Towards Outcome-Based Incentives for Grid-Connected Windpower Energy Conclave 2006

1. 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

2. 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

3. 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)…

4. 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

5. 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.

6. 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

7. 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

8. 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

9. Yearly tax loss/gain to exchequer TCC payments Depreciation Tax shelter

10. 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

11. 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

12. Plausible implementation framework

13. Central Income Tax Department Filing For provisional TCC IT Regional Circle-I IT Regional Circle-V IT Regional Circle-IV IT Regional Circle-II IT Regional Circle-III Refund after reconciliation by the registry Generation Report Certified by Utility Provisional TCC Independent Registry Redeemable on half yearly basis Utility Grid (Transco) TCC Units Credited E. Sales Investor - I Equity Investment

14. Central Income Tax Department Filing For provisional TCC IT Regional Circle-I IT Regional Circle-V IT Regional Circle-IV IT Regional Circle-II IT Regional Circle-III Refund after reconciliation by the registry Generation Report Certified by Utility Provisional TCC Independent Registry Redeemable on half yearly basis Redeemable on half yearly basis Utility Grid (Transco) TCC Units Credited E. Sales Payment for TCC Realised Portion of TCC units sold Investor - I Investor - II Equity Investment

15. 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