The 12th Plan (v/s 11th Plan) renewable capacity addition to slowdown
CARE Research expects the 12th Plan (2012-17) the renewable especially wind capacity addition to slowdown due to removal of tax benefit. However, wind capacity addition is likely to maintain its dominant share in the capacity addition. At present, the policy environment needs a boost to achieve as removal of Accelerated Depreciation (AD) scheme from April, 2012 is likely to act as dampener resulting into sharp slowdown in wind capacity addition in the 12th Plan. Moreover, solar capacity addition is purely RPO driven; hence institutional framework needs to be strengthened for higher and sustainable capacity addition run-rate. Finally, State level policy issues related to Small Hydro Power (SHP), Biomass, Co-generation, Waste-to-Energy (WtE) sectors need to be sorted out to improve 12th Plan capacity addition.
With AD benefit removed, capacity addition to fall; IRR to shrink by 300-400bps
AD benefit was removed from April 1, 2012, which was a major driver for wind installations in the 11th Plan. The country added 3.2GW of wind capacity in FY12 (last year of the 11th Plan), which is expected to fall sharply due to AD benefit removal. Consequently, CARE Research expects capacity addition to fall to sharply from FY13 onwards. The Central Board of Direct Taxes (CBDT) issued a notification on 30th March 2012, that the depreciation on wind mills will be restricted to 15% from the current financial year (with and additional 20% depreciation on equipments). This marks a significant change to the incentive structure as AD benefit typically increases project IRR by around 300-400bps, with other factors held constant. Thus, the industry would move strongly towards IPPs driven from a typical retail investor driven structure a few years ago.
Indian capacity glut to pressurise WTG margins; ancillary market to deepen
Indian wind market is primarily small captive player driven which used to invest in wind turbines primarily to avail tax-shield. With AD benefit removal, the wind equipment market is expected to shift towards large IPPs. Consequently, CARE Research believes that this coupled with capacity glut can continue to put pressure on wind equipment industry margins over the near to medium term. However, ancillary component manufacturing in India can partially help negating the margin pressure as lead time faced for procuring small components which are currently imported from Europe and China may contract significantly.
SECTION- I CARE Research’s OUTLOOK
Outlook on Indian Renewable Energy Sources
12th Plan (2012-17) to add 19.7GW; funding requirement of Rs1.35tn
AD scheme removal to hurt wind capacity momentum; IRRs to fall by 300-400 bps
Indian capacity glut to pressurize WTG margins; ancillary market to deepen
Solar Grid Parity by 2017, few states to reach it even before the 12th Plan end
JNNSM Batch-II bidding aggressive; State preferential bids are still lucrative
Capital costs underestimation; higher raw material prices to hurt biomass sector
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