In final days of Modi government, Adani project in Jharkhand becomes India's first power sector SEZ

Twelve days before elections dates were announced, the Modi government on February 25 cleared the way for an Adani project in Jharkhand to become the first standalone power project in India to get the status and benefits of a Special Economic Zone. For this, the commerce ministry amended power-related guidelines for Special Economic Zones earlier this year.

Geared towards exports, Special Economic Zones get a host of duty-waivers, tax exemptions and faster clearances. The government decision to grant SEZ status to the Adani project will save the company billions of rupees in taxes – Rs 3.2 billion annually in clean energy cess alone.

In addition, with the amended guidelines mandating that all electricity generated in the SEZ be exported, Jharkhand could lose its share of electricity from the project.

The project that will be converted into an SEZ is a coal-fired power plant in Godda district of Jharkhand being built by Adani Power Limited, the power subsidiary of the Gautam Adani-led infrastructure conglomerate. Under a memorandum of understanding signed with Bangladesh in August 2015, the plant will mainly supply electricity to India’s neighbour.

However, Jharkhand’s energy policy requires all power projects to supply 25% of the electricity locally. As Scroll.in has previously reported, the Bharatiya Janata Party government in Jharkhand amended the energy policy in 2016 to allow Adani to charge a higher price for electricity from this project than other thermal plants bill the state. Now, by allowing Adani to convert its power plant into an SEZ, the BJP government at the Centre has made Jharkhand’s share of electricity uncertain.

To enable SEZ status for the Adani project, the Centre had to amend 2016 guidelines that prohibited the establishment of a standalone power project inside an SEZ. The commerce ministry moved the amendment on December 28, 2018, which the Board of Approval for SEZs cleared on January 9, 2019, after commerce minister Suresh Prabhu directed it to consider the matter, minutes of board meetings show.

A month and a half later, on February 25, the board approved Adani Power’s proposal for a sector-specific SEZ for power in Jharkhand. The same proposal had been rejected by the board in February 2018 because it was inconsistent with the guidelines and there was no recommendation from the state. It is unclear whether Jharkhand backed the Adani proposal the second time around, or whether its views were sought by the board. Questions sent to the state government went unanswered.

Scroll.in also sent questions to the commerce ministry and the board, asking whether the amendment of guidelines was prompted by the Adani proposal, or whether there was a larger rationale for the decision. No response has been received.

Questions emailed to Adani Power Limited about how the SEZ status will impact the economics of the project remained unanswered at the time of publishing. On March 5, in a clarification issued to Indian stock exchanges, the company said it was yet to receive the letter of approval for the SEZ from the government.

First private coal project to export electricity

As a power-deficient country, India has restricted electricity exports. But in December 2014, it signed a framework agreement for energy cooperation with other countries of the South Asian Association for Regional Cooperation to enable electricity to be exported to Bangladesh, Bhutan and Nepal. Until then, the only power projects geared to export electricity were being built by public sector companies like the National Thermal Power Corporation and regulated by the Power Trading Corporation.

In June 2015, Prime Minister Narendra Modi travelled to Dhaka to meet his Bangladeshi counterpart Sheikh Hasina and made a pitch for Indian power companies, both public and private. Two months later, on August 11, 2015, a memorandum of understanding was signed by Adani Power Limited and Bangladesh for the export of 1600 megawatts for electricity.

However, signalling that the export of electricity by private projects was still an exception, on December 5, 2016, the Ministry of Power released guidelines on the cross-border trade of electricity that said: “Any coal-based Indian thermal power projects other than Public Sector Undertakings shall be eligible for export of electricity to neighbouring countries only if surplus capacity is certified by the Designated Authority.”

Adani Power Limited presumably obtained such certification since it went on to ink an implementation agreement with Bangladesh Power Development Board in April 2017, followed by a power purchase agreement in early November 2017.

We tell you the truth those who hold power do not want you to hear. If you like our work, do consider supporting our journalism by subscribing to Scroll+

Does electricity export qualify as an SEZ?

Special Economic Zones were first created in 2000 by Atal Bihari Vajpayee-led BJP government under a policy to encourage exports. In essence, the idea was that to enable Indian companies to compete in global markets, industrial production for exports must be exempt from duties and taxes, both on inputs as well as the final output.

Since India did not export electricity until recently, the question of whether power projects should be considered SEZs did not arise. However, guidelines were framed to govern power stations set up inside SEZs to supply power to the industries operating there.

On February 16, 2016, the commerce ministry amended the guidelines to explicitly state: “No single stand-alone power plant will be permitted to be set up in an SEZ in which there would be no other units.” This effectively meant a standalone power project could not be considered an SEZ.

Adani bid to become SEZ

A proposal by Adani Power Limited, seeking in-principle approval for setting up a sector-specific SEZ for power in Godda district, came up for consideration for the first time in front of the Board of Approval for SEZs on February 5, 2018.

The Board noted the proposal was inconsistent with the power guidelines issued by the commerce ministry in February 2016. It also noted that there was no recommendation from the state government, and hence it decided not to approve the proposal.

Ten months later, on December 28, 2018, the commerce ministry moved a proposal before the Board of Approval of SEZs to amend the February 2016 guidelines. It pointed to guidelines issued by the power ministry some months after its own guidelines in December 2016, underlining a specific provision: “Indian Generating Stations supplying electricity exclusively to neighbouring countries may be allowed to build independent transmission system for connecting to the neighbouring country transmission system…”

The commerce ministry argued that “exclusive export of electricity from SEZs could not be envisaged” at the time it had drafted the February 2016 guidelines, and hence, they should be revised.

The next meeting of the Board of Approval of SEZs was held on January 9, 2019. The minutes of the meeting state: “The Board was informed that the Hon’ble Commerce and Industry Minister had directed that the matter be deliberated in the Board of Approval. The Board, after deliberations, approved the proposal.”

