Vol.

1 Issue 3

December 23, 2009

The Union Ministry of Power notifies the revised Mega Power Policy
The Union Ministry of Power, Government of India notified (Vide notification No. A-18/2003-IPC dated December 14, 2009) the modified Mega Power Policy. The Mega Power Policy was introduced in November 1995 for providing impetus to development of large size power projects, and was last revised in August 2006. The key features of the modified Mega Power Policy are as follows: Threshold capacity for availing benefits under the Mega Power Policy: Thermal power plant of capacity of 1000 MW or more; or Thermal power plant of capacity of 700 MW or more located in the States of J&K, Sikkim, Arunachal Pradesh, Assam, Meghalaya, Manipur, Mizoram, Nagaland and Tripura Hydel power plant of capacity of 500 MW or more; or Hydel power plant of capacity of 350 MW or more located in the States of J&K, Sikkim, Arunachal Pradesh, Assam, Meghalaya, Manipur, Mizoram, Nagaland and Tripura
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The Union Ministry of Power, Government of India notified (Vide notification No. A-18/2003IPC dated December 14, 2009) the modified Mega Power Policy. The Mega Power Policy was introduced in November 1995 for providing impetus to development of large size power projects was last revised in August 2006.

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Brownfield expansion Mega Power Policy benefits also extended to brownfield (expansion) projects. In case of brownfield expansion phase of existing mega project, the size of the expansion unit(s) should not be less than that provided in the earlier phase of the project granted mega power status. Condition of inter-state sale of power Mandatory condition of inter-state sale of power for getting mega power status done

Sujit Ghosh, New Delhi T: +91 11 3021 5070

away with. Certification for availing fiscal benefits on goods procured for mega power project Goods required for setting up mega power project to qualify for fiscal benefits after it is certified by an officer not below the rank of a Joint Secretary to the Government of India, Ministry of Power that: Power purchasing States have constituted the Regulatory Commissions with full powers to fix tariffs; and Power purchasing States shall undertake to carryout distribution reforms as laid down by the Ministry of Power.

M: +91 9811019857 E: sujit.ghosh@bmradvisors.com

Tie-ups of power supply Mega power projects would be required to tie up power supply with distribution companies / utilities through long term PPAs in accordance with the National Electricity Policy and Tariff Policy, as amended from time to time. Requirements of follwing International Competitive Bidding (ICB) No requirement of following ICB for procurement of equipments for mega projects if the requisite quantum of power has been tied up or the project has been awarded through tariff based competitive bidding. Under such circumstances, the requirement of ICB for the purpose of availing deemed export benefits would be presumed to have been satisfied. In other cases, ICB for equipments mandatory. Dispensation of price preference to domestic bidders The present dispensation of 15 percent price preference available to the domestic bidders in case of cost plus projects of PSUs will continue. However, the price preference will not apply to tariff based competitively bid projects of PSUs. BMR Comments and Analysis In the following paragraphs we have discussed the impact of the key modifications notified in the Mega Power Policy. Striking out the condition of inter-state sale of power is an encouraging modification. Earlier only inter-state thermal and hydel power plants (i.e. power plant selling electricity on a long-term basis to two or more states) having minimum specified installed capacity was eligible for seeking a mega power project status. Given the significant demand for power across all states,

