New Delhi: India is considering a change in laws governing tax benefits linked to investments in wind power, a move that could have an adverse effect in the short term on wind power firms such as Suzlon Energy Ltd but eventually benefit them and also increase the amount of wind energy generated in the country.
The change involves linking the benefit to the actual generation of wind power and not merely the investment in a wind power project.
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Specifically, it involves the depreciation benefits currently available to companies or individuals investing in wind power. Under current laws, such companies or individuals can claim a depreciation benefit of up to 80% of their investment in the first year of the project itself. That would mean a company that invests Rs100 crore in wind power generation effectively gets to take Rs80 crore off its taxable income.
The change in policy is being considered by the energy coordination committee, or ECC, a body whose members include the Prime Minister, the ministers for finance, petroleum, power and coal, and the deputy chairman of the Planning Commission.
Wind power: Depreciation benefit is one major draw for companies investing in wind energy. (Bloomberg)
At a meeting in late June, minutes of which have been reviewed by Mint, the committee asked the ministry of new and renewable energy, or MNRE, to study whether “depreciation could be linked to outcome or generation”.
India has an installed wind power generation capacity of 8,696MW, but most projects have a plant load factor, or efficiency, of only 10-15%. Some power sector analysts say the low efficiency is because the developers are interested in claiming depreciation benefits, not generating power.
Apart from encouraging companies and individuals to invest in wind power, the benefits have also partly been responsible for the growth of companies such as Suzlon and RRB India Ltd. “Wind power projects are set up for different reasons. Claiming depreciation benefits within first year of operations is one of them,” said Vikram Apte, senior vice-president at consulting firm Feedback Ventures Pvt. Ltd.
The prevailing business model doesn’t even require companies to develop the project. Companies such as Suzlon, which has around a 70% share in the domestic wind power market, develop wind farms. They then sell a part-ownership in such farms to individuals and firms who can, in turn, claim tax credits.
If the government goes ahead with the change, it will affect firms such as Suzlon’s revenue stream in the short run, said Anish De, chief executive of Mercados Asia, an energy consulting firm. “(But) the wind power lobby is very strong and hence it will be very difficult for the government to abruptly withdraw the depreciation benefits.”
A senior official at MNRE, who did not wish to be named, confirmed the ministry had been asked by ECC to “check the feasibility of such a move” and said a report on this would be submitted “within a month or 45 days”.
A Suzlon spokesperson played down the impact such a measure would have on the company. “The generation-based incentive programme has been created in addition to the existing accelerated depreciation structure, and not replacing it ....”
Significantly, the minutes reviewed by Mint do not mention an alternative to this benefit. Instead, their emphasis is on an alternative way of calculating the depreciation benefit.
Executives at RRB Energy and Enercon India Ltd, another wind power company, did not respond to an emailed query.
In the June meeting, ECC said: “(The) outcome should be incentivized rather than creation of capacities”.
Mercados’ De, however, said the impact on Suzlon would be temporary because about 60% of the company’s production “caters to overseas markets”.
Apart from the “depreciation benefits”, investors also stand to benefit from the sale of power to the grid. MNRE recently announced a 50-paisa incentive per unit for wind power supplied by independent power producers
Of India’s total installed capacity of 143,000MW, wind-based power accounts for only 6.08%. India, however, has a wind energy potential of 45,000MW and MNRE hopes to increase wind power capacity to around 18,000MW by 2012.