Case Study Details - Playbook of Solutions

Challenges to Investment

Launching the National Solar Mission in 2010, India set a target to deploy 100 GW of solar PV by 2022. However, the government faced several challenges to realizing its ambitious target. First, the lack of awareness and understanding among consumers about the benefits of solar energy led to slower adoption and limited demand. Additionally, the high upfront costs of solar PV systems posed a financial barrier for many individuals and businesses, highlighting the need for sustained investment incentives that would ensure solar capacity growth. To overcome these challenges, the government provided various initiatives, subsidies, and incentives to promote solar investment.

Approach

As early as the 1990s, the Indian government considered using accelerated depreciation as an incentive for renewable energy. Since 2003, to promote solar energy deployment by corporates and households, the Indian Ministry of Finance Department of Revenue offered a tax relief allowing corporates and investors to claim an 80% depreciation rebate on qualifying solar power plants. An additional depreciation of 20% of actual costs could be claimed in the first year of the new plant and solar machinery installment (e.g., solar power generation systems, solar pumps, solar water heaters) for the purpose of manufacturing. Hence, the asset owner could claim 100% depreciation in the first year.

Key Enabling Conditions

The accelerated depreciation scheme, along with other dedicated policies, increased the financial incentive for the commercial sector to invest in solar projects. By targeting incentives for solar PV installation, the policy established a supportive environment for the adoption of solar technology. This approach contributed to the objectives set by the National Solar mission to drive down reliance on traditional energy sources and promote the widespread adoption of solar power in the commercial sector.

Impact / Outcomes

India experienced a significant decrease in solar installation costs from 2010 to 2022, achieving a solar levelized cost of electricity (LCOE) that was lower than that of fossil fuel based generation sources in 2018. The most substantial reduction in solar LCOE occurred during the period 2010-2016, attributed to the decline in module costs and improved module efficiencies. The accelerated depreciation benefit did not have the intention to reduce solar module prices nor to foster solar module efficiencies. However, the measure could have indirectly accelerated efficiency gains by accelerating solar installments and increasing the scale and ecosystem for installation. Despite significant progress, overall solar energy capacity was slightly delayed versus the original 2022 target of 100 GW, with 70.1 GW installed as of June 2023. However, an additional 55.6 GW was already under construction, meaning India was well positioned to reach its deployment objectives thanks, in part, to the accelerated depreciation incentive. Some research also believe that the earlier discounting of accelerated, started in 2013, depreciation for wind turbines partially explains the sector's decline relative to solar.

Additional Sources

Accelerated Depreciation