July 12 (Bloomberg) -- Ending a federal tax break for wind farms in India, the largest market for turbines after China and the U.S., would cause a $540 million drop in demand just as suppliers including General Electric Co. expand local capacity.
Wind park installations may fall 15 percent in the financial year starting April 2012 from the 2,600 megawatts projected for this year should the benefit be discontinued, said Ashish Sethia, lead analyst with Bloomberg New Energy Finance in New Delhi.
The government wants to axe an accounting rule next year that encouraged companies to erect most of India’s 14,157 megawatts in wind projects as a way of cutting taxes rather than generating power. It favors a less-generous subsidy that companies have been slow to adopt.
“We could see some disturbance in demand and some filtering out of smaller players,” said Mahesh Makhija, director of renewables at the local unit of CLP Holdings Ltd., Hong Kong’s biggest power supplier and India’s largest developer of wind farms. A 400-megawatt slump in demand could cut investment by 24 billion rupees ($540 million) based on current construction costs.
India’s biggest property developer DLF Ltd. and Hindustan Zinc Ltd., a mining unit of billionaire Anil Agarwal’s Vedanta Resources Plc, used the tax benefit called accelerated depreciation to build some of India’s largest wind farms, project design documents show. The accelerated depreciation accounting method allows companies to write off investments at a faster rate than normal, which reduces tax liabilities.
A ‘Financial Instrument’
“The wind farm was really more of a financial instrument than a power plant,” said Arvind Prasad, managing director of the power unit of Ushdev International Ltd., India’s third-largest non-state metal trader, which also develops wind parks.
“It’s not the best way to address the country’s power issues,” said Prasad, who heads the Indian Wind Power Association’s chapter in the state of Maharashtra.
The government says an alternative subsidy will do more to address a power deficit that tops 39 percent in some areas, hampering the second-fastest growing major economy after China. The Generation-Based Incentive rewards projects on how much clean energy they produce instead of the size of installations.
“Wind projects need to increase generation, not be put up just for tax benefits,” Renewable Energy Minister Farooq Abdullah said in February. The finance and renewable energy ministries plan to discontinue the benefit next April, when India is expected to introduce a new tax code, he said.
Lack of Clarity
The upcoming Direct Tax Code doesn’t explicitly propose to change current income tax laws that permit accelerated depreciation, the Finance Ministry’s Central Board of Direct Taxes said in response to questions. The government is still discussing the matter, Dilip Nigam, the renewable energy ministry’s head of wind power policy, said by telephone.
The lack of clarity is likely to prompt a temporary jump in demand amid a rush to build projects in the current financial year, said Sethia of New Energy Finance, a London-based researcher. Even if the government decides to continue the tax break, wind projects may drop by 250 megawatts next year, he said.
A shakeout may intensify turbine suppliers’ push for new business as wind installations peak in developed markets in the U.S. and Europe. Turbine suppliers in India jumped by a third to 20 last year as the country installed about $3 billion of wind capacity, the most after China and the U.S.
Surpassed Wind Targets
While global wind farm installations declined for the first time in almost two decades in 2010, India overshot the government’s target by 18 percent.
Anticipating that trend to continue, Siemens AG plans its first 500-megawatt wind turbine plant in India by 2013, Gamesa Corporacion Tecnologica SA aims to complete three facilities by 2012 and GE opened a turbine assembly plant in India this year.
The alternative subsidy favored by the government “will shift the market focus from investment incentives to production incentive, which is very relevant in the backdrop of energy shortfalls in the country today,” GE said.
“This will attract new developers” that will focus on making power more available more efficiently, it said in an e-mailed response to questions.
Suzlon Energy Ltd., India’s dominant supplier, said in an e-mail that it welcomed “this shift across investor groups” who are now looking with a long-term view that would mean larger-sized projects, lower transaction costs and more evenly distributed demand throughout the year for the industry.
Enercon India Ltd., India’s second-biggest turbine supplier, declined to comment on whether the end of the tax break could impact demand. Suzlon shares fell as much as 4.4 percent, the most in three weeks, and closed down 2.7 percent in Mumbai trading. Suzlon’s stock has dropped 10 percent this year.
Suzlon, Gamesa Competition
Suzlon faces increasing competition from new entrants. Its share of new wind installations in India dropped below 50 percent for the first time last year while Spain’s Gamesa topped Vestas Wind Systems A/S to emerge as the nation’s third-biggest wind supplier after just 18 months in the market.
The Generation-Based Incentive pays wind farms 500 rupees for every megawatt-hour fed to the grid.
Wind developers are pressing to double that to 1,000 rupees and remove an overall cap of 6.2 million rupees per megawatt to make the subsidy as lucrative as accelerated depreciation, said K. Kasthoorirangian, chairman of the Indian Wind Power Association.
Only 543 megawatts of wind projects have signed up for the Generation-Based Incentive since its introduction in December 2009, which is available for as much as 4,000 megawatts of projects, according to ministry data.
State electricity regulators are also gradually raising the tariffs they pay for wind-powered electricity while tradable renewable-energy certificates issued to clean-power utilities could make projects more profitable.
Helpful as an early catalyst, the tax break is now distorting the sector, CLP’s Makhija said. “It’s high time that it goes,” he said.
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