There was no mention of the state government’s views on the matter – or whether they were even sought.

On February 25, the board approved Adani Power’s proposal to set up “a sector specific Special Economic Zone for power” over an area of 425 hectares in Motia, Mali, Gaighat and adjacent villages in Godda district, Jharkhand. This is the existing site of Adani Power’s coal-fired thermal power plant.

What does Adani gain?

SEZs are deemed foreign territory for the purposes of trade, with the minimum possible taxation and regulations. “According to the SEZ legal framework, goods and equipment coming into the SEZ – otherwise deemed foreign territory – will not have import duties,” said Preeti Sampat, a faculty member at Ambedkar University who works on rights and resources in relation to infrastructure creation in India. “Domestic area taxes like income tax and so on are also exempt for income from economic activities and production in SEZs for an extended period of time, except the minimum alternate tax.”

Said Vibhuti Garg, Senior Energy Specialist with the International Institute for Sustainable Development: “Given the prices of renewable energy have reduced and coal-based power generation is finding it difficult to compete with low cost renewable power, government support to such imported coal-based plants by declaring it as an SEZ is reducing the level playing field.”

Here are some of the ways in which the Adani project stands to gain from SEZ status.

Equipment costs

Currently, imports of power equipment attract duties of 10% on the total basic price. In April 2018, Adani signed an Engineering, Procurement and Construction contract with SEPCO, a Chinese firm, to design, manufacture and install equipment, including a pulverised coal-fired supercritical steam generator.

The SEZ status will enable Adani to avoid paying these import duties on the equipment, reducing its capital costs.

Imported coal duties

Adani Power will also save on working costs.

The company has said it will import coal from Australia for the Godda project. Currently, power projects using imported steam coal pay 10% basic customs duty and 5% Integrated Goods and Services Tax, which are calculated on the base price. In addition, they pay 10% Social Welfare Surcharge on all duties, taxes and cesses which are levied and collected by the central government.

As an SEZ, Adani can skip all these duties, taxes and surcharges, which will bring down its working costs.

Clean energy cess

For every tonne of coal that is imported, power producers had to pay a clean energy cess of Rs 400 per tonne, which has since been converted to a GST compensation cess.

Adani Power Limited, in its environment clearance documents, states that the Godda plant will need between 7 million tonnes of coal to 9 million tonnes every year to generate 1496 MW of power. It furnished a commitment letter with an Indonesian firm PT Limas Tunggal for the supply of 9 million tonnes of coal per year. Taking an average of 8 million tonnes of coal per year, Adani will avoid paying GST compensation cess of Rs 320 crore every year. Over 25 years – the duration of Adani’s power purchase agreement with Bangladesh – that could go up to Rs 8,000 crores or Rs 80 billion.

Transport charges

Under the GST regime, coal importers have to pay 5% IGST on 10% of the sum of cost, insurance and freight by sea. The Adani project will no longer have to pay this.

The project will also be exempt from 5% GST levied on coal transported by rail. Coal shipped from Australia for the Adani project will be brought inland by railways.

Other taxes

The Adani SEZ would attract a full income tax exemption on export income for the first five years, 50% for the next five years and 50% on export profit for five years after that. It would be exempt from electricity duty payable to Jharkhand, besides other levies.

Faster clearances

One of the biggest hurdles to the project was opposition from residents of the villages where it was seeking to acquire land. As Scroll.in has reported previously , Jharkhand government had contentiously aided the transfer of farmland for the Adani project by declaring that the project served “public purpose” and overlooking the objections of local residents during the mandatory social impact assessment hearings.

Now, as an SEZ, the Adani project could bypass several environmental safeguards entirely.

The project includes not just the thermal power plant but also electricity transmission systems running up to the Bangladesh border. It also includes a 98-km pipeline to river Ganga at Sahibganj. While the initial water source for the plant was the Chir River, this allotment was cancelled on January 15, 2018 and was changed to the Ganga. Adani Power signed a water drawal agreement with the Jharkhand Government on March 9, 2018.

This change necessitated an amendment of the project’s environment clearance, for which the company submitted a proposal on December 10, 2018. In a meeting held on February 23, 2019, an expert panel at the environment ministry deferred taking a decision on this proposal. Two days later, the project was approved as an SEZ.

Units within an approved SEZ are not typically required to conduct public hearings to obtain environmental clearances.

No power to Jharkhand

Since the project took shape in 2015, opposition parties and civil society groups in Jharkhand have repeatedly questioned the BJP government for allowing Adani to set up a power project which aims to primarily supply electricity to Bangladesh. The state will provide land, infrastructure, water for the project, and shoulder the burden of pollution. Barring a share of 25% electricity, it is unclear what it gets in return, opposition leaders have pointed out.

Now, with SEZ status for the project, the state could even lose this. The commerce ministry’s proposal to amend the guidelines stated: “There will be no option for selling any surplus power in the DTA [domestic tariff area] as the entire power will have to be exported abroad or consumed within the SEZ to be treated as export in terms of Section 2 (m) (iii) of the SEZ Act, 2005.”

Legal experts say Jharkhand government could contest this, since it goes against the state energy policy as well as the memorandum of understanding between the state and Adani Power Limited on February 17, 2016. A senior official of the state government, who spoke on the condition of anonymity, however, indicated the state was unlikely to contest this. “It is no longer under the state’s purview,” the official said.

The state government did not respond to a questionnaire emailed by Scroll.in.

Also read

Rs 7,410-crore question: Jharkhand amended energy policy to buy power from Adani at higher price

Jharkhand villagers ask why should they lose land for Adani project supplying power to Bangladesh