Thursday, March 22, 2012

Power Sector news in Union Budget 2012-13

Big duty cuts to aid ailing power sector; coal and gas get full exemption from basic duty 

Pranab Mukherjee, in his budget speech, announced cuts in duty rates to aid power generation in the country. High coal prices have been a thorn in the flesh of power producers in the country, and Indonesia changing its domestic laws on coal export has further added to the woes of generators as import prices have risen substantially to erode the bottom lines of the companies dependent on imported coal. Recognizing the enormity of the situation, the minister introduced a slew of duty cuts to remedy the situation, and hopefully restore the profits margins of some of the struggling producers.
  • The finance minister has provided full exemption from basic customs duty and a concessional CVD of 1 per cent to steam coal for a period of two years till March 31, 2014.
  • In addition, full exemption from basic duty is also being provided to the following fuels for power generation:
    •  Natural Gas and Liquefied Natural Gas; and
    •  Uranium concentrate, Sintered Uranium Dioxide in natural and pellet form.
  • The mining sector, which is critical for coal production, and by consequence for the power sector as well, has also come in for cuts in customs duty. A reduction in basic customs duty on machinery and instruments for surveying and prospecting from 10 per cent or 7.5 per cent to 2.5 per cent has been proposed by Pranab Mukherjee. In addition, full exemption from basic customs duty is being provided to coal mining projects
  • Another important source of energy generation--solar energy--has, over the past few years, received a lot of attention from the Indian government, of which the Jawaharlal Nehru National Solar Mission is a prime example. The union budget, it may the be said, was only a reflection of the government's affinity towards solar energy. Specifically, solar plant and equipment etc. have been fully exempt for the initial setting up of such projects from special CVD.
Power tariffs likely to go down; FM allows ECBs to part finance power projects, lowers withholding tax 

The Budget is likely to come as a breather for power companies and consumers alike with measures such as external commercial borrowings (ECB) for part-financing debt and lowered withholding tax on interest payments on ECBs aimed at reducing the cost of setting up of power plants and hence, generation costs and consumer tariffs.
  • Presenting his 7th budget in the Lok Sabha, the finance minister allowed for ECBs to part finance Rupee debt of existing power projects. This move is likely to help reduce interest costs, making room for smaller power companies to raise finance from banks.
  • Further, as financing power projects has been perennially constrained for developers given the long gestation period of projects and high financial stakes, the minister, to make borrowings attractive, has reduced the withholding tax on interest payments from 20% to 5%.
  • In addition, to encourage investment in the beleaguered power sector, financial institutions have been allowed to raise Rs 10,000 crore from tax-free bonds.
Sign FSAs with power companies, FM tells Coal India 

In an effort to ease the fuel supply constraints that have been affecting production prospects in the country, Pranab Mukherjee, in his speech to the parliament, directed state-owned Coal India to firm up fuel supply agreements (FSAs) with power plants that have entered into long-term Power Purchase Agreements with distribution companies and would get commissioned on or before March 31, 2015.
  • Last month, a Pulok Chatterjee headed committee had deliberated upon numerous plausible solutions for adequate coal provision to power plants.
  • The government had then advised the coal monolith to guarantee 20 years of supplies to private power producers in a bid to curb chronic electricity shortages that have threatened economic growth.
  • During the meeting it was agreed that for projects which have been commissioned up to December 31, 2011, CIL will sign FSAs by the end of March 2012.
  • Further, the Maharatna is to sign FSAs with power plants that have already entered into long-term PPAs with discoms and have been or are scheduled to be commissioned by the end of FY 2014-15.
  • On another note, the finance minister said that "an inter-ministerial group is being constituted to undertake periodic review of the allocated coal mines and make recommendations on de-allocations, if so required."

Sunset clause for tax holiday for power generation extended by one year 

The terminal date for the tax holiday allowed against income accruing from power generation, transmission and distribution businesses has been extended till March 2013.
  • Accordingly, undertakings will be able to deduct gains or profits under each of the following scenarios between the period April 1, 1993, to March 31, 2013:
    • It commences power generation or;
    • Starts distribution or transmission of power or;
    • Undertakes substantial renovation and modernization of transmission or distribution networks;
  • These benefits are provided to the power sector under Section 80-IA(4)(iv) of the Income Tax Act. 
Despite tax breaks, MoP's budget allocation falls 

The Union Budget 2012-13 presented by the finance minister, Pranab Mukherjee has brought plenty of good news in the form of reduction in duties and taxes for the the country's struggling power sector. However, as far as the budget allocation to the power ministry goes, the government's stance was quite opposite. For instance, Mukherjee chose not to extend any additional budgetary support to the ministry, which remained unchanged at Rs 9,642 crore from the previous fiscal.
  • In addition, the total budget allocation to MoP actually fell 6% from Rs 66,382 crore in 2011-12 to Rs 62,424 crore for the upcoming fiscal.
  • A break up of this allocation reveals that the plan outlay for central public sector units in the power sector has decreased from Rs 57,640 crore in 2011-12 to Rs 53,296 crore for 2012-13.
  • The budgetary support extended for the power ministry's rural electrification scheme, Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) has also fallen. The scheme now stands to receive Rs 4,410 crore, against the budget estimate of Rs 5,326 crore for the previous fiscal.
  • Taking due cognizance of the power situation in the north eastern region, however, the lump sum provision for schemes in the region and Sikkim has been enhanced to Rs 1,080 crore, from the previous Rs 964 crore. This, it may be said, signals the urgent impetus that the government has put on development of that part of the country. 
 Allocation for public power sector companies increased by 13% 

