India's tax windbreak

London (Bloomberg New Energy Finance): A looming threat to India's wind power market came closer this week with the tabling of a bill that would overhaul the country's direct tax regime. Though there are still quite a few hops for the so-called Direct-Tax-Code-bill to become law, it is widely expected to end tax incentives of the kind given to wind power promoters.

Wind investors in India got an 80 per cent accelerated depreciation benefit. This was responsible to a substantial extent for catapulting India to the list of the world's top five wind power countries. It also led to the likes of former Miss World Aishwarya Rai and cricket star Sachin Tendulkar owning wind assets, along with textile mills, and jewellery and tyre companies.

The new law ending the incentive is set to kick in at the beginning of April 2012, from the earlier announced date of April 2011. Since the future is unclear-to-negative, there seems to be a rush to set up wind power plants. That could be one of the reasons for a record 2GW addition expected this year. The capacity added has been in the range of 1.4-to-1.7GW in the last three years and "most of these projects have availed the 80 per cent accelerated depreciation benefit available," Farooq Abdullah, the Minister for New and Renewable Energy told Parliament last week.

Critics of the exemptions say that wind power investments have not really yielded any significant addition to generation. Many companies have used them to reduce their income tax burden without too much concern about the actual power being generated. These exemptions have also failed to excite independent power producers, since they have no other revenue stream or balance sheet to leverage the depreciation. A generation-based incentive scheme launched last year to incentivise higher efficiencies in wind power plants and to facilitate entry of large independent power producers has however proved to be a non-starter.

Wind power is critical to India, accounting for over almost 70 per cent of the installed renewable energy capacity. It is perhaps in recognition of the potential of wind power that Indian policy-makers are revisiting the generation-based incentive scheme, or GBI, to make it work and, over time, replace the depreciation incentive.

Green Infra – a private equity backed company that owns 124MW of wind energy plants – highlighted the reason for the GBI scheme not taking off. It calculated the net present value (NPR) of the accelerated depreciation benefit at INR 8.81 million while, in contrast, the NPV of the GBI is only INR 3.59 million, based on certain assumptions on plant load factor and project cost. Bloomberg New Energy Finance analysis also shows that the benefits of the GBI scheme are less than half of what comes through in the accelerated depreciation scheme.

The headlines out of India for the last few months have been dominated by solar, and the 20,000MW target that India has set for itself by 2022. Yet, wind is the here and now. A mature technology in which the country's potential could be far more than the earlier estimated 45,000MW. Getting the GBI scheme up to speed is the correct priority. And it may not be too early to start looking at offshore wind. Neighbouring Bangladesh has already received three bids for its proposed 200MW offshore wind plant, tipped to be South Asia's first.

Reproduced with the permission of Bloomberg New Energy Finance. For further information, see www.newenergyfinance.com