towards outcome-based incentives for grid-connected windpower energy conclave 2006
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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
Page 14 of 15
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
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