1.9 Query: Windmill- Whether a Continuous Process Plant.
1. A public sector company is engaged in the manufacture of power generating equipments and auxiliaries. In the course of business, it also supplies windmills which are used in converting wind energy into electrical energy. The company has also set up wind farms for captive consumption of power.
2. Fixed assets are depreciated as per the company’s Accounting Policy No. 7, which reads, inter alia, as follows:
3. All the items of plant and machinery of the company are classified as (i) General Plant & Machinery and (ii) Automatic/Semi-automatic machines only, as per the accounting policy mentioned above. Accordingly, windmills have been classified as Automatic Machinery and depreciation at the rate of 20% as applicable for triple shift operation has been provided.
4. Auditors, during the course of audit of annual account of the company for the year ended 31.03.96, have expressed the view that windmills have to be classified as a Continuous Process Plant, i.e., a plant which is required and designed to operate 24 hours a day, as indicated in Schedule XIV to the Companies Act, 1956, as amended by notification no. GSR 756(E) dated December 16, 1993 and that depreciation of 5.28% (as per Schedule XIV) only, is to be provided, instead of the rate of 20% as provided by the company in accordance with Accounting Policy No.7 stated above.
5. With reference to the views of the auditors, the company has contented that depreciation for windmill @ 20% is appropriate in view of the following facts:
(i) Windmill used as plant and machinery for captive power production/consumption cannot be classified as ‘Continuous Process Plant’ as contemplated by Schedule XIV to the Companies Act 1956, inter alia, because of the following relevant factors:
(a) As per the Guidance Note on Some Important Issues Arising from the Amendments to Schedule XIV to the Companies Act, 1956, issued by the Institute of Chartered Accountants of India, the words “required and designed to operate 24 hours a day” are very significant and should be interpreted with reference to the inherent technical nature of the plant, i.e., the technical design of a continuous process plant is such that there is a requirement to run it continuously for 24 hours a day. If it is not so run, there are significant shut down and/or start up costs. If such a plant is shutdown, there may be significant spoilage of materials in process/some damages to the plant/significant energy loss.
(b) Windmill as designed cannot function continuously 24 hours a day due to various factors including external factors like non- availability of Grid Supply at 415v +/- 13%, grid frequency within 47 HZ to 51 HZ, non-availability of wind speed within 3 m/s to 25m/s. Windmill will stop working if the above parameters are not met with. The above factors are also not within the control of the management. Also, there is no limit for stopping or starting of machines during the day. The performance of the machine is not affected by these stops/ starts and there is no significant shutdown/startup costs. The expected annual power generation from a windmill is only 18% to 25% of the rated capacity. A technical opinion from the Engineering Chief of the company in this regard is given in the Annexure. From the above, it is clear that the inherent technical design of the windmill is such that it cannot be run continuously for 24 hours a day, particularly in view of the various external factors as explained above. Hence, because of the technical opinion, a windmill cannot be classified as a Continuous Process Plant.
(ii) The Companies Act, 1956, does not prohibit provision of depreciation at rates higher than those prescribed in Schedule XIV, which are only minimum rates. As per the company’s Accounting Policy 7 on depreciation, which has been consistently followed over the years, the rates of depreciation adopted for all the items of plant and machinery including windmill is higher than Schedule XIV rates which is well within the provisions of the Companies Act.
6. The querist has sought the opinion of the Expert Advisory Committee as to whether windmill if used by the company for generating power for its own use can be treated as a Continuous Process Plant within the meaning of Schedule XIV to the Companies Act, 1956, for the purposes of provision of depreciation.
Opinion May 19, 1997
1. The Committee notes paras 3 and 4 of the Guidance Note on ‘Some Important Issues Arising from Amendments to Schedule XIV to the Companies Act, 1956’, issued by the Institute of Chartered Accountants of India, which are reproduced below:
“3. The expression ‘Continuous Process Plant’ has been defined in the aforesaid notification as follows:
‘Continuous Process Plant’ means a plant which is required and designed to operate 24 hours a day.”
