Towards Outcome-Based Incentives for Grid-Connected Windpower

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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 Mathur President Senergy Global Pvt Ltd India
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Overview

• 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

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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

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

With 80 Accelerated Depreciation Average DSCR
1.70
Without Depreciation Average DSCR 1.39
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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 RD and improved OM
• 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
  PM) 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
TCC payments
Depreciation Tax shelter
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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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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