Hoping for a re-charge



India's power sector is ending the current Five-Year Plan on a not so happy note. Power sector woes have exacerbated over the last few years due to fall in merchant power realisations, sharp jump in imported fuel costs, lower availability of domestic coal, inability to pass on the fuel hikes to the buyers and lower off-take and delayed payments by the troubled distribution sector.

As we enter the Twelfth Plan (2012-17), there are issues that need immediate attention. Some of these issues can be addressed in the current year's Union Budget. Restructuring of the distribution sector, a cut in import duty of coal, extension of tax holiday (80IA) for the upcoming power projects and encouraging higher investments in this sector by enhancing the limits of infrastructure bonds are the key expectations. Private sector players, however, may need to watch out for any import duty hike on power equipment and increase in minimum alternate tax.

Duty cuts

India may import as much as 140 million tonnes or 20 per cent of the overall coal demand this fiscal. The shortage is expected to widen even further during the Twelfth Plan.

At $80 per tonne of coal, a cut in import duty from 5 per cent to nil would translate into Rs 2,800 crore of savings for the coal importers assuming 140 million tonnes of import. Of the 140 tonnes deficit, the imports by the power players could be in excess of 35 million tonnes.

For power projects, this would translate into savings of 8-9 paise per unit. Many coastal projects and projects with no linkages will benefit from this cut. Adani Power, Tata Power, Reliance Power, JSW Energy, and Lanco Infratech are likely beneficiaries.

SEB restructuring

The losses of State Electricity Boards (SEBs) during the current fiscal are estimated at Rs 70,000 crore. Ballooning losses have not only led to delayed payment by the distribution companies to power projects but also increased the risk of payment defaults. SEBs have also reduced offtake, which has led to lower profitability for many projects. While the majority of SEBs have revised their tariffs which may partially bridge the losses, the reduction in transmission and distribution losses (T&D losses) would further benefit the sector.

The Accelerated Power Development and Reform Programme (APDRP) aims to exactly do that. The Budget may increase the outlay to grant loans which would help the distribution sector strengthen its infrastructure and reduce losses. The increased focus on ARDRP in addition to Rajiv Gandhi Grameen Vidythikaran Yojana can improve the efficiency of the distribution sector. For a fall of 5 percentage points in T&D losses, SEBs together would earn Rs 12,000 crore more in revenues.

power equipment duty

Around half the power projects slated for the Twelfth Plan which are under construction are based on imported equipment, according to the Central Electricity Authority. But if the government decides to hike the import duty on power equipment to 19 per cent, this could escalate capital costs for upcoming mega projects. Assuming a fixed cost of Rs 1.1-1.2 per unit , the costs for mega power projects will go up by 20 paise per unit. This would adversely affect companies such as Reliance Power, Adani Power, Lanco Infratech and Sterlite Energy. That said, power projects may still favour Chinese equipment as the negotiated rates are low and they also get access to cheap financing. These projects, however, have to negotiate for higher tariffs to recover fixed costs.

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