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Why pure-play power project developers in India are running away from solar energy projects

According to reports, private power project developers in the country appear to be losing interest in solar energy projects, as they are finding it difficult to compete with companies that have taken a plunge into the sector only to avail tax incentives. Four-fifths of the bids placed in recent tenders issued by government agencies to set up solar power projects have been from companies that are investing for tax-saving purposes, while many developers have stayed away.

“We did not participate in any of the recent tenders,” says Shiv Nimbargi, Managing Director and CEO at Green Infra Ltd, a private power producer owned by the private equity arm of infrastructure financier IDFC. Green Infra has an installed solar capacity of 35 megawatt in Gujarat and Rajasthan. “There have been crazy and aggressive bids by non-serious companies,” Nimbargi adds.

A company investing its profits in solar projects can claim depreciation of 80 per cent of the capital costs in the first year. There have been many companies from non-power sectors that have been diverting their profits to the renewable energy sector in order to enjoy depreciation benefits. Power project developers, on the other hand, enjoy a 10-year tax holiday which they find inadequate to compete with investors in solar projects.

Investors have been active in the solar energy sector for the past two years thanks to government programmes offering a slew of sops including generation-based incentives. With capital costs for projects falling in the past couple of years due to a slump in demand for solar modules in Europe, a few states came up with ambitious solar programmes and invited bids last year. In these tenders, companies investing for tax-breaks outsmarted pure-play developers with aggressive bids.

For instance, in a tender issued by the Tamil Nadu government in January, renewable energy firm Welspun quoted Rs.8.60 per unit and Lanco Infratech Rs.8.20 per unit. However, the lowest bid turned out to be from Mohan Breweries, which offered to supply power at Rs.5.97 per unit. In a Rajasthan tender in the same month, Azure Power quoted Rs.8.20 per unit while Essel Mining came up trumps with a bid tariff of Rs.6.45 per unit. According to Crisil Research’s calculation, accelerated depreciation enables non-power sector firms to bid Rs.2 per unit lower than power project developers.

“Solar power projects under different state policies have been competitively bid and awarded at a tariff of about Rs. 6.5 per unit. This levelised tariff is significantly lower than Rs.9.4 per unit, a level we believe is required to achieve reasonable equity internal rate of return of, say, 16 per cent,” says an October note from Crisil Research. The note says the capital costs will not fall any more as solar module prices may stabilise in 2013.

“There is no distinction between accelerated depreciation (AD) investors and non-AD investors in solar tenders,” says Nimbargi of Green Infra. “The government can level the playing field by earmarking a certain amount of capacity for AD investors so that power project developers are not hurt.”

Vineeth Vijayaraghavan, Editor of online industry newsletter Panchabuta, says government policies should not alienate power generating firms as they are the ones which are committed to long-term growth of the sector. The government must tweak its tender rules to remove disadvantages that power companies face, he adds.

Industry experts say non-power investors will remain in the fray only as long as tax benefits are available. They point out that ever since Finance Minister P. Chidambaram ended the accelerated depreciation benefits to the wind energy sector in April 2012, the wind project installations have fallen more than half.

The Crisil Research note says that power companies, too, will have to bid from their profitable parent company or other subsidiaries and avail accelerated depreciation. Power companies without such an option will be at a significant disadvantage, thus limiting their growth potential, it adds.

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