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Thursday, March 22, 2012

Australia's new mining law to impact acquisitions

Current Indian investment may not be hit immediately

The Australian government’s move to impose 30 per cent tax on coal mining and iron ore profits might not affect any Indian investment in that country immediately, but could have an impact on Indian companies, including state-run mining major Coal India Limited (CIL), which are scouting for assets Down Under.

The country passed a legislation for a mining tax called the mineral resource rent tax (MRRT) that will impact the prosperous mining sector of the country. But recent Indian investments like Adani group's Linc Energy, Lanco Infratech's acquisition of Griffin Coal and GVK’s Hancock might not bear the brunt of this tax for years to come. Gujarat NRE Coke, NMDC and Hindalco, too, have assets in the country.

The law is meant to tax major mining companies and their profits, but many Indian coal mine investments are new and are making no profit. Also, many of these are in the capital expenditure and investment stage.

“The decision will not have any significant impact on our coal mining business for several years after the start of production. The law allows the full capital expenditure incurred to be set off from the profits derived from its mining operations in the year it is made, and any unabsorbed excess is carried forward (with no time limit),” Adani group said in a statement on Tuesday. The company’s shares fell by 4.6 per cent in intra-day trade on Tuesday after the development, and ended three per cent lower at Rs 285 apiece.

The impact of this tax might come in the long-term, and would not affect mines for the initial 8-10 years of operations, say analysts. After that, they might start impacting costs in the range of $28 per tonne, pushing up the costs of coal and iron ore. That too would not be a huge matter of concern as international prices may rise, following the cost escalation and they would be able to pass a portion of the tax to the customers.

“Since Australia is a large coal exporter, it should be able to pass through a part of the cost increase to buyers,” said Pukhraj Sethiya, senior consultant, PricewaterhouseCoopers.

Arun Kumar Jagatramka, chairman and MD Gujarat NRE Coke said this tax was expected to push coking coal prices up the curve. “The mining tax is on super-profit, which is calculated after deducting all the expenses as well as capital expenditure and even the state royalties. Hence, it would not impact the new mining companies with large capital expenditure like Gujarat NRE,” he added.

Gujarat NRE's shares fell by two per cent on Tuesday and closed at Rs 23.4 per share.

The tax which is being panned by critics for being complex, is also known to have a number of provisions that will soften its impact. “The MRRT has credit provision against other taxes and royalties payable, thus significant impact may not be visible in the initial years,” said Sethiya.

Mining and mineral major NMDC said it would have to re-look at the cash-flow analysis. “We are yet to examine the tax, but to our understanding it may not be applicable to magnetite mines, as there is a huge capital outlay for these projects. We have to see the scope of the new tax and the minerals that it covers,” an NMDC official said. But, there could be an impact on the Legacy Iron Ore project which has a combination of hematite and magnetite ore assets. The company is a 50 per cent equity partner in Legacy Iron Ore, which it bought last year. NMDC's stock went up by three per cent.

CIL, sitting on an acqusition war-chest of Rs 6,000 crore, has looked at Australia for coal assets more than once. “But ultimately we had to back down because the IRR (internal rate of return) wasn't good enough. With this tax coming in, it would further have a negative impact on the assets there. We might have to stop looking at Australia all together,” an official said.

With more than half of India’s coking coal requirement coming from Australia — 60 per cent of total coking coal imports for Tata Steel, and 45 per cent for JSW come from Down Under —there is a chance that Indian steel makers’ input costs going up if prices are revised upwards.

Although Tata Steel said it was not expecting any immediate impact, SAIL indicated it was still examining the situation. “There is overall resentment among the leading mining companies of iron ore and coal, as it may affect their costs and profitability. We are examining the impact on our imports from Australia," SAIL chairman C S Verma said.

Silence is killing

Budget makes no mention of pooled pricing for natural gas

Finance minister Pranab Mukherjee has proposed key concessions like the removal of imported duty on coal and natural gas and a reduction in the withholding tax rate on interest payments for external commercial borrowing (ECB) loans to the power sector. These measures are expected to check the rising electricity tariff. However, the Budget does not suggest a strategy to turn around the power distribution sector, where key business decisions like tariff hike are still dictated by political considerations than economic prudence. Unless the problems in the distribution area are fixed, the concessions offered by the finance minister may not be effective in building investor confidence.

