Towards greener pastures: how FM can provide the needed boost to the renewable energy sector

India is making steady progress in decarbonizing the energy mix. The county doubled renewable energy (RE) capacity in five years, from 50 GW at the end of 2016 to 105 GW at the end of 2021. With the exception of the year 2020, when COVID-19 a affected growth, the rest of the years witnessed capacity addition of over 10 GW per year.

In terms of electricity generation, RE has also contributed significantly to greening the consumption mix. This is illustrated by the graph below which reflects that the contribution of RE has increased from a monthly average of 12 billion units (BU) in 2020 to 14 BU in 2021. In addition, the recent announcement of the cumulative deployment of the clean capacity target of 500 GW by 2030 would see an increased penetration of clean energy into the overall energy mix.

2021 has been a pivotal year for the RE sector. The stage of installing the cumulative capacity of 100 GW was reached this year, which represents another 150 GW if we include hydroelectric projects. The country has committed to achieving net zero by 2070, which supports the adoption of renewables and other clean energy technologies not only for electricity but also for other energy applications.

Some of these key drivers of renewable energy in India include:

Policy push for on-grid and off-grid systems: The Indian government and state governments have encouraged the implementation of grid-connected and off-grid projects in every nook and corner of the country. There are support policies, rebates and flexibilities on charges and losses for electricity distribution, capital grants, incentives, etc. that contribute to growth. In addition, the government is also focusing on greening the electricity needs of the agricultural sector through the solarization of feeders and pumps through the PM-KUSUM program. Furthermore, the government is encouraging the deployment of renewable energy systems with livelihood applications to make consumers self-sufficient and sustainable in the energy mix.

Production Incentive Programs (PLI): Manufacture of Solar Cells and Solar Modules: The PLI scheme with a financial outlay of INR 4,500 crore for the manufacture of “High Efficiency Solar PV Modules” has garnered an overwhelming response and received proposals to set up a manufacturing of 54.8 GW. Based on this success, the Indian government plans to increase the expenditure of the PLI program to INR 24,000 crore.

Advanced Chemical Cell (ACC) Battery Manufacturing: In May 2021, the government approved the PLI scheme for the manufacture of 50 GWh ACC batteries with an estimated expenditure of INR 18,100 crore for 5 years, from the date of manufacture. The program has received an encouraging response from battery manufacturers around the world, expressing their interest in entering the Indian market.

Main areas of concern in the sector:

Renegotiation of prices: Some states have recently asked project developers to renegotiate the tariff agreed in the power purchase agreement (PPA) for renewable energy (RE) projects, hoping to reduce the tariff to current market rates. . This would undermine the viability of the projects, given that they were installed at current market prices, which have declined considerably over the years, and therefore would not guarantee the recovery of the investments made in the projects.

Imposition of taxes and duties on renewable energy components: The Goods and Services Tax (GST) on renewable energy products from 5% to 12%, which would increase the cost of project development. In addition, a basic customs duty (BCD) of 25% on solar photovoltaic cells and 40% on solar modules would be applicable from April 2022, which will increase the cost of the project dependent on imported cells and modules. .

High financing cost: The sector, although established, is experiencing a high interest rate to finance the project, leading to increased costs, and therefore tariffs.

Electricity not covered by GST: Components involved in setting up a project attract GST, however, electricity supplied through it is not within the scope of GST, and therefore the tax expenditure is not refunded.

High manufacturing cost: The country promotes self-sufficiency in ER components such as solar cells, modules, storage, etc., however, the cost of electricity is high, which affects the production cost and hinders the growth of manufacturing national.

Reduced Equipment Export Incentives: To make optimal use of manufacturing capacities, manufacturers export turbines, etc. to other countries; however, the incentives have been drastically reduced in recent years, leading to increased costs and thus reducing the competitiveness of Indian equipment in the global market.

Expectations from the 2022-23 union budget: The sector must rapidly grow from a current clean energy capacity of 105 GW to 500 GW by 2029-30.

A roadmap and annual plan should be developed immediately and a budget push will help. The following catalysts in the union budget can push the renewable energy sector to expand its reach:

Passage of the Electricity (Amendment) Bill, 2020: The Electricity (Amendment) Bill 2020 paves the way for a number of enabling frameworks, including the removal of electricity distribution licenses. It would be relevant if the bill could be passed to help improve competition and efficiency in the sector.

PLI for small capacities and other components: The recent PLI program for solar manufacturing is considered a success given the overwhelming response received from the industry. A similar PLI program can also be rolled out for small manufacturing capacities to promote other potential manufacturers with a low appetite for investment. Additionally, the PLI program can also be advertised for other components contributing to domestic RE manufacturing, which can help reduce costs along the value chain.

Cancel the increase in GST on RE components: The recent revision of the GST on RE components from 5% to 12% has had a negative impact on the cost of setting up RE projects and therefore needs to be reconsidered and revised to the lowest slab possible to ensure the profitability of the systems.

Revision of the function structure: The budget may also focus on revising the manufacturing fee structure of RE components and avoiding any inverted fee structure, in which the raw materials attract higher GST, while the finished product attracts lower GST, increasing thus the tax burden on the project.

Include electricity in the GST: Imposing the GST on electricity will help manufacturers and suppliers neutralize the tax implication and would further increase government revenue inflows.

Import Duty Exemptions and Export Incentives: As India expands the manufacturing base of renewable energy, it is important to promote import of equipment/components until manufacturing is self-sustaining. Also, sectors like wind that are underutilized domestically can be promoted with export incentives to utilize their manufacturing base and improve global competitiveness.

Facilitate RE project finance facility: RE projects, including manufacturing, can be facilitated by standards and relaxed interest rates to promote RE adoption.

Obligation to purchase hydrogen: The Indian government could announce an obligation to purchase hydrogen in this 2022-23 budget. This can be complemented by incentives and support mechanisms to allow industries such as fertilizers, refineries and other entities to be forced to adopt interventions to set up green hydrogen plants or procure green hydrogen for their respective industrial applications.

Roadmap for new technologies such as offshore wind, green hydrogen, energy storage: The government can roll out a roadmap with incentives and support mechanisms such as concessional loans, dedicated areas, etc. to promote the implementation of projects based on green hydrogen, energy storage, etc. of combined offshore wind potential. However, the technology has not yet seen commercial implementation and can therefore be supported by financial support in the form of Viability Gap Funding (VGF) to ensure the financial viability of initial projects and support the development of the sector.

The author is Partner and Leader – Power & Utilities, Mining, PwC India

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