1. Centre’s extension of tax benefits to mega power projects unlikely to effect revival; here’s why

Centre’s extension of tax benefits to mega power projects unlikely to effect revival; here’s why

The government's decision to extend the tax benefits for 25 mega power projects by five years is unlikely to help them take off before 2022 unless major concerns of getting fuel linkages and power purchase agreements remain unaddressed, analysts feel.

By: | Mumbai | Published: May 11, 2017 6:27 AM
As per the policy, these projects are eligible for tax breaks on a pro-rata basis against the quantum of power purchase deals they sign with utilities. (Reuters)

The government’s decision to extend the tax benefits for 25 mega power projects by five years is unlikely to help them take off before 2022 unless major concerns of getting fuel linkages and power purchase agreements remain unaddressed, analysts feel.

Since the launch of Mega Power Policy in 2009, only 11,000 MW projects have been commissioned out of 32,000 MW that got mega power status. Majority of these projects could not see the light of the day due to non availability of land and fuel linkages and even in cases where plants were set up, lack of PPAs have left them stranded.

“Tax concessions are no longer central to power-sector investments. Investors need security of fuel availability and long-term supply contracts, and any revival package for the sector should include these,” Kameswara Rao, leader energy, utilities and mining, PwC India said. He, however, thinks there was still a good case for investments in thermal power plants. “Base load demand continues to grow at 7-8% per annum, and in fact will rise further as the government drives hard to fully electrify rural areas,” Rao added.

On April 1, Cabinet gave five-year extension to 25 large power projects with combined capacity of around 30,000 MW to ink long term PPAs and avail the tax sops, such as excise and custom duty benefits on equipment procured under the Mega Power Policy of 2009. The move was aimed to provide `10,000 crore benefits to these projects and enable them to run profitably and service debts.

As per the policy, these projects are eligible for tax breaks on a pro-rata basis against the quantum of power purchase deals they sign with utilities. These projects were given provisional mega power project status in 2011 and had five years to sign power sale deals. However, delay in getting clearances and land acquisition impacted the project progress and thus the signing of PPAs.

Rupesh Sankhe, senior research analyst with Reliance Securities said that the capacity addition is happening at 9% per annum, and if demand for electricity grows at 7%, utilisation of plant is not seen at more than 60-65% level. “At this level the stressed plants are not expected to take off before financial year 2021-22 despite tax incentives, since incentives are there for solar and wind power too,” Sankhe said.

Experts believe the biggest driver would be turnaround in financial situation of state distribution companies from 2019-20 as debt restructuring under Ujjwal Discom Assurance Yojana (UDAY) starts to show result. GMR Chhattisgarh Energy, Monnet Power, Lanco Power, Essar Power Jharkhand, Jindal India Thermal Power, Hinduja National Power, IL&FS Tamil Nadu Power and Torrent Energy are among companies that are seen benefiting from the extension of tax sops.

“There’s considerable capital tied up in distressed projects, whether operating or under development. Further, given imminent demand growth, these projects are worth well above the book value. Sponsors have a good case for taking them to completion,” Rao added.

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