Further, the Budget has also failed to give an assurance on implementation of pooled pricing for both imported and natural gas. Given the stagnation in the domestic production of these fuels, a decision on pooled pricing was needed urgently.

But it seems that the Centre continues to shy away from its responsibility to get states to expedite power sector reforms. This is unfortunate given that distribution is the only point of revenue for investors to get their investment back. The Shunglu committee set up by the Centre to study factors impacting the financial health of state power utilities has recommended floating a special purpose vehicle to take over the bad loans of discoms against a guarantee of repayment by state governments. The industry was expecting an announcement to this effect in the Budget. But that has not happened.

But because of the widespread practice of state governments, instead of regulators, deciding on tariff revisions, the distribution has become a financial black hole. The combined losses of the power distribution utilities have accumulated to more than R1.5 lakh crore.

In the absence of tariff revisions. states were using bank loans to finance the losses of discoms. But banks and financial institutions have now stopped lending short-term loans to the discoms, creating a cash crunch for them. Several states have approached the Centre for financial assistance to bail out their debt-ridden discoms.

The government has set up a committee under BK Chaturvedi, member (energy), Planning Commission, to suggest ways to improve the financial health of state power utilities. The committee was asked to consider the findings and recommendations made by the Shunglu committee.

It is understood that the Chaturvedi committee submitted its recommendations to the finance minister well in time for him to incorporate the same in the Budget.

The Planning Commission has suggested a switchover to pooled pricing for coal and natural gas to help absorb the high cost of imports. While the finance minister has proposed the withdrawal of import duty on these fuels, there is no mention of pooled pricing, which is the only way to distribute the burden of pricey imports across the industry.

On the positive side, several initiatives have been taken in recent weeks at the intervention of Prime Minister Manmohan Singh to resolve pressing power sector issues. The suggestions received from the committee of secretaries led by Pulok Chatterjee, the PM's principal secretary, have come in handy for the PM here. One hopes that he picks up from where the Budget has left on the issue of pooled pricing.

Tax sops to check power generation cost

Concessions on duty and tax proposed for the power sector will not only help attract investment but will also keep a check on rising electricity generation costs. That should help the government’s mission to boost competitiveness in the manufacturing sector, though in a limited way.

The finance minister has tried to rein in power generation costs by exempting both coal and natural gas from import duty even as he reduced withholding tax rate on interest payment for ECB loans from 20% to 5%. “The finance minister has tried to reduce costs of fuels besides lowering borrowing costs for the power sector,” power secretary P Uma Shankar said.

Experts agree that the manufacturing sector will get a boost as financially bankrupt power distribution companies pose a major hurdle to turning around the sector.

“These incremental measures will help the sector, but may not be enough unless the problems in the distribution sector are fixed,” said DK Joshi, chief economist at Crisil.

The government has envisaged adding 1 lakh MW capacity during the coming 12th Five Year Plan (April 2012-March 2017). That would call for matching investments into the transmission and distribution business. The total fund requirement for the sector during the coming plan is estimated at R12 lakh crore.

Meanwhile, most domestic banks and financial institutions are close to hitting their exposure ceilings for the sector. This problem is more acute for players like Reliance Power, Adani and Lanco, who are implementing large-sized projects.

Power companies are expected to increasingly tap overseas capital market for meeting their project financing requirements. The reduction in withholding tax rate will lead to a significant gain for ECB borrowers.

A back-of-the envelope calculation suggests that interest burden for an ECB borrower will come down by $12 million on a five-year loan worth $1 billion taken at an interest rate of 6%.

Peak hour power supply short by 11.2% in April-Feb 2012

The country suffered a power deficit of over 8 per cent in April-February 2012. At the same time, peak hour electricity supply fell short by over 11 per cent during the same period.

There is an overall shortage of power in the country, Mr K.C. Venugopal, Minister of State in the Power Ministry, said in response to a question in the Rajya Sabha on Monday.

The shortage, Mr Venugopal said, varied from State-to-State on month-to-month and day-to-day basis depending upon demand and availability of power.

Shortage of electricity in rural, backward and tribal dominated areas is generally attributable to inadequacy of sub-transmission and distribution network or their healthiness. Electricity being a concurrent subject, responsibility for supply to different categories of consumers and areas lies with the State Government/power utilities concerned.


