The Union budget 2014-15 provides immediate relief to the power sector by extending the tax holiday period, rationalising customs duty and lowering excise duty on certain products. The policy measures on coal supplies, coal linkages and long-term funding sources outlined would be long-term positives while the exact policies would take time to be formulated. Overall, Ind-Ra assesses the budget to be positive for the power sector.
Tax Holiday Extension: The extension of the tax benefit for any of the 10 years of the first 15 years of the project life under section 80-IA is a long-term positive, as it would provide additional funds to projects and developers. Additionally, the 80-IA extension has been provided till 31 March 2017. Ind-Ra believes that the three-year extension would provide greater clarity to developers. This is the second extension post the expiry of the scheme in March 2011.
Customs Duty Rationalisation: The proposed rationalisation of customs duty on coal continues the rationalisation measures offered in the previous budget. The current proposal further lowers ambiguity, transaction costs and the need for a third-party inspection to determine the quality of coal. The customs duty has now been proposed at 2.5% independent of coal quality (anthracite, bituminous, coking coal, steam coal and all other coals). In the earlier structure bituminous coal and steam coal attracted 2% customs duty while non-bituminous did not, which led to mis-reporting. For generators operating under the cost plus regime the same is expected to be profit neutral, as the same would be passed on to the beneficiaries. However, the overall electricity cost could increase marginally.
For coal traders such as Knowledge Infrastructure Systems Private, the move is expected to ease the coal classification difficulties encountered during the import of coal and could reduce the operating costs while the increase/decrease in duties is a direct pass-through to the off-taker.
Focus on Renewable Energy: The re-iteration of government's intent of focusing on renewable energy would lead to lower dependence on conventional fuels and more so when the solar energy prices are inching close to grid parity. The government plans to set up Ultra Mega Solar Power Projects in Rajasthan, Gujarat, Tamil Nadu and Ladakh with a capital outlay of INR5bn.The government has also provided excise duty exemptions on certain products to further lower the cost of solar and wind energy plants. These products include EVA sheets, solar back sheets, solar tempered glass, machinery and equipment for setting up solar energy plants and forged steel rings. This could further accelerate the process of solar energy achieving grid parity.
Rationalisation of Coal Linkages: The intent of rationalisation of coal linkages through re-assignment of coal linkage to the mines closest to the power plant, is to lower coal transportation costs. Additionally, the focus on transportation of only washed and crushed coal would be a long term positive leading to lower quantum of coal transportation on kcal/kg as washed coal has higher calorific value. However, at the same time, the clean energy cess has been increased to Rs 100/tonne from Rs 50/tonne which would largely neutralise the benefit that would accrue from savings on transportation cost. Additionally, the royalty is proposed to be hiked which would impact the price of domestic coal, though the quantum of such a hike has not been spelt out.
Over the next one or two years, the impact of the clean energy cess would be visible, while the rationalisation of coal linkages could take some time. Therefore over the next year, the average price of generation could increase by 3.5 paisa per unit. The royalty increase would also impact the overall cost of generation. NTPC which operates under the cost plus RoE model would not be impacted as such costs are pass-through. However private independent power producers would have to take minor hits if they are unable to increase the selling price.
Focus on Higher Coal Supplies: The government's re-iteration of its earlier thrust area of ensuring adequate coal supplies to power plants already commissioned or about to be commissioned by March 2015, would boost investor confidence. Increased coal supplies are likely to resolve the debt servicing problems being faced by the coal fired power plants. Moreover, as the fuel availability increases, both the plant availability factor (PAFs) and plant load factor (PLFs) are expected to increase. The former will lead to better recovery of fixed costs while the latter would aid in ensuring healthy incentive income as Central Electricity Regulatory Commission (CERC) guidelines for 2014-19 link the incentive income to PLFs.
Long-Term Funds for the Sector: The indications towards encouraging banks to extend long-term loans to the infrastructure sector with flexible structuring to absorb potential adverse contingencies would lead to cash-flow alignment between that allowed under the regulatory framework and that actually observed. The CERC framework assumes the depreciation amount to be equivalent to loan repayment which is generally not the case. However, the tenure of loans available to developers varies from 8-10 years while the depreciation is spread over 25 years leading to cash-flow mismatches.
