Investors in Indian wind energy are choosing certain savings now over government incentives that are dependent on the performance of their wind turbines.
Developers in India installed a record 2,827MW of wind energy capacity in 2011. China and the US were the only countries to install more. Over 70% of the developers in India chose to take up the government’s accelerated depreciation incentive scheme rather than an alternative generation-based incentive. The government had intended to scrap the accelerated depreciation incentive from 1 April 2012. But it has proven too popular to scrap, according to the Economic Times of India.
A series of financial and fiscal incentives are offered to wind power developers by the Indian government on top of state-level incentives. Developers are exempt from income tax on all earnings generated from their project for ten years. Loans at a reduced interest rate are made available to them.
Developers can also choose between two major incentive schemes: the accelerated depreciation scheme and a generation-based incentive scheme. By opting for the accelerated depreciation scheme, investors can treat a wind project for tax purposes as if the assets depreciate in value by up to 80% in the financial year after the project is commissioned.
The generation-based incentive provides INR 0.50 (about 10 US cents) per kWh, but it caps payments at around US$120,000 per MW spread over a minimum of four years (the equivalent of an annual cap of a little over US$30,000 per MW.) The generation-based incentive is over and above any feed-in tariff specified by any of the state energy regulatory commissions.
When the Indian Ministry for New and Renewable Energy introduced the Generation-Based Incentive scheme in December 2009, they planned to subsidize up to 4,000 MW through the scheme by March 2012. By March 2012, developers had applied for less than half the incentive available. By contrast, over 70% of wind power projects during the period were registered under the accelerated depreciation scheme and large numbers of investors in the Indian wind industry had lobbied hard for the continuation of the depreciation scheme.
Investors choose certainty
“The accelerated depreciation scheme is a very concrete and risk-free tool for investors,” says Amit Kumar, Director of the Energy-Environment Technology Development Unit at The Energy and Resources Institute in Delhi. “When it comes to performance-related generation incentives, the investors do not know what the performance will be and how much incentive they are going to get.
“The clear-cut quantity of revenue generation identifiable with accelerated acquisition schemes helps investors to create bankable projects more easily.
“The cap on the generation-based incentive for wind actually acted as a disincentive.”
According to V. Subramaniam, secretary-general of the Indian Wind Energy Association, the generation-based incentives have served a useful purpose because the two incentives met different needs. He told the Economic Times:“Accelerated depreciation attracts new players while GBI ensures the presence of large power plants and investment.”
The introduction of the generation-based incentive was intended to attract large independent power producers and foreign direct investors into the Indian wind energy sector by making the same incentives available to both national and international investors.
“Not many foreign investors have come forward for these investments,” says Amit Kumar. “Their concern seems to be related to political risk more than anything else.”
The reprieve of the accelerated depreciation incentive is temporary. The Indian Government is introducing major reforms to the country’s tax system. When the new Direct Tax Code eventually comes into force, the accelerated depreciation incentive will come to an end.
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