The Petroleum Ministry has said that no additional domestic gas is likely to be available till 2015-16, the Minister said, responding to another question.

A delegation of Association of Power Producers met the Prime Minister and Ministers of Power, Coal, Petroleum and Natural Gas, Environment & Forest as well as Finance to discuss issues concerning the sector, he said.

The issues raised in the meetings included shortage of coal and gas supplies, signing of fuel supply agreement, speedy disposal of forest and environment clearance, removal of customs duty on coal imports, and improvement of financial health of discoms.

To supply coal to power projects commissioned in the 11{+t}{+h} Plan and getting commissioned up to 2014-15 in 12{+t}{+h} Plan, Coal India will sign the fuel supply agreements for full quantity of coal mentioned in the letter of assurance with power plants that have entered into long-term power purchase agreements with the Discoms. For projects that have been commissioned up to December 31, 2011, Coal India will sign the fuel supply agreements before March 31, 2012, he said.

To meet its commitment, Coal India may reduce coal meant for e-auction from 10 per cent to 7 per cent till the end of 12th Plan. In case of any shortfall in fulfilling its commitment under the fuel supply agreements from its own production, Coal India, will arrange for supplies through imports.

NTPC ties up Rs 500-cr capex loan with Mizuho Bank

To part finance its capex, the country's largest power producer NTPC has tied up a loan of $100 million with the Japanese Mizuho Corporate Bank.

NTPC has signed a loan facility of $100 million (about Rs 500 crore) with Mizuho Corporate Bank on March 16, the company informed BSE.

The loan will be spent on capital expenditure for the company's ongoing as well as new projects, NTPC said. It would also be utilised for financing coal mining projects and renovation and modernisation of power stations.

NTPC is planning to invest Rs 24,000 crore on setting up a thermal plant of 4,000 MW at Vishakhapatnam, in Andhra Pradesh. The state government will facilitate land availability and coal linkage for the project.

NTPC operates plants with over 36,000 MW of capacity from all sources of energy, and has plans to enhance the capacity to about 70,000 MW by March 2017.

NTPC to invest 20% less in FY13

At an investment size of Rs 20,995 crore, the country’s largest power producer, NTPC, would invest about 20 per cent less in 2012-13, compared to 2011-12, when it was estimated to spend around Rs 26,400 crore. The investment next year would be for adding new capacity of about 4,000 Mw.

On the other hand, the largest transmission company, Power Grid Corporation of India (PGCIL), would invest 13 per cent more at Rs 20,000 crore in the next financial year, from Rs 17,700 crore in the current one. The company is expected to invest Rs 1 lakh crore during the 12th Plan to increase the inter-regional transmission capacity from the current 28,000 Mw to 65,000 Mw. The investment is double of what was fixed for the 11th Plan ending March 31.

According to the Budget documents, NTPC’s internal resource mobilisation would be Rs 20,995 crore in 2012-13. Commenting on the decrease in spending, NTPC said the difference was based on nearest calculation. “There is no change in our expansion plans. We will add about 4,000 MW in the next financial year. The capital expenditure for the 12th plan has been fixed at Rs 2.19 lakh crore,” said a company executive. Some of the projects that will be commissioned in the next financial year include Mauda (2x500Mw) in Nagpur, Maharashtra, and Bongaigon in Assam (3x250Mw).

NTPC also plans to increase its generation capacity from the current 36,000 Mw to 66,000 Mw by the end of the 12th Plan. Besides, it plans to foray into power distribution and also spruce up mine development to start coal production next yea. It is also exploring opportunities for acquisition of stakes in coal mines in Indonesia, Mozambique and Australia.

Reliance Power draws utilities' fire as 4 states slap Rs 400-crore fine on Krishnapatnam project delay

Four states have slapped a fine of Rs 400 crore on the Reliance Power entity setting up one of India's largest power projects, worsening troubles for a prestigious venture which has been in a limbo for about nine months. 

Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra, which have agreements to buy electricity from the 4,000-mw project, have also threatened to encash bank guarantees, terminate power purchase agreements and recover the land allotted for the coal-fired project. 

