Plans by India to force renewable energy developers to share up to half their carbon offset revenues could prove complex to administer and deter investment, carbon market participants say.
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India's Central Electricity Regulatory Commission issued draft rules in May to harmonise the power price premium which state-owned distribution firms must pay for renewable energy.
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The prospective laws would soften the extra cost of the premium by forcing renewable energy projects to share any revenue they earn from selling carbon offsets under a separate Kyoto Protocol scheme.
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Under Kyoto's Clean Development Mechanism (CDM) companies in the developed world can invest in clean energy projects in emerging nations like China and India and get carbon offsets in return to help them meet domestic emissions limits.
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"The thinking is that since the state-based electricity distribution firms have to pay a higher tariff to renewable energy projects, then they should at least get a share of the CDM revenues," said Vinod Kala, managing director of Emergent Ventures India, a leading clean-energy project developer and advisory firm.
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State distribution firms are under pressure to buy more green energy from wind farms and other projects that can earn offsets under the CDM.
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The draft rules say carbon offset sales "shall be shared between the generating company and concerned off-taker." Parliament must still approve the plan.
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The project developer would keep 100 percent of the carbon offsets sales in the first year after the date of commercial operation of the generating plant, falling to half over time.
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"The biggest impact of this would be that when we're trying to forward-sell the carbon credits and organising project finance, including equity, that may become a problem," said Kala. "This would mean not all of the total carbon credits from the project are available for sale."
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"DISINCENTIVE"
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Kala said it would be impossible to negotiate with each state and that one option was for state governments to agree to a lower premium without sharing offset revenues.
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The proposal as it stood would be "a disincentive, not an incentive, to invest in renewable energy", Pamposh Bhat, chief executive of consultancy EFCON Carbon Market Services in New Delhi, said.
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India is the world's second source of CERs after China. So far, 448 Indian projects, mostly wind farms and biomass plants, have been formally registered. More than 1,200 Indian projects have been registered or are in planning.
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CDM revenues are not directly taxed in India. The proceeds are grouped under "other income" and taxed at about 33 percent, but most renewable energy projects in India can be granted a 10-year tax holiday, meaning they are taxed at the minimal alternative tax rate, which is around 15 percent, said Kala.
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If India's revenue sharing rules become too tough, renewable energy developers could bypass state distribution firms and sell directly to private power consumers, such as a factory owner.
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"If a lot of stringent conditions are imposed, then people will not go to the regular off-takers," said Chaitanya Kalia of Ernst & Young in Mumbai, India's top CDM project developer.
