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Budget 2013: Govt eyes more investments in energy sector

According to reports, electricity generated from imported coal will become costlier by around 3.5 paise a unit after finance minister P. Chidambaram on Thursday removed duty concessions granted in last year’s budget.

Instead, he imposed an equal duty on different types of coal imported for electricity generation in the budget for 2013-14. This follows an increase in railway freight rates for coal announced on Tuesday.

However, to attract investments to energy projects that are capital-intensive, such as power generation plants and hydrocarbon blocks, the budget allowed for deduction of investment allowance of 15% on investments of Rs.100 crore or more in plant and machinery during the next two fiscal years of 2013-14 and 2014-15. This is in addition to depreciation benefits. Currently, no such investment allowance deduction is available.

“Steam coal is exempt from customs duty but attracts a concessional CVD (countervailing duty) of 1%. Bituminous coal attracts a duty of 5% and CVD of 6%. Since both kinds of coal are used in thermal power stations, there is rampant mis-classification. I propose to equalize the duties on both kinds of coal and levy 2% customs duty and 2% CVD,” Chidambaram said in his budget presentation.

Mint reported on 19 February about a proposed clarification on coal imports meant for electricity generation that would resolve the confusion resulting in Indian customs authorities denying importers fuel duty concessions granted in last year’s budget. “The impact may be incremental now that prices are subdued from recent peaks, but will make it more expensive as international prices may be heading for a rise going by the forward-market transactions,” said Dipesh Dipu, a partner at Jenissi Management Consultants, a Hyderabad-based resources-focused consultancy.

India is facing a chronic fuel shortage. In such a scenario, imports hold the key. The size of the market for imported coal that goes into power generation in India is around 80 million tonnes per annum (mtpa).

India will need to import 185 million tonnes of coal in 2016-17, which may further add to the financing cost of power projects.

“It wouldn’t impact us as fuel costs are a pass through to the customers. We expect the overall increase in electricity tariff due to railway freight hike and today’s announcement to be around 5 paise,” said Arup Roy Choudhury, chairman and managing director of NTPC Ltd, India’s largest power generation utility with a capacity of 40, 174 MW. The government plans to devise a public-private partnership (PPP) policy framework with Coal India Ltd to attract the private sector as partners to increase the domestic coal production.

In addition, the budget also extended a tax holiday under section 80-IA of the Income-Tax Act for power projects, which ends on 31 March, by another year and announced a generation-based incentive for wind-energy projects to discourage investments aimed at availing tax concessions.

The government will also spend Rs.1,840 crore for connecting the Ladakh region to the northern region electricity grid. To promote other environment-friendly energy projects, the government will also provide low-interest-bearing funds to the Indian Renewable Energy Development Agency for lending. Noting that the country tosses out several thousand tonnes of garbage each day, Chidambaram said the government will evolve a scheme to encourage cities and municipalities to take up waste-to-energy projects in the form of public-private partnerships, employing different technologies.

Waste-to-energy plants, however good an idea, have not worked in the country, according to Sunita Narain, director general of Centre for Science and Environment, a Delhi-based environment advocacy institute.

To arrest rapidly diminishing interest in the Indian hydrocarbon sector, the budget announced a move towards a revenue-sharing model from a profit-sharing one in calculating the share of earnings that operators of oil and gas block have to pay it. This is in line with the recommendations of the Rangarajan committee on formulating new production-sharing contracts.

“Revenue share replacing profit share will help investors not get subjected to cost scrutiny and likes of CAG (Comptroller and Auditor General) audits,” said Deepak Mahurkar, leader, oil and gas, PwC India, a consultancy. “However, withdrawal of the cost-recovery mechanism exposes investors to more risks and that may dissuade large oil companies from India.”

“Although this announcement removes certain uncertainties in terms of capital cost padding, it brings in additional complication of industry not attracting risk capital,” said Debasish Mishra, senior director at Deloitte Touche Tohmatsu India Pvt. Ltd, an audit and consutancy firm.

This comes in the backdrop of the petroleum ministry’s proposal to deny Reliance Industries Ltd $1.24 billion in costs for the deepwater KG-D6 fields for 2010-11 and 2011-12.

“The natural gas pricing policy will be reviewed and uncertainties regarding pricing will be removed,” Chidambaram said.

“A key next step should be the transition of prices of domestic natural gas to import parity in the next three years, similar to the diesel price reforms,” said Sashi Mukundan, regional president and head of country, BP India, an oil firm.

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