In line with the developments in the renewable energy sector in the past year, there are high expectations from the industry for the upcoming year. Industry stakeholders discuss their wish list for the Union Budget 2017, as well as the concerns they hope will be addressed…
What are your expectations from the Union Budget 2017 for the renewable energy sector?
- The government should offer an incentive package for electric vehicles (EVs). Given that India’s oil import bill is over $65 billion, this is a strategic area from an energy security standpoint. World over, evidence shows that direct incentives for consumers for EV purchase and the availability of charging infrastructure are the two main factors driving adoption.Incentives to utilities to invest in battery storage systems and to certain consumers would help give an early boost to the renewable energy segment. Just as the Jawaharlal Nehru National Solar Mission helped give an initial boost to solar power through the bundling scheme and viability gap funding, schemes should be devised for storage systems. (The Ministry of New and Renewable Energy is looking at some small-scale projects.)
- Segments such as solar rooftop and off-grid/distributed generation, which are still at a relatively nascent stage, require a special focus in terms of fiscal incentives to encourage investments in this space. To enable a scale-up in these segments, there is a need to bring in innovative financing such as leasing through third-party financiers. This can be encouraged if there is a continuation of the tax holiday, higher accelerated depreciation benefit and service tax/indirect tax exemptions for these segments.
- The government should facilitate the creation of a guarantee fund or an interest subvention scheme for supporting financing in off-grid and mini-grid systems where commercial financing is largely not available. Decentralised re-newable energy/off-grid systems need to scale up to complement grid-based supply for providing reliable, 24×7 power to remote areas. Given the high regulatory and commercial risks perceived with this segment, significant financing bottlenecks are faced, which need to be addressed.
Overall, I expect to see the existing policy direction towards a greener energy mix firmly reiterated. The budgetary allocation for key central clean technology institutions that have done commendable work could be significantly enhanced. The government may consider extending some of the incentives to maintain the capacity addition (to meet the 4.75 per cent renewable purchase obligation and other policy targets) and compensate for the current uncertainty arising from goods and services tax (GST) implementation. The increase in clean energy cess may be moderated as the government introduces alternative policy initiatives to improve demand-side efficiency in energy use.
The renewable energy sector has been very high on the government’s agenda and there have been many positive policies, and tax and other financial incentives for the sector. Business volumes have grown substantially as a result, costs have come down and renewable power has achieved grid parity. Against this background, it is unlikely that there will be any new funding or tax initiative focused on renewables in this budget. In fact, we believe that some of the incentives currently available, particularly the 10-year corporate tax holiday and generation-based incentives for wind may be phased out. The sector will also face an adverse impact from any hike in service taxes. On the other hand, any move to bring down corporate taxes will be beneficial for the sector.
We expect the government to announce special incentives for the renewable energy sector to offset the possible increase in costs owing to the GST and achieve the ambitious 175 GW by 2022 target.
Special concessions should also be given to domestic solar panel manufacturers to reduce the dependence on imports. India is heavily dependent on imports for solar panels owing to the limited manufacturing capacities and high cost of financing. The government should encourage indigenous manufacturing of solar panels by effecting a steep hike in import duty and introducing low-cost finance options for domestic manufacturers. We also expect the government to allocate more funds for upgrading grid infrastructure for renewable energy projects and announce incentives for attracting private investments in the transmission and distribution domain.
What are the lingering concerns in the sector that can be addressed through the budget?
Santosh Kamath, Nandita Tripathi, Priyajit Ghosh
The infrastructure industry is normally required to undertake a project through a separate subsidiary so as to comply with the bid conditions/regulatory laws. This leads to the creation of a number of subsidiaries within a group and the group is not able to avail of the benefits that are otherwise available to companies in other sectors where such separate companies are not mandated. In order to restore parity, the government may consider the following special measures:
- Special tax compliance schemes related to the utilisation of losses for the group as a whole;
- Exemption from the application of Section 14A of the act on investments in subsidiaries due to bid conditions/regulatory laws.
