New Delhi: The government’s proposal to dilute existing rules and allow power plants in special economic zones, or SEZs, to sell power outside such zones without paying significant extra taxes and levies could benefit developers such as Mukesh Ambani-owned Reliance Industries Ltd, or RIL, Petronet LNG Ltd and Reliance Anil Dhirubhai Ambani Group, or R-Adag.
A senior commerce ministry official, who is involved in the government’s effort to do this and who did not wish to be identified, said: “I cannot say who will benefit from any such decision. However, for the purpose of the proposed policy, we will not differentiate between captive power plants and stand-alone SEZs. The deliberations on the power SEZs policy are likely to yield results in the next one or two months.”
The move will likely benefit customers, but will put power plants outside such zones at a disadvantage, as reported by Mint on 8 May. That is because units, including power plants, located in SEZs are eligible for a range of fiscal incentives that lower their production and operating costs. This means power plants located in SEZs can sell power at a lower price than those located elsewhere.
If the government goes through with this proposal and RIL does indeed set up a captive power project in an SEZ area, it could trigger a conflict with rival R-Adag. This is because under a non-compete clause signed between the two companies at the time that the assets of RIL and its affiliates were divided between the two estranged brothers, Anil Ambani and Mukesh Ambani, the power sector was reserved for R-Adag.
Mint had reported on 20 April 2007 that RIL planned to enter the business of captive power generation.
Spokespersons for RIL and R-Adag declined comment.
Anil Ambani-led Reliance Energy Ltd had earlier claimed that RIL’s plan to set up a captive power unit was in violation of the January 2006 agreement between the two groups.
“RIL is not allowed to set up any power project (other than a captive one) as per the demerger agreement,” an R-Adag spokesperson had earlier told Mint.
The agreement says that RIL can sell any surplus power from a captive plant to anyone “after first offering it to” R-Adag. The non-compete agreement is valid for a 10-year period beginning 2006.
RIL plans to set up captive power generation capacity of around 8,000MW for its retail outlets, associated units and the two special economic zones in Mumbai and Haryana at an investment of Rs24,000 crore. The captive power units will have a capacity of around 400MW each and will generate power at a tariff of Rs2.60 per unit.
Reliance Power Ltd, part of R-Adag, plans to set up a SEZ at Dadri in the Ghaziabad district of Uttar Pradesh and locate its 7,480MW gas-based power project within the zone.
A New Delhi-based power sector analyst, who did not wish to be identified, said: “Both RIL and Adag will be immensely benefited from this. 8,000MW, by no stretch of imagination, is the consumption of the SEZs or the retail units. Though the move is very beneficial for the project developers, it is not logical at all and will lead to economic distortions as every project developer will start locating its power plants within the SEZ. There is obviously a lobby working on this.”
Existing rules take this factor into account and say that power generated within an SEZ “may be transferred to domestic tariff area on payment of duty on consumables and raw materials used for generation of power”. The rules add that these units will also have to pay extra taxes, including basic customs duties, countervailing duties (to offset against the domestic excise and sales tax levies) and a special additional duty (4%) to make up for the fiscal incentives.
It is these rules that the government now wants to dilute or completely do away with.
The power ministry believes this change will help add generation capacity and bring down electricity cost. India has a power generation capacity of 141,000MW and aims to add another 78,577MW by 2012.