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Policy reforms have cheered the power sector

Last updated on: July 11, 2014 20:09 IST

Budget Provisions

Sunset    clause of claiming Tax Holiday under Section 80IA has been extended  by another 3 years till FY17. The move will encourage investments in the power sector and will benefit  plants getting operational by FY17. All power companies like NTPC, Powergrid, NHPC, Reliance Power, JP Power etc likely to benefit.  

A sum of Rs 100 crore is  allotted for preparatory work for ‘Ultra Modern Super Critical  Coal Based Thermal Power Technology’.  

Please click here for the Complete Coverage of Budget 2014 -15

Comprehensive measures  for enhancing domestic coal production; more washeries to improve  the quality of delivered coal. Adequate quantity of coal will be  provided to power plants which are already commissioned or would be  commissioned by March 2015. An exercise to rationalize coal linkages  to optimize transport of coal and reduce cost of power is also underway.  

Clean Energy Cess increased from Rs 50 per tonne to Rs100 per tonne. Duty on imported coal raised by 0.5% to 2.5% from existing 2%. The move will lead to rise in variable cost.  

Basic customs duty on forged steel rings reduced from 10% to 5% used in the manufacture of bearings of wind operated electricity generators. Exemption of the  SAD of 4% on parts and raw materials required for the manufacture of  wind operated generators.  

Encouraging investment in solar power which will enable the government to meet its 20GW solar capacity addition by 2022. Positive for solar EPC players, cell and module. 

The move will encourage investment in wind power capacity as the duty reduction will lower the cost of setting up wind power plant. Tata Power, Reliance Power and other big companies planning to foray into wind segment.  

Adequate quantity of coal will be provided to power plants which are already commissioned  or would be commissioned by March 2015 by resolving the existing impasse in the coal sector.

An exercise to rationalize coal linkages  which will optimize transport of coal and reduce cost of power is  underway.  

Propose to take up Ultra  Mega Solar Power Projects in Rajasthan, Gujarat, Tamil Nadu, and Laddakh in J&K. A sum of Rs 500 crore is allocated for this purpose.  

Implementation of the Green Energy Corridor Project will be accelerated in this financial year to facilitate evacuation of renewable energy across the country.  

A sum of Rs 100 crore is set aside for the development of 1 MW Solar Parks on the banks of canals.  

“Deen Dayal  Upadhyaya Gram Jyoti Yojana”, a programme for feeder separation to augment power supply to the rural area and for  strengthening sub-transmission and distribution systems got a budgetary allocation of Rs 500 crore.  

Infrastructure  Investment Trusts (InvITs), a modified REITS type structure for PPP  and infrastructure projects will also have similar tax efficient pass through status. This brings in fresh equity by attracting long term finance from foreign and domestic sources including NRIs.  

The battered power sectorhas got the sunset clause under section 80(I)(A) got extended uptoMarch 31, 2017 along with commitment of adequate coal supply forpower plants already commissioned and would be commissioned by March2015 by both addressing the current impasse in the coal sector and bytaking up comprehensive measure to enhance coal production.

Apartfrom coal supply assurance the finance minister has also indicated anexercise to rationalize coal linkages which will optimize transportof coal and reduce cost of power is underway.

On renewable side Butsome of the other key issues such as keeping power sector out of thepurview of MAT, service tax excemption for power sector has not met.

Similarly though announcement of solar power projects and duty cutsfor intermediate products of renewable power generation equipmentsi.e. WTG and Solar PV is provided the key demand of reinstatement ofaccelerated depreciation for WTG and time bound payment of capitalsubsidy is not found favour.  

Industry Wish-List

Sunset clause under section 80(I)(A) should be extended by another five years. Union  Budget 2013-14 has extended the sunset clause for eligibility for tax holiday u/s 80IA from March 31, 2013 to March 31, 2014. In other words undertaking which begins generation of power by March 31, 2017 should be eligible for tax holiday.

Fiscal incentives such as exemption from excise duty for cement, steel and equipment as well as exemption from service tax for construction activities so as to reduce the capital cost of hydro power projects lower so as to make it more attractive in terms of tariff.  

Keep power sector out of  the purview of MAT so as the sector could avail the benefit u/s 80IA  fully.  

