In a bid to promote merchant power projects in the country, the government is planning to permit projects that allow merchant sales of up to 40% of saleable energy in case of hydel power and 15% in thermal power to get zero import duty and deemed export benefit (excise duty waiver) on equipment purchase. It is also planning to extend its policy of giving price preference of 15% to domestic equipment companies till 2011.

Merchant sales allow project developers to sell power in the open market at market-determined prices instead of signing long-term contracts with state electricity boards.

The Centres mega power policy, in its present form, provides tax sops to projects (over 1,000 mw thermal and over 500 mw hydel projects) where the entire capacity is tied up under long-term power purchase agreements (PPAs) with state utilities and trading entities. Under the policy, while import of capital goods is exempted from Customs duty, deemed export benefit is available for supplies by domestic bidders. In addition, income-tax holiday under Section 80-IA can also be availed.

The proposals are part of the new mega power policy being finalised by the government. The power ministry has forwarded the final note on the new policy to the Cabinet for approval, a government official said.

The new hydro power policy cleared by the government already allows merchant sales of 40% of the total capacity of power projects. Thermal projects also have a 15% quota of power they can sell outside PPAs. The new policy would integrate these two clauses (for thermal and hydel projects) to give tax incentives to project developers.

This would help projects to get tax incentives even if they are undertaking market sales of a portion of the total capacity of a power project. The proposal to allow mega power benefits to merchant and captive power projects was earlier rejected by the government, the official said under condition of anonymity.

In terms of price preference, the new policy is likely to permit state-owned power companies such as NTPC to give preferential treatment to domestic equipment companies such as Bhel and still avail mega power benefits. This system, which was proposed to be discontinued under the new policy, would be retained till January 2011. This is the cut-off time, after which it would be mandatory even for government-run power companies to sell power through a tariff-based competitive bidding process. All new power projects being developed by private sector companies are already tying PPAs through bidding.