Budget - Effect on Power Sector

The annual drama of budget was done and over with last Friday on 16th March 2012. This time the Railway Budget made more news and had more drama than the General Budget. It may be possible that Railway budget has an overpowering effect and hence the General Budget was toned down!

The key effects on the power sector are given below:

1. Customs Duty (5%) exempted on imported coal and gas (imported by ships in form of LNG)
2. Countervailing Duty of 1% (reduced from earlier 5%)
3. Reduction in witholding tax from 20% to 5% on interest payments on External Commercial Borrowings (ECB) for 3 years
4. Decrease in plan allocation for Rajiv Gandhi Grameen Vidyutikiran Yojana (RGGVY) from Rs. 6000 Crs (2011-12) to Rs. 4900 Crs (2012-13) - should not cause much of impact as usage was only Rs. 3544 Crs.
5. Increase in plan allocation to Restructure Accelerated Power Development and Reforms Program (R-APDRP) from Rs. 2034 Crs to Rs. 3114 Crs - however again the usage was only Rs. 1668 Crs
6. Rs. 10,000 Crs worth tax-free infrastructure bonds for power sector
7. Extension of 80IA provision for one more year
8. Additional depreciation of 20% for new assets acquired by power generation company 
9. Part refinancing of rupee loans using ECBs permitted
10. Solar thermal power plant equipment exempt from import duty
11. Subject to end use condition the basic customs duty on boiler quality tubes and pipes for manufacture of boilers reduced from 10% to 7.5%. 
12. Concessional rate of 5% basic customs duty is being extended to raw materials for the manufacture of intermediates, parts and sub-parts of blades for rotors for wind energy generators. 
13. Exemption from tax on dividend paid by SPV to parent company, ensuring higher returns
14. Duty - free import of mining equipment would lower the mining costs and eventually fuel costs

Industry demands not met by the budget

1. Protection to domestic electrical equipment manufacturing including equipment for generation projects
2. Service tax exemption for all power projects
3. Duty-free import of CRGO steel (major component of all electrical equipment)

The industry has overall been happy with the budget, but the fundamentals affecting the power sector still needs to be resolved through policy issues. Some of the main issues to be resolved are given below:

1. Allowing steep tariff hikes
2. State owned companies to increase their efficiencies and ensure more availability of fuel
3. Land acquisition, environmental and forest clearances

For the power sector, the concerns are still the same, nothing much has been provided.

UMPP and surplus coal

The Comptroller and Auditor General has made yet another report on Reliance Power diverting the coal from mines allotted for UMPPs (Ultra Mega Power Project). R-Power has diverted coal from its mines at Kerandiri (Jharkhand) and Moher-Chatrasal (Madhya Pradesh) for its other projects. The report talks about issues of provision for diversion in bidding and allotment documents and estimation of financial implications.

We shall look at the core issue - Should coal diversion be allowed?

In principle, all activities which are economically viable and environmentally non-destructive shall be allowed. Coal is a natural resource to be used for development of the nation. Ideally, coal should be used for nearby power and industrial areas. However, if these are not in place, coal may be diverted to where it can be used.

Now adding a second layer to the argument, should coal be diverted when it has been allotted a specific purpose - i.e. operation of UMPP and supply of power. What if R-Power declares after 10 years, that they have run out of coal and hence can't supply power for next 15 years, unless additional coal mines are allotted. This would then imply that R-Power is using cheap coal to sell costly power (from its other projects) and denying the public of cheap power (from UMPP).

Another, thought could be that Reliance is utilizing the proceeds of coal diversion to fund building its UMPP. As long as Reliance does not go back on its contract and if bid documents allow it, coal diversion from UMPP or any other mines shall be allowed.

Coal Blocks - licences to be revoked?

The coal ministry has stated that it may revoke licences of 60 companies for slow development of coal blocks. The companies include major players like Tata Power, Reliance Power, ArcelorMittal, Jindal Steel & Power, Monnet Ispat, Hindalco, Tata Sponge, Electro Steel Casting, MMTC, NALCO etc.

The major problems faced by these companies are

• Environmental / Forest clearance
• Land acquisition
• Mining Lease

It is a good sign that the Coal Ministry is pushing the private developers to make progress on the mines/coal blocks allotted to them, however, revoking of licences would not solve the issues. The Ministry would have to go through the allocation process again and the next batch would face similar issues. The Ministry may charge hefty fines in cases of negligence by developers - however if the issue is stuck with some Govt. department, the Ministry may take the onus on itself and try to resolve it through the highest powers possible.