“4. The words “required and designed to operate 24 hours a day” are very significant and should be interpreted with reference to the inherent technical nature of the plant, i.e., the technical design of a continuous process plant is such that there is a requirement to run it continuously for 24 hours a day. If it is not so run, there are significant shut-down and/or start-up costs. If such a plant is shutdown, there may be significant spoilage of materials-in-process/some damage to the plant itself/significant energy loss. It is, however, possible that due to various reasons, e.g., lack of demand, maintenance etc., such a plant may be shut down for some time. The shutdown does not change the inherent technical nature of the plant. For instance, a blast furnace which is required and designed to operate 24 hours a day, may be shut down due o various reasons; it would still be considered as a continuous process plant and the relevant rate as per Schedule XIV would be applicable.”
2. The Committee notes from the above that in deciding whether a plant is a continuous process plant, one of the factors is that if such a plant is not run 24 hours a day, in view of its design and requirement, then there are significant shut-down and/or start-up costs and if such a plant is shut-down then there may be, inter alia, some damage to the plant itself/significant energy loss. The Committee notes from the facts of the query and the technical opinion of the expert that the windmills are designed in a manner that the machines stop/start automatically as per the prescribed limits; the stopping and starting does not influence the performance of the machines; and start/stop do not involve any significant costs. The Committee is, however, of the view that the question whether a windmill can be classified as a ‘Continuous Process Plant’ is largely a technical matter. Normally, in technical matters it is a practice to rely on the views of the relevant technical experts, who should take into account the various factors mentioned in the Guidance Note as given in the above paragraph in forming their opinion. The Committee is of the view that the auditors of the company while relying on the opinion of the technical experts, should perform the necessary procedures prescribed in the Statement on Standard Auditing Practices (SAP) 9 on ‘Using the Work of an Expert’, issued by the Institute of the Chartered Accountants of India.
3. The Committee is of the view that rates of depreciation higher than those specified in Schedule XIV to the companies Act, 1956, can be adopted only on the basis of a bona fide technological evaluation.
4. The Committee is, therefore, of the opinion that whether a windmill is a continuous process plant or not would depend upon the factors dealt with in paragraph 2 above.
Annexure
Technical Opinion On Classification of Wind Mills
(i) The Wind Electric Generators (WEG) are Grid connected type. The generators are rated for 415 V. Each WEG is connected through a set-up transformer to the overhead line running through the wind farm. They are brought to one location called the point of supply or the metering yard. From this point onwards it is connected to the Electricity Board Grid or to the nearest substation as the case may be.
(ii) For the operations of the WEG, power supply in the grid must be available. If the grid fails the WEGs cannot work as the excitation for the generator is provided by the grid only.
(iii) The generator rated for 415V is capable of operating with +/- 13% variation in the voltage. The asymmetry in voltage or current can be only +/- 12.5%.
(iv) The frequency of the grid is normally 50 HZ. The WEGs can operate in the limits of 47HZ to 51 HZ.
(v) The above limits on voltage, current, frequency etc., are set for the operation of the WEG and if the limits are exceeded, the WEGs will stop functioning. Whenever the grid becomes normal and is within the limits, the WEGs will start working.
(vi) Availability of sufficient velocity of wind is another essential requirement for the operation of the WEG. The WEGs can operate if the wind speed is above 3m/s only. Below this speed, it will stop. Similarly, the upper limit is 25m/s beyond which also the WEG will be stopped.
(vii) Since the wind blows as per the season, there are certain periods in a day and certain periods in a month or year the machines cannot work due to low wind and this period is called ‘LULL’ period.
(viii) The wind speeds available during the whole year vary as per seasons. These have been recorded over a period of years and published data is available for each windy site.
(ix) The capacity factor for a wind turbine for a year is in the order of 18% to 25% only, e.g., 250 KW rated WEG if it theoretically works for 24 hrs & 365 days it has to provide 250 X 24 X 365 = 21,90,000 KWH (units). At a particular location, the annual generation calculated on the basis of published wind data works out to 4,00,000 units only. The Actual Capacity factors works out to 18% only.
(x) The Wind Turbines are provided with microprocessor based controllers with necessary software to monitor such parameters. There are set points built in so that the machines stop/start automatically as per the limits prescribed. The number of such starts and stops are not limited, i.e., the stops and starts do not affect the performance of the machines. The starts/stops do not involve any significant costs.
(xi) Because of the external factors like Grid availability, wind velocity etc., explained above, the wind electric generators cannot run continuously for 24 hours a day.
(xii) In view of the foregoing, Wind Electric Generators (windmills) can not be classified as Continuous Process Plant. ____________________________
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