Accelerated Depreciation Benefit for Wind Projects Withdrawn

Recently the Central Government withdrew Accelerated Depreciation (AD) benefit for wind projects. This was widely anticipated (we had covered it earlier here), but there were some uncertainties (see Economic Times article of a few days back which said the benefit will be extended).
 
AD played a key role in building the vast wind base that India has developed – India has more than 16,000 MW of wind mills, one of the largest in the world. However, it also led to inefficiencies and small scale projects.
 
Several factors have led to the removal of AD benefit:

• The wind sector already has scale. The market has been steadily moving towards an Independent Power Producer (IPP) model for some time. IPP based projects do not get AD benefit – instead they avail Generation Based Incentives (GBI). However, investments based on AD remained significant (according a Bloomberg article AD based investments accounted for 70% of total in 2011).
• The removal of AD was a part of the larger cleanup of the Direct Tax Code.
• Small scale investments led to inefficiencies and sub-optimal asset utilization. For example, many companies own a single or few wind turbines, often no more that a few hundred kilowatts in capacities. In contrast, IPP often aim to develop several hundred megawatts.

 
This change will change the industry structure significantly. At present, companies selling WTGs sold the whole package – land, approvals, WTG (ofcourse), erection and commissioning and day-to-day management of the wind farm. This catered primarily to the small investor who was in it for the AD benefit. IPPs tend to work differently, preferring to select different vendors for each task and often managing the asset very proactively.
 
Under the AD benefit, companies could claim 80% depreciation in the first year itself. With the benefit gone, they will be eligible for 15% (the rate in the Income Tax act for Plant and Machinery). They are also likely to be eligible for a further 20% available to power equipments. Thus, the total depreciation benefit will be 35%. In other words, a significant asset like the WTG can be depreciated in 3 years – not a small benefit at all in absolute terms.
 
Its important to note that AD benefit will continue for Solar projects. It will be interesting to watch the solar industry now, and at least some of the investment that would have traditionally gone into wind may now shift to Solar. A critical factor in that would be the emergence of a Suzlon-equivalent in the Solar space – a company that can package the whole thing for the small investor.
 
Interestingly, GBI also had a sunset date of March 31, 2012 (Word file). It is yet to be withdrawn or extended. However, the market expects the benefit to be extended mainly because it caters to IPPs.