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Source: Indian Wind Power Directory, 2005
The capital cost and Capacity Utilization Factor (CUF) are very much inter-related. The capital cost varies with the technology. A more efficient Turbine produces more energy but is also costlier. Further the CUF widely varies with the site.
In view of above mentioned two factors it is more rational to take into consideration cost per kWh produced instead of independently considering capital cost and CUF. Keeping in view the wind resource scenario of the country, the Cost-CUF relationship are given in [Table-2].
Table-2: Cost-CUF relationship
Usually there is lot of misunderstanding regarding financial benefit accruing out of accelerated depreciation under Income Tax Act and it should be understood clearly.
The benefit of tax saving through high rate of accelerated depreciation is real only if the taxable income is substantially high to absorb the accelerated rate of depreciation. In wind energy project, the revenue income is so low that the benefit of accelerated depreciation cannot be availed. Therefore to avail this benefit, the Investor must have very high taxable income from other business(es).
The net rate of tax saving can at the most be 25.245% of eligible investment made in wind power project after consideration of MAT. Typically if an investment of Rs 400 Lacs has been made in wind power project, the maximum tax saving of prevailing rate of 80% can be Rs 80.78 Lacs if Investor has taxable income of Rs.360 Lacs in some other business in that particular year. Further, this tax saving of Rs 82.6 Lacs can be availed only if the wind power project is commissioned before September otherwise in the first year tax saving shall be only Rs. 40.39 Lacs.
Factoring of tax saving benefit in determining the purchase rate for wind energy would mean:
a) Wind power project is not viable as Independent Power Project (IPP)
b) The wind power project solely dependent on balance Sheet of Promoter Company with very high tax liability
c) If the profit earned by the promoter in the other business drops, it shall affect the financial viability of wind power project.
d) If wind power project is largely dependent on profit from other business then it is no more a bankable proposition.
e) Initial saving of Income Tax would mean higher tax rate in subsequent years.
Benefit of high accelerated depreciation is available for may other project/activities e.g. investment in pollution control, energy conservation etc. A promoter would surely prefer
the tax benefit through such activities which are statutory requirements and / or mean direct financial saving in his existing business operation.
To avail the accelerated depreciation benefit through wind power project would probably be the least preferred option in view of variation in energy output from wind power project. As per statutory provisions, accelerated rate of depreciation –if claimed initially should be treated as deferred tax liability and should be clearly indicated in the Balance Sheet. In
subsequent year if there be any profit this deferred tax liability shall get adjusted. In reality it is therefore only a short term cash availability through tax saving and this has to be paid back in subsequent years whenever there is higher profit.
Finally it is to be clearly understood that accelerated rate of depreciation is basically an incentive which means that it is an added attraction for an otherwise financially viable and bankable investment. This incentive being an added attraction the rate may be gradually reduced by Govt. of India.
Detailed year-to-year cost of generation is calculated on the basis of assumptions/
parameters as mentioned above and provided in [Table-3]. The cost varies from Rs
4.49/kWh to Rs 3.38/kWh and the average of 20 years works out to be Rs 3.86/kWh
(rounded off Rs 3.90/kWh)
4.2 Selling/Purchase Rate
The selling rate if based on the actual cost of generation would be quite front-loaded and may have significant impact on the existing tariff. The selling rate based on the average cost of energy would not be acceptable since the debt cannot be serviced within a period of 10 years. To avoid initial negative impact and also to ensure bankability of the project in terms of debt servicing initially the tariff should be lower than the cost of generation [Table-4]
but higher than the average cost.
Table-3: Cost calculation
Project Cost : Rs 40 Mill Loan 70% : Rs 28 Mill
Equity 30% : Rs 12 Mill
(first 2 years)
: 1.50% of Capital cost
Interest Rate : 11.00%
From 3rd year : 2% + 5% escalation MAT Rate : 8.415% MAT/IT on Return
Generation : 1.75 Mill. KWh On Equity
5% derating after IT Rate : 33.660%
10 years Depreciation Rate : 5.28%
Table-4: Cost of generation
Average of 20 years + Rs 3.86/kWh
There can be number of options to determine the selling price which would avoid too much of font-loading and at the same time ensure that the project is profitable and bankable.
Initially a comparatively lower rate may be considered with escalation till loan is repaid and subsequently after repayment of loan the rate can be substantially lower. To ensure simplicity in terms of administration of the tariff two flat rates may be considered – one for first 10 years during loan repayment period and other for balance life of WEG after repayment of loan. A typical cash-flow has been prepared and furnished in Table-4 C which considers first 10 year rate to be 45 paise per unit higher than the average cost and 60 paise lower than the average cost for balance 10 years life of WEG.
The proposed norm would ensure:
c) Simplicity in administration d) Lower front loading
The purchase price as proposed above would hold good only if timely payment is received from the utility. As the interest constitutes the main cost, delay in receipt of payment would mean larger interest liability and the project would turn unviable. The ideal arrangement to guarantee timely payment would be opening of irrevocable revolving Letter of Credit by the Utility