Private plants to aid power generation

With the coming of Electricity Act 2003, the power sector, which was highly regulated with lot of licensing requirements, is in the throes of a long awaited change. The licensing requirements have been reduced, as the generation company will be free to enter distribution business and vice-a-versa. Currently private sector accounts for 10% of the total power generation capacity. The remaining is divided between Center and the state owned companies in the ratio of 36:64.

Budget Measures

	Hike in corpus of Rural Infrastructure Development Fund-XIII from Rs 100 bn to Rs 120 bn
	Government's equity support of Rs 164 bn and loans of Rs 30 bn to central public sector enterprises
	Facilitation of setting up of merchant power plants by private developers
	Private sector participation in transmission projects
	Hike in budgetary support for APDRP from Rs 6.5 bn to Rs 8 bn
	Increase in allocation for Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) from Rs 30 bn to Rs 40 bn
	Full custom duty exemption on coking coal, from 5% rate currently
	Tax on dividend distributed by companies to be hiked from 12.5% to 15%
	Tax on dividend distributed by money market and liquid mutual funds to be hiked to 25%
	Additional education cess of 1% to fund secondary and higher education

Budget Impact

	Increase in corpus of RIDF-XIII and higher allocation for RGGVY to aid addition to power capacities for rural areas
	Government's equity and debt support to central public sector enterprises to aid funding for national electrification programme
	Setting up of merchant power plants by private developers to aid the power generation sector
	Private sector participation in transmission projects likely to lead to higher spending and faster creation of transmission infrastructure
	Hike in budgetary support for APDRP from Rs 6.5 bn to Rs 8 bn to aid reduction in losses in the transmission and distribution segments through way of incentives
	Custom duty exemption on coking coal to lead to around 5 paise reduction in tariff for the end user of electricity
	Higher education cess and dividend distribution tax to impact net profits and retained earnings
	As for increase in tax on dividend distributed by money market and liquid mutual funds, this is likely to impact the large debt investments made by power sector companies

Sector Outlook

While the finance minister has talked of setting up of ultra mega power projects and greater thrust on rural electrification, we find nothing new in these announcements, as these have already been made earlier. However, despite this enhanced focus, we remain concerned about the pace of actual implementation of the planned projects, in all the segments of power generation, transmission and distribution. The full exemption on import duty on coking coal will lead to a marginal reduction in electricity tariffs. However, we believe that the increase in tax on dividend distributed by money market and liquid mutual funds is likely to impact the large debt investments made by power sector companies. Overall, we remain cautiously optimistic on the sector's progress in the years to come. Long term fuel linkages and investment in transmission and distribution are our key areas of consideration with respect to the sector's growth prospects.

Company Impact

	Boost to rural electrification to benefit generators like NTPC, Tata Power, Reliance Energy and consequently power generation equipment and service providers like BHEL and Siemens
	Aid to setting up of merchant power plants to benefit private developers like Tata Power and Reliance Energy
	Private sector participation in transmission projects and hike in budgetary support for APDRP to lead to increased benefits for companies like ABB and Siemens

Industry Wish List

Mr. Madhukar Moolwaney, Sr. Vice President, Reliance Energy
	Clarification on treatment of MAT as part of Income tax liability while determining tariffs to be paid by state electricity boards on power purchase agreements with power generating companies
	Fringe benefit tax to be made an allowable expense by regulator while determining tariffs
	Extending the period of Section 115J by 3-5 years over its expiry in 2010

Budget over the years

Budget 2004-05	Budget 2005-06	Budget 2006-07

For development of the power infrastructure, the FM announced that mega power status would now be given to all power projects meeting the existing norms. Financial institutions like IDFC, ICICI Bank, SBI, LIC, Bank of Baroda and Punjab National Bank will form an Inter-Institutional Group (IIG) where in, they will pool resources to the tune of Rs 400 bn, which will be made available to infrastructure projects as and when needed. Government to provide equity support of around Rs 142 bn and loans worth Rs 21 bn to central public sector enterprises including power. Tax benefit under Section 80 IA extended to projects undertaken during the period April 1, 2004 to March 31, 2006. Basic necessities like power to be made available to everyone. 2% education cess on all taxes.	6 power projects brought to financial closure in last one year and another 10 projects are likely to reach financial closure soon. Creation of a rural electricity distribution backbone envisaged To reach electricity to the remaining 125,000 villages and offer electricity connection to 23 m households Proposal for setting up a 33/11 kV sub station in every hub and at least 1 transformer in every village	Rural infrastructure development fund - a corpus of Rs 80 bn for FY06 Five ultra mega power projects of 4,000 MW each to be awarded before December 31, 2006 Tenth plan target of 3,075 MW of installed capacity for non-conventional energy sources exceeded by December 31, 2005 with installation of 3,650 MW capacity. Rs 5.9 bn proposed to be spent on non-conventional energy resources. 10,000 villages in 2005-06 and 40,000 more villages in 2006-07 to be electrified under the Rajiv Gandhi Grameen Vidyutikaran Yojana. Coal reserves of 20 bn tonnes to be de-blocked for power projects Customs duty on natural gas reduced from 10% to 5%
[Read more on Budget 2004-05]	[Read more on Budget 2005-06]	[Read more on Budget 2006-07]

Key Positives

	Large investment plans: With the recent string of reforms in the Indian power sector, the sector is expected to grow at a rapid rate going forward. As per the commissioning programme, till March 2010, an aggregate generation capacity of 43,865 MW is expected to come on stream. The government has also indicated of a projected capacity expansion of 67,000 MW in the 11th five-year plan (2007-12).
	Electricity Act 2003: The Electricity Act 2003 has provided great opportunity for power companies, given its provisions relating to the abolishment of various licensing norms, liberalisation of the power distribution business and opening of power trading for private sector power companies. Though the track record of execution of such reforms is appalling, the power sector is slowly but surely set for a change. Corporatisation of SEBs and linking profitability to the state government's plan outlay are likely to give some sort of fiscal strength to the key sector participants in the long run.
	Benefits of unbundling: Provision for unbundling of power generation, transmission & distribution companies has been laid. This will result in reducing T&D losses, as incentives to these private players are directly linked to reduction in T&D losses.

Key Negatives

	T&D losses pinch: The T&D losses, which are still on the higher side, result in lower effective realisation of per unit of power produced by generation companies. Poor T&D infrastructure remains a cause of concern. It is due to this and few other factors that the losses are on the higher side as compared to other countries. As a result, the industry is able to deliver less than its actual potential. This, in turn, has also affected the ability of players to re-invest towards growth initiatives. Average transmission and distribution losses (T&D) exceed 25% of total power generation compared to less than 15% for developing economies. The T&D losses are due to a variety of reasons, viz., substantial energy sold at low voltage, sparsely distributed loads over large rural areas, inadequate investment in distribution system, improper billing, and high pilferage.
	Existing capacity under-utilisation: The poor performance of India's existing generating units has been a principal cause of power shortages and unreliable quality of power supply. The primary culprits are the coal-fired thermal power stations, which accounts for over 65% of total installed capacity. The average plant load factor (PLF) of thermal power stations in India is less than 60%, but varies considerably across regions. However, not all of the thermal generating stations have such dismal records. For instance, the performance of 500 MW and 200 MW units has been satisfactory, and their PLFs have been higher than the national average. It is, in fact, the thermal units of 120/140 MW and below that are cause for concern.
	SEBs still reeling under losses: Poor financial health of a large number of state electricity boards (SEBs) continues to be cause of concern. Though some measures have been taken to address this issue, these have been inappropriate. Inability to take hard decisions has been impacting industry fortunes.

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