Energy Sector in India 2017: Basics and Post-budget insights

Prepared by:Arindam Bhattacharjee (316SM1006)

School of ManagementNational Institute of Technology,

Rourkela

May 2, 2023 2

Contents• Income and expenditure of GoI• Energy sector in India• Working of power industry• Inputs from economic survey• Policy announcements• Direct taxes• Income from transfer of carbon credits• Rationalization of tax rate and MAT• Indirect taxes• Other points• Impacts post-budget• Major misses• Stocks in focus• GST and Indian energy sector• Porter’s five forces analysis• Conclusion

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Income and Expenditure of GoI

Source: The Times of India

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Energy sector in India: An overview

• The utility electricity sector in India had an installed capacity of 314.64 GW as on 31st January 2017. • Renewable power plants constituted 29.9% of total installed

capacity. • During the fiscal year 2015-16, the gross electricity generated

by utilities in India was 1,116.84 TWh and the total electricity generation (utilities and non utilities) in the country was 1,352 TWh or 1,075.64 kWh per capita.• India is the world's third largest producer and fourth largest

consumer of electricity. • Electric energy consumption in agriculture was recorded

highest (17.89%) in 2015-16 among all countries.

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Energy sector in India

Source: Wikipedia

60%15%

9%

3%3%

8%2%0%

Installed capacity by source (in%)

Coal Hydro Wind Biomass Solar Power Gas Nuclear Diesel

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Energy sector in India

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Working of power industry

Source: www.stockshastra.moneyworks4me.com

Inputs from Economic Survey

Major programs / schemes on

implementation of solar parks, solar defense

schemes, solar rooftops, etc., have been launched

in recent years; Green Energy Corridor worth ₹ 380 billion is also being

set up.

India has attained the fourth position in the global wind power

installed capacity after China, USA and

Germany.

With India’s initiative, International Solar

Alliance (‘ISA’) was launched, as a

coalition of solar resource rich countries to address their special

energy needs .

India ratified the Paris Agreement in October 2016 to combat climate change and committed

itself to increase the share of non-fossil fuels based

power generation capacity to 40 percent of its installed capacity.

Against the targeted capacity of 175 GW from renewable sources by the

year 2022, in the past two and a half years, aggregate capacity addition of 14.3 GW has been reported

under the Grid Connected Renewable Power.

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Policy Announcements

The Government has decided to set up additional Strategic Crude Oil Reserves at two locations in Odisha and Rajasthan respectively, in addition to the existing

(three) reserve facilities.

Proposal to create an integrated public sector ‘oil major’ through consolidation, merger or acquisition, to enable it to bear higher risks, avail economies of scale etc.

Plan to achieve 100 percent village electrification by May 1, 2018; an

increased allocation of ₹ 106.35 bn has been proposed for the Integrated Power Development Scheme and Deen Dayal Upadhyaya Gram Jyoti Yojana in the

year 2017-18.

Proposal to commence the second phase of Solar Park development for additional 20,000 MW capacity. It is further proposed to power 7,000 stations with solar power in the medium

term; work will also be undertaken for 2,000 railway stations as part of 1,000 MW solar mission.

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Direct taxes

Exemption of income of foreign companies from sale of leftover stock of crude oil from strategic reserves at the

expiry of agreement or arrangement.

This amendment is proposed to take effect from April 1, 2018 and will, accordingly,

apply in relation to assessment year 2018-19 and

subsequent years.

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Income from transfer of carbon credits

Finance Bill has provided for taxation of income arising from transfer of

carbon credits, at the rate of 10 percent (plus applicable surcharge and cess) on the gross amount of such income.

No expenditure or allowance in respect of such income shall be

allowed under the ITA.

This amendment will take effect from April 1, 2018 and will, accordingly, apply in relation to the assessment

year 2018-19 and subsequent years.

The proposal has been inserted in order to bring clarity on the litigious issue surrounding characterization of

income arising from transfer of carbon credits (i.e. revenue vs capital receipt)

and taxability thereof.

On the flip side, this new levy could impact overall return expectation of

the investors, albeit marginally.

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Indirect taxes

Reduction of customs duty rates on import of LNG• BCD on import of LNG reduced from 5 percent to 2.5 percent.

This reduction is aimed at increasing the availability of clean energy, reducing carbon emissions and preventing excess usage of fossil fuel. As a result, this change will boost the power and fertilizer sectors which use LNG as a key input.

Disposal of used goods imported for E&P operations• Introduction of mechanism for disposal of used goods imported

for E&P operations on payment of customs duty. Such customs duty payable on depreciated value calculated as per straight line method (subject to depreciated value not being less than 30 percent of the original value).

