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Mr FM, it's time now to allow the wind power to stand without tax incentives!

MAY 05, 2005

By Naresh Minocha, Consulting Editor

''PROMOTIONAL and fiscal incentives are being provided to create the necessary market 'pull' or short-term demand that will lead to expansion of the industry and subsequent reduction in costs."

So said the Ministry of Non-conventional Energy Sources (MNES) about the wind power in 1996 in a background note prepared for Consultative Committee of Parliament.

The wind power has come a long way since then. From capacity of less than 500 megawatt in 1996, India today has 2900 MW capacity. This is fifth largest capacity base in the world after Germany, Spain, the United States and Denmark.

This impressive performance and certain other achievements in the wind sector prompts one to ask: Should there not be sunset clause for fiscal package enjoyed by the wind power? Should the Government not transfer these very concessions to other sources of renewable or alternate sources of energy that have not reached the take-off stage or are at the infancy?

To answer these questions, one need to delve deeper into fiscal-led market pull for grid-interactive electricity generated by wind farms.
The tax incentives that existed at that time included 100% accelerated depreciation in first year, 5-year income tax holiday, customs duty exemption on nine components used in production of wind turbines. The States also offered generous dole-outs such as sales tax incentives and assured purchase of power at specified tariff.

The tax incentives were in fact introduced several years prior to 1996 for the wind power. They have been modified over the years and are no less attractive even today. The Central Government's fiscal package includes 80% accelerated depreciation, 10-year income tax holiday, and excise and customs duty concessions on components.

Till 22 February 2005, a textile mill could avail of soft loans for wind turbine generators under the Textiles Ministry-administered Technology Upgradation Fund.

The States also have been very supportive to wind power projects initiated by the corporate sector. Tamilnadu, for instance, buys wind-generated electricity @ Rs 2.70/unit.

According to the Tamil Nadu Energy Department's policy note for 2005-06, "the investors of the wind mills can avail of wheeling facilities by which the power generated from windmills can be used in other places in the State on payment of 5% as wheeling charges to TNEB (Tamilnadu Electricity Board). Further, they can avail of banking facilities for their power generated during a few months for using it throughout the financial year on payment of additional charge of 5% to TNEB."

Other State Governments have also in place policies and procedures that are broadly pattern on the guidelines for wind power issued by MNES. Moreover, MNES and other government bodies have been funding activities such as wind monitoring and identification of suitable sites for locating wind farms. This reduces the cost of expenditure on project planning that the companies incur before taking final investment decision.

Different components of wind mills including their dimensions have undergone impressive improvements over the last 10-15 years. The capacity rating of wind mills has increased from 50 Kilowatt (KW) in 1980 to 5000 KW in 5000 KW in 2004. The diameter of rotor has increased from 15 metres to 124 metres. The height of tower has increased from 20 metres to 100 metres, according to data available with wind energy industry.

The capital cost for wind-based power plant at Rs 4.5 crore/MW thus today compares favourably with that of coal-fired power plant at Rs. 3.5-4.5 crore/MW. The former, however, enjoys the advantage of zero fuel cost over the latter.

This shows that wind power projects can stand on their own or at best would require a modest set of incentives that could be phased out over five years or so.

Another factor that shows that the wind sector has gained enough momentum is that the sector is primarily driven by private investments. Most of the wind farms have been set up private companies across the entire spectrum of industries ranging from cement, chemicals, investment and trading to oil drilling services. The State electricity Boards (SEBs) have few number of wind mills.

Some cash-rich companies such as Oil and Natural Gas Corporation and Hindustan Petroleum Corporation have been toying with idea of setting up very large wind farms with capacity of 50MW-100 MW.

All these favourable pointers suggest that the wind energy sector can grow rapidly on its own. The time is thus ripe for the Central Government to phase out tax incentives over five years or reduce to the modest levels.

If there is sunset clause for every other tax incentive and for every sector, why should there not be similar provision for the wind sector?

Taking a long-term perspective, there has to be level-playing fiscal or subsidy field for all sections with the renewable and alternative energy sources, if we have to have an integrated renewable energy policy.


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