As India accelerates towards its 500 GW renewable energy target by 2030, professionals working with solar and wind power companies face increasingly complex accounting considerations.
This article examines five critical accounting areas specific to renewable energy projects: (1) Capitalization – determining what costs to capitalize and handling hybrid EPC-cum-O&M contracts; (2) Government Subsidies – accounting for Central Financial Assistance and Generation-Based Incentives under Ind AS 20; (3) PPA Revenue Recognition – managing fixed-price contracts, variable consideration, and liquidated damages under Ind AS 115; (4) Useful Life Estimates – applying component accounting and reconciling PPA terms with technical life; and (5) Inventory Valuation – treating spare parts and the unique challenge of Renewable Energy Certificate (REC) inventory.
Capitalization: What Qualifies as an Asset?
Under Ind AS 16, renewable plants involve multiple cost components—modules, turbines, civil works, evacuation lines, transformers, SCADA and monitoring systems, EPC fees, and interconnection charges. A common sector practice is seen in a typical 100 MW solar project in Rajasthan: ₹12 crore worth of energy generated during the testing phase is deducted from the project cost rather than recognised as revenue, since pre-COD output must reduce capital work in progress.
Wind farms require similar judgment. For example, meteorological masts and LiDAR equipment used to validate wind-resource data are capitalised because they are essential for reaching the intended operating condition. Audit reviews often focus on componentisation and treatment of pre-bid or feasibility study costs, which usually do not qualify for capitalisation.
Subsidy Accounting: Deferred Income Approach
Under Ind AS 20, most companies adopt the deferred income method. For a rooftop solar project with a ₹2.5 crore cost receiving 20% MNRE subsidy (₹50 lakhs), the subsidy is credited to deferred income and amortized over a 25-year useful life (₹2 lakhs annually), while depreciating the gross asset value.
Generation-Based Incentives (GBI) are recognized as income when receipt is reasonably assured. A 25 MW Karnataka wind project earning ₹0.50/unit GBI on 55 million units generates ₹2.75 crores annual income.
PPA Revenue Recognition: Long-Term Contract Dynamics
Under Ind AS 115, revenue from PPAs is recognised when electricity is supplied and the customer obtains control. However, typical PPA features can influence measurement.
As an example, a 25-year PPA at ₹2.80/kWh includes compensation for backdown not related to grid security. If 1 million units are curtailed and compensation is contractually enforceable, the developer recognises ₹28 lakh as revenue. But if compensation is subject to regulatory approval, recognition may be deferred until enforceability is established.
Hybrid developers selling partly under PPAs and partly in open-access markets must allocate revenue based on metered supply and contract terms—an area requiring strong meter-data controls.
Renewable Energy Certificates (RECs) add complexity. Projects may sell power at merchant rates (₹3.20/unit) while separately monetizing RECs at ₹1,000 each, requiring dual revenue streams and REC inventory management.
Useful Life Estimates: Component Approach
While solar assets are often assumed to have a 25-year life, degradation rates differ across technologies. A plant using high-efficiency monocrystalline modules may justify longer useful-life assumptions than older polycrystalline installations.
Wind assets require component-specific lives—for example, gearboxes may be depreciated over 10–15 years even though towers last 20–25 years. Ind AS 16 mandates such componentisation, and technical assessments are increasingly used to support audit review.
Inventory Valuation: RECs as Special Inventory
Spare parts inventory follows Ind AS 2—valued at the lower of cost and NRV. Technological improvements often necessitate write-downs; if spare solar modules purchased at ₹15,000 have an NRV of ₹13,000, a write-down to NRV is required.
RECs represent unique inventory—environmental attributes separated from electricity. At issuance, companies typically record RECs at fair value (say ₹1,200/REC) as "REC Inventory Accretion" (income). Upon sale, transfer cost to "Cost of REC Sold." Critical consideration: RECs expire after two years, requiring a complete write-off if unutilized.
CAs must assess impairment triggers like declining merchant tariffs or grid curtailment. Wind projects may require decommissioning provisions under Ind AS 37. Land leases trigger Ind AS 116 right-of-use asset recognition.
Renewable energy accounting demands sector-specific expertise covering long-term PPAs, evolving incentive structures, component depreciation, and specialised inventory treatment. As India targets 500 GW by 2030, professionals must navigate this complex interplay of standards while staying current on regulations and technological advances.
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