Changes made to the mega power policy (MPP) last week exempts eligible power projects from paying customs duties on equipment imports and excise duties on locally sourced equipment. The objective of this policy originally introduced in 1995 was to incentivise capital expenditure for large power projects (1000MW+ thermal plants, 500MW+ hydro projects) and to rein in the cost of electricity for the end consumer.
In 2012, a list of 111 power projects, totalling to about 167GW, was frozen to enjoy mega power project status--of which 25 were provisional mega projects of independent power producers (IPPs)--thus, making it a restricted club.
No greenfield project was to be given the mega status after July 2012, by the rules of the ministry of power. In fact, new projects with imported equipment were required to pay custom duty at 5%, countervailing duty at 12% (as applicable and equal to excise duty on domestic industry from time-to-time) and special additional duty at 4% of equipment cost of R25 million/MW.
The restricted club under the MPP enjoys a clear capital cost advantage. A report by JP Morgan notes that 39 projects of NTPC totalling to about 58 GW, making up roughly 35% of this club, are entitled to mega policy benefits, including 32.8 GW of projects due for commercial operation date (CoD) after FY17.
In the MPP, the cabinet committee on economic affairs (CCEA) last week approved amendments for projects with provisional mega status i.e. 25 private sector projects (out of 111) with total capacity of 32.5GW. The amendment serves to give more time (60 months from import of equipment to furnish mega project certificate to tax authorities vs. 36 months earlier) to these private IPPs to meet relaxed preconditions (65% capacity should be tied up through competitive bidding vs. 85% earlier) for enjoying benefits under the MPP.
As table 3 shows, the notable beneficiaries of this policy relaxation are 2,400MW KSK Mahanadi, 3,960MW of Lanco Infratech's projects and 2,400MW Reliance Power’s Samalkot project. Delay in floating new Case-I tenders by state electricity boards is a risk for these private IPPs to meet the power purchase agreement pre-condition. The mega project benefits are much required by most of these projects as they have suffered sharp capital cost escalation owing to a steep rupee depreciation of 38% over the last three years and execution delays.
About half of the mega club is made up of central and state government projects (35% being NTPC),