The GST rate changes made two days ago have raised hopes for positive changes in the power sector. Experts believe that reducing GST on renewable energy equipment and coal-based power generation will lower electricity rates.
These changes will give cheaper electricity to consumers and also provide financial relief to discoms and developers. It is said that electricity generated in thermal power plants may become cheaper by up to 10 paise per unit across the country.
How Much Will Electricity Become Cheaper?
Pranav Master, Senior Practice Leader and Director at Crisil Intelligence, says, “By reducing the GST rate on renewable energy equipment from 12% to 5%, the effective rate of EPC services (engineering, procurement, and construction cost of the plant) will come down from 13.8% to about 8.9%. This will reduce electricity rates of renewable energy projects by 4-5%, which is about a saving of Rs 0.11-0.14 per unit.”
He also said this cut will increase the demand from discoms and encourage corporate consumers to use the open access route. Consumers will benefit from cheaper renewable electricity, and developers will get more investment capacity. However, manufacturers may face some challenges in working capital due to low GST input credit.
Cost of New Projects Will Reduce
Crisil Ratings Director Ankit Hakhu estimates that the GST rate cut will reduce the total cost of new projects by 4-7%, and the return on equity for developers will improve by 100-200 basis points. The cut is also likely to lower coal-based thermal power costs, which makes up 73% of the country’s power generation.
He added that although the GST rate on coal increased from 5% to 18%, the cess of Rs 400 per tonne has been removed. This is expected to reduce the cost of coal-based power by more than Rs 0.10 per unit, depending on the quality of domestic coal. This will reduce financial pressure on power distribution companies (DISCOMs). However, there is a small risk that input costs may rise.