Sectoral lending limit  of the banks should be relaxed to facilitate fresh lending and Power sector should be included in priority sector lending. Currently the  sectoral limits are at 15% and that is not suffient to address the financial needs of the sector.

Financing of operational projects by  IIFCL should be taken out or such other agencies should be encouraged to create more lending capacity for banks.  

Exemption  from Dividend Distribution Tax (DDT) for infrastructure SPVs. Given reinvestment needs by the holding company in power sector, the DDT should be levied only on ultimate parent company level and SPVs be exempted from the DDT.  

Service tax exemption  for infrastructure projects in power sector on the lines of benefits  available for projects in other infra sectors such as road, railways   and airports as power generation companies are not entitled to   credits on tax paid on procurements.  

Removal of withholding tax on External Commercial Borrowings for power companies. 

For  the purpose of claiming additional depreciation, it should be clarified whether Electricity is a goods or not. An initial depreciation of 20% should be allowed in full in the first year as  an incentive for investments irrespective of the number of days of  use.  

Removal of MAT and DDT for SEZ Units 

Renewable energy 

Accelerated Depreciation  for wind projects which was withdrawn from 1.4.2012 has to be restored. 

Providing capital  subsidy for off grid solar projects in time bound manner. Off-grid solar projects have a huge potential to address the power gap in rural areas that do not have access to the grid and can bridge the energy divide in the country.  

Bringing renewable  energy including solar project under infrastructure projects to allow tapping of long term, low cost debt from insurance, pension  funds.

Rationalize taxes and duties on the solar thermal and solar photovoltaic value chain and to bring down cost of solar power. 

Provide generation based incentive for current 12th Five - year plan for solar power plants similar to wind power sector. 

Low cost funding to be  extended to solar photovoltaic and solar thermal for meeting capital expenditure requirement for entire value chain (including components and machinery) i.e. Viability gap funding for new technologies up  to 40%; Low interest finance to be made available to ensure a level  playing field (0-5%).  

Cost of Debt should be  reduced by eliminating the tax on interest received by banks and  relaxing ECB norms.  

Reimbursement to State Electricity Boards / DISCOMs on fulfilling Renewable Purchase Obligations and net metering purchase or Establishment of Government  sponsored body to act as intermediate buyer and seller of Renewable Energy Certificates (REC) in case of oversupply or shortage of REC to make the REC market function.  

Renewable Energy should be made an independent sector (separate from Power Sector) as many banks have reached their sectoral exposure limits, thus limiting the flow of finance to renewable energy projects.  

Analyst Expectations

The sunset clause forpower projects commissioned to eligible for benefits u/s 80IA isexpected to be by atleast 2-3 year even not for 5 years as expectedby the industry.

Restoration of accelerated depreciation for windenergy as well as sops for promotion of renewable energy is stronglyexpected in the budget.

In addition directional statement regardingutilization of surplus captive coal, coal block auctions,rationalization of coal linkages, extension of financialrestructuring package for state utilities and incentives forimprovement in distribution sector efficiency is expected in thebudget for 2014-15.

Stock to watch

NTPC, Power GridCorporation of India, Reliance Power, Tata Power, GMR Infra and LancoInfratech.


Unlike last two unionbudgets which has extended the sunset period for tax holiday of 10years applicable for power generation/ transmission/ distributioncompany by one year, the union budget 2014-15 has extended it forpower generation/transmission and distribution companies whichcommence operation upto March 31, 2017.

This is expected to boost theconfidence of IPPS who have their projects struck to various issuesto complete it fast.

Similarly the assurance of finance minister inhis speech that adequate coal supply will be made available forgeneration projects got completed or would be completed by March 2015will spring back lot of power projects that are idle or commerciallyunviable to operate on imported coal.

Similarly the acceleratedimplementation of green transmission corridor during the year aspromised by the finance minister will benefit Power Grid Corporationof India, the nominated project developer with increasedcapitalization.

Further the setting up of InvITs, in the line of RealEstate Investment Trust apart from increase the fund availabilitywill also help players such as GMR Infra, Lanco Infratech, JaypeePower and other IPPs to divest their stake in project SPVs so as toreduce their debt. Overall the budget is positive for the sector. 

Please click here for the Complete Coverage of Budget 2014 -15

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