mandatorily selling power inter-state for the availing tax incentives was an obsolete requirement. Also for obtaining a mega power project status, the entire power generated had to be tied up through PPAs and electricity sold on merchant basis disqualified the entity from seeking the same. Easing of these conditions will bring in many more power projects under the ambit of mega power project. The mandatory requirement to enter into long term PPAs to qualify for mega power project acted as a disincentive for several players. The amendment in the Mega Power Policy to sell power outside long-term PPAs in accordance with the National Electricity Policy 2005 and Tariff Policy 2006 would enable sale of power on a merchant basis and thereby provide a long awaited flexibility for power project developers and may attract new investments as well - an welcome move by the Government. However, there is no clarity whether selling of power outside PPAs will be capped as per the limits prescribed in the recently amended tariff guidelines for procument of power which permit selling upto 15 percent (40 percent for hydro) of electricity outside long-term PPAs for a period of less than one year. The easing of ICB condition for developers procuring equipments for mega power project is a positive step. Once sale of electricity is tied up under tariff based competitive bidding (it ensures the purpose of the tax concession ie availability of low priced electricity to the consumers) or if the project has been awarded through a tariff based competive bidding, following ICB at the equipment procurement stage for excise exemption is futile and time consuming. It is pertinent to note that for a mega power project the condition of procurement of goods against ICB is mandatory to avail the excise duty exemption (even though the project may have been awarded under tariff based competitive bidding). This anomaly was duly rectified for Ultra Mega Power Projects (where if the project is awarded through a tariff based competitive bidding then the condition of procurement of goods under ICB is not required) but continues for mega power projects. Vide this amendment, the anomaly for mega power projects stands rectified. Also currently the deemed export benefits under the Foreign Trade Policy (FTP) are contingent upon compliance of ICB. Pursuant to this amendment, even the deemed export benefits under the FTP should not remain contingent upon ICB if the sale of electricity is tied up under tariff based competitive bidding. Manufacturers supplying to mega power projects are exempt from excise duty. Even though these supplies are exempt, the manufacturers are entitled to input credits provided the supply is against ICB. This condition of ICB (for availing input credits) would also need to be aligned with the amended Mega Power Policy ie if

the project owner has tied up the sale of electricity under tariff based competitive bidding, then input credit should be available to the manufacturers even though the supply is not against ICB. As per the revised Mega Power Policy the benefits will also to be extended to brownfield (expansion) - the only exception being that instead of the full customs duty exemption available to mega power project, a concessional rate of basic customs duty of 2.5 percent would apply to these expansions. This will significantly reduce the tax costs on capacity expansions by existing mega power projects and may culminate in a significant boost to power generation capacity addition in the country. However, one needs to bear in mind that these benefits will be granted to only brownfield (expansions) which are associated with projects that have earlier been granted mega power project status. Also while carrying out the brownfield (expansion) in these existing mega projects the proposed expansion of each proposed unit has to be identical to the unit size of existing mega power plant. Example: Suppose the earlier project which has been granted mega power project status is 1000 MW ( 500 X 2 Units) power plant, the minimum brownfield (expansion) for availing benefits under the Mega Power Policy has to be 500 MW (500 X 1 Unit). The above amendment to the Mega Power Policy has been implemented by amending the existing customs duty exemption notification for mega power projects under entry 400 of Notification 21/2002-Cus and introducing entry number 400A therein. It is important to understand that the benefit under this new entry is available only if the expansion is eligible for project imports. Under the present provisions under the Customs laws, a brownfield (expansion) qualifies as a project import, if the expansion is more than 25 percent. However, to qualify as a brownfield (expansion) under the revised Mega Power Policy, the size of the expansion unit(s) should not be less than that provided in the earlier phase of the project granted mega power project and thus may warrant a much more extensive capacity addition as compared to the criteria of expansion under project imports. It is desirab le that pursuant to the present amendment in the Mega Power Policy, the definition of expansion be reconciled with the Customs laws. Further, it is pertinent to note that mega power projects are also entitled to exemption from Excise duty on domestic supplies (subject to ICB condition and complete exemption from Customs duty. Given that, brownfield (expansion) is not eligible for a complete customs duty exemption, the exemption from excise duty available to mega power projects would not be available for brownfield (expansion), unless specific amending notifications are issued in this regard.

The removal of dispensation of 15 percent price preference to domestic PSU bidders for tariff based competitive bidding projects of PSUs is a welcome modification. While on the one hand the Government encourages tariff based competitive bidding, giving price preference defeats the competive aspect of PSUs and is against the spirit and principle of tariff based competitive bidding.

The Road Ahead While various welcome changes have been sought to be introduced, it is pertinent to keep in mind that the intended changes would come into force only when corresponding notifications are issued by the Department of Revenue under Customs and Excise laws. Only when the notifications are issued and they appropriately reflect the amendments discussed above, the amendments would come into force. Thus far, only the notifications pertaining to Brownfield expansion have been issued. Other notifications, like notifications easing the ICB condition are awaited. In the mean time, we would continue to follow up on the proposed amendments in the law and shall keep you posted on future developments.

Disclaimer: This newsletter has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of preparation and does not express views or expert opinions of BMR Advisors. The newsletter is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this newsletter will be accepted by BMR Advisors. It is recommended that professional advice be sought based on the specific facts and circumstances. This newsletter does not substitute the need to refer to the original pronouncements.

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