budget 2012-13 & it’s effect on power and infrastructure

8/2/2019 BUDGET 2012-13 & ITS EFFECT ON POWER AND INFRASTRUCTURE

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BUDGET 2012-13 & ITS EFFECT ON

POWER AND INFRASTRUCTURE

PRESENTED BY:

Hiren Patel


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BUDGET FOR POWER SCTOR


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PRE BUDGET EXPECTATIONS OF

POWER SECTOR

The issues that are grappling the sector are many. Privatepower producers have bid aggressively in ultra mega powerprojects and are slowly getting unviable, coal supply has notimproved much in the last two years and fuel imports are

expensive.

The health of the state electricity boards

Expectation: Giving SEB pricing hike.

The budget sops come at a time when 52 power projects,being developed at a cost of about Rs 3.42 lakh crore, couldface the risk of default on fuel shortages and environmentalhurdles. India is expected to see a capacity addition of 80,000mw in the 12th Five-Year Plan (2012-17) and a significant

chunk would be from private players.


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PRE BUDGET EXPECTATIONS OF

POWER SECTOR

1. Waiver on import duty on coal.

2. Doing away with customs duty on powerequipments.

3. Reduction of customs duty on coal handlingand transportation equipment.

4. Greater focus on the Restructured -

Accelerated Power Development and ReformProgramme (R-APDRP).

5. Setting up of the National Electricity Fund.


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POST BUDGET ANALYSIS

1. Tax incentives: Extension of sunset clause

for tax holiday for power sector:

It is proposed to amend section 80-IA (4) (iv) to extent

the terminal date for a future period of one year, i.e.,

up to 31st March, 2012. This amendment will take effect from 1st April, 2012 and

will, accordingly, apply in relation to assessment year 20

12-13 and subsequent years.


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POST BUDGET CONT2. Waiver of Import duty on fuel

Full exemption on basic customs duty for Natural gas /Liquefied Natural Gas imported for power generation;uranium concentrate, sintered natural uranium dioxide,sintered uranium dioxide pellets for nuclear power

generation and Steam coal (only up to 31/3/2014) is to makeimported fuel cheaper for power plants.

CVD (Counter Vailing Duty) on steam coal is also beingreduced from 5% to 1% on such coal till March 2014.

Customs duty exemption for coal mining projects. Power utilities such as TATA power, NTPC ltd, Adani power

and Reliance power are likely to benefit after the budgetproposed a 2-year exemption on import duty for companiesimporting thermal coal.


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POST BUDGET CONT

3. Reduction of Import duty on Equipment

The basic customs duty on boiler quality tubes and pipes formanufacture of boilers reduced from 10% to 7.5%.

Almost 30% of the projects awarded during the 11th FiveYear Plan that ends in March were bagged by Chinese

companies. Power generators, such as Reliance Power, LancoInfratech, and Adani Power have sourced majority of theircore power equipment from foreign manufacturers.

The Chinese power generation equipment manufacturers

have advantage due to low interest rates and an undervaluedcurrency in the country. In the Budget there is also nomention about development of the transmission sector andreform in the distribution sector.

The reduction in customs duty will be more beneficial toforeign MNCs operating in India.


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POST BUDGET CONT4. CoalIndia to sign fuel supply agreements with power projects

The Budget has also directed Coal India to sign fuel supply agreements withpower projects to give a boost to energy generation. Coal India would signfuel supply pacts for power projects for a period of 20 years.

"For power plants that have been commissioned up to 31 December 2011,FSAs will be signed before 31 March 2012," the PMO had said in astatement.

Fuel Supply Agreements (FSAs) would be signed for the full quantity of coalmentioned in the Letters of Assurance (LoAs) for a period of 20 years. If thesupply is below 80 percent, then Coal India would be penalized, whereas incase the supply is above 90 percent, the company would be provided an

incentive. In case Coal India is unable to meet the obligations, the company would

have to arrange for fuel through imports or other arrangements.

The PMO had also noted that these arrangements would provide relief topower plants with an estimated capacity of more than 50,000 mw.


