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Budget 2010 and Power Sector, Shri R V Shahi, Former Secretary, Ministry of Power

Annual Budget of the Government of India, which is presented by the Finance Minister in the last week of February, for the ensuing financial year commencing from 1st April, is an exercise, which people wait for with keen interest. This exercise reflects the direction of the Government in respect of various economic and social aspects. it reflects the priorities of expenditure and also the areas of raising resources. This exercise, therefore, becomes relevant for all sections of society - from common man to the wealthy segments. Different industries, both in the private and public sectors, look forward to the policy announcements in the Budget to see what are the pluses and minuses for them. Besides, they also look forward to positive policy prouncements which will lead to a better investor friendly climate.

Growth of Indian economy is intensely dependant on infrastructure, and more particularly on power. In the last few years what the Budget conveys and what it does not, about the power sector, has been of keen interest for all the concerned stakeholders.

1.

Budget 2010 has laid special emphasis on power. In his Budget speech the Finance Minister said "Government accords the highest priority to capacity addition in the power sector. The framework for inclusion of super critical technology in large capacity power plants of NTPC is now in place. The Mega Power Policy has been modified and is now consistent with National Electricity Policy 2005 and Tariff Policy 2006. It will help in lowering the cost of generation and the cost of power purchased by distribution utilities. I have more than doubled the plant allocation for power sector from Rs. 2,230 Crores in 2009-2010 to Rs. 5,130 Crores in 2010-11. This does not include allocation for RGGVY, which is a part of Bharat Nirman".

2.

From the above it may be observed that power sector indeed has been recognised as an essential element of economic development and, therefore, Government accords "highest priority to capacity addition". Secondly, Government is concerned that the cost of power generation and, therefore, it says that the cost at which distribution utilities procure power should be lowered. This concern is reflected by the provisions of the Mega Power Project Policy which enables reducing the cost of generation by about 15 paise per Kwhr because of exemption from customs duty and excise. Though there was an expectation in the industry that the threshold level of capacity for Mega Power Policy will be reduced from 1,000 MW, the fact of the matter is that most of the developers in the public sector as well as in the private sector are developing power projects of 1,000 MW and more. Therefore, even if the eligibility level of capacity has not been reduced, it may not matter much, looking at it at the macro level.

3.

Another aspect where there is a relevance to the power sector is about the Infrastructure Bond. The announcement that investment in Infrastructure Bonds to the extent of Rs. 20,000 will be tax free, will definitely lead to mopping up of financial resources at retail level in a significant way. It has been clarified that this Rs. 20,000 is over and above the present exemption limit of Rs. 1 lakh. Power sector constitutes almost 50% of infrastructure in terms of capital investments required. Therefore, this relief is going to help towards meeting the investment needs of the power sector.

4.

As we know, Indian power sector is heavily dependant on domestic coal industry. While there have been several initiatives to reform power sector, which have been put in place in last about ten years, commensurate reform movements in the coal sector have not taken place. The Integrated Energy Policy had recommended for setting up of a Coal Regulator. In the Budget speech of the Finance Minister this has been confirmed "Government proposes to take steps to set up a Coal Regulatory Authority to create a level playing field in the coal sector. This would facilitate resolution of issues like economic pricing of coal and benchmarking of standards of performance". Coal Regulator has been felt to be essential for last few years because almost entire coal industry has been under the Government control so far, captive coal developers have also been allotted a large number of coal blocks, and hence, balancing the interests of consumers on the one hand and of investors on the other can best we addressed by independent regulatory mechanism.

5.

In the Budget speech the Finance Minister also announced that the coal industry is introducing a competitive bidding process for allocating coal blocks for captive mining to ensure greater transparency and increased participation in production from these coal blocks. It is expected that such a competitive process of selection of Bidders should lead to minimising the cost of production and supply of coal. Therefore, the criterion to evaluate the Bids should be mainly - perhaps entirely - dependant on the price at which the coal mine developer should offer to produce and supply coal. This alone will be in conformity with the announcement of the Finance Minister while dealing with power - "it will help in lowering the cost of generation and cost of power ........." This should also set at rest a perception that the allotment of coal blocks through competitive bidding could be on the basis of premium that the Bidders would offer to the Government, because such an approach would be counter to the objective of lowering the cost of power generation, since higher cost of coal would mean higher cost of power.

6.

There was an apprehension in the industry, among power utilities, that the Budget would impose a Custom Duty on Chinese power plant equipment. This was based on the assumption that local manufacturers were working hard to see that with such a duty component they are able to become competitive with Chinese equipment. While manufacturers were in favour of this, generating and distribution utilities were against for obvious reasons. It is good that no such import duty has been imposed. I have written about this in other papers, and I wish to reiterate that though India needs a lot of power, but it also needs cheaper power. Affordability is an issue, particularly when we talk of an inclusive growth, encompassing vast majority of our people, who have remained deprived of a reasonable consumption level of commercial energy, and more particularly electricity. Power Ministry, it is reported, had also not supported such an import duty, atleast for the current Five Year Plan. Domestic manufacturers need to tighten their belts, optimise various costs, improve productivity and compete. Domestic manufacturing must be encouraged but not at the cost of significantly higher cost burden to power utilities. Such a duty has not been rightly considered relevant now, and I would feel it may not be relevant, and desirable even in the Twelfth Plan. Of course, quality aspects of Chinese equipment, together with maintenance and spare parts requirements, must be uppermost, for which I have made a number of recommendations elsewhere.

