Budget 2007-08: Power

Budget Measures

Budget Impact

Increase in corpus of RIDF-XIII and higher allocation for RGGVY to aid addition to power capacities for rural areas

Government’s equity and debt support to central public sector enterprises to aid funding for national electrification programme

Setting up of merchant power plants by private developers to aid the power generation sector

Private sector participation in transmission projects likely to lead to higher spending and faster creation of transmission infrastructure

Hike in budgetary support for APDRP from Rs 6.5 bn to Rs 8 bn to aid reduction in losses in the transmission and distribution segments through way of incentives

Custom duty exemption on coking coal to lead to around 5 paise reduction in tariff for the end user of electricity

Higher education cess and dividend distribution tax to impact net profits and retained earnings

As for increase in tax on dividend distributed by money market and liquid mutual funds, this is likely to impact the large debt investments made by power sector companies

Sector Outlook

While the finance minister has talked of setting up of ultra mega power projects and greater thrust on rural electrification, we find nothing new in these announcements, as these have already been made earlier. However, despite this enhanced focus, we remain concerned about the pace of actual implementation of the planned projects, in all the segments of power generation, transmission and distribution. The full exemption on import duty on coking coal will lead to a marginal reduction in electricity tariffs. However, we believe that the increase in tax on dividend distributed by money market and liquid mutual funds is likely to impact the large debt investments made by power sector companies. Overall, we remain cautiously optimistic on the sector's progress in the years to come. Long term fuel linkages and investment in transmission and distribution are our key areas of consideration with respect to the sector's growth prospects.

Company Impact

Boost to rural electrification to benefit generators like NTPC, Tata Power, Reliance Energy and consequently power generation equipment and service providers like BHEL and Siemens

Aid to setting up of merchant power plants to benefit private developers like Tata Power and Reliance Energy

Private sector participation in transmission projects and hike in budgetary support for APDRP to lead to increased benefits for companies like ABB and Siemens

Industry Wish List

Clarification on treatment of MAT as part of Income tax liability while determining tariffs to be paid by state electricity boards on power purchase agreements with power generating companies

Fringe benefit tax to be made an allowable expense by regulator while determining tariffs

Extending the period of Section 115J by 3-5 years over its expiry in 2010

Budget over the years

Financial institutions like IDFC, ICICI Bank, SBI, LIC, Bank of Baroda and Punjab National Bank will form an Inter-Institutional Group (IIG) where in, they will pool resources to the tune of Rs 400 bn, which will be made available to infrastructure projects as and when needed.

Government to provide equity support of around Rs 142 bn and loans worth Rs 21 bn to central public sector enterprises including power.

Tax benefit under Section 80 IA extended to projects undertaken during the period April 1, 2004 to March 31, 2006.

Basic necessities like power to be made available to everyone.

2% education cess on all taxes.

Creation of a rural electricity distribution backbone envisaged

To reach electricity to the remaining 125,000 villages and offer electricity connection to 23 m households

Proposal for setting up a 33/11 kV sub station in every hub and at least 1 transformer in every village

Five ultra mega power projects of 4,000 MW each to be awarded before December 31, 2006

Tenth plan target of 3,075 MW of installed capacity for non-conventional energy sources exceeded by December 31, 2005 with installation of 3,650 MW capacity.

Rs 5.9 bn proposed to be spent on non-conventional energy resources.

10,000 villages in 2005-06 and 40,000 more villages in 2006-07 to be electrified under the Rajiv Gandhi Grameen Vidyutikaran Yojana.

Coal reserves of 20 bn tonnes to be de-blocked for power projects

Customs duty on natural gas reduced from 10% to 5%

Large investment plans: With the recent string of reforms in the Indian power sector, the sector is expected to grow at a rapid rate going forward. As per the commissioning programme, till March 2010, an aggregate generation capacity of 43,865 MW is expected to come on stream. The government has also indicated of a projected capacity expansion of 67,000 MW in the 11th five-year plan (2007-12).

Electricity Act 2003: The Electricity Act 2003 has provided great opportunity for power companies, given its provisions relating to the abolishment of various licensing norms, liberalisation of the power distribution business and opening of power trading for private sector power companies. Though the track record of execution of such reforms is appalling, the power sector is slowly but surely set for a change. Corporatisation of SEBs and linking profitability to the state government's plan outlay are likely to give some sort of fiscal strength to the key sector participants in the long run.

Benefits of unbundling: Provision for unbundling of power generation, transmission & distribution companies has been laid. This will result in reducing T&D losses, as incentives to these private players are directly linked to reduction in T&D losses.

T&D losses pinch: The T&D losses, which are still on the higher side, result in lower effective realisation of per unit of power produced by generation companies. Poor T&D infrastructure remains a cause of concern. It is due to this and few other factors that the losses are on the higher side as compared to other countries. As a result, the industry is able to deliver less than its actual potential. This, in turn, has also affected the ability of players to re-invest towards growth initiatives. Average transmission and distribution losses (T&D) exceed 25% of total power generation compared to less than 15% for developing economies. The T&D losses are due to a variety of reasons, viz., substantial energy sold at low voltage, sparsely distributed loads over large rural areas, inadequate investment in distribution system, improper billing, and high pilferage.

Existing capacity under-utilisation: The poor performance of India's existing generating units has been a principal cause of power shortages and unreliable quality of power supply. The primary culprits are the coal-fired thermal power stations, which accounts for over 65% of total installed capacity. The average plant load factor (PLF) of thermal power stations in India is less than 60%, but varies considerably across regions. However, not all of the thermal generating stations have such dismal records. For instance, the performance of 500 MW and 200 MW units has been satisfactory, and their PLFs have been higher than the national average. It is, in fact, the thermal units of 120/140 MW and below that are cause for concern.

SEBs still reeling under losses: Poor financial health of a large number of state electricity boards (SEBs) continues to be cause of concern. Though some measures have been taken to address this issue, these have been inappropriate. Inability to take hard decisions has been impacting industry fortunes.