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Towards Outcome-Based Incentives for Grid-Connected Windpower

Energy Conclave 2006“Implementing the Integrated Energy Policy”

IRADe, New Delhi, 27th July 2006

Ajay MathurPresident

Senergy Global Pvt LtdIndia

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IEP stresses need to move away from capital subsidies towards performance incentives, such as Tradeable Tax Rebate Certificates

Wind projects have need for high cashflow in early years because debt-service coverage ratio is low; this need is met by cashflow from the currently available accelerated depreciation benefit

A TTRC of Rs. 1 per kWh, subject to a maximum of Rs. 17 lakhs per MW per year, for the first four years of a project, can provide the same benefit as accelerated depreciation

Overview

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Subsidy should be linked to outcomes

IEP, Chapter VII: Policy for Renewable and Non-Conventional Energy

Price subsidy should be linked to outcomes. Thus, for example, giving a capital subsidy on wind power plant provides encouragement to set-up a power plant but does not provide additional incentive to generate power…

…capital subsidy, however, can be linked to the amount of power actually generated, if it is given in the form of Tradable Tax Rebate Certificates (TTRC)…

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Depreciation benefit helps the repayment capacity of wind power projects

0.00

1.00

2.00

1 2 3 4 5 6 7 8 9 10Years

DS

CR

With 80% Accelerated DepreciationAverage DSCR: 1.70

Without DepreciationAverage DSCR: 1.39

Assumptions•Rs 5 crore/MW•PLF-20%•Buy-back rate Rs 3.10/kWh (5% escalation)

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The shift to TTRC : The much required correction

The current accelerated depreciation, for installation of wind energy projects, to be supplemented by a system of tax credit certificates of equivalent value, earned through the generation of electricity from these projects.

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What are TTRCs ?

Rearrangement of existing cash-flow of tax forgone/tax collected by Government of India, from wind energy projects, in order to link with energy generation by using the same discount factor REVENUE NEUTRAL VIS-À-VIS BASE CASE

TCCs are tax credit certificates to be given on a unit generation of electricity (much like in US) with a possibility of a transfer to a third party Ensure performance Create a framework for non-recourse project financing Push a way for large sized wind projects (50 MW and above) Culminate into an environment to attract FDI in wind energy

projects Lower the cost of generation, and in turn the tariff

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Advantages of TTRCs

Direct Participation of serious energy sector players Encourage higher performance – improving the

economics Break investment barrier which is currently linked with

tax appetite

Indirect Energy diversity/security & environment benefits Higher tax revenues with expanded markets Being generation linked, would put extensive thrust on

R&D and improved O&M Push project financing, thereby reduction in Capex

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The design of Revenue neutrality

Current model of accelerated depreciation Tax deferral against a normal depreciation (for P&M)

accounted using time value of money (discount rate of 12%)

Wind energy projects subsequently generate profit and thereby pay “tax on operations”

TTRC is designed for the same revenue neutrality (atleast in designing) so that it is not a burden on the exchequer

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Yearly tax loss/gain to exchequer

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Years

BAU TCC

DepreciationTax shelter

TCC payments

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The way ahead

Not changing the set-up; hence TTRCs offered alongwith accelerated depreciation

Project proponent can choose the following option at the start of the project Availing 80% depreciation benefit, OR Availing TTRC (per unit of generation, subject to a certain

cap per MW per year) for a period of years

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TTRC Benefit

A possible TTRC design – so as to maintain revenue neutrality for the government compared to the current accelerated depreciation regime – could be:

Rs.1 per kWh generated for the first four years, subject to a cap of Rs. 17 lakh per MW per year

Other combinations of value, duration and cap are also possible

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Plausible implementation framework

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Utility Grid(Transco)

Generation Report Certified by Utility

CentralIncome Tax Department

ITRegionalCircle-I

ITRegionalCircle-II

ITRegionalCircle-IV

ITRegionalCircle-VIT

RegionalCircle-III

IndependentRegistry

FilingFor provisional

TCC

ProvisionalTCC

Investor - IEquity Investment

E. Sales TCC UnitsCredited

Redeemable on halfyearly basis

Refund after

reconciliatio

n

by the re

gistry

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Utility Grid(Transco)

Generation Report Certified by Utility

CentralIncome Tax Department

ITRegionalCircle-I

ITRegionalCircle-II

ITRegionalCircle-IV

ITRegionalCircle-VIT

RegionalCircle-III

IndependentRegistry

FilingFor provisional

TCC

ProvisionalTCC

Investor - IEquity Investment

E. Sales TCC UnitsCredited

Redeemable on halfyearly basis

Refund after

reconciliatio

n

by the re

gistry

Investor - IIPortion of TCC units sold

Redeemable on halfyearly basis

Payment forTCC Realised

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Trade-offs

The final design of the TTRC system will involve tradeoffs:

Valuation, duration and cap No annual cap Annual cap with fixed duration Fixed duration

Transfer Taxable or non-taxable

Tax neutral !! Only fixed duration