En­ergy sec­tor wish-list by Man­ish Ag­gar­wal, Part­ner and Head of En­ergy and Nat­u­ral Re­sources, KPMG in In­dia.

Power Watch India - - CONTENTS - By Man­ish Ag­gar­wal The au­thor is Part­ner and Head of En­ergy and Nat­u­ral Re­sources, KPMG in In­dia. Views are per­sonal.

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The year 2016 was an event­ful one for the In­dian en­ergy sec­tor. Var­i­ous in­ter­ven­tional poli­cies such as in­tro­duc­tion of UDAY, amend­ments in the Na­tional Elec­tric­ity Act, new so­lar RPO tar­get for states, draft wind­so­lar hy­brid pol­icy, off­shore wind pol­icy, and a new hy­dro­car­bon pol­icy, had been in­stru­men­tal in con­tribut­ing to the growth mo­men­tum in the sec­tor. These ini­tia­tives have helped cre­ate an en­vi­ron­ment con­ducive for in­vest­ment with many new in­vestors.

Yet, de­spite the progress the sec­tor has made, there are some long stand­ing is­sues which need to be ad­dressed and re­solved on an ur­gent ba­sis. The govern­ment needs to ini­ti­ate new in­ter­ven­tional poli­cies to ac­cel­er­ate the growth mo­men­tum in the sec­tor. Hence, the up­com­ing bud­get would be very cru­cial.

To start with, Bud­get 2017 should fo­cus on re­solv­ing the long pend­ing is­sue of stressed as­sets. Stressed as­sets in power sec­tor have long haunted the stake­hold­ers who are now in dire need of fi­nan­cial sup­port from the govern­ment. The up­com­ing bud­get should carve out from NIIF a stressed as­set re­vival fund that is em­pow­ered to per­form cap­i­tal as well as op­er­a­tional re­struc­tur­ing of stressed power plants.

Talks on pri­vate sec­tor par­tic­i­pa­tion in com­mer­cial min­ing have been around for long. Pri­vate sec­tor par­tic­i­pa­tion has an edge as it will bring with it a host of ben­e­fits such as ad­vance min­ing tech­nol­ogy, in­creased op­er­a­tional ef­fi­ciency and mar­ket driven coal pric­ing.

But, mere open­ing of the sec­tor will not be suf­fi­cient. Bud­get 2017 should also draw a clear cut roadmap to en­sure cre­ation of a free coal mar­ket in the coun­try. And in par­al­lel there is strong need to delink hav­ing a PPA to get coal dis­burse­ment. This con­di­tion was brought in at a dif­fer­ent con­text of time and has out­lived its util­ity at present.

With im­ple­men­ta­tion of GST from July 2017 on­wards, the cost of pro­duc­ing power from re­new­able en­ergy sources es­pe­cially so­lar and wind is ex­pected to in­crease sub­stan­tially as tax ben­e­fits available to the sec­tor will dis­ap­pear. Low­er­ing of ac­cel­er­ated de­pre­ci­a­tion (AD) from 80 to 40 per cent and elim­i­na­tion of Gen­er­a­tion based in­cen­tive (GBI) from April 2017 on­wards will fur­ther heat up the cost of gen­er­a­tion of power from wind. To ac­com­plish the RE tar­get by the set time­lines, bud­get 2017 should con­sider plac­ing RE in the low­est slab of the GST, ex­tend­ing GBI for at least 2 years, and de­vis­ing an al­ter­nate mech­a­nism to com­pen­sate for the rise in cost from low­er­ing of AD.

There is also a need to in­sti­tute a lim­ited play guar­an­tee fund only for re­new­ables that can take care of pay­ment de­lays to IPPs be­yond a de­fined time-frame of say three months. This will go a long way to get an ex­po­nen­tial jump in in­vest­ments from over­seas in­vestors, as well as do­mes­tic play­ers. Fund can charge guar­an­tee com­mis­sion, states that failed to de­liver can be pe­nalised through fund­ing / grants un­der UDAY. This fund can be con­sti­tuted through funds from clean en­ergy cess and can be at play only for say the first 100 GW of ca­pac­ity for re­new­ables.

