Renewable energy projects to fetch 19-24% returns

In a much-needed shot in the arm for the renewable energy sector, the government on Thursday offered investors in the sector a fixed rate of return of 19-24% through higher tariffs.

The promised rate of return is significantly higher than the 14-16% promised to investors in conventional power projects.

Under the current rules, tariffs are determined entirely by state governments through negotiations with the owners of such plants and are no better than that of ‘dirty power’, or power generated through non-renewable resources such as fossil fuel and gas, in many states.

The new policy is also a break with the practice of giving support to the sector in the form of tax breaks in lieu of investments and is likely to broaden the market to pure-play investors and utility companies.

The current incentive structure, based on tax breaks related to total investments rather than actual production, has been blamed for creating inefficient renewable energy structures such as wind farms. The structure has also kept out smaller investors and others who do not have big tax liabilities to take advantage of the tax breaks.

According to the new guidelines issued by the Central Electricity Regulatory Commission, investments in renewable energy plants such as solar, biomass and wind will get a pre-tax return of 19% per year for the first 10 years and 24% per year from the 11th years onwards. The state electricity commissions, which have been buying power from renewables-based power companies on their own tariffs will have to abide by the guideline in the future.

In order to prevent companies from over-investing or over-declaring their costs, the commission has also come out with norms for how much investment is to be made to put in place each megawatt of generation capacity — it is Rs 45 per watt for biomass plants; Rs 50 per watt for small hydro projects; Rs 51.50 per watt for wind projects; and Rs 170 per watt for solar.

The costs, arrived through a formula, will be reset every year as the input costs contained in the formula change. The new policy also entitles the consumers of renewables-based power to claim 50% of the carbon credits from the sixth year onwards.

“This is a welcome move towards production-based incentives rather than investment-based incentives,” said Chandra Bhushan, associate director at Delhi-based Centre for Science and Environment. Bhushan, a critic of the current policy, sees it as a move towards the highly successful tariff-based incentive structure prevalent in countries like Spain and Germany.

While investment-linked incentives have helped India grow in terms of renewables-based power capacity, it lags other markets in actual production of renewables-based power. Countries such as Germany, which work on a tariff-based incentive model, get nearly 15% of their electricity from renewables.

Even companies that have built their fortunes on the existing incentive structure welcomed the move.

“This will definitely broaden the market and bring newer kind of investors who may have been reluctant earlier,” said an official of wind energy major Suzlon.

Industry heads expect even pure investment firms to enter the market, lured by the high rate of return and one of the biggest power deficits anywhere in the world.

Under the current model, for every Rs 100 invested in wind energy, the investing company can reduce Rs 80 from its tax burden of the same year. The incentive has made India into the fifth-largest player in the wind energy market in terms of capacity installed. It has a total of 8,000 MW of installed wind energy capacity out of a total of around 150,000 MW. India also has an ambitious target of adding around 15,000 MW of renewable power capacity during FY2007-2012, at a cost of $2 billion.

While generally welcoming of the new policy, some industry participants expressed concern over the smooth implementation of the proposal.

“Power is a concurrent subject, over which both the states and the Centre have authority. So, it is not clear how this will work out, especially since state governments have to bear the brunt of returning the investments. One has to look at what kind of financial implications large-scale investments in this area will have on their health,” an industry official said.