Bringing in competition in all areas of the power sector would benefit both the industry and the general public.
The Previous Budget
The power sector had been facing serious challenges over the past few years. The key issues pertain to shortfall in supply of coal and gas, delay in clearances for projects and the declining financial health of electricity distribution utilities. The last Budget highlighted the key focus areas. The government intends to secure the energy needs of the country with a larger share of renewable energy, specifically wind and solar power.
The focus of the previous Budget was providing 24x7 power supply to all households. This is not a target that can be achieved overnight but needs a special mention. We are witnessing constraints along all links of the power value chain today, be it in fuel supply, transmission infrastructure or distribution efficiency. However the government is committed towards reviving the sector. Already a number of action plans have been designed to accelerate the reforms in the sector, be it reviving the sick generation assets or last-mile competition.
In keeping with the focus of the Budget, Rs 500 crore was allocated for ultra-mega solar projects, Rs 400 crore was allocated to solar power driven agricultural pump sets, Rs 100 crore for the development of 1 MW solar parks on the banks of canals and implementation of the green energy corridor project to facilitate evacuation of renewable energy across the country. The duties on solar PV panels and for wind generators were reduced, the clean energy cess on coal was doubled and accelerated depreciation for wind energy generators was reintroduced. While the preparatory work for ultra-mega power projects has started, we are yet to see concrete action on the ground.
While it is too early to assess the achievements, against the FY 2014-15 target of 2,000 MW of addition to wind capacity, as on December, 2014, 1,333 MW has been achieved. As also against the FY 2014-15 target of 1,100 MW of addition to solar capacity, as on December, 2014, 431 MW has been added. Similarly, the Budget allocated to the ultra-mega solar projects and the agricultural pump sets remain largely unused. There has been limited progress on the green energy corridor project. With respect to distribution reforms, the Budget allocated an amount of Rs 500 crore to the feeder separation program (Deen Dayal Upadhyaya Gram Jyoti Yojana) to augment power supply to the rural areas and for strengthening sub-transmission and distribution systems. The Budget allocated was too small to make a significant impact. The Budget allocated to the program is likely to increase manifold in the upcoming Budget.
The government extended the 10-year tax holiday for the power business for all projects getting commissioned before 2017. This has provided investors a wider horizon to plan investments.
A slew of initiatives and targets were set to enhance domestic coal production. Some of the key highlights in the last Budget for the mining sector included comprehensive measures to enhance domestic production, rationalizing the coal linkages and exploitation of coal bed methane reserves. While in quantitative terms, a little has been achieved, a number of initiatives have been launched to achieve the objectives. The production from State-owned CIL has been irregular, forcing a number of power plants to operate with less than seven days of stock, much below the desired levels. However, post the Supreme Court decision to de-allocate the captive mines, the government has been quick to implement a framework for coal block allocation to the private sector, based on end use. Contrary to previous initiatives, this framework is forward looking and may in future also allow private miners to mine coal for commercial sale. Already we are witnessing an unprecedented effort from the government to quickly award the de-allocated captive mines and private sector response has also been overwhelming.
Another major setback for the sector was in implementing the next Ultra Mega Power Projects under the proposed DBFOT route. Private sector companies have found this route to be highly restrictive and the two projects (Odisha and Cheyyur UMPPs) on the anvil did not take off. The Budget might provide direction on implementation of the proposed UMPPs.
Rollover to the next Budget
As discussed, the government from day one has been focused on two macro initiatives; one, 24x7 power to all and second, increasing focus on renewable energy initiatives. We believe these two highlights from the previous Budget shall be rolled over to this year´s budget but with far greater impetus. The government is also likely to increase the focus on the Deen Dayal Upadhyaya Gram Jyoti Yojana project to ensure 24/7 availability of power while reducing the theft of power. There has been limited progress with respect to the green energy corridor with no specific budgetary allocation. With the increasing growth in renewable energy targets, it is likely that there would be a more specific action plan in this regard in this Budget.
The focus of the government has been clearly on promoting renewable energy in India but unlike previous regimes, this government is focused not only on simple capacity augmentation but also price rationalization. This is evident from recent discussions between the government of India and the international community on allowing technology flow into India, which will be a game-changer. This has been one of our bargaining chips in the climate change talks.
The government is planning significant investments in solar power and countries such as US and Germany have pledged significant investments in India. We anticipate that such investments will take time to trickle down but the width and scale of initiatives being undertaken will provide an unprecedented impetus to renewable energy sector especially solar.
What will change?
While the first Budget broadly touched on the key area that the government would focus on, it is likely that this Budget will detail out the action plan to achieve the desired objectives. We anticipate a more action-oriented Budget this year from the government setting the contours for achieving power for all. The previous Budget has without doubt touched upon the key issues in the sector but did not provide a course of action to achieve targets. It is unlikely that any of the macro issues/initiatives flagged in the previous Budget will change, however, we are likely to see more additions to the Budget in terms of the future course of action.
A majority of the power generation capacity in the country is based on coal. The previous Budget only provided pointers that the government would look at enhancing coal production. With the Supreme Court judgment on the de-allocation of coal blocks and the subsequent bidding process being conducted, it is likely that the government would continue to address the issue of improving coal supply to the power plants. The coal auction process is likely to find a special mention and the importance to continue the ongoing reforms in the mining sector cannot be overstated. The Budget should also look to highlight the development of coal markets and commercial mining in India.
The previous Budget seems to have completely ignored the investments needed in power transmission and the same is likely to be a priority in the upcoming Budget. It may also address an action plan to revive the sick assets, especially ones that are stranded due to unavailability of gas. The new Budget is also likely to touch upon the amendments to the Electricity Act, especially the introduction of retail competition. The Cabinet has already accorded its nod to the key amendments and the government would like to introduce the changes the coming financial year. We are also anticipating introduction of some new initiatives in solar, such as, implementation assistance for mega power solar parks and rooftop solar schemes.
Desired change that can be good for both industry and public
Bringing in competition in all areas of the power sector would benefit both the industry and the general public. The first step with respect to breaking the monopoly of domestic coal supply has been taken through the Coal Mines (Special Provisions) Ordinance, 2014, which has a provision for commercial mining. Operationalising this provision would be necessary to increase the supply of coal. In addition, this will bring in the latest and efficient technology in the sector.
Among the major initiatives, the Cabinet has approved the provisions of introducing retail competition which is expected to drive the next set of reforms in the sector. The segregation of retail and wire business at the distribution level will imply that the network/wire company will focus on coverage i.e., reaching out to each and every consumer and allowing them the bandwidth to switch suppliers. We anticipate that this initiative will not only significantly improve the customer experience and involvement but enhance the level of rural electrification much like the telecommunications sector. The initiative will change the face of the industry and provide choice to end consumers.
In the modern world, the country which controls the technology controls the supply chain and prices. The government´s initiative towards this has been heartening to bring in technology from developed countries, but we need to focus on research at home. The government and industry need support both in terms of policy and funds for research in alternate and clean technology. Once we own the technology, prices of renewable energy will become affordable.The Budget is likely to provide incentives for research and development in clean technology.
This article has been authored by Umesh Agrawal, Associate Director - Energy Practice, PwC India, with inputs from Sandeep Kumar Mohanty , Manager - Energy Practice, PwC India.