The stoppage of the project has caused irreparable loss to the electricity procurers, which would ultimately be detrimental to end-consumers of the four beneficiary states, said K Vidya Sagar Reddy, CMD of AP Southern Power Distribution Company, which served the notice on behalf of 11 utilities in the four states on March 15. 

The project is being implemented by Coastal Andhra Power, a special purpose entity set up by Reliance Power. On Tuesday, Reliance Power, a part of the Anil Dhirubhai Ambani Group, moved the Delhi High Court and obtained a stay on the notice to invoke bank guarantees of Rs 300 crore and terminate the power purchase agreements. 

The project in Krishnapatnam in coastal Andhra Pradesh is one of four ultra mega power projects that have been awarded to ease the acute electricity shortage in the country using the advantages of efficiencies of scale and advanced technologies. 

Similar to Tata's Gujarat UMPP 

Reliance Power won three of the bids for projects in Andhra Pradesh, Jharkhand and Madhya Pradesh, but only the project in the southern state relied on imported coal. Similarly, Tata Power, which won the bid to build a 4,000-mw project in Gujarat with imported coal as fuel, has also been struggling. 

A proposal by the Tatas to increase power tariff citing costly Indonesian coal has been turned down by the Gujarat government. It has advised Tata Power, which has already commissioned the first unit of 800 mw, to approach the central government for remedy. 

Reliance Power, too, has been pleading for an increase in power tariff saying its project will become unviable if the rate of Rs 2.33 per unit agreed in 2007 is not changed. The main reason, it says, is that Indonesia, from where it imports coal, has changed rules to benchmark the export price to that prevailing in the international market. 

Andhra Pradesh was to get a 40% share of the electricity while the three other states would share 20% each. The project cost is estimated at about Rs 17,500 crore. 

When Reliance Power stopped work at Krishnapatnam, among the reasons it cited were the Indonesian rule change, the delay in handing over of land by the Andhra Pradesh government and poor soil quality. It has also argued that the Indonesian rule change was beyond its control and could not have been envisaged when it bid for the project. 

"The change in regulations in Indonesia has impacted all imported coalbased projects in India. Reliance Power is committed to the Krishnapatnam project and favours amicable solution to this issue through mutual discussions as provided in the provisions of the PPAs signed with procurers," a spokesman for Reliance Power said. 

The buyers in the four states, on the other hand, say Reliance Power has not adhered to the timelines prescribed for financial closure, fuel supply agreements, awarding contracts, submission of additional bank guarantees and resuming work at Krishnapatnam.
"We will initiate action against them under the provisions in the power purchase agreement," said Ajay Jain, CMD of AP Power Transmission Corporation. 

The Reliance entity has taken refuge under the force majeure clause saying events beyond its control led to an increase in coal costs but the utilities counter that the agreements do not allow for a rate increase influenced by changes in policies by foreign governments. They have also told Reliance Power that fuel and consumables for the project were excluded from the force majeure clause. 

Kameswara Rao, an executive director specialising in energy, utilities and mining at consultancy PwC, said that power producers cannot be left in a limbo because of factors beyond their control and suggested a balanced approach. 

"We have to recognise the realities of global commodity markets and that we cannot guarantee that other countries, including Indonesia, will not change their regulations in future. So both power consumers and developers must take account of political and commercial risk in their calculations," he observed.

Hitachi NeST Control Systems eyes NTPC's thermal power projects

Bangalore-based Hitachi NeST Control Systems (HNC) is eyeing four of NTPC's thermal power projects for supply of advanced control systems.

The newly-formed company is a 70-30 joint venture between Japanese major Hitachi, and Kochi-based SFO Technologies.

The joint venture, formed to manufacture and supply information and control systems to companies across industries, has begun operations with orders for information and control systems.

“We have orders for nine sets for use across four of NTPC's sites,” Mr Junichi Suzuki, Managing Director of the company told Business Line. “The systems will be manufactured at HNC's Rs 30 crore-plant at Bangalore and manufacturing will commence a few months from now,” Mr N. Jehangir, Vice- Chairman of Hitachi NCS, said. The company currently has 25 employees and will be hiring more based on project requirements, he added.

The company also has orders on hand for renovation of control systems at several existing projects for Damodar Valley Corporation, Andhra Pradesh Power Generation Corporation Ltd (APGenco) and NTPC's existing projects.

