The Hindu Business Line : Mega power policy examined

Hitherto, qualification as a mega power project was contingent upon privatisation of distribution by the State within a fixed period of time in specified cities. This was a bottleneck as only a few cities in specific States have privatised distribution.

The latest amendment relaxes this condition to prescribe that power purchasing States shall undertake to carry out distribution reforms — clearly a more practical condition.

This is a positive change as the same will incentivise distribution reforms as well as ease the condition of seeking a mega power project status.

Inter-State sale of power

Striking out the mandatory condition of inter-State sale of power to qualify as a mega power project is an encouraging modification. Given the significant demand for power across all States, mandatorily selling power inter-State for the tax incentives was an obsolete requirement. Increasingly, in the recent past, one has noticed that the demand of power has grown and States such as Gujarat are capable of buying the entire 1000 MW capacity from generators. Under these changing dynamics of demand supply, it was clearly otiose to insist on signing of power purchasing agreements (PPAs) with more than one States.

Price preference

Prior to the amendment, a dispensation of 15 per cent price preference was available to domestic bidders in the case of all cost-plus projects of public sector units (PSUs). The latest amendment removes the price preference for tariff based competitively bid projects of PSUs.

This is a welcome modification. Price preference, even for tariff based competitively bid projects, defeats the ‘competitive’ aspect of PSUs and is against the spirit and principle of tariff based competitive bidding. The latest amendment seeks to extend the benefits of the Mega Power Policy to projects based on supercritical technology — a positive development.

Supercritical tech

Supercritical technology uses less coal per unit of power produced and is environment-friendly. Using policy and tax concessions as a tool for promoting supercritical technology is a step in the right direction.

However, it is not clear from the Cabinet note whether the current threshold capacity of 1000 MW for tax concessions will be eliminated/reduced for these projects. The removal/reduction of the threshold capacity for supercritical projects is important as otherwise this amendment would be redundant (as most of the supercritical power projects in the pipeline are below 1000 MW).

ICB condition

The latest amendment prescribes that the requirement of undertaking international competitive bidding (ICB) by the developers for procurement of equipment for mega power projects would not be mandatory if the requisite quantum of power has been tied up, or the project has been awarded, through tariff based competitive bidding . The easing of ICB condition for developers procuring equipments for mega power project is a positive step. Once sale of electricity is tied up under tariff based competitive bidding, mandating ICB at the equipment procurement stage for excise exemption is futile and time consuming.

However, corresponding changes would need to be introduced with respect to the deemed export benefits under the Foreign Trade Policy (FTP), the CENVAT Credit Rules, 2004 and the current excise exemption notification that is dependent on supplies being made to mega power projects only under ICB.

It must be noted that need for ICB was dispensed with last year in the Ultra Mega Power Projects case and suitable amendments to the Mega Power Policy would certainly put the ultra mega power plants at par with the mega power plants insofar as the fiscal incentives are concerned. The latest amendment extends almost all the benefits of the Mega Power Policy to expansion of existing mega projects and levies only a basic Customs duty of 2.5 per cent on such expansion. This will significantly reduce the tax costs on capacity expansions by existing mega power projects and may culminate in a significant boost to power generation capacity addition .

PPA condition

The mandatory requirement to enter into long-term PPAs to qualify for mega power projects, as was the case prior to the latest amendment, acted as a disincentive for several players.

The amendment in the Mega Power Policy to sell power outside long-term PPAs in accordance with the National Electricity Policy 2005 and Tariff Policy 2006 would enable sale of power on a merchant basis and, thereby, provide flexibility for power project developers and may attract new investments as well.

The intended changes would come into force only when corresponding notifications are issued by the Department of Revenue under the Customs and Excise laws, and the Foreign Trade Policy.

(The author is, Partner and Head of Infrastructure Practice, BMR Advisors.)