Govt plans ultra mega power projects

The Indian power industry has been characterised by energy (non-peak) and peak shortages. Over the years, demand for electricity has exceeded supply by a sufficiently large margin. Now, with the coming of Electricity Act 2003, the power sector, which was highly regulated with lot of licensing requirements, is amidst a long awaited change. The government has set an ambitious target of providing 'power for all' by the end of the eleventh plan. To achieve this goal, India would require an additional capacity creation of nearly 100,000 MW by 2012.

Budget Measures

	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%

Budget Impact

	Setting up of ultra mega power projects is a step in the right direction. If achieved, this shall help the power sector tide over energy and peak shortages.
	Considering the scarcity of inputs, the proposal of de-blocking coal reserves of 20 bn tonnes for power projects is a big positive.

Sector Outlook

Although the track record of execution of electricity reforms in India 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. To that extent, we are cautiously optimistic on the sector's progress in the years to come. Long term fuel linkages and investment in transmission and distribution are also our key areas of consideration with respect to the sector's growth prospects.

Industry Wish List

	Removal of existing disparity in tax treatment among generation, transmission and distribution.
	Incentives for modernisation and expansion in addition to new capacity creation.
	Extend Section 80IA of Income Tax Act to 2011 pertaining to tax exemptions.
	Qualify pipelines and LNG facilities as infrastructure.

Budget over the years

Budget 2003-04	Budget 2004-05	Budget 2005-06

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. Customs duty reduced on high voltage equipments from 25% to 5%. Import of capital goods relating to water treatment exempt from duties.	6 power projects brought to financial closure in last one year and another 10 projects are likely to reach financial closure soon. 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.	Rural infrastructure development fund - a corpus of Rs 80 bn for FY06 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
[Read more on Budget 2003-04]	[Read more on Budget 2004-05]	[Read more on Budget 2005-06]

Key Positives

	Large investment plans: Considering the energy shortage in the country, the government has embarked on a plan to add nearly 100,000 MW of capacity by 2012. This includes 35,724 MW of addition in the ongoing tenth plan (2002-07). The planned generation capacity expansion, if achieved, shall plug the demand-supply gap and result into improved performance for power sector players.
	Electricity Act 2003: The Electricity Act 2003 provides 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.
	SEBs reeling under losses: Poor financial health of the 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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