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POST BUDGET CONT

5. Increasing the quantum of tax-free bonds limit

The minister has also permitted power companies to

avail of external commercial borrowings (ECBs) to part

finance their rupee debt besides increasing the quantumof tax-free bonds limit for the sector to Rs 10,000 crore

from Rs 5,000 crore.


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POST BUDGET CONT

6. External Commercial Borrowings (ECBs)

"The decision to allow ECBs and cutting the withholdingtax on ECBs to 5 per cent from 20 for power sector arewelcome moves. This will bring relief to new projects inthe thermal power space. Also the reinforcement of

intention to introduce DTC and GST in the near futureshould create a positive investment climate,"

The budget allowed power projects to retire part of theirrupee debt and replace it with foreign borrowing, whichis much cheaper even after hedging costs. This wouldalso increase the ability of domestic banks to lend to thesector without exceeding their exposure limits.


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POST BUDGET CONT

7. Incentives for promotion

The budget also announced incentives to promote

the use of energy-efficient appliances and light-

emitting diodes (LEDs)

I propose to fully exempt a coating chemical used

for compact fluorescent lamps from basic customs

duty. Excise duty on LED lamps is also being

reduced to 6%, Mukherjee proposed.


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POST BUDGET CONT

8. Agreement To Compute Additional Depreciationfor the New Assets

The finance minister has agreed to compute additional

depreciation for the new assets purchased by powercompanies and extended the sunset clause for the

power sector by one more year.


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BUDGET DISAPPOINTMENTS

1. Disappointment for non conventional and

renewable energy

There is nothing supportive for the wind and solar

energy sectors in particular,"

"The indigenous solar cells and module manufacturers

are suffering because of cheap imports. By not

addressing this issue, the Budget has left domesticindustry to suffer and fail.

Thus, the non-conventional power producers, however,

have expressed disappointment over duty exemption on

imported coal.


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BUDGET DISAPPOINTMENTS CONT

2. Disappointment for Indian power equipment makers, Indian power equipment makers, who were demanding imposition of

customs duty on imported power gear above 1,000 mw, are left highand dry by the finance minister as there was no mention of thisdemand in the budget. Thus, Union Budget 2012-13 has been a great

disappointment for the Power Plant Equipment makers who weredrumming up for imposition of import duty of 14%-19% onmega/UMPP projects, which currently allows concession duty imports.

Non-introduction of duty on import of power gears was criticized byDomestic Equipment Manufacturers Association.

"This is a major setback for manufacturers who have made biginvestments to build power equipment capacity,"

Subject to end use condition the basic customs duty on boiler qualitytubes and pipes for manufacture of boilers reduced from 10% to 7.5%.

Equipments for setting up of solar thermal projects are being fullyexempted from SAD (Special Additional Duty)


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"This is a major setback for manufacturers who have madebig investments to build power equipment capacity,"

The industry has also raised concerns about cheap import of

equipment from China not being addressed.

"Companies may scale down investment and those who havealready set up capacity may run on low capacity and jobs

would be lost unless government intervenes,

Companies impacted by the decision include Bharat Heavy

Electricals, Doosan Heavy Industries and Construction, Larsen& Toubro-Mitsubishi Heavy Industries joint venture, JSW

Energy-Toshiba Corporation JV, BGR Energy-Hitachi Power

Europe JV, Gammon India-Ansaldo Caldaie SpA JV and Bharat

Forge-Alstom SA venture.


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4. Sharp Increase in the Cess on Domestic

Crude Oil

The government also sharply raised the cess on

domestic crude oil.

Oil explorers such as ONGC, Oil India and Cairn

India will be hit after the budget proposed to raise

cess on crude oil to Rs 4,500 per tonne from Rs2,500 per tonne.


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5. No attempt made to address the structural problems

No attempt has been made to address the structural

problems facing the sector, namely fuel scarcity and

distribution sector reforms. The finance minister was silenton the issues surrounding the supply of coal. No concrete

measures were announced on resolving issues such as

environment and mining clearances. Thats perhaps why the

power index on the Bombay Stock Exchange lost more thanthe benchmark SENSEX on Friday, and stocks such as GVK

Power Ltd and NTPC Ltd lost far more.


