The implementation of the goods and services tax (GST) will likely increase costs for developers of renewable energy projects by 10-15%, and force them to seek a tariff hike, firms and consultants said.
Once GST comes into force, renewable energy firms, which are currently exempted from any duties on the import of equipment, will have to pay a special additional duty and countervailing duty while importing solar modules under the GST slab of either 18% or more, or below 12%, whichever is applicable.
The National Democratic Alliance (NDA) government wants to introduce the GST from 1 April 2017. The bill needs to be endorsed by half of the states before it can take effect. The tax will subsume various indirect taxes at the central and state levels, including excise duty, service tax, value-added tax, entertainment tax and luxury tax.
Renewable energy is one sector that has so far benefited from multiple tax exemptions such as full exemption from value-added tax and excise duty in some states and continues to lobby for an exemption from GST.
The centre has put renewable energy at the top of its energy security agenda and has been looking to provide green power at less than Rs.4.50 a unit.
Any increase in the cost of equipment for upcoming projects, especially in solar energy, will have an implication on the tariffs, at least three renewable energy producers said.
The increase in project costs will have to be passed on to the buyer—the distribution companies—as allowed under the power purchase agreements (PPAs), a spokesman for Hindustan Powerprojects Pvt. Ltd said.
Currently, PPAs provide for protection to developers of renewable energy projects against any change in law, and they are allowed to seek a tariff revision from the central or state regulator, which would then review requests on a case-by-case basis.
“The process of determining a tariff increase, however, is often lengthy and difficult, and despite a favourable outcome, state distribution companies (discoms) can be unwilling to buy power at a higher cost due to their financial weakness,” the chief executive of a large renewable energy producer said on condition of anonymity.
Solar power tariffs this year fell to a record low of Rs.4.34 per kilowatt-hour (kWh) after a drop in the cost of modules and aggressive bidding by overseas and local clean energy firms. GST implementation could set back tariffs by a year, said Vinay Rustagi, managing director of renewable energy-focused consulting firm Bridge to India.
Most impacted will be upcoming projects whose developers have signed a PPA at fixed tariff before the enactment of the GST bill, but are yet to procure equipment, said Jasmeet Khurana, associate director (consulting) at Bridge to India.
Solar tariffs will fall to as low as Rs.3.5 per unit in three years owing to falling module prices, better use of technology, higher volumes, increased competition and a favourable regulatory environment, Mint reported on 26 July.
Modules account for about 60% of a solar project’s total cost and their prices have already fallen sharply, down by 10% in the first half of 2016.
“Tariffs could have fallen faster if GST was not there... Some developers might want to stay away from upcoming tenders due to increased costs,” Khurana said.
Currently, the average tax in wind energy comes to 4-5% and about 2-3% in solar. This is set to rise sharply once GST takes effect, said Ravi Seth, chief financial officer at ReNew Power Ventures Pvt. Ltd, one of India’s largest clean energy companies.
A study by the ministry of new and renewable energy on the implications of GST on the delivered cost of renewable energy estimates a cost increase of about 12-16% for grid-connected solar photovoltaic projects and 16-20% increase in costs for off-grid solar projects. It estimates an increase of 11-15% in wind energy project costs.
GST could come as a setback to firms that hadn’t accounted for the tax in their bids at auctions of solar projects, said Pashupathy Gopalan, president, Asia-Pacific, SunEdison Inc.
India has targeted 100 gigawatts (GW) of solar and 60GW of wind energy capacity by 2022. It currently has about 8GW of solar capacity and about 27GW of wind power capacity.