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Rediff News  All News  » Business » Power: Extend eligibility timeline for benefits

Power: Extend eligibility timeline for benefits

February 23, 2010 19:53 IST

Considering double-digit peak and normal power deficit, and the industry seeks direct and indirect tax incentives to facilitate acceleration in the pace of capacity additions.

Power sector is often cited as stumbling block in the accelerated economic progress of the country due to double-digit power deficit in the country.

Heavy power deficit is largely on account of continued failure in achieving the planned power generation capacity in all the ten five year plans so far since independence.

At the end of Jan 2010 the power generation capacity stood at 156.784 GW including the renewable energy sources such as wind, solar etc. of about 15.427 GW.

However the peak power deficit in Jan 2010 is 12.2% and the normal power deficit is 12.2%. With the country's peak power demand (as on Jan 2010) being 112 GW well below the country's current generation capacity, the double digit peak power deficit is largely on account of aged power plants often operating at lower plant load factor, high T&D losses, paucity of fuel/ feedstock.

In the current 11th Five-Year Plan period (2007-08 to 20011-12), the country targets a new power generation capacity addition of 78 GW. The power generation capacity addition as end of Jan 2010 is just 16.8 GW even after crossing half way mark (of the current five year plan period).

Going by the current pace, capacity addition of even 62 GW for the current five-year plan itself would be a record for the country. In addition to the above captive power plants with an aggregate generation capacity of 12 GW are currently under execution and of which about 2700-3000 MW has been commissioned and balance is under construction.

A generation capacity addition target of 100 GW is tentatively finalised for twelfth five-year plan period. This is planned through a mix of thermal power at 76.6 GW, hydel power at 20 GW and Nuclear power at 3.4 GW.

Besides increase in plan target, the country has also planned technology transition in the 12th Five-Year Plan period in a big way. The super critical technology was introduced in a smaller way in the 11th Five-Year Plan,  but they are set to play a major role as 59% (or 43640 MW) of the coal generation capacity in the 12th five year plan will be based on super critical sets.  

The share of super critical sets is to be 100% of thermal power plants in 13th Five-Year Plan target of about 100 GW. Similarly the share of nuclear is all set to rise to 8 GW in 13th Five-Year Plan period compared to 3 GW in the 11th Five-Year Plan target.  

Currently the Nuclear power sector in the country is a highly regulated business, operated through a single government-owned entity Nuclear Power Corporation of India (NPCIL). No company can enter into nuclear power generation without NPCIL.

As per the Atomic Energy Act, private companies can team up with NPCIL as junior partners to set up atomic plants. So to encourage private investments suitable regulatory changes are essential.

Limited power generation equipment manufacturing capacity as well as power EPC capacity is often cited as the major reason for the country not achieving the targeted generation capacity in the all the earlier 10 five year plans period.

Of the all power project planned under 11th Five-Year Plan period, the share of BHEL is just 54% as far as supply of core power generation equipments of BTG, hydro mechanical equipments etc there by the balance 46% is being supplied by overseas players including Chinese, Korean and others.   

Increased share of overseas players is on account of current concessional import duty on power generation equipment (0% for supply to mega power plants, 5% for others) as well as long delivery schedule of domestic power equipment major i.e. BHEL.  

Given the demand supply gap BHEL is in advanced stage of commissioning its expanded capacity (to 15000 MW) by March 2010, which will further enhance to 20000 MW per annum by the end of March 2012.

Considering the strong demand growth for the power generation equipments, players such as L&T (in JV with Mitsubishi), Bharat Forge, JSW, Ansaldo etc., are setting up green field generation equipment capacity.

To encourage domestic manufacturing capability/ capacity especially in the super critical technology space, GOI has included domestic manufacturing as a mandatory clause for pre-qualification in some of the proposed/ on going bulk tenders.  

The ministry of heavy industries, under whose control the PSU giant BHEL comes, wants the finance minister to do away with the concessional customs duty on power equipments so as to protect and encourage domestic manufacturing.  

The country in order to hasten the process of execution of infrastructure projects including power sector projects should develop a robust inventory of infrastructure projects that can be offered to the industry.

Completed project dossiers with all approvals granted should be offered to the private sector through the competitive bidding route. Also, with a view to ensuring low cost of raising capital for thrust area projects, tax exemption of income from investment in infrastructure and other projects under section 10(23G) be restored.

