The business of setting up power plants in special economic zones (SEZs) will become even more attractive than before if the power and commerce ministries have their way. They want to give such power producers an unwarranted tax edge over outside competition. For consumers, it may be a short-term boon with more and cheaper electricity supply entering a market facing huge shortages. But it will not help them in the long term as the move amounts to public policy that distorts incentives in the power generation business, discourages efficient location decisions and thereby adds to overall costs and tariffs. This, since it’s cheaper to carry electricity through wires than haul fuel.
SEZs already offer much business promise to power producers. Here’s an assured bulk buyer —industry—which offers high credit quality, unlike the still largely-in-the-red state utilities. Plus, their other major worry— fuel linkages—may be easy to secure. Their SEZ address also means related fiscal concessions.
It is to balance these advantages vis-à-vis power producers outside SEZs that certain taxes are currently levied on such players for selling their surplus electricity in the market outside the SEZ—the domestic tariff area. Since the sale would be in the spot market, the power ministry wants a waiver of these levies as it would lower spot power costs and encourage firms to set up more merchant capacity.
But that’s a mypoic view. It lends itself to biased policy that expands the use of SEZs as tax shelters. It unduly benefits power producers such as Reliance Industries, Reliance Power, Essar, Petronet, Torrent, etc. At the same time, it erodes the competitiveness of those outside the SEZ —which, as the trend grows, set out a part of their output for spot sales, the rest being contracted in long-term power purchase agreements with utilities or the very few private distribution companies. These are called hybrid power projects. In a maturing market, spot sales assume significance for providing liquidity in electricity trading to smoothen out demand spikes.
The proposal also means that the spot market development driver will be a differential tax regime, not entirely economic merit. That’s a bad idea. Power plants have a long life—coal-based plants work for 30 years and gas, 15 years. Decisions to invest on such basis are distortionary. Patchwork might leave little fabric to hold it in the long run.
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