors a level playing field vis-a-vis other listed companies and will discourage sponsors from listing yielding assets as InvITs. Sponsors may be subject to a lock-in of their holding for at least a year to avail this exemption.

Fiscal concessions for transmission projects
With the government approving nine new transmission projects with an aggregate cost of over Rs12,500 crore to fast track building of high capacity inter-State power transmission lines and recently approved another eight projects worth Rs 53,000 crore through tariff-based competitive bidding (TBCB) route, there is no policy in place for fiscal concessions/benefits for setting up of power transmission lines. The industry wants benefits of mega power projects to be extended to transmission projects too.

Excise exemption for cement industry considering hydro projects
The government of India had issued Notification (No 34/2012-CE dated 10.09.2012) to withdraw excise duty benefits from power project developers for new mega power projects. The notification withdraws exemption of ED for new mega projects and also cement is not explicitly covered under the notification and hence, not considered eligible for excise duty exemption. Since the cost of the cement constitutes about 18 per cent of total cost, exemption of excise duty would lower the cost of project by at least Rs 111 crore for a 1,000 MW hydro project.

The recent announcement of progressive plans and policies of the government of India in the last six months or so and visible effective steps taken in implementing these policies have brought up a new urgency in effective implementation of the policies on a fast track basis. POWER TODAY lists out some of the expectations from the allied sectors of the power industry.

What India Inc wants from the Union Budget

This year´s Union Budget is expected to be unique and innovative and different because it has to address substantially increased expenses and accumulated losses and shortage of funds to the sources of funds which were limited. And yet (the budget has) to create ways to generate inflow of funds for the government including curtailment of misused subsidies.
- Ved Prakash Mahendru, CMD, Eon Electric Ltd.

We would also like to see more movement on the smart cities agenda with clearer policies that incentivises private sector involvement and even investment.
- Dr AS Prasad, Head-Product and Marketing, Emerson Network Power, India.

We want the government to make the processes simpler and easier. We are looking for special incentives such as land and infrastructure to foreign companies to facilitate investments.
- Zhiguo Zhu, Senior Vice President and President - Module Business Unit of Trina Solar Ltd.

With the increased focus on renewable energy sector, we expect higher budgetary allocation to fund the grant and viability based support in the schemes recently announced such as solar parks & grid connected solar PV project schemes.
- Girish Kadam, Vice President, Corporate Sector Ratings, ICRA Ltd.

The manufacturing sector is one of the key drivers of the Indian economy and it is therefore critical that focused attention be given for stimulation of India´s manufacturing growth. We eagerly look forward to formulation and implementation of stable policies along with a clearer and transparent tax regime.
- Shishir Joshipura, Managing Director, SKF India.

The government should focus on creating a positive and encouraging environment for Indian and foreign investors by providing clarity around taxation including implementation of Direct Taxes Code (DTC), GST and removing retrospective tax amendments.
- Manu Rikhye, Executive Vice President and Managing Director, India -Encore Capital Group.

For the oil & gas sector, there were no major announcements in the last Union budget. We look forward to a policy on Coal Bed Methane (CBM) and Petroleum Natural Gas (PNG), as has been hinted by the government. India has good potential in CBM, which not only provides a cleaner energy option as compared to other fossil fuels, but also is a import substitute for RNLG.
- LK Gupta, MD & CEO, Essar Oil.

Follow through with the Energy Conservation Building Code. This was ushered in by the Bureau of Energy Efficiency in 2007 but with the 2017 deadline fast approaching, many States like West Bengal are yet to notify it. This is a critical area as we believe these norms when implemented will reduce energy demand by a whopping 25 per cent in new buildings as compared to the older ones.
- Manish Tiwari, CEO, Biltech, an Avantha Group Company.

There is a need for rapid implementation of uniform Goods & Services Tax (GST) for decreasing the compliance burden for businesses. It will also reduce paperwork and make the tax system simple and transparent.
- Dinesh Aggarwal, Jt. Managing Director, Anchor Electricals Pvt. Ltd.

Good encouragement for non-renewable energy sector subsidy and/or to support infrastructure and engineering industry in the form of interest free finance for limited period to compete with our neighbouring country
- V B Kalyankar, CEO, Elecon.

A strong policy framework should give the utilities the position whereby they can offer to supply solar deployment or lease schemes to their consumers. Rather than being passive recipients of power, the utilities can play a critical role in the rooftop solar value chain.
- Anurag Garg, Vice President-Solar Business, Schneider Electric India.

In the wake of global warming and rising energy expenses, the government should also officially acknowledge and recognise manufacturers of eco-friendly and green consumer durables.
- Rajeev Sharma, Strategic Planning and Business Development, Mitsubishi Electric India.

Creating land banks across the country to be leased out for solar project development will drastically induce the growth of solar power projects in the country and also reduce the time of implementation of the projects.
- Manoj Upadhyay, CMD, ACME.

- Rahul Kamat

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