Editorials, Environment, GS-3, Indian Economy, Science & Tech, Uncategorized

Budget’s Impact on Renewable Energy

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This Budget has laid down the roadmap for taking India to the next level of growth. We not only see a clear direction in which the economy is going to be steered but also the key milestones that we need to cross on the way. Finance Minister Shri Arun Jaitley has identified 9 pillars for having a transforming impact on the economy and life of people which were – Agriculture, Rural Sector, Social Sector (healthcare), Education, Infrastructure, Financial Sector, Governance and Ease of Business, Fiscal Discipline, Tax Reform. The Budget was presented in the backdrop of an improving rural sector and infrastructure expansion; which were two of the prominent features of the Finance Minister’s Budget speech.

What’s in it for the Renewable Energy Sector?

The government has allocated an outlay of above Rs.10,000 crore for 2016-17 for the renewable energy sector. This outlay includes Rs.5,000 crore from the National Clean Energy Fund (NCEF) with the balance coming from Internal & Extra Budgetary Resource (IEBR).

  • A significant part of viability gap funding for solar power projects is intended to be financed out of such cash outlay.
  • The finance minister, in his speech, also mentioned diversification of sources of power for long-term stability and outlined his endeavour to augment investment in nuclear power generation in the long term. Changes have been proposed in the public-private partnership (PPP) mode to revive development of infrastructure.
  • On the taxation front, the clean environment cess on coal, lignite and peat has been doubled from Rs.200 per tonne to Rs.400 per tonne; encouraging the use of renewable sources of energy.
  • Other proposals include extension of benefit of additional depreciation to businesses engaged in the transmission of power and exemption of capital gains arising on account of the appreciation of the rupee against a foreign currency at the time of redemption of rupee-denominated bonds.
  • The final road map for phasing out of tax incentives has also been rolled out. No profit-linked incentives have been extended to the power sector, or renewable energy in particular.

What has been done so far for the Renewable Energy Sector?

At the UN Climate Change Conference held in Paris in 2015, India put forth its strong commitment towards clean energy and announced its climate change plan, i.e. Intended Nationally Determined Contribution (INDC) setting targets for domestic efforts against climate change.

  • Among other initiatives, key targets are 40% power installed capacity from non-fossil-fuel-based energy resources and reducing emissions by 33-35% of its GDP by 2030.
  • India’s INDC also sets a target of achieving 175 gigawatts (GW) of installed capacity of renewable energy—including 100GW of solar power and 60GW of wind power.
  • India also launched the International Solar Alliance (ISA), a coalition of solar resource-rich countries, to address energy needs and common concerns.
  • The Renewable Energy Global Investment Promotion Meet and Expo (RE-INVEST) organized in February 2015, received satisfactory response from global investors. India also signed an MoU with Germany to promote solar energy.
  • The government has also launched programmes, including the Green Energy Corridors, a nationwide transmission grid dedicated to power generated from renewable energy projects; setting up of 25 solar parks with a capacity of 50MW each; ultra-mega solar power projects scheme; and the viability gap funding scheme for setting up solar power projects by offering project developers capital cost support.

What’s holding India back from achieving the stated renewable energy targets?

A challenge remains in the capital funding required for such capacity expansion. With the finance minister deciding to stick to fiscal consolidation and reining in the deficit, India’s ability to further access debt resources is limited, due to an existing high debt ratio.

What else needs to be done to improve the energy sector (Renewable in particular)?

  1. Solve policy lag:

A lot of financing lined up for the deployment of wind and solar projects is stuck. This is due to lack of clarity at the individual state level on tariffs and policies preventing the execution of power purchase agreements (PPAs) in a time bound manner. This problem should be addressed soon.

  • Also, the renewable transition continues to be mired with litigation, discom financials and policy lag. Stressed projects are today a cause of systemic concern and there is a need to ensure that tribunal rulings are more or less binding and that going to courts is more a matter of exception than de rigueur.
  1. Capital allocation and incentives:

The extension of the 10-year tax holiday, inclusion of electricity under GST and clarity on domestic content requirement for renewables would help reduce the end cost of electricity to the consumer.

  • UDAY (Ujwal Discom Assurance Yojana) has the potential to transform the discom landscape but needs clear visibility on capital allocations and time bound focus on separation of content and carriage if the one off projected gains are to be sustained over a longer time frame.
  • Incentives and rebates should be given to the consumers to make solar an attractive and viable option. The solar rooftop industry will certainly need better non-recourse financing options by increasing power sector exposure limits of domestic banks.
  1. Need government reforms:

The government needs to design reforms in terms of pushing the initiative of biomass plants and more in 2016. Countries like Japan and India have identified a huge opportunity to further the energy cooperation across the energy value chain. The government needs to design reforms in terms of pushing the initiative.

  1. Push for solar power generation:

Also, the need of the hour is to create an effective ecosystem to enhance solar power generation capacity across India. While talking about rooftop solar in specific, extension of tax holidays, waiver of electricity duty and banking charge for solar rooftops, activating Renewable Energy Certificates (REC) benefits for rooftop projects and captive projects will certainly motivate more rooftop installations to come-up in cities and towns.

  1. Other reforms:

Enforcement of net metering guidelines across states and renewable purchase obligations, strengthening of grid infrastructure to accommodate intermittent solar power, and promoting storage solutions by way of incentives, subsidies etc.

Conclusion:

The recent budget appears to be focusing more on administrative issues within the limits of fiscal prudence, like providing a legal framework for dispute resolution in PPP projects and measures to curb litigation in order to promote a non-adversarial tax regime. However, in order to provide a fillip to the sector, especially in view of the ambitious targets for capacity enhancement set by the government, it should consider implementing the above mentioned reforms.

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