New Delhi, June 8 (IANS) India is the third most favoured destination globally for investments in the renewable energy sector and will also be a major source of new entrants into the sector, behind the US and China, according to a survey released Wednesday by global consulting firm KPMG.

The top five targeted countries for renewable energy investment are the US, selected by 53 percent of respondents, China (38 percent), India (35 percent) Germany (34 percent) and the UK (33 percent)," according to KPMG's annual survey of global renewable energy mergers and acquisitions titled Green Power 2011.

"Some 78 percent of all survey respondents expect new players to come from China, followed by North America (59 percent), India (42 percent) and Western Europe (41 percent)," it added.

The Indian renewable energy market has become increasingly dynamic in recent years as a result of strong natural resources, greater accommodation to international investments and a variety of government incentives.

"In India, we see increasing trends towards sustained M&A activity in the renewable space, specifically wind, small hydro, and solar sub-segments going forward. With clear thrust on this space, and a supportive policy and regulatory environment, we see this activity picking up slowly but steadily," said Richard Rekhy, Head of Advisory, KPMG in India.

"The deal sizes, however, may be smaller (as compared to global benchmarks) to start with," he added.

The government is providing an array of incentives to firms in the renewable energy sector including setting of renewable energy generating standards for utilities, creating a structure for trading renewable energy certificates.

On the tax incentives front, the government has allowed project developers to take 80 percent accelerated depreciation on assets deployed in renewable energy generation and given a ten year tax holiday to the sector and concessional duties for imports.

In the Indian renewable energy sector, solar and wind energy will be the driving force for overseas investments and acquisitions. The Indian wind market has experienced rapid growth in recent months.

"Some $586 million of project financing flowed into Indian onshore wind farms in the first quarter of 2011, only 37 percent below the $934 million that was allocated to the sector throughout 2010," said the survey.

Although a majority of the respondents picked the US as a favoured market for solar energy, about a third said they would seek deals in other countries like India.

One of the reasons why the Indian solar sector is increasingly attractive to acquirers is the plethora of incentives that have been announced to support the sector's development.

"With India it is a combination of factors. There is a portfolio standard on a state by state basis. Developers have the ability to get power purchase agreements due to utility obligations. Then there are the Generation Based Incentive (GBI) and tax depreciation incentives," said Siobhan Smyth, head of renewables at HSBC.

"You are looking at 15-20 percent returns depending on the state you look at and the type of assets you are buying."