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BUDGET 2012-13 & ITS EFFECT ON POWER AND INFRASTRUCTURE

PRESENTED BY: Hiren Patel

BUDGET FOR POWER SCTOR

PRE BUDGET EXPECTATIONS OF POWER SECTOR


The issues that are grappling the sector are many. Private power producers have bid aggressively in ultra mega power projects and are slowly getting unviable, coal supply has not improved 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, could face the risk of default on fuel shortages and environmental hurdles. India is expected to see a capacity addition of 80,000 mw in the 12th Five-Year Plan (2012-17) and a significant chunk would be from private players.

PRE BUDGET EXPECTATIONS OF POWER SECTOR


1. Waiver on import duty on coal. 2. Doing away with customs duty on power equipments. 3. Reduction of customs duty on coal handling and transportation equipment. 4. Greater focus on the Restructured Accelerated Power Development and Reform Programme (R-APDRP). 5. Setting up of the National Electricity Fund.

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.

POST BUDGET CONT


2. 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 make imported fuel cheaper for power plants. CVD (Counter Vailing Duty) on steam coal is also being reduced 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 budget proposed a 2-year exemption on import duty for companies importing thermal coal.

POST BUDGET CONT


3. Reduction of Import duty on Equipment
The basic customs duty on boiler quality tubes and pipes for manufacture of boilers reduced from 10% to 7.5%. Almost 30% of the projects awarded during the 11th Five Year Plan that ends in March were bagged by Chinese companies. Power generators, such as Reliance Power, Lanco Infratech, and Adani Power have sourced majority of their core power equipment from foreign manufacturers. The Chinese power generation equipment manufacturers have advantage due to low interest rates and an undervalued currency in the country. In the Budget there is also no mention about development of the transmission sector and reform in the distribution sector. The reduction in customs duty will be more beneficial to foreign MNCs operating in India.

POST BUDGET CONT


4. Coal India to sign fuel supply agreements with power projects The Budget has also directed Coal India to sign fuel supply agreements with power projects to give a boost to energy generation. Coal India would sign fuel 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 a statement. Fuel Supply Agreements (FSAs) would be signed for the full quantity of coal mentioned in the Letters of Assurance (LoAs) for a period of 20 years. If the supply is below 80 percent, then Coal India would be penalized, whereas in case 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 to power plants with an estimated capacity of more than 50,000 mw.

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 quantum of tax-free bonds limit for the sector to Rs 10,000 crore from Rs 5,000 crore.

POST BUDGET CONT


6. External Commercial Borrowings (ECBs)
"The decision to allow ECBs and cutting the withholding tax on ECBs to 5 per cent from 20 for power sector are welcome moves. This will bring relief to new projects in the thermal power space. Also the reinforcement of intention to introduce DTC and GST in the near future should create a positive investment climate," The budget allowed power projects to retire part of their rupee debt and replace it with foreign borrowing, which is much cheaper even after hedging costs. This would also increase the ability of domestic banks to lend to the sector without exceeding their exposure limits.

POST BUDGET CONT


7. Incentives for promotion
The budget also announced incentives to promote the use of energy-efficient appliances and lightemitting 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.

POST BUDGET CONT


8. Agreement To Compute Additional Depreciation for the New Assets
The finance minister has agreed to compute additional depreciation for the new assets purchased by power companies and extended the sunset clause for the power sector by one more year.

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 domestic industry to suffer and fail. Thus, the non-conventional power producers, however, have expressed disappointment over duty exemption on imported coal.

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 high and dry by the finance minister as there was no mention of this demand in the budget. Thus, Union Budget 2012-13 has been a great disappointment for the Power Plant Equipment makers who were drumming up for imposition of import duty of 14%-19% on mega/UMPP projects, which currently allows concession duty imports. Non-introduction of duty on import of power gears was criticized by Domestic Equipment Manufacturers Association. "This is a major setback for manufacturers who have made big investments to build power equipment capacity," Subject to end use condition the basic customs duty on boiler quality tubes and pipes for manufacture of boilers reduced from 10% to 7.5%. Equipments for setting up of solar thermal projects are being fully exempted from SAD (Special Additional Duty)

BUDGET DISAPPOINTMENTS CONT


"This is a major setback for manufacturers who have made big 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 have already 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.

BUDGET DISAPPOINTMENTS CONT


3. Hike in service tax and excise duty rates
The hike in service tax and excise duty rates, will further impact the top-line and the bottom-line of electrical equipment manufacturers. Thus, were saddled further with 2% hike in excise duty and service tax

BUDGET DISAPPOINTMENTS CONT


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 Rs 2,500 per tonne.

BUDGET DISAPPOINTMENTS CONT


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 silent on 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 than the benchmark SENSEX on Friday, and stocks such as GVK Power Ltd and NTPC Ltd lost far more.

BUDGET DISAPPOINTMENTS CONT


6. Reduced Overall Budget Allocation
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. 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 Rajiv Gandhi Gramin Vidyutikaran Yojana (RGGVY) scheme now stands to receive Rs 4,410 crore, against the budget estimate of Rs 5,326 crore for the previous fiscal. 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.

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 takes around 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 year ending 31 March. The state-owned firm mined only 431 mt in 2010-11 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 tonnes already forecast by analysts for 2012-13. But the gap between domestic and international coal prices is still wide, discouraging imports. Power producers cannot pass on any increase in fuel prices to consumers.

EFFECTS ON POWER SECTOR CONT


Global coal prices are about 40% more than domestic price, which accounts for about 80% of the countrys output. Indonesia spot coal prices are currently around $65 per tonne 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 an incentive but this will not necessarily make importers go for foreign coal in a big way. Using current benchmark Newcastle coal prices at $110 per tonne, and CFR prices around $120 per tonne, the impact of removing the duty is a benefit close to $6 per tonne

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 companies that 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.

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 of PFC 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 stock dipped by 2.27 per cent. Earlier this week, the Prime Ministers Office said that Coal India would sign Fuel Supply Agreements (FSAs) by March-end to power projects commissioned up to December 2011. Coal India would sign FSAs with power plants that have entered into long-term Power Purchase Agreements (PPAs) and have been commissioned or would get commissioned on or before March 31, 2015. If the supply is below 80 per cent, then Coal India would be penalised whereas in case 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 Rs 324.85 at the BSE

BUDGET FOR INFRASTRUCTURE

THANK YOU!

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