Hitachi has already completed similar projects for the Tamil Nadu Generation and Distribution Corporation at Mettur and Tuticorin, Mr Suzuki said.

HNC is targeting sales of approximately Rs 1.5 billion in the fiscal year ending March 2015.

The company will start operations with supply of control systems for power plants but will “subsequently move into other sectors like for fertilizer plants and chemical plants,” Mr Jehangir said. Hitachi, known for its home appliances, is now positioning itself as a major player in the social infrastructure space in India.

It is focusing on power systems, information and telecommunication systems, information and control systems, smart city-related business.

In this context, it recently also entered into a joint venture with Chennai-based BGR Energy to BGR Energy Systems, to manufacture super-critical boiler, turbines and generators.

It also set up an R&D centre in Bangalore in October last year to focus on localisation of products and services.

Power producers resist gas price hike move

With the government acknowledging Reliance Industries’ argument for reopening KG—D6 gas pricing, an association of private power producers has opposed any hike in rates saying the cost of electricity will rise by 50 paise per unit for every dollar increase in gas price.

Association of Power Producers (APP), whose members include Anil Ambani Group firm Reliance Power and Tata Power, on March 7 wrote to Oil Minister, Mr S Jaipal Reddy saying domestic natural gas prices should not be increased above current rate of $4.2 per million British thermal unit.

“It may be noted that for every USD 1 per mmBtu increase in gas price, the cost of generator increases by 35 paisa per unit, and the cost of power to the end consumer goes up by 50 paisa per unit,” APP Director General, Mr Ashok Khurana wrote.

An Empowered Group of Ministers (EGoM) on Gas Pricing last month “noted that there is a wide divergence between the domestic and international prices of gas and the import of natural gas at a high price to meet the domestic shortfall adversely impacts the current account balance“.

It asked the Oil Ministry to seek views of Attorney General of India on reopening of KG-D6 price which was in 2007 fixed at $4.2 per mmBtu for five years of production ending March 31, 2014.

In January, RIL wrote to the oil ministry and the Prime Minister’s Office seeking a price revision, saying that the current price was “sub-market” compared with three times higher price being paid for imported gas (LNG).

The company had originally applied to the government for approval of a $4.3 per mmBtu price of KG—D6 for first three years of productions but the EGoM marginally lowered the rate and fixed it for first five years of production.

In the letter - copies of which were also marked to the Finance Minister, Mr Pranab Mukherjee, Power Minister, Mr Sushil Kumar Shinde, Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia and Mr Pulok Chatterji, Principal Secretary to Prime Minister, Dr Manmohan Singh - APP said any gas price increase would make the fuel unaffordable to the power sector.

D6 output hits all-time low as Reliance shuts 6 wells

Reliance Industries’ largest gas fields in its flagging KG-D6 block have hit an all-time low production of about 28 million standard cubic meters per day as the firm shut six wells due to water and sand ingress.

Dhirubhai-1 and 3 gas fields in the eastern offshore KG—DWN—98/3 or KG—D6 block, which started production in April 2009 at the rate of 30 mmscmd, saw output plummet to 28.16 mmscmd in the week ended March 4, according to a status report filed by the company with the Oil Ministry here.

Together with 6.46 mmscmd of gas production from MA oil field in the same area, KG-D6 block output in the February 27 to March 4 averaged 34.62 mmscmd.

The KG-D6 production is lower than 61.5 mmscmd rate achieved in March 2010, as a drop in pressure in the wells and increased water ingress has led to a lower per—well gas output.

The report said that of the 18 wells drilled, completed and put on production in the D1 and D3 fields, six wells had to be shut or closed due to high water cut/sanding issues.

The output from KG—D6 is short of the 70.39 mmscmd—level (61.88 mmscmd from D1 and D3 and 8.5 mmscmd from the MA field) envisaged by now as per the field development plan approved in 2006.

While Reliance holds 60 per cent interest in KG—D6, UK’s BP Plc holds 30 per cent and Niko Resources of Canada the remaining 10 per cent.

The MA oilfield currently produces about 11,335 barrels of crude oil per day. In addition, 1,680 barrels of condensate are produced from the field every day.

The report said 14.80 mmscmd of the gas output is being sold to fertiliser plants and 16.62 mmscmd to power plants.