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Impacts post-budget

Decline in LNG custom duty is

positive for the sector. Analysts expect Petronet LNG’s

utilizations to get some fillip.

Gas distributors such as Indraprastha Gas Ltd and Mahanagar Gas Ltd are expected to benefit on account of this move.

Their profit margins could improve depending on the

extent of the decline in prices the companies pass

on to consumers.

As regards the creation of an integrated oil major,

while the idea is certainly laudable, the key challenge will be integration issues

especially on the human resources side.

Higher fund allocation for

integrated power development scheme

and Deen Dayal Upadhyaya Gram

Jyoti Yojana to bring grid connected power to more

villages.

Additional strategic reserves will help

strengthen the country’s energy

security.

Higher spending on electrification to

result in more orders for

companies in the transmission sector.

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Major misses

Lack of any relief provision for private thermal generators

struggling with huge investments stuck for

want of long term PPAs left a part of the

domestic industry disappointed.

The wind power sector had also hoped for a

revision of the generation based

incentive (GBI) for wind generators which

is expiring on 31st March 2017.

The oil and gas industry had also demanded a revision of the high

crude oil cess - another demand that remained

unheeded in this budget.

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Stocks in focus (on the day of budget)

Gainers

+1.7%

+3.5%

+2.5%

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Stocks in focus (on the day of budget)

Losers-1%

-5%

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GST and Indian energy sector

Renewables:The sector currently enjoys various fiscal

incentives like 100 per cent tax holiday on

earnings for 10 years, concessional excise and custom duties and so on.

These incentives will come to an end in the new

GST regime.

Renewables:The impact includes a 16-20 per

cent rise in Solar Off Grid costs; 12-16 per cent rise in Solar PV Grid installations and a 11-15 per cent

jump in the cost of setting up wind energy projects.

Also, biomass projects could see their costs rising by 11-14 per cent

while setting up small hydro projects could become costlier by

up to 11 per cent.

ELECTRICAL EQUIPMENTS:Under the new tax structure, the overall incidence of effective indirect taxes on the companies in the sector will be lowered to around 18 per cent from the current 29-30 per cent, according to equity brokerage

firm Motilal Oswal.

May 2, 2023

GST and Indian Energy sector

Oil and Gas:Five petroleum products -- crude, natural gas, Aviation

Turbine Fuel, diesel and petrol -- are excluded from the coverage of GST for the

initial years while the remaining petroleum

products -- kerosene, naphtha and Liquefied Petroleum Gas

-- are covered within the coverage of GST.

18Source: Times of India

Porter’s five forces analysis

Availability of substitutes :

Medium

Threat due to entrants : Low

Supplier power : High

Buyer power: Low to medium

Competitive rivalry : Medium

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Porter’s five forces analysis

Buyer Power:a) Low Switching

Costb) Buyer size - Very

smallc) Undifferentiated

product

Rivalry among existing firms:a) Competitor size

- Few companies are very large in size

b) Number of players - Very few

Supplier Power:a) Supplier size -

Very Largeb) Oligopoly threat

- Small number of suppliers enjoy monopoly

c) Switching costs - Very high

Threat of substitutes:a) Switching Cost -

The cost of switching to substitutes like gas, solar penal, etc. is high.

Threat of New Entrants:a) Low Switching

Costb) Undifferentiated

productc) Fixed costs-High

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Conclusion

The policy announcements for Energy sector affirm the Government’s continuing commitment to reform this sector.

There are no new ideas or bold measures envisaged in this year’s budget proposals.

An across the board cut in corporate tax rate, coupled with rationalization / withdrawal of MAT could have helped Energy sector tide over the present phase of sluggish growth.

From an indirect tax perspective, the focus has been on doing away with inverted duty structures and rationalization of overall tax structures for promoting the cleaner sources of energy in India.

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References :

• "Budget 2017: Has Jaitley done enough for the energy sector?”, http://energy.economictimes.indiatimes.com/news/power/budget-2017-has-fm-jaitley-done-enough-for-the-energy-sector/56913666, accessed on 1st February 2017

• “Union Budget 2017-18: Key budget expectations for the energy sector”, http://energy.economictimes.indiatimes.com/energy-speak/union-budget-2017-18-key-budget-expectations-for-the-energy-sector/2099,accessesd on 20th January 2017

• Economic Survey 2016-17,Chapter-1 ,p.27• “Power Sector Using Porters Five Forces Model Economics Essay”, https://

www.ukessays.com/essays/economics/power-sector-using-porters-five-forces-model-economics-essay.php, accessed on 8th March 2017.

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