Generation Based incentives for Wind Power Projects Beyond 2012

Posted on February 21, 2011 by

Generation Based Incentive (GBI) of 50 paise per unit was launched in India in December 2009.  The purpose of this subsidy/incentive was to shift the mechanism of payment from a installation-based to generation-based methods of rewarding wind farms. Even before the GBI getting introduced, the tax benefits in the form of accelerated depreciation were made available to the wind farm developer. But this mechanism failed to encourage the wind projects to produce power once built. Thus the GBI is a way to encourage development of more efficient wind farms.

Another reason for GBI coming into picture was the fact that the development of renewable energy, though has been significant, the achievement can not be compared to the potential that exists. There is a potential of more than 45,000 MW wind capacity against which only 11,000 MW has been commissioned. Also, it was felt that the fiscal incentives in place were not sufficient to meet the RPO targets under the NAPCC( National Action Plan on Climate Change). The GBI was introduced to act as a booster to the capacity addition. [As against a target of 10,500 MW capacity addition in 11th plan, less than 4000 MW had been commissioned by Dec 2009].

As mentioned earlier, the purpose and thought process behind GBI was as under

  1. GBIs will broaden the investor base by facilitating the entry of independent power producers (IPPs), thus attracting more FDI in wind power sector
  2. It will provide level playing field between various classes of investors.
  3. It will incentivize higher efficiencies and provide a framework for transitioning from investment based incentive to output based incentive.

The GBI was introduced in parallel to the then existing fiscal incentive including that of accelerated depreciation in a mutually exclusive manner. As per the initial announcement, the GBI was applicable for maximum capacity limit of 4000MW during reminder of 11th plan. The provision of GBI in parallel to accelerared depreciation was planned to be continued till 11th plan period or introduction of direct tax code, whichever earlier.

MNRE now plans to continue offering the GBI, government officials said. A recent announcement by Renewable Energy Minister Farooq Abdullah states that the “Generation-based incentive will continue beyond March 2012″.  This announcement was made by the Minister in a conference in New Delhi last week.

As per the annoucements made earlier, wind farms built by March 31, 2012, are eligible for the subsidy of 500 rupees per megawatt-hour of electricity they feed into the grid. The finance and renewable energy ministries both indicate that the accelerated depreciation benefit may get discontinued next year. This is when India is expected to introduce a new tax code. He said “They’re not going to continue depreciation,Generation-based incentive is better because you’re paid for the power you generate. Depreciation does not really do that.”

The government is expected to continue the GBI beyond 2012. This is yet to be formally approved from the Cabinet. There is a hint that the subsidy may not be raised. If the depreciation benefit are to be removed, project developers will want an increase in the GBI, saying that otherwise the proposition is not as lucrative as depreciation benefits.

Wind projects are also eligible for RECs which are worth at least 1,500 rupees per MWh. The Ministry continues to hold that this (REC trading) should provide more than enough incentive. The budget annoucements are expected to clarify on the future of wind energy propelled (or otherwise) by incentives.

For more details and technical help, contact us at : Agneya Carbon Ventures Pvt. ltd. Pune (India)

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