Cost of select mega power projects will come down

Union Budget 2010-11 has been fairly good for the power sector with one of its key demands of extension of excise duty exemption to supplies made to mega power project irrespective of whether it is awarded through ICB or domestic competitive bidding apart from doubling of budgetary allocation to power sector for the period 2010-11.

However the budget disappointed the industry with one of its key expectation of extension of project commission time beyond March 31, 2011 so as to eligible for tax breaks U/s 80IA of Income Tax being not met.

Budget provisions

Budgetary allocation for the power sector to Rs 5130 crore (Rs 51.3 billion) for 2010-11 from Rs 2230 crore (Rs 22.3 billion) in 2009-10. This is excluding the RGGY.

Goods supplied to mega power projects under ICB is currently fully exempted from central excise duty and this was extended to goods supplied to mega power projects from which power supply has been tied up through tariff-based competitive bidding. The exemption would also be available where the mega power project has been awarded through tariff-based competitive bidding.

Transmission of Electricity is exempted from service tax with immediate effect.  PowerGrid will be the major beneficiary of this exemption.

Service tax is being levied on service provided by electricity exchanges.  This will impact PTC India and other power exchanges.  Many frontline players like NTPC, Lanco Infrastructure etc have their own power trading companies, and this provision will impact such subsidiaries.

Electrical energy supplied from a SEZ to the domestic tariff area (DTA) and non-processing areas of SEZ would attract a customs duty of 16% advalorem + nil special CVD effective June 26, 2009 on retrospective basis. At present electrical energy is fully exempted from customs duty.

Competitive bidding process will be introduced in allocation of Coal blocks for captive mining for power plants so as to ensure greater transparency and increased participation in production from these blocks.

Clean Energy Cess have been levied at Rs 50 per tonne on both coal produced in India as well as imported coal. This will not affect most of the power sector players, as coal cost hike is a pass through item.  However, it can impact marginally the profitability of merchant power sales, especially when Unscheduled Interchange (UI) rates tumble down.  A Rs 77 per tonne increase in coal prices was earlier estimated to lead to Rs 0.05 (Paise 5) increase in cost of power generation, assuming specific coal consumption of 0.7 kg per Kilo Watt Hour.

The surcharge on corporate tax has been reduced from 10% to 7.5% while MAT has been hiked from 15% to 18%.  Though reduction in surcharge is beneficial, we expect the power sector to be impacted by high in MAT.

Stocks to watch

NTPC, Power Grid

Impact

Sofar excise duty on supplies to mega power projects was exempted only for mega projects awarded through ICBs, Now the Budget has extended this zero excise duty to mega power projects awarded through tariff based competitive bidding or power supply tied through tariff based competitive bidding also.

This brings down the cost of setting up power projects auguring for IPPs.  This will also benefit PSU power generation utilities as well as equipment suppliers such as BHEL etc. Thermal power plants with a generation capacity of over 1000 MW and hydel power plants with a capacity of more than 500 mw, is defined as mega power project.

Similarly exempting power transmission from service tax net will benefit Power Grid Corporation of India.  Likewise the allocation of captive coal blocks through competitive bidding will give equal opportunity for private sector power players. Overall, the Union Budget 2010-11 is positive for the power generation sector.