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PPA-signing spree in Odisha may lead to massive oversupply and large losses for SEBs
Over supply of electricity is leading to high capacity charges in Odisha. This coupled with low demand growth, transmission capacity constraints and weakness in industrial consumption makes the Odisha state electricity utilities prone to risks, says a report from ICICI Securities Ltd.
 
The brokerage, as part of its efforts to obtain feedback from ground-zero with regard to the status of Ujjwal Discom Assurance Yojna (UDAY) implementation and its impact on power demand recovery, visited the SEBs in Odisha.
 
 
According to the report, power purchase agreement (PPA) signing spree in the state poses risk of massive oversupply while capacity charges on underutilised capacity is increasing losses for SEBs. "Against a current peak demand of about 4.1Gigawatts (GW), Odisha’s power supply is likely to reach around 9GW by FY2019, when peak demand is estimated to be 5.3GW, resulting in serious stress of fixed charges on underutilised capacity. Blessed with abundant coal reserves, anticipation of surge in power demand and willingness to participate in merchant market as a supplier, the government of Odisha had entered into 27 memorandums of understanding (MoUs) with independent power producer (IPP) (totalling 40GW capacity) for 12-25% power on the ‘cost plus’ basis."
 
"While many of these MOUs plant might not see the light of the day, a detailed analysis highlights at least 8 GW out of the total 40GW capacity have got or will likely get commissioned. In addition, Odisha has share of about 7GW is various state and central public sector unit (PSU) owned projects and ultra mega power projects (UMPP). Given the current financial state of the Odisha  distribution companies (DISCOMs) as Rs18.1 billion loss in FY2014 including losses of Grid Corporation of Odisha (GRIDCO), bulk power procurement and trading arm and unfavourable demand supply situation, we believe the SEB will be stressed to service the increased capacity charge on underutilised capacity," it added.
 
ICICI Securities feels that the under-investment in infrastructure as privatisation went wrong in Odisha. Odisha has been a pioneer in power sector reforms as the state unbundled generation, transmission and distribution activities into professionally separate entities. It also established a bulk power procurement and trading company and was the first state to bring the power sector under regulatory regime by establishing the Odisha State Electricity Regulatory Commission (OSERC). However, the state has an electrification rate of only 56-57% as there was very limited investment in transmission and distribution (T&D) infrastructure for 12 years post privatisation of discoms. It was only after 2010 that investment restarted when the government took up infra investment on its own. Currently, the license of the private discom is forfeited (issue currently under litigation). Privatisation of discoms is the reason why the state cannot sign up for UDAY as the government cannot assume liability of private companies. 
 
 
The state’s industrial power demand has seen a major drop (CESCO’s industrial volumes saw a drop from 1,618 million units (MUs) in FY14 to 1,230MUs in FY16 as the state’s mineral-based industry suffered from the mining slowdown and global commodity down cycle. This has been compounded by shift of industries to open access, where power is available at cheaper landed cost at Rs5 per kilowatt hour (kWhr) as against Rs6.3 per kWhr from discoms.
 
The state government is targeting revival through agriculture and domestic households. Agricultural sector accounts for barely 1% of overall power consumption in Odisha as the state is well fed by monsoons, land holdings are largely marginal, and farming is mainly ‘single crop’. Additionally, rate of electrification is fairly low, leaving about 4.5 million rural and urban households un-electrified. This however, presents an opportunity to increase power demand and the government is targeting it by incurring agri and household focused infrastructure development capex and rolling out schemes. The government aims to install 100,000 deep borewells at about 94% subsidy to boost agricultural demand. The state also aims at achieving 100% electrification by FY18, which will double the existing consumer base and aid power demand growth. The state initiated work on schemes like Biju Gram Jyoti Yojana and Biju Saharanchala Vidyutikaran Yojana to ensure supply of adequate and quality power. 
 
According to ICICI Securities, the state is hoping intervention from the central government for surrendering expensive power it gets from NTPC. Odisha has sought support of the Central government in untangling itself from the impending supply glut by surrendering its share of allocation in NTPC power plants located outside the state and of other power plants supplying costly power. It has also asked for coal block allocation for state-run power plants to bring down the cost of power procurement.
 

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Rajya Sabha elections raise hope of GST Bill passage: Report
Recent elections of the Rajya Sabha increase probability of Goods and Services Tax (GST) Bill being cleared by the upper house of the Parliament. If the Bill gets cleared in the Rajya Sabha, the roll out of GST could be by 1 April 2017, says Kotak Institutional Equities Research in a note. West Bengal Chief Minister Mamata Banerjee on Tuesday assuring support instructed state Finance Minister Amit Mishra and Chairman of the Empowered Committee of Finance Ministers on GST, to ensure passage of the Bill in the ensuing monsoon session of Parliament.
 
"A constitutional amendment bill requires the support of two-thirds of the members present and voting, which means the GST bill would need the support of 161 out of 241 members. If the opposition is able to garner 81 members, it can stall the legislation. The known opponents of the bill, Congress -58, Communist Party of India (Marxist) (CPI-M) -8, Dravida Munnetra Kazhagam (DMK) -4 and Communist Party of India (CPI) with single member are expected to have, between them, 71 members of Parliament (MPs). All India Anna Dravida Munnetra Kazhagam (AIADMK)’s 13 MPs will play a critical role. We do not count MPs that were nominated by the previous United Progressive Alliance (UPA) government in this list. Parties such as Janata Dal -United (JD-U) with 10 MPs and Rashtriya Janata Dal (RJD) with four are in alliance with the Congress in Bihar, although the government there is not dependent on continued support of INC. If all the regional parties were to side with the government, the (GST) Bill can pass in the Rajya Sabha. Even abstentions will work in favour of the opposition," says the research report.
 
 
In December 2015, a government panel headed by the chief economic adviser had recommended three broad rates for GST—17-18% as the standard rate for most goods and services, 12% for essential items and 40% for luxury items, and tobacco. Precious metals will be taxed at 2-6%. More importantly, the ‘reclassification’ of the current huge number of indirect taxes into one tax and rates into three rates broadly for most goods and services will result in simplification of India’s complex indirect tax system.
 
Kotak says, "A standard rate of 17%-18% (or lower) is possible only if various exemptions and low tax rates removed or reduced from the onset of GST and the tax base expands with time. Some of the bigger consumption items such as alcohol, electricity and petroleum products are being kept out of GST; precious metals will be taxed at 2-6% as per the panel. The panel’s computed revenue-neutral rate (RNR) of 15-15.5% highlights the large number of items that have nil or low indirect tax currently since the current indirect tax rate on most goods is over 20% (cumulative impact of central excise duty of 12.5% and state value added tax (VAT) of 12.5%; the bases for computation of excise duty and VAT are different though) and on services 15%."
 

"We note that the current tax rates (total indirect taxes) on most goods and services are quite different from the proposed standard rate of 17%-18%. This may create volatility in stocks and speculation about the actual rates until the rates are finalized. The final decision on the rates and the classification of items (by rates) will be taken later by the GST Council once the GST Constitutional Amendment Bill is cleared in the parliament and ratified by at least 50% of the states. The GST bill with specific details on rates and items will be enacted later by the parliament and all the state legislatures once there is consensus on the structure and specifics of GST. We expect GST to be implemented from 1 April 2017," the research note concluded.

 

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