- From an indirect tax perspective, service tax exemption may be granted for this sector on services like installation, commissioning, and operations and maintenance. Also, currently electricity generation is not subject to taxes. Equipment manufactured or procured from outside India for electricity generation through renewable sources is exempt from excise and customs duties. However, service tax paid on procurement of services is a cost for the sector. Thus, exemption from service tax for this sector would help in reducing the tax burden. Further, electricity is likely to be kept outside the purview of the GST; accordingly, the above exemptions should also be granted under the GST regime.
Renewable energy is growing faster than conventional energy now, crossing 15 per cent of the installed capacity, and is significantly higher in terms of active despatch capacity. It is critical that renewables get mainstreamed now.
All renewable energy is paid for on the basis of energy generation, which makes it highly susceptible to offtake risk, thus increasing the cost of capital. These risks have grown as transmission investment, especially at the intra-state level, has not kept pace.
Renewable energy companies also run a higher risk of delayed payments, and measures such as the Ujwal Discom Assurance Yojana and use of CPSU trading companies as intermediaries offer only a temporary respite. The more fundamental step regarding the improvement of the financial health of discoms is still pending.
The biggest challenge for the sector is expansion and upgradation of the transmission grid to cope with the increasing renewable capacity. It will be good if the budget allocates greater investment capital for this. Another area where the budget could potentially be helpful is allocation of funds for creating awareness and quality assurance schemes focused on rooftop solar, which is becoming highly cost competitive and attractive for end-consumers. There is a need to educate consumers about the potential of this energy source, different technologies and business models, quality standards, operational requirements, etc.
The government should address the concerns associated with GST and demonetisation by announcing measures that will boost investments and limit the possible fallout of the two policy decisions. With the GST committee still in the process of giving final shape to the new tax regime, it will be premature to foretell the impact of GST on the renewable energy sector.
What specific provisions should be included to promote domestic manufacturing in the renewable energy sector?
Santosh Kamath, Nandita Tripathi, Priyajit Ghosh
The following proposals may be evaluated in order to promote domestic manufacturing in renewable energy:
- Tax holiday for manufacturing renewable energy equipment, photovoltaic cells, wind turbines, etc., along with exemption from minimum alternate tax (MAT) provisions;
- A differential duty regime for domestic manufacturers, as is the case with mobile phone handsets;
- Non-applicability of MAT provisions to a unit set up in a special economic zone engaged in manufacture and export;
- Availability of funds at preferential interest rates to set up manufacturing facilities.
The most significant concern for manufacturers, despite a clear policy direction, is the market size. The actual flow of project opportunities is determined by state policies and only a few states at a time are pro-investment. The renewable purchase obligations, despite the courts and regulators providing clarity, are not rigorously enforced. The long-term market opportunity is, undoubtedly, large. But local manufacturing suffers from a cost disadvantage due to the tax structure and because the existing semiconductor manufacturing po-licies are not sufficiently compelling. The governments in Germany in the 1990s and in China more recently overcame similar challenges by offering comprehensive state support for the initial years, before economies of scale and cluster benefits took over. India needs a similar strong policy package to really kickstart domestic manufacturing on a larger scale.
A new domestic manufacturing policy has been long awaited. Expectations are that this policy will provide multiple benefits in the form of assured demand offtake, cheaper electricity and/or other financial incentives for investors setting up integrated manufacturing capacity in the country. However, we believe that this policy is not yet finalised and it seems unlikely that we will see anything focused on manufacturing in this budget.
The central government should allocate more funds for research and development (R&D) to promote domestic manufacturing in the renewable energy sector. Access to, and integration of the latest technologies hold the key to India’s success in the sphere of manufacturing. Our R&D efforts should be in sync with the growth that we aim to achieve in manufacturing. The government should set up R&D centres for solar technologies in collaboration with public sector agencies and the private sector. It should opt for a suitable public-private partnership model by involving small and medium-sized enterprises (SMEs) and micro SMEs to train technical manpower under the Skill India campaign. Low-cost finance options for the SME and MSME sectors can also go a long way in attracting investments, promoting manufacturing and augmenting capacities.