Wind energy: continuing the incentives is the key

Well, India is not having a good time when it comes to the power sector. Thermal power is reeling under the trouble of low resources and mounting debt for distributors. The nuclear energy space too is getting worse with civil society protests and is no more treated as the best complement to thermal power. But all is not bad in the power sector. Another alternative slowly and silently making its footing in the sector is wind energy, which has been the best performer this year.

In first nine months of this year, the wind installation has been 2.6 GW(1GW=1000MW), up 37 percent from last year. HSBC Securities, today relooked at their estimation of installation for the year and put the figure at 3GW, up 39 percent from last year. If their estimates are anything to go by, India will almost meet the target of installation of 14GW of renewable energy for the 11th five year plan. Compare this to 29GW of thermal power capacity till now added in comparison to a target of 50GW for this five year plan.

Most of the demand this year is probably coming from the government’s decision to abolish the accelerated depreciation benefit by March 2012. Another incentive of Rs 0.50 for every unit of power produced for wind firms will also end by then. HSBC says though the government will abolish the former incentive within the given timeframe, it might extend the latter. The point is since it is not clear whether the government will extend any of these benefits after March 2012, the companies are trying to maximise installations within this year.

The interest in wind power and other renewable energies is undoubtedly growing. Yesterday, Tata Power reached 300 MW for installed wind power capacity in India and almost 65 MW more is in the offing. As HSBC notes, on 26 September, ReNew Wind Power (unlisted), a venture started by former COO of Suzlon in 2011, said that it has secured equity investment of Rs 100o crore from Goldman Sachs. Greenko also announced an investment of $50 million by GE Energy Financial Services to support the development of 500MW of wind energy projects across India.

Wind energy is not a substitute to thermal power because India has a huge demand for power. But the government’s commitment to reduce carbon footprints, questions regarding availability of coal and water for thermal plants is creating hopes for increasing investment in wind energy.

But let us look at the depreciation benefit closely. A company shows its depreciation in the first year equal to its expenditure for creating an asset, in the balance sheet. So the company saves its taxes for multiple years. This especially is crucial for companies where wind power is not the only investment and saves taxes for the consolidated business group for several years. If the tax benefit is taken away these companies might lose interest in the wind power investment.

Though the wind power scene looks great for now, and HSBC estimates 2.4 GW for 2012 and 2.7 GW for 2015, plant load factor (capacity utilisation) is very low for these plants compared to a thermal plant. Take away the tax benefit, and you are only left with the hope of earning carbon credits. This might not bear too many positives for the wind energy segment in India.