The remaining 3.20 mmscmd is consumed by other sectors, including those fed by the East—West pipeline that transports gas from the East Coast to consumption centres in the West.

RIL projected output of 34.5 mmscmd of gas during March.

GSPC plans to commission Mundra LNG terminal in 2015-16

Gujarat State Petroleum Corporation (GSPC) plans to commission liquefied natural gas terminal with a capacity of 5 million tonne per annum at Mundra by 2015-16, a top official said on Monday.

“Some preliminary work for the project has started, site has been identified. It is planned to be commissioned in 2015—16,” Gujarat Principal Secretary (Energy), Mr D J Pandian told reporters here on the sidelines of a CII conference on shale gas.

He added that the entire project cost is estimated at Rs 3,500 crore and GSPC is now looking at preparing detailed project report (DPR) of the proposed LNG terminal, which will be third such project in the state.

“Now GSPC will go for the DPR and then issue the EPC (engineering, procurement and construction) contract in 6 months to 1 year’s time,” Mr Pandian further said.

GSPC, the Gujarat government—owned company, holds 50 per cent stake in the venture, while Adani Enterprises has 25 per cent stake. However, Essar group —— the third partner with a 25 per cent stake in the venture —— has exited from the proposed LNG terminal.

“We are not worried about it, there is lot of interest. In next 6 to 12 months, we will look for the third partner after completing a certain level of work,” Mr Pandian said.

The state is also contemplating another LNG terminal at Pipavav of 2.5 to 5—MTPA capacity, he said, adding that the companies will have to carry forward the proposal.

Tata Power is largest private power producer

Tata Power on Monday synchronised the second unit of its Maithon power project in Jharkhand. With this 525 megawatt (Mw) unit, the company has a total power generation capacity of 5,297 Mw, making it the country’s largest private sector power generating firm.

The Maithon project's first unit was commissioned in September 2011. It is a 74:26 joint venture between Tata Power and Damodar Valley Corporation. “The synchronisation of Maithon unit-2 today is a significant milestone. This development reaffirmed Tata Power's contribution as the largest integrated power company in India,” said Anil Sardana, managing director, Tata Power in a statement.

Ten days earlier, the company commissioned the first unit of India’s first ultra mega power project in Mundra, Gujarat.

The 800-Mw unit was synchronised in mid-January and achieved full load in late February. With Mundra and Maithon, Tata Power has a gross thermal power generating capacity of 4,447 Mw, and a clean generation capacity of 850 Mw from renewable sources. The company’s stock went down by three per cent in Monday’s trade, to close at around Rs 102 per share.

The company added 1,300 Mw in gross capacity this quarter. Lanco Infratech comes second in terms of capacity with private power sector companies, and has an operational capacity of 4,388 Mw and Adani Power has 3,330 Mw of capacity. Reliance Power which has plans to add 24,000 Mw of capacity, plans to bring their capacity to 5,000 Mw, by December this year.

Procurers may sue Reliance Power for project delay in AP

The 4,000 MW Krishnapatnam power project appears to be heading for a legal battle between Reliance Power and power procurers.

The procurers, totalling 11, comprise State electricity boards and electricity distribution companies in Andhra Pradesh, Karnataka, Tamil Nadu and Maharashtra.

The lead procurer, Andhra Pradesh Southern Power Distribution Co, has written to RPower advising it to take up construction work or face legal consequences under the PPA (power purchase agreement).

RPower was awarded the project, based on imported coal, under the competitive bidding process. The Krishnapatnam Ultra Mega Power Project of 3,960 MW (6 units of 660 MW each) is based on super critical technology in Nellore district, Andhra Pradesh.

The Rs 17,400-crore project is being implemented by Coastal Andhra Power Ltd (CAPL), a subsidiary of RPower. CAPL had entered into a 25-year PPA with the procurers for its entire capacity at a competitive tariff of Rs 2.33 per kWh. The supply was proposed to off-takers in the four States.
Suspended work

RPower suspended work at the Krishnapatnam project last year, stating that the fuel supply at benchmark prices made the project unviable and lenders were unwilling to fund the plant.

Citing the changes in Indonesian mining law which mandated coal supplies to be in line with international prices, RPower told procurers that this was not envisaged during bidding and was completely out of its control. Further, its consequences prevented it from meeting its obligations under the PPA.