Interest tax exemption on foreign currency borrowings also calls for being restored. Power projects given its nature of long gestation period as well as life cycle of 25 years, requires long term lending but that is not available easily as banks normally lends for 7-10 years.

Hence a sector specific fund as well as permitting the sector to issue tax free bonds for a limited period would facilitate the sector to tide over the problem of limited funding that is presently available.

Industry wish list

(a) for thermal and hydro power, transmission and distribution

  • The time deadline for eligibility for Tax holidays U/s 80-IA of the Income-Tax Act has to be extended for another 5 years. Currently only those projects that are likely to be commissioned by March 31, 2011 are eligible to claim tax exemption of up to 10 years within the first 15 years of a project's commissioning. In fact the original deadline of March 31, 2010 was extended to March 31, 2011 in the last budget on June 2009.  
  • Central Government should link central assistance to States with reduction in T&D losses achieved by them.  This will increase investment in T&D segment.  Central schemes such as APDRP have to be strengthened with milestones being formulated with State Electricity Boards.
  • Excise duty exemptions that are available now to power developers for mega projects, should be made available for transmission companies (like PowerGrid) too.
  • Excise duty exemptions in power equipment should be reconsidered to attract investments.
  • Supplies to mega power projects/ ultra mega power projects have to be exempted from excise duty irrespective of whether the project is part of ICB or not as the imports are allowed at 0% duty without Countervailing duty (which is equivalent to domestic CENVAT).   This will ensure that the power equipments procured from domestic players (through negotiation / domestic tenders) will also not suffer excise duty, and hence the capital cost of such projects will also be lower.
  • Exemption from service tax to be extended to all the power projects. Exemption from service tax is available on the construction of all infrastructure projects except for the power sector. The scope of benefit should also be extended to include power projects.

(b) for new and renewable energy including wind, biomass and solar power projects

  • Provide long-term policy stability with Generation Based Incentive (GBI).  All wind projects in India during the 11th Five Year Plan period (until 2012) should be eligible for GBI and not be capped at any MW value. This would reward technological improvements in reliability and efficiency and result in higher-performance wind projects. Further this would facilitate consolidated growth of the Independent Power Producer (IPP) sector including encourage foreign IPPs to enter this market.
  • To increase the GBI (for wind power) beyond 49MW @ 50 paise/kwh. Globally while countries offer competitive tariffs e.g. Thailand 15 cents/kwh, Germany 13 cents/kwh and France 12 cents/kwh, our tariffs in the states in India are in the range of 6.6-9.1 cents/kwh (Rs 3.37 - 4.3). Hence, GBI, which is an incentive for new and renewable energy Helps Bridge the gap, such incentives should not be limited to 49MW and 50paise/kwh.
  • GBI incentive is sanctioned by the Union Government to enhance the availability of power to the grid.  However, this should not be taken into account while fixing tariff by the State Electricity Regulatory Commissions.
  • Exemption of service tax to all activities like erection, installation & commissioning involved in execution of wind power projects and on import of services, since they are used for promoting non-conventional energy sector and as the Units are not eligible to avail credit of service tax on inputs services.
  • Exemption of income from investment in infrastructure and other projects under section 10 (23G) should be revived in the ensuing budget with a view to ensuring low cost of raising capital for thrust project areas.
  • The Cenvat Credit should be made available on setting up and operation of a power plant for captive consumption irrespective of the location of the power plant.

Analysts' expectations

The budget is expected to sustain the strong focus on the power sector given its importance in economic progress of the country both in terms of budgetary allocation as well as tax sops.

The sunset clause of 80IA that expires on March 31, 2011 may get extended further to make the sector attractive.

Stocks to watch

NTPC, NHPC, Tata Power, JSW Energy


Power sector will continue to get the preferential treatment as in the earlier budgets with increased budgetary allocation. Likewise the sunset clause of 80IA may further be extended beyond March 31, 2011.

Though the government is not expected to drastically change the current concessional customs duty on mega power projects, if that happens as per the wishes of domestic power equipment manufacturers, it will lead to increase in landed cost of imported power equipments, and increase the project cost.

It can also lead to associated delays, and adversely affect power players that have already placed orders, with overseas players, factoring in nil customs duty.

Overall, the budget is expected to be positive for the power sector.

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