Budget 2015: India raises coal cess; electricity tariff to go up by 4-6 paise per unit

New Delhi: The government on Saturday proposed to raise levies on greenhouse gas-emitting coal, a move that will increase electricity tariffs while strengthening India’s position at upcoming global climate change negotiations.

add_main_image“I propose to increase the clean energy cess from ₹ 100 to ₹ 200 per tonne of coal, etc. to finance clean environment initiatives,” finance minister Arun Jaitley announced in his budget speech.

The cess, which applies to coal mined in India as well as imported coal, will result in a tariff increase of 4-6 paise per unit.NextMAds

This comes in the backdrop of India working on a plan to reduce borrowing costs and improve the viability of solar and wind power projects by extending hedging support for foreign loans, leveraging the National Clean Energy Fund.

India, the world’s third largest emitter of greenhouse gases, is among the few countries in the world to have introduced a carbon tax. Of India’s installed power generation capacity of 255,681.46 megawatts (MW), around 60%, or 154,170.89MW, is coal-based. The cess at current levels aggregates to ₹ 6,000 crore every year.

With mining activity expected to pick up in the country after the coalfield auctions, the annual collection is expected to substantially increase.

“Also, for the 75th year of independence, there will be 60 million houses to be built. These houses will have 24x7 electricity—this will give a huge boost to the electricity sector consumption. Coupled with a push for Make in India, going forward the demand for electricity will grow in excess of 7% per annum,” said Debasish Mishra, senior director, consulting at Deloitte Touche Tohmatsu India Pvt. Ltd.

India has substantially revised an earlier solar energy target of achieving 20,000MW of capacity by 2022 to 100,000MW. It plans to put in place 60,000MW of wind power capacity by then. While India has set up a green energy target of 1,75,000MW by 2022, green energy has a share of 12.42%, or 31,692.14MW. The country’s National Action Plan on Climate Change recommends that the nation generate 10% of its power from solar, wind, hydropower and other renewable sources by 2015 and 15% by 2020.

However, some analysts were not impressed.sixthMAds

“The general emphasis on renewable energy and re-stating of the MNRE (ministry of new and renewable energy) target to 175GW by 2022, comprising 100GW of solar, 60GW of wind and 15GW of other technologies is not adequate to make capacity creation happen in reality. Prima facie, we have not seen any concrete measures in the budget for renewable energy. Unlike rail and roads, tax-free bonds have not been specifically proposed for renewable energy,” said Anish De, partner, infrastructure and government services, KPMG.

“Given this, any funds from tax-free bonds will now have to come out of the general pool of infrastructure bonds. Also, the proposals for the utilization of funds from the increased coal cess are yet to be spelt out. It would have been better to propose specific allocations and measures for renewable energy, especially on availability of low cost funds for the renewable energy sector,” De said.

“The intent to drive new investment in generation through 20GW UMPP and 175GW of renewable energy by 2022 is welcome and necessary, but to continue to attract investors its necessary to revive the distribution sector and its ability to pay,” added Kameswara Rao, leader energy, utilities and mining at PwC India.

Increased cess collection

As part of its strategy to garner additional resources in the backdrop of higher devolution to the states through the 14th finance commission, the government increased the road cess on petrol and diesel from ₹ 2 per litre to ₹ 6 per litre. Cess and surcharges are not shared with the states.

“These include conversion of existing excise duty on petrol and diesel to the extent of ₹ 4 per litre into road cess to fund investment in roads and other infrastructure,” Jaitley said. This will lead to the availability of ₹ 40,000 crore for these sectors.

“Basic excise duty rates on petrol and diesel are also being increased suitably so as to subsume education cess and secondary and higher education cess presently levied on them,” Jaitley added.

In keeping with the National Democratic Alliance government’s repeated articulation of what it calls cooperative federalism, the state’s share of revenue has been increased to 42% of net tax receipts of the central government.

“It is also proposed to have an enabling provision to levy Swachh Bharat cess at a rate of 2% or less on all or certain services if need arises. This cess will be effective from a date to be notified. Resources generated from this cess will be utilised for financing and promoting initiatives towards Swachh Bharat,” Jaitley added.

Power to all

As part of the government’s energy security efforts, the finance minister announced setting up five new ultra mega power projects (UMPPs) at an investment of 1 trillion. UMPPs are India’s attempt to create large power generation capacities at a single location. It has had its share of problems, weighed by ecological concerns and local resistance.

UMPPs follow competitive tariff-based bidding, and special purpose vehicles (SPVs) are set up to reduce risk perception and to increase investor confidence. These SPVs take care of regulatory requirements such as land acquisition and environmental clearance, and transfer these to the winning bidder. The United Progressive Alliance (UPA) government had plans to set up 16 UMPPs, but only four have been awarded—at Mundra in Gujarat, Sasan in Madhya Pradesh, Krishnapatnam in Andhra Pradesh, and Tilaiya in Jharkhand.

This comes in the backdrop of 300 million Indians lacking access to electricity with per-capita electricity consumption being one-fourth of the world’s average.

“Electrification, by 2020, of the remaining 20,000 villages in the country, including by off-grid solar power generation,” Jaitley promised.

India has taken significant steps to eliminate oil subsidies and has gone beyond to impose taxes on petroleum products, taking it from a carbon subsidization regime to one of carbon taxation.

“As environmental degradation hurts the poor more than others, we are committed to make our development process as green as possible. Our de facto ‘carbon tax’ on most petroleum products compares favourably with international norms. With regard to coal, there is a need to find a balance between taxing pollution, and the price of power. However, beginning this year, I intend to start on that journey too,” Jaitley said.