7.

The idea of a National Clean Energy Fund (NCEF), for funding research and innovative projects in clean energy technologies, is an excellent initiative. Rupees 50 per tonne of coal produced and consumed will indeed create a handsome amount of money. In the year 2010-11, the coal production and import may be of the order of 500 million tonnes. This itself would mean a corpus of the order of Rs. 2,500 Crores. Since the coal consumption would rise at the rate of 7 to 8% annually, at the least, the annual amount in this fund will keep growing. Therefore, this will have a powerful potential to make a visible impact on technology development. However, there is a word of caution. Appropriate implementation mechanism for proper utilisation of fund, with pre-determined deliverables, requires a great degree of thought and skill. Our experience of dealing with a similar fund to develop forests in the country from the money that is deposited for compensatory afforestation, by project developers, has been abysmally poor. The funds created from these deposits have not been utilised properly, even to the extent of 50 percent, for the purpose for which they were provided. Ministry of Power and other concerned Ministries which need to develop perspective, plans and programmes aimed at development of innovative technologies need to work in a co-ordinated manner, so that the desired outcomes expected from NCEF are achieved.

8.

In certain quarters there has been a criticism about the Clean Energy Fund, saying that a Cess of Rs. 50 per tonne of coal would mean an increase of atleast 3 to 4 paise per Kwhr. of power produced. This is true. However, we need to appreciate another relief that has been provided in the Budget in respect of waiver of Service Tax on transmission charges. This issue has been under discussion for a few years. Power sector felt the burden of Service Tax component on transmission charges and, therefore, has been requesting for its withdrawal. The Finance Minister, in this Budget, has considered this suggestion favourably. This would mean a relief of the order of atleast 4 to 5 paise per Kwhr, if we consider inter-regional transmission charges. Therefore, the reduction in Service Tax on transmission more than offsets the extra burden on account of Cess on coal. Besides, the Clean Energy Fund will ultimately prove to be in the larger interest of the power sector.

9.

In certain quarters there has been a comment about the Budget provision for nuclear power which is somewhat lower for the year 2010-11 as compared to Budget for the year 2009-2010 - Rs. 1,848 Crores as compared to Rs. 2,065 Crores. This should not cause any concern and there is no disconnect because Nuclear Power Corporation has a huge cash surplus. Inadequate Budget provision may not constrain the Nuclear Power Project Development Programmes that they have taken up. As a matter of fact, almost all the power companies under the Ministry of Power have been developing their projects without budgetary supports from the Government for the last many years. Their internal resources have been adequate enough to take care of their expansion programmes.

10.

In the power sector there is considerable amount of uneasiness about Custom Duty on supply of electricity from SEZ to outside the SEZ area. Power utilities in India have been importing power from neighbouring countries such as Nepal, Bhutan. At present the amount of power constitutes a small fraction of the total power supply in India. In the future this is likely to increase particularly from Bhutan and also later from Nepal. It is, therefore, necessary that these imports remain duty free. In the Budget as high as 16% of Duty has been imposed on power supply from SEZ area to outside SEZ. What has, perhaps, not been recognised is that all the large power projects in the country which are identified as Mega Projects enjoy the benefits of exemption from Custom Duty and Excise, just as the power projects located in the SEZ area. Therefore, if the proposed duty of 16% is on the ground that these power projects were allowed duty free import, then it really calls for a review of the decision to impose duty. It will only add to the cost of power supply and will negate the objective of Mega Project aimed at lowering the cost of power generation, as rightly appreciated by the Finance Minister himself in his Budget speech. What should, however, be definitely captured is the benefit these power projects may be deriving by way of Duty Free fuel imports. To the extent of these benefits, there should be additional burden on cost of power if it is being supply outside the SEZ area to put these projects exactly at par with other Mega Power Projects.

11.

To promote other renewable energy technologies the Budget has very gratifyingly provided benefits for solar energy and wind energy. A concessional Custom Duty of 5% to machinery, instruments equipment and appliances for Photo Voltaic and solar thermal power generation units has been provided. They have been fully exempted from the Central Excise. Another important concession allowed is for ground source heat pumps used to tap geothermal energy which has been exempted from Custom Duty and Special Additional Duty. Growth of wind energy in India has been remarkable. In the Budget further concession has been allowed by exempting from Central Excise manufacture of rotor blades.

12.

Energy efficiency and energy conservation are national needs. The Budget provides for reduction of Central Excise for LED lights from 8% to 4%, which is at par with the Excise for CFL. LED technology needs encouragement. Its cost in the initial stage is high. This decision will indeed facilitate expansion of LED systems. These consume one twentieth (about 5%) of the electricity that is consumed by a conventional bulb for similar level of lighting. In the field of energy conservation, Star Labelling of high electricity consuming gadgets such as air conditioners, refrigerators etc. has been a remarkable initiative. To encourage this, the industry was expecting a graded system of Excise - lower Excise for Five Star gadgets and higher Excise Duty for 4, 3 Star gadgets. This would encourage manufacturers to shift to more energy efficient production on the one hand and enthuse buyers to go in for higher Star products. This is an issue which must be pursued. If not this year we may try to succeed in this regard next year.

On the whole, the Budget for the power sector has brought in a number of positive features, starting from a clear declaration of the Government to accord highest priority to this sector and giving a clear direction towards energy efficient technologies, need for lowering the cost of generation, developing innovative clean technologies, encouraging renewable energies and incentivising Demand Side Management.