The budget for the various public enterprises in the power sector has witnessed a fall to Rs 53,297 crore for the fiscal 2012-13, against the Rs Rs 57,641 crore allocated in BE 2011-12. Internal and Extra Budgetary Resources (IEBR) make up Rs 52,782 crore of the budget, while NHPC garners the majority of the total budgetary support, of Rs 514 crore, provided by the Centre.
  • NHPC has been provided with Rs 270.37 crore of budgetary support in the form of loans for developing power projects, while NTPC and THDC get the remainder of Rs 244 crore. As usual, the largest investment will be seen by NTPC, at Rs 20,995 crore, against the RE 2011-12 of Rs 26,400 crore
  • Investments in state-owned Powergrid (PGCIL) are expected to total Rs 20,000 crore, a 13% jump over the revised estimates for the previous fiscal. Allocation for DVC and NHPC, however, have been reduced to Rs 5,571 crore and Rs 4,097 crore respectively, showing a fall of 5.4% and 12.3%, in that order, over the budgeted figures for 2011-12. 
 Outlay for coal sector up by more than Rs 300 crore at Rs 9,632 crore 

The Finance Minister, Pranab Mukherjee, in his Union Budget speech for 2011-12, chose not to upset a lot of apple carts, preferring to announce an increase in the total outlay for the coal sector to Rs 9,632.78 crore, as against the revised expenditure estimate of Rs 9,302.85 crore for the previous fiscal year.
  • The contribution to the coal mines pension scheme has fallen by Rs 2.95 crore to Rs 25.70 crore. Conversely, the budgetary provision for conservation and safety of coal mines has been increased to Rs 137.30 crore, from the revised estimates of Rs 121 crore last year.
  • Further, the budgetary support for development of road and rail transport infrastructure in the coalfield areas and research and development programs has more than doubled, from Rs 22 crore in the previous fiscal to Rs 55 crore for the 2012-13 fiscal.
  • A lump sum provision of Rs 31 crore has also been made for projects and schemes directed towards the benefit of tribal populace.
  • Budgetary support of Rs 1,687 crore and Rs 3,220 crore have been provided to Neyveli Lignite Corporation Limited and  Singareni Colleries Company Limited, respectively.
  • The government has increased its budgetary support to Coal India Limited (CIL) to Rs 4,275 crore, as against the previous Rs 4,220 crore.
 Greater stress on nuclear and renewable sectors; plan outlay upped 
Nuclear and renewable energy have been favored by the government in this budget. The budget allocation for both the sectors has been increased by more Rs 1,000 crore each for FY 2012-13. This indicates the importance of these two sources of energy, not only as possible alternatives for the struggling thermal sector in India, but also from the point of view of their environmental benefits.
  • Specifically, the total outlay for the nuclear sector for 2012-13 is Rs 6,607.68 crore (outlay in 2011-12 was Rs 5,581.00 crore). The Plan Outlay consists of Rs 998.27 crore by way of budgetary support and Rs 5,609.41 crore by way of IEBR.
  • The budgetary support includes for investment in equity in Bharatiya Nabhikiya Vidyut Nigam Limited (BHAVINI) and Rs 14 crore for Externally Aided Projects at Kudankulam being executed by Nuclear Power Corporation of India Ltd. with the assistance of the Russian Federation. Projects of Bhabha Atomic Research Centre and that of Indira Gandhi Centre for Atomic Research to provide R&D support for the power programme are also included.
  • As far as the renewable energy sector goes, an outlay of Rs 3,355.00 crore (Rs 2,150 crore in 2011-12 ) has been made in the annual plan for the year 2012-13.
  • This budget allocation is for programmes such as Grid-Interactive and Distributed Renewable Power which includes provision of Central Financial Assistance (CFA) for about 4,145 MW Grid-interactive Power capacity addition from wind, small hydro, biomass power/cogeneration, urban and industrial waste to energy and solar power; and deployment of about 140 MW equivalent off grid/distributed renewable power systems.
 Other important programmes under this budget allocation also include:
  --Renewable Energy for Rural Applications: The provision will be used for construction of 1.25 lakh family type biogas plants and start of a new programme on cook stoves. It also includes provision for scheduled castes beneficiaries.
  --Research, Design and Development in Renewable Energy: R&D activities on different aspects of new and renewable energy technologies; support to MNRE centres/institutions; standards and testing; renewable energy assessment (including research design and development activities to be undertaken under the solar mission).

Other highlights 

Some of the other highlights of the Budget 2012-13 are as under:
  • Power generating companies can now also claim an additional 20 percent of depreciation on new assets acquired in the initial year.
    • Under the existing provisions, the benefit of initial depreciation is not available on the new machinery or plant installed by an assessee engaged in the business of generation or generation and distribution of power.
  • In order to incentivise the corporate sector to continue to spend on in-house research, the finance minister Pranab Mukherjee has extended the benefit of weighted deduction for a further period of five years i.e. up to March 31, 2017.
    •  Under the existing provisions of Section 35(2AB) of the Income-tax Act, a company is allowed weighted deduction at the rate of 200% of expenditure (not being in the nature of cost of any land or building) incurred on approved in-house research and development facilities.
  • Tunnel boring machines and parts for their assembly have been fully exempted from import duty in the FY13 Budget.              

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