Frameworks & Incentives
Foreign Direct Investment (FDI) Policy
The growth of the clean energy sector in India has been impressive. India permits FDI up to 100% in the sector under the automatic route in Renewable Energy Generation and Distribution projects that are subject to the provisions of the Electricity Act of 2003. Under the Act, no prior approval of regulatory authorities is required. Giving a boost to infrastructure sectors, Reserve Bank of India (RBI) has relaxed the External Commercial Borrowings (ECB) norms. Earlier, ECB was allowed to be raised for investment in infrastructure sector which included power. Now, the RBI has expanded the definition of infrastructure to cover sector such as Energy which in turn covers sub-sectors such as Electricity generation/transmission/distribution, Oil pipelines, Oil/Gas/Liquefied Natural Gas (LNG) storage facilities, Gas Pipelines (includes city gas distribution network). With a view to strengthen the flow of resources to infrastructure sector, RBI has also now permitted raising ECB for project use in SPVs in the infrastructure sector under the automatic route/approval route, as the case may be.
Jawaharlal Nehru National Solar Mission (JNNSM)
The objective of JNNSM, which was launched in 2010, is to establish India as a global leader in solar energy and to deploy 20,000 MW of solar power capacity by 2022. JNNSM targets to achieve this in three phases: Phase 1 (upto early 2013), Phase 2 (2013-17) and Phase 3 (2017-22). In the Phase 2 – Batch 1, Solar Energy Corporation of India (SECI) auctioned total 750 MW of solar projects divided in two categories - open and domestic with 375 MW in each. This had a strong interest with bids from 58 developers for 2,170 MW as against 750 MW capacity on offer. Besides the national program, solar programs at the state level are also driving solar growth in the country.
The cumulative capacity addition under JNNSM has been subsequently revised upwards from 20,000 MW to 100,000 MW by 2022.
Wind Policies & Targets
A target of 60 GW of wind power by 2022 has also been set by the new government. Development of smaller and higher efficiency machines, turbines conducive to low-wind regime and offshore wind will be encouraged to meet the target.
Renewable Purchase Obligation (RPO)
The RPO framework, and the REC mechanism, was designed to encourage generation of electricity from eligible renewable sources. It is a regulation under the Electricity Act of 2003 which makes it mandatory for certain identified entities, government and private alike, to procure a certain percentage of power from renewable sources based on their consumption, annually. Although the framework has been created through central provisions, regulation and implementation responsibilities of the mechanism lie with the State Electricity Regulatory Commissions.
Apart from central policies, there are various state-level initiatives that target capacity additions of renewables through incentive mechanisms.
Many states in India already have solar and wind policies under implementation which will aid in achieving national targets.
Accelerated Depreciation under the domestic income-tax law, companies involved in renewable energy such as solar and wind was provided with accelerated depreciation at 80% (40% from April 2017). Further, power companies have been provided with an option to claim depreciation under straight line method.
Generation Based Incentives (GBI)
Under the scheme, a GBI will be provided to wind electricity producers at Rs. 0.50/unit of electricity fed into the grid for a period not less than 4 years and a maximum period of 10 years, with a cap of Rs. 100 lakhs per MW. The total disbursement in a year will not exceed one fourth of the maximum limit of the incentive i.e. Rs. 25 lakhs per MW during the first four years. GBI would be available for wind turbines commissioned on or after 01.04.2012 and for entire 12th plan period and shall be governed by the guidelines.
The generation based incentive for solar power varies from state to state in India. Basic guidelines for the GBI scheme, for solar, as released by the IREDA can be found here.
A company can claim only either accelerated depreciation or GBI (but not both).
Promotional Wheeling and Banking Measures (State-level)
Wheeling is the transportation of electric energy from within an electrical grid to an electrical load outside the grid boundaries. States across India, as a part of their policies, provide incentives for the merchant sale of renewable power (concessional wheeling and other costs). This is done mainly to neutralize the disparity between renewable and conventional power.
Other fiscal Incentives
Income Tax Holiday
Undertakings engaged in the generation and/or distribution of power have been offered a 10-year tax holiday (Section 80 IA of Income tax Act, 1961, applicable up till 31st March, 2017). However, the plants have to pay a minimum alternative tax at the rate of approximately 20 to 21% (based on the income), which can be offset in future years (10 years). Recently, however, the Finance Minister has released the Direct Taxes Code, 2013 (DTC 2013) for public discussion/ comments. The draft provisions of the Direct Taxes Code provide for alternative mechanisms of providing tax incentives to power companies. Almost all revenue and capital expenditures are proposed to be allowed as tax deductions upfront instead of amortization/depreciation on the capital expenditure. In addition, there would be no tax holiday.
Other tax incentives
Tax cost form a substantial part of Engineering Procurement and Construction (EPC) project costs, which can range from 10 percent to 20 percent of the total project costs. Considering the special focus on renewable energy, the Central Government has given various incentives on setting up the renewable energy power project which includes exemption from customs and excise duties on specific goods required for setting up the renewable energy projects.
However, these exemptions are subject to the fulfilment of prescribed conditions and compliances to be undertaken by the EPC contractor or the generators. For example, some state governments have provided incentives in the form of a VAT at a reduced rate (5 percent) whereas the other states levy a VAT of 15 percent for solar projects.
Taxation of EPC, O&M and other contracts present various challenges and opportunities. Given the vast variety of tax and fiscal incentives available, one needs to quantify the tax cost and explore the structuring options before investing in the sector.