It all adds up

The 2012-13 budget proposals for the power sector clearly take a different approach. It fails to offer even a hint at fundamental reforms, but at least presents a coherent approach to tackling the rising energy costs and fuel shortages.

Several proposals are made to lower the unit cost of generation, all modest individually, but collectively add up. The basic customs duty exemption on thermal coal and concessional countervailing duty (CVD) up to March 31, 2014 helps save about R80 crore per giga watt capacity on imported coal.

Similar exemption on imported natural gas and uranium lowers the cost of power generated although almost negligibly in the case of nuclear plants. The duties on imported power equipment remain unchanged, which is disappointing for the domestic suppliers, but is in line with the apparent aim to avoid higher costs.

The capital costs contribute, too, with withholding tax on interest payments on external commercial borrowings reduced from 20% to 5% for three years. The sunset clause is extended by a year giving 100% tax deduction to power developers commissioning projects by this date.

A key challenge for the country is energy security and one option is to step up local coal production. The finance minister has proposed full exemption from basic customs duty for coal mining projects and a reduction for equipment used for surveying and prospecting. This will help the domestic coal companies and power companies’ captive coal MDOs (mine developers-cum-operators) invest in higher productivity equipment and ramp up production more cost effectively.

The direction to Coal India to sign fuel supply agreements with power plants scheduled for commissioning by March 31, 2015 will improve their bankability. The proposals for coordinated inter-ministerial group to monitor the progress on captive coal mines can help expedite and diversify India’s coal production if pursued as robustly as seen in recent months.

The scope to improve the flow of financing for power projects remains limited, and the budget does this by raising tax-free bonds and broader end-use of external commercial borrowing for existing power projects. The goal should be to tap into foreign direct investment and private sector financing, and the government needs to accelerate distribution reforms with private participation for this. The time is ripe as a wider range of private investors are available and armed with new technologies.

The renewable energy sector gains little from this Budget. The proposals for reduced special CVD on solar thermal projects, lower excise duty on LED lamps, and exemption of basic customs duty and special CVD and lower excise duty on lithium-ion batteries help support a young industry. But on the whole, the Budget is a significant let-down for the renewable and energy conservation sectors.

The focus for the power sector in this Budget appears to be on conventional power projects, aimed at some early cost reduction and steps to upgrade and expedite coal production. We must hope that more fundamental actions to turnaround distribution companies and improve energy efficiency will be taken up soon before the temporary relief from these Budget proposals is lost.