Capital subsidy is a financial incentive available on the total project cost of solar farms. Depending on the country, type of solar plant and the project size, a certain percentage of the capital investment is written off. Therefore it simply reduces the upfront cost of installing a solar farm.
Apart from capital subsidies, the other financial incentives available for solar include tax incentives like accelerated depreciation and generation-based incentives such as feed-in-tariffs.
Why is it relevant?
Developing a solar farm is an expensive affair. The purchase and installation of solar panels requires a huge amount of capital. Businesses are often reluctant in investing these huge sums on a new form of renewable energy like solar. This financial bottleneck facilitated the introduction of capital subsidies by governments. Capital subsidies encourage businesses to invest in solar by providing an attractive business case and scale up opportunities.
How does it work?
Let us consider the following example to understand the concept of capital subsidies.
|Cost of a 10KW solar PV plant ($)||20000|
|Capital subsidy available (%)||30%|
|Net cost after subsidy ($)||14000|
As seen above, the capital subsidy is directly applied to the cost of the power plant.
- Reduces the overall project cost
- Lessens financial burden on the investor
- Promotes investment in solar
It is important to understand that capital subsidy is a function of the capacity of the plant. Since it is a one-time cost incentive, it does not encourage customers to generate and consume electricity efficiently. So once the plant has been installed, there are no further incentives to improve the quality of the electricity.
It can be concluded that in a scenario where the technology is established but has not reached commercial viability and therefore has a high perceived risk, capital subsidies have been found to be beneficial.
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