Union Budget 2012-13: Power tariffs set to fall
The measures announced in the Budget will help remove the roadblocks the power sector has been facing in terms of fuel and finance. They will help lower tariffs for consumers and offer a breather to power companies setting up new projects.
“Tax-free bonds, external commercial borrowings (ECB) for part-financing rupee debt of existing projects, withholding tax on interest payments on ECBs, sunset norms and profit tax as well as exemption of basic customs duty will help reduce the cost of setting up power plants, and hence, generation costs,” said Ashok Khurana, director-general at Association of Power Producers. “This in turn will result in lower generation costs and lower tariff for consumers,” Khurana added.
“Customs duty was 2% if coal was imported from Asian countries; it was 5% for other countries. A 2% waiver will results in savings of about Rs 90 per tonne if the coal costs about Rs 4,500 a tonne. We import 12-16 million tonnes of coal every year. The exemption won’t mean much,” said SN Goel, executive director, fuel security, NTPC. An executive of CESC backed this view.
The CESC executive, however, said that ECB was a long-standing demand of the power sector. It will now facilitate raising of funds at low cost. The waiver of customs duty on mining projects will also result in lowering of cost of production of coal, which in turn will mean lower tariffs.
However, Khurana said, “Funding costs in the power sector is hovering around 14%. An ECB for part-financing debt will help reduce interest costs. Rupee debts will also get paid, making room for smaller power companies to raise finance from banks.”
Rajesh Agarwal, Head – Research, Eastern Financiers Ltd said: “The inability of the SEBs in passing on the increased cost of power, followed by shortage of feed stock due to lower production in KG-D6 as well as skyrocketing coal prices has resulted in huge financial problems.
The problems are so huge that the SEBs have resisted buying power even from long-term contracts. This is resulting in stagnation in merchant power rates. In order to help the sector from some of their woes the FM has taken adequate steps by Proposing tax free bonds of Rs 10,000 crore, allowing External Commercial Borrowings (ECB) to part finance Rupee debt of existing power projects and to help them accessing low cost funds – withholding tax on interest payments on external borrowings (ECBs) has been reduced from 20 percent to 5 per cent for 3 years.
Apart from the above Extension of the sunset date by one year for power sector undertakings so that they can be setup on or before March 31, 2013 for claiming 100 per cent deduction of profits for ten years and the additional depreciation of 20 per cent in the initial year proposed to be extended to new assets acquired by power generation companies would help them in reducing some of their problems.”