The govern­ment should fi­nalise the so­lar man­u­fac­tur­ing pol­icy and an­nounce its im­ple­men­ta­tion dur­ing bud­get 2017. The said pol­icy is ex­pected to ac­cel­er­ate growth of the sec­tor by re­duc­ing the cost of so­lar pan­els, other equip­ment, and over­all so­lar tar­iff, and by de­vel­op­ing a so­lar ecosys­tem in the coun­try. This pol­icy will also be crit­i­cal from the per­spec­tive of achiev­ing 100 GW of in­stalled so­lar en­ergy tar­get.

The other ar­eas of fo­cus in Bud­get 2017 should be en­cour­ag­ing stor­age so­lu­tions, off-grid so­lu­tions, mini grid fi­nanc­ing through some guar­an­tee funds and / or in­ter­est sub­ven­tions.

In­dia has about 145 GW of hy­dropower po­ten­tial and 70 per cent of this po­ten­tial is yet to be tapped. Hy­dropower plants are best suited for meet­ing peak­ing power de­mand. Bud­get 2017 should utilise funds from clean en­ergy cess to cre­ate a vi­a­bil­ity gap fund­ing mech­a­nism that could be used to sup­port new hy­dro in­stal­la­tions. The hy­dro sec­tor may also re­quire a sep­a­rate RPO obli­ga­tion, in­ter­est sub­ven­tions and FIT sup­port to re­vive the oth­er­wise ail­ing sec­tor.

Re­al­is­ing the im­por­tance of nat­u­ral gas as a fuel of the fu­ture, the Govern­ment of In­dia in the past few years has been en­cour­ag­ing an in­crease in the con­sump­tion of nat­u­ral gas in trans­port, in­dus­trial use, and in do­mes­tic house­holds. In the ab­sence of suf­fi­cient do­mes­tic pro­duc­tion, the gas has to be im­ported in the form of LNG. To pro­mote con­sump­tion of LNG, im­port duty of LNG should be made at par with the im­port duty of crude petroleum, which is presently zero.

We are well aware of the fact that ex­plo­ration of oil and gas is a risky busi­ness and at times yields no oil or gas. Com­pa­nies in­vest a huge amount on ex­plo­ration and on set­ting up ex­plo­ration and pro­duc­tion fa­cil­i­ties. But, the fact re­mains that no pro­duc­tion re­sults in sunk cost for com­pa­nies. This means huge fund­ing is re­quired and com­pa­nies in­volved in this busi­ness re­quire sup­port from the govern­ment. In­fra­struc­ture sta­tus for ex­plo­ration and pro­duc­tion fa­cil­i­ties will help these fa­cil­ity own­ers avail ad­di­tional ben­e­fits available to in­fra­struc­ture projects and cover up for some of the sunk cost.

Govern­ment may need to con­sider an An­nu­ity, Op­er­ate, Trans­fer (AOT) model for trans­mis­sion as­sets owned by PGCIL and state util­i­ties as well on the lines that was re­cently con­cep­tu­alised for the high­ways sec­tor. It can bring in a lot of in­vest­ments into this space and money gen­er­ated can then be ploughed back to cre­ate new ca­pac­i­ties.

The sig­nif­i­cant Bud­get 2017 an­nounce­ments which the en­ergy sec­tor is look­ing for­ward to with ea­ger­ness are a re­duc­tion of clean en­ergy cess to the pre-2016 bud­get lev­els, i.e., Rs 200 per tonne, and ex­ten­sion of 80 IA tax hol­i­days for at least a two year pe­riod.

Go­ing for­ward, what is re­quired is a more hands-on ap­proach to find a so­lu­tion to the above men­tioned pend­ing is­sues. Once re­solved, these will drive growth in the sec­tor. The govern­ment has demon­strated a for­ward-look­ing ap­proach for the sec­tor that en­com­passes en­ergy se­cu­rity, clean / sus­tain­able en­ergy, and af­ford­able power to all.

The fu­ture of the en­ergy sec­tor looks promis­ing as higher in­vest­ment flows are en­vis­aged owing to dif­fer­ent pol­icy ini­tia­tives and the bud­getary sup­port. To­day, all eyes are on In­dia to see how it can trans­late words into ac­tions as well as ac­cel­er­ate the re­forms mo­men­tum for a more sus­tain­able and in­clu­sive growth.

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