The National Tariff Policy (NTP), brought out by the ministry of power on January 6, 2006, outlined a brave new world, one that seeks to make the power sector competitive and create a level-playing field for various participants. Famously, the NTP decreed that all future requirements of power shall be procured competitively by distribution licensees. Even for public sector projects, tariff of all new generation and transmission projects should be decided on the basis of competitive bidding after January 6, 2011, it said. From this time, it was expected that the private and the public sector would compete in a fair market to sell their power to distribution utilities.
But to this day, the playing field remains far from fair. Most policies remain terribly skewed against the private sector in all areas?financing, forest clearances, coal block allotment, customs duties, and so on.
Coal supply from captive coal blocks
The allotment of coal blocks was made to the private and public companies by the screening committee route. However, due to various reasons, coal blocks allotted to several private plants could not commence production on time, making the linked power project suffer. In such cases, the developer needed to apply for tapering coal linkages in the intervening period, and always had the sword of reduced coal availability dangling on the project. Even if the same developer had another coal block allotted for another power project, the coal from one block couldn’t be used for another project.
The public sector companies have no such issues. For instance, the mammoth Pakri Barwadih coal block (with reserves of 1.6 billion tonnes) was allotted to NTPC through the ?government dispensation? route?the coal produced from this block could be transported to any of NTPC?s power plants freely with no restrictions. Further, the ministry of power fast-tracked reallocation of coal blocks to NTPC, despite deallocations due to no progress. On the other hand, we read of reports of private companies having blocks deallocated every few months due to lack of progress. In total, NTPC has over 5 billion tonnes of coal reserves, but production so far has been nil.
Compensatory afforestation for mining on forest land
Providing alternative land for compensatory afforestation for coal mining/power plant on forest land is a big challenge for developers. The private sector is expected to provide an equivalent quantity of land for the state to afforest (in certain states, two times the quantum of land). However, for government projects, the state identifies degraded forestland for compensatory afforestation, and the government project only makes the payment for the afforestation. This alone makes a difference of about two years in the timeline of a project.
Mega power certification and zero custom duties
The ministry of power, in its drive to reduce the end cost of power, launched the Mega Power Policy, providing zero customs and excise duties for import of power plant equipment. While the policy was discontinued in September 2012, a set of projects was still entitled for mega power benefits as these projects were under construction and benefits could not be withdrawn halfway. This list of 111 projects has 65 projects from the public sector, with 39 from NTPC alone. Even projects that are still in the conception stage like Kawas II and Gandhar II are included. But for the private sector, only when firm EPC orders are placed, advances are paid and letters of credit are opened, are they included in this list. Thus, we are looking at a scenario wherein every single NTPC project in the next 10 years is likely to be import duty free, while the private sector is expected to compete on tariff after paying all duties.
Tax-free bond issues
In December, NTPC closed its tax-free bond issue of R1,750 crore. The terms of this tax-free bond issue indicate that this issue is to fund ongoing projects. Investors benefit to the extent of about 30% more from the same issue, since the returns from this bond are tax-exempt.
On the other hand, the cost of capital for a private sector independent power producer (IPP) going for a bond issue would be about 30% higher, since a private IPP cannot hope to get tax-free status. Needless to say, this ultimately increases the cost of the power from the project.
With all these benefits to the public sector, one may be tempted to conclude that the public sector power plants must offer much cheaper power compared to the private sector. However, this is not so. The tariffs from various approved regulatory orders show that the tariffs of public sector plants are between 150% to 200% of the private sector plants. The accompanying table compares the fixed charges of various public and private plants.
The ministry of power proposes to overhaul the NTP, and bring it in line with the needs of the times. The statistics outline the exemplary performance of the private sector (with almost 50% tariffs) despite the differential treatment in most areas of project development. It is important to reflect on how the government can really create a level-playing field in all respects, and cease preferential treatment to state-owned companies. The outcome of such an exercise should be incorporated in the new NTP to revive investor interest in the power sector.
Shravan Sampath
The author is an independent analyst and consultant to power companies. He can be reached at shravan.sampath@oakridge.co.in