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6. Reduced Overall Budget Allocation

The total budget allocation to MoP actually fell 6% from Rs66,382 crore in 2011-12 to Rs 62,424 crore for theupcoming fiscal.

The plan outlay for central public sector units in the powersector has decreased from Rs 57,640 crore in 2011-12 toRs 53,296 crore for 2012-13.

The Rajiv Gandhi Gramin Vidyutikaran Yojana (RGGVY)scheme now stands to receive Rs 4,410 crore, against thebudget estimate of Rs 5,326 crore for the previous fiscal.

The lump sum provision for schemes in the region andSikkim has been enhanced to Rs 1,080 crore, from theprevious Rs 964 crore.


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EFFECTS ON POWER SECTOR While such exemptions will increase the demand for imported

coal, they will also help state-owned Coal India Ltds mining plans.The demand-supply gap is expected to touch 450 mt by 2017,which is largely expected to be met through imported coal. It takesaround 5,000 tonnes of coal to generate 1 megawatt of power.

Only 320 mt of coal is expected to be supplied to the power sector

by Coal India against the committed 347 mt in the fiscal yearending 31 March. The state-owned firm mined only 431 mt in2010-11 against a target of 461.5 mt because of stalled projects.Its overall target in the current fiscal is 452 mt.

Scrapped taxes on coal imported by power companies wont be

enough to boost purchases much beyond the 70-80 million tonnesalready forecast by analysts for 2012-13. But the gap betweendomestic and international coal prices is still wide, discouragingimports. Power producers cannot pass on any increase in fuelprices to consumers.


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EFFECTS ON POWER SECTOR CONT

Global coal prices are about 40% more than domesticprice, which accounts for about 80% of the countrysoutput.

Indonesia spot coal prices are currently around $65 pertonne while average domestic coal prices are Rs1,600-1,700($31.76-33.74) per tonne.

Here we are talking about a 5% cut in duties -- so its anincentive but this will not necessarily make importers go forforeign coal in a big way.

Using current benchmark Newcastle coal prices at $110 pertonne, and CFR prices around $120 per tonne, the impactof removing the duty is a benefit close to $6 per tonne


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EFFECTS ON POWER SECTOR CONT

With imported coal at least 50% costlier than what

Coal India Ltd provides, companies dependent on

imported coal can look forward to lower generating

costs. But the gains could be limited to companiesthat import coal and sell power in merchant power

markets. According to analysts, most power

purchase agreements have a pass-through clause,which requires the producers to pass on the duty

benefits to the utilities, namely state electricity

boards.


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EFFECT ON STOCK MARKET Shares of power sector firms on Friday rallied for the second consecutive day, as

the government direction to Coal India for fuel supply to power utilities continued

to boost the sentiments. Shares of Lanco Infra zoomed 11.58 per cent to close at Rs 22.65 on the BSE,

while Adani Power gained 4.23 per cent to close at Rs 85.

Tata Power soared 4.68 per cent, while JSW Energy gained 8.28 per cent. Shares ofPFC and REC also gained 3.30 per cent and 2.86 per cent, respectively.

However, Neyveli Lignite shares declined by 3.12 per cent and Reliance Infra stockdipped by 2.27 per cent.

Earlier this week, the Prime Ministers Office said that Coal India would sign FuelSupply Agreements (FSAs) by March-end to power projects commissioned up toDecember 2011.

Coal India would sign FSAs with power plants that have entered into long-termPower Purchase Agreements (PPAs) and have been commissioned or would getcommissioned on or before March 31, 2015.

If the supply is below 80 per cent, then Coal India would be penalised whereas incase the supply is above 90 per cent, the company would be provided incentive.

Coal India shares also bounced back today and settled 1.2 per cent higher at Rs324.85 at the BSE
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BUDGET FOR INFRASTRUCTURE


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THANK YOU!

budget 2012-13 & it’s effect on power and infrastructure

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