New Delhi: The government is considering relaxing or diluting rules that prevent power plants in special economic zones, or SEZs, from selling power outside such zones without paying significant extra taxes and levies, in an attempt to meet growing demand for power in a rapidly expanding economy.
The move will likely benefit customers, but will put power plants outside such zones at a disadvantage.
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.
CURRENT AFFAIRS (Graphic)
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 relax or dilute.
According to a government official familiar with the development, who did not wish to be identified, discussions are on among the ministries of commerce, power and finance on firming up the regulations under which power plants located at these zones should function.
“Once the basic issues are sorted out, a proposal may be sent to the Union cabinet for clearance. These SEZs would help utilities (power generation firms) cut down their costs and, thereby, bring down power tariffs in the country. As per the proposal, these power units should be allowed to supply power to the domestic tariff area where the SEZ is based by paying reduced duties. The idea is to frame a comprehensive policy for setting up SEZs specifically for the power sector,” the official added.
Confirming the development, another official familiar with the matter who, too, did not wish to be named, said it was close to “being finalized”.
A senior power ministry official, who did not wish to be named, said: “We have discussed the issue in detail and are in favour of it. The power generated within these SEZs will be treated as merchant power.”
Merchant power is the term used to describe electricity sold in the open market.
Power plants usually sign long-term power purchase agreements with state governments under which they agree to sell to state-owned distribution utilities at a fixed rate for a specified period. This price is usually lower than the price they can get in the open market.
The power ministry believes that this change will help add power generation capacity in the country and will also bring down the cost of merchant power. India has a power generation capacity of 141,000MW and aims to add another 78,577MW by 2012.
However, the finance ministry is opposed to the proposal to allow the sale of power outside the SEZ without paying all the duties.
“If this happens, then everyone would want to place a power plant within the SEZ. It would be unfair to the existing power generators who conduct business from the domestic tariff area. While the move will bring down power prices, yet I am not convinced with the premise itself,” says Manpreet Dhingra, vice-president at Feedback Ventures.
Mint had reported on 13 January that Petronet LNG Ltd was lobbying the commerce ministry for a special exemption that will allow it to sell the power it generates in SEZs to customers outside without having to pay any additional taxes, a move prompted by its decision to do this at Dahej.
Udit Misra contributed to this story.