On an earlier occasion,23 mining licences for captive coal blocks were revoked and later allotted to Coal India Ltd. (a PSU). What has Coal India done with regards these? If they have made progress on the same, the processes need to be highlighted to private developers.

When private players are ready to do investments, Govt. should also take a step forward and provide the required clearances after adequate due diligence. Contract clauses and efficient monitoring would ensure that the private player does not misuse the natural resources.

Additionally, mine development is a relatively nascent industry in India and the Govt. companies have had the maximum exposure so far. Govt. should assist the private players with the know-how and supply of trained manpower on deputation basis. 

Renewables - How long on Govt. crutches?

The Govt. is considering extension of incentives for the wind energy sector in the coming budget. Generation - Based Incentive (GBI) and Accelerated Depreciation (AD) are the two incentives which has propelled the wind power capacity so far. GBI may be continued as it is paid only on power generation. However, now options like RECs (Renewable Energy Certificates) are also available, which can take place of GBI. RECs would require lesser involvement of the Govt. and increase efficiency of the developer. AD, which is being provided to captive users, should be done away with on an immediate basis as it is used as an income-tax saving tool rather than for installation of wind energy capacity. In one of the wind energy projects its was observed that turbines have been set-up, however, no generator had been installed, which is a clear case of mis-use of AD incentive. Govt. should take back a step and let developers build capacities only if it is viable business.

On the solar power front, Govt. has announced that the phase - II of JNNSM would be Indianized, by which imported solar panels/cells would not be allowed for setting up projects. Indian solar equipment industry is a fledgling industry right now with a very few number of players. The solar energy generation from Indian as well as foreign equipment over long periods of time is yet to be tested in the Indian environment. The National Solar Mission was launched in 2009 and the Govt. should wait for at least 10-15 years for the sector to develop before taking calls on nationality of equipment manufacturer. If foreign players can quote abnormally low prices like Rs. 7.18/kWh, it is the time to wait and watch how things work out, rather than lashing out on foreign equipment.

Renewable energy has been mainly sustaining on government subsidies and policies. Although during the initial periods Govt. has to provide subsidies, there should be timeframe in which these should be phased out so that market forces determine which source of energy is to be used.

Chinese Equipment and Import Duties

The government is considering a proposal to increase import duty on power generation equipment to 19% from current 5% applicable to less than 1000 MW while negligible duty is applicable to 1000 + MW. This is to provide a level playing field for domestic manufacturers against the Chinese manufacturers who provide equipment very cheap.

However, we think that the government should not interfere more than required and focus on the ultimate goal of reliable, quality and affordable power to all. It should be left to the power project developers to their discretion on sourcing of equipment. While dealing for the PSU, the government took the stand that equipment should be manufactured in India, due to while various foreign players, including Chinese set shop in India. So, now should these also get the benefit which is clearly intended for the state player BHEL?

Additionally, the developers who buy Chinese equipment also get cheap debt for the same. Would the Government instruct Indian Banks to provide cheap debt for usage of Indian equipment? (As a separate matter, Indian banks have become quite averse on providing loans to power sector.)

The Generation end of power value chain is well developed with huge private participation. The government should focus on the distribution end - especially on collection and efficiencies of Distribution Companies.

Coal Ministry to Outsource Bidding Process

The coal ministry has decided to outsource the entire bidding process for auction of over 50 coal blocks that hold an estimated 18,000 million tonnes in reserves.

The ministry will soon hire a consultant to finalise the bid documents, carry out the bidding exercise. The task of inviting global bids and selecting a consultant has been given to Central Mine Planning & Design Institute Ltd (CMPDIL), a Coal India subsidiary that specialises in coal block exploration, research and development.

According to reports, the ministry will auction the blocks on upfront payment basis. Bidding in the first round will be done for blocks in Chhattisgarh, Jharkhand, Maharashtra, West Bengal, Orissa, Madhya Pradesh and Andhra Pradesh.

Source: http://economictimes.indiatimes.com/news/news-by-industry/indl-goods-/-svs/metals-mining/coal-ministry-to-outsource-bidding-process-for-auction-of-50-coal-blocks/articleshow/12090024.cms

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