Moreover, with the increase in coal cost, as the existing fuel supply deal for the tenure of the PPA stood nullified by the Indonesian law, the lenders to the project were unconvinced about its viability. Hence, RPower was deprived of the debt draw down.

Reliance Power said it had been in constant touch with the procurers to find an amicable solution to issue.

Seeking relief under the PPA as laid out in ‘force majeure', RPower said the current tariff of Rs 2.23 per KWh was not viable.

Under the PPA, force majeure events provisioned for relief such as restoration of economic value to the extent -- had the coal not being available at the contracted price, it said.

Besides Reliance Power, Adani and Tata Power too are impacted by the change in Indonesian mining law.

About 13,000 MW of the upcoming capacity addition of 45,000 MW is based on imported coal. Tata Power recently commissioned the first of its five units of 830 MW at Mundra this month.

Mega power plant equipment imports will attract 21% duty

The government, which has extended help to the crisis-ridden power sector by removing duty on imported fuel and opening access to cheap overseas funds, is likely to whittle down the benefit with an impost on imported equipment for mega power projects. A duty of 20.94% will be imposed on equipment imports for mega power projects, bringing them on par with other power projects.

The move will take away the incentive available to a large number of power generators to source cheap equipment from overseas markets, particularly China.

As per the note finalised by the power ministry for Cabinet Committee on Economic Affairs’ approval, imported power equipment for mega power projects will attract 5% basic customs duty, 12% countervailing duty (after the excise hike to 12%) and 4% special additional duty. Cumulatively, this works out to 20.94%. Of this, the CVD is equivalent to the excise duty for domestic producers (which Bhel and L&T will have to pay) and SAD is in lieu of state VAT. The basic customs duty alone will act as an import tariff.

“We were asked by top functionaries in the government to hold back Cabinet approval for this important piece of tax proposal till the Union Budget. Now, it could be taken up immediately,” said an official.

The changes will dilute the government's mega power policy, which offers benefits to thermal power projects of 1,000 MW and above and hydro projects of 500 MW and above by way of a tax holiday for 10 years and customs waiver on equipment imports. At present, a 5% duty is levied on equipment imported for power projects with capacities less than 1,000MW.

“The mega power benefit has been of immensely useful to the power sector in sourcing world-class, cost-effective equipment from abroad along with international financing. The Budget has not taken up proposal on the new duty and we hope that existing benefits continue,” Association of Power Producers' director general Ashok Khurana said.

“The duty on power equipment will not only add to our cost of generation, but will also rob us of timely and fast deliveries ensured by overseas suppliers,” said a private sector power generator who has placed orders for Chinese equipment for few projects.

A power ministry official said large equipment capacity was being built in country; so with competition, even price of domestically produced equipment would fall negating the disincentive to generators who were importing equipment now. Chinese equipment is said to be 25-40% cheaper than domestic variants.

The government has proposed the levy to counter the surge in imported equipment, particularly from China. Once implemented, the duty is expected to provide a level playing field to domestic equipment manufacturers like Bhel and L&T, who together currently support 18,000 MW of capacity. It is expected that capacity would go up to 35,000 MW over next few years with new manufactures like BGR Energy, JSW and Alstom-Bharat Forge opening their facilities. Bhel is also expected to ramp up its capacity to 20,000 MW by the end of year.

Around 42,000 MW of capacity has already been added in the 11th Plan and 76,000 MW is under construction for benefit in the 12th Plan. Around 59,580 MW (about 48%) of orders out of the total 122,965 MW have been placed with Bhel. Share of orders placed on Chinese manufacturers have been 48,090 MW (about 39%) and 7,960 MW (about 6.5%) on other foreign manufacturers. Besides Bhel, other domestic manufacturers have only 7,335 MW (about 5.6%) share out of 76150 MW of orders placed so far.

The Budget has doled out benefits for the sector by way of withdrawing import duty on coal and R-LNG, allowing ECB to part re-finance the rupee debt on power plants, tax free bond for power sector has been increased from Rs 5,000 crore to Rs 10,000 crore, withholding tax on ECB has been reduced from 20% to 5% for three years, the sunset date for 80IA benefit of the Income Tax Act has been extended by one year, i.e. till 2013.