The government may struggle to get lower tariff for new renewable power projects, to be auctioned after March, with the incentives to the sector in the form of higher accelerated depreciation and 10-year tax holiday for such projects being withdrawn from FY18.
Industry sources said the changes would increase the cost for developers of solar projects, particularly rooftop ones, and push tariff up by 10 paise per unit. This could make low quote of Rs 2.97 per unit in auction of 750 mw of solar units in MP difficult for future projects.
Wind power projects would be even badly impacted by the phasing out of incentives as a large portion of these plants are set up on the back of accelerated depreciation benefits.
Moreover, with the possibility of goods and services tax (GST) being implemented from next financial year becoming a reality, solar tariffs could see a further jump of 10 per cent as several other tax exemptions for the renewable sector would also be subsumed in the new indirect tax structure.
It would increase capital cost of a solar project by Rs 45 lakh per mw, setting back the sector in terms of cost competitiveness by about 18 months, according to a Council on Energy, Environment and Water (CEEW) study.
“The withdrawal of tax incentives will add cost pressure on projects, but the constant fall in equipment prices and low interest rates could offset some of this pressure. I expect that solar tariff in general could see a rise of 5-10 paise per unit.
“But the withdrawal of tax sops could be negative for attractive foreign investment as it would be seen as inconsistent policy environment in the country,” said Vinay Goyal of Ganges Internationale.
The budget proposals for 2016-17 had reduced accelerated depreciation benefit available to renewable sector (for both old or new assets) from 80 per cent to 40 per cent with effect from April 1.
The benefit allows investors to save tax by claiming higher depreciation at the start of a project cycle itself. Provisions towards depreciation are tax-free.
In addition, last year the government also announced that profit-linked incentive available under section 80IA for power projects would be withdrawn after its extended period ends on March 31 and this would be replaced by an investment-linked incentive scheme. There is no change in the proposal in FY18 budget. “We hoped the government could continue the accelerated depreciation limit of 80 per cent till 2022, aligned to its target of 175 gw renewable by 2022 and to boost manufacturing under the ‘make in India’ vision,” said a large renewable energy player.
According to Bridge to India, which tracks developments in the renewable energy space, there could be some cost pressure on projects, which are not being set up in solar parks, where land acquisition would be an issue and are being invited by organisations other than NTPC with higher risk perception.
The pressure on renewable projects is not only coming from withdrawal of incentives as earlier announced by the government but also from GST that is expected to become a reality later this year.
According to CEEW, India’s emerging solar sector could see tariffs rise by nearly 10 per cent if current tax exemptions were curtailed in the GST rollout.
In addition, the multiple GST rates and their uncertain applicability to different equipment and services for solar projects have also become a cause of concern for solar developers with potential to raise cost of renewable projects, the study has said.
The key contributors to hike in solar tariffs, as a result of GST, would include rise in operations and maintenance cost, panel prices and financing costs. The increase in solar tariffs would also vary across states; higher for states like Rajasthan where VAT and entry tax exemptions are provided for solar equipment, as opposed to Andhra Pradesh and Gujarat where VAT and entry tax exemptions are not provided, the study points out.
The 2017-18 budget has incentivised domestic solar manufacturers with the reduction of basic customs duty to zero for tempered glass used in the manufacture of solar cells, panels and modules and the reduction of countervailing duty from 12.5 per cent to 6 per cent for parts used in the manufacture of tempered glass, which is used in solar PV cells and modules. But the industry feels too little has been done for the sector.
If renewable tariff starts increasing it would set back plans to add 175 gw renewable power capacities by 2022, including 100 gw of solar and 60 gw of wind. The country is expected to add 9 gw in 2017, up from just 2 gw in 2015.