Cabinet approves changes to the mega power policy

The Cabinet to approved changes to the mega power policy, with the modifications focusing on ensuring simpler procedures giving benefits to economies of scale and harmonizing this policy with the National Electricity Policy and Tariff Policy.

The key changes are as under:

• All power projects with a capacity of 1,000MW and above would now be classified as a Mega Power Project. The earlier policy stated that projects with capacity of 1,000MW and above and supplying power to more than one state would be eligible for classification as a mega power project.
• All the benefits of the Mega Power Policy would also be extended to projects using super-critical technology provided these are awarded through the International Competitive Bidding (ICB) route and the equipment supplier sets up indigenous manufacturing facility.
• The mandatory requirement of awarding equipment order through ICB would be waived provided if the project has been awarded through tariff based competitive bidding or the supply of power is tied up through tariff based bidding.
• All benefits, except basic customs duty of 2.5%, would be available for brown-field expansion of existing mega power projects. This would apply even if the capacity expansion is less than the qualifying threshold for mega power projects (700MW in J&K, 1,000MW in other states). However, the unit size/s should not be less than the earlier phase.
• While the present 15% price preference to domestic equipment suppliers for cost-plus projects of PSU’s will continue, an exception has been introduced in the form of projects which are awarded on tariff based bidding. A committee under the Planning Commission would be set-up to suggest options and modalities to access and rectify the disadvantages that the domestic equipment industry may suffer as a result of this change in policy.
• Mega power projects would be allowed to sell power outside long term PPA/s, in addition to having tie up power supply through Long Term PPA/s.
• The existing condition of distribution privatization by power purchasing states will be replaced by the condition that power purchasing states would be required to undertake distribution reforms as laid down by the Ministry of Power. Thus, as against the earlier policy of distribution reforms being mandatory at the state level, these can now be undertaken by the states in a phased manner as permitted by the Ministry of Power.

We believe that these changes are a welcome step in attempting to ensure faster generation capacity additions to meet the country’s power requirements. However, we also believe, and reiterate, that generation side reforms would aid the economy only to a certain extent. Without adequate transmission capacity and distribution network upgradation, either through reforms or privatisation or a combination of both, the generation side reforms will not yield the desired results.

We expect all the domestic equipment players, mainly BHEL and L&T, to benefit from these changes. Also, most of the existing power projects with capacity of 1,000MW of more do comply with the earlier policy, however these changes would spur some of the projects being planned for the 12the five year plan to change tack and sell power to a single state. Apart from the state utilities, all the major power companies, including Adani Power, JP Associates, NTPC, Reliance Power, Tata Power etc., could revisit their capacity addition plans.

Further, deferral of the mandatory distribution reforms is likely to have a negative impact on the companies banking on distribution reforms. Equipment companies in the transformers segment were banking of large-scale distribution reforms and privatisation to boost growth. Utilities such as Torrent Power and Reliance Infrastructure were aggressive in bidding and winning distribution frachanise’s, a newly emerging segment which could see a set-back.

We have already witnessed this to a small extent in the form of announcements for setting up new power projects. PowerGrid too has placed large equipment orders, on the back of increased funding availability. We reiterate our stand that continued increase in order flows for power equipment, including BTG and transmission equipment, could lead to an upward re-rating of the sector.