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It is no secret that the explosive growth in the wind energy sector in India is chiefly attributed to the accelerated depreciation incentive that has been adopted. AD is a mechanism through which project developers can show that their asset has depreciated at a significantly faster rate over its life thereby reduce their tax liabilities. In a move that could come as a huge blow to the sector, Dilip Nigam, Director of Wind Policy at MNRE announced yesterday that this financial instrument is due to be scrapped in the FY 2013. He also added that the government will end the incentive either on 31 March or with the introduction of a new taxation framework whichever comes first. Interestingly, US is scheduled to scrap its production tax credit allowances by the end of 2012. This double blow from two of the top nations in terms of wind energy production could see installations spike in 2012 and then dampen from 2013 onwards.

The announcement though was inevitable. A large number of wind farms in the country were setup merely as financial instruments with profits as the only goals leading to a situation where a large majority of the wind farms in the country lay idle and in a state of disrepair. The government had taken note of this previously and indicated that the AD mechanism would be removed in the future. In view of this, MNRE had previously introduced what is known as the Generation Based Incentive (GBI) which rewards developers for each unit of electricity that they produce (Rs. 0.50 per kWh). Though the GBI is currently available, developers still opt for AD over GBI (only of the two can be availed) as it is observed that AD is a rather significant financial instrument.

It is expected that this announcement by the government would lead to a spike in wind farm installations over the current fiscal year in hopes of securing AD for the wind energy projects, leading to annual capacity additions significantly larger than the 2827 MW seen over the last year. However, over the period immediately after the adoption of the new regulations, BNEF (Bloomberg New Energy Finance) predictions indicate that the new installations year on year would reduce by about 15% implying a reduction in investment of about $540 million.