Union Budget 2021: Power sector needs higher outlay for incentivising investments in R&D, renewables

Without a doubt, 2020 was an unprecedented year, even for the power sector. Both supply and consumption underwent a significant change. The impact on local manufacturing in the wake of falling demand and rising input costs was evident. The pandemic has acted as a catalyst towards the energy transition taking place in India. The government had revised its renewable energy targets to an even more ambitious 220 Gigawatt (GW) by 2022 from 175 GW.

The COVID-19 crisis has highlighted the importance of smart technologies, smart utilities and smart working styles. The government also supported the power sector with a massive stimulus package and various initiatives and incentives for connected segments such as green energy and EVs. To accelerate this further, we hope to see a greater focus on indigenisation, innovation, digitisation, energy efficiency, electrification besides market reforms and system integration in the coming times starting with the Budget 2021.

Interest and duty incentives

Clearly, the duty structure on the import of solar modules is an area of debate. While local manufacturers will prefer a higher import or safeguard duty in some form, project developers would like to have an exemption or as low import duty as possible at least till the time local manufacturing scales up. The government should thus look at it closely from both sides and arrive at a viable solution.

In the long-term, India surely wants to have as much local manufacturing as possible and hence, must have a duty structure to protect the interests of indigenous manufacturers as long as it is not hurting timely project development. For instance, basic customs duty exemption on imported solar modules may continue for a year beyond 2021 as well. Further, to avoid frequent changes, the government should lay out the duty structure for a period of 5-7 years.

Even duty on solar lanterns has an inverted structure. Imported lanterns have much lesser duty than importing electronic components. This anomaly should be corrected to avoid cheap and low-quality solar lanterns from hitting the Indian market. Battery manufacturing is another big area that needs to be supported. The government could consider reducing the Goods and Service Tax (GST) on lithium-ion batteries from 18 percent to 5 percent to promote the development of battery ecosystem in the country. Also, the long-pending issue of inclusion of gas and power within the ambit of GST could be re-considered.

Financing mechanisms and market support

Often funding to the renewable energy sector gets clubbed with thermal power for limits. As a measure, removing renewable energy from the power sector, priority lending and creating a separate priority sector category for renewable energy to enable Renewable Energy (RE) Independent Power Producers (IPPs) would ensure more bank funding.

Currently, the definition of power also includes thermal power due to which banks are not lending to the RE sector citing that their power sector exposure is full.

Accelerate the retirement of inefficient and costly coal-based power plants through ratepayer-bond concept. This will create a win-win situation for power generation companies (GENCOs), distribution companies (DISCOMs) and end consumers of electricity. There is certainly a need to support the wind industry that has the longest history of contributing to the RE capacity. The wind industry as compared to solar has more domestic component and relatively provides more jobs. However, there are fewer wind auctions in light of lower solar tariffs. It is time to enforce Wind RPO or a minimum wind procurement to keep the industry alive.

Other policy and infra support for indigenisation

The overall objective is to increase green energy capacity in all its forms by lending policy and funding support. This can be achieved by setting aside funds to make a robust ecosystem for indigenous solar manufacturing. To make the domestic solar industry cost-competitive, there is a need for an all-inclusive policy framework required for encompassing both tariff and non-tariff barriers, long term financial support, and direct incentives. Also, provide a 3-5 percent interest subvention on working capital loans and term loans for assisting domestic solar manufacturing.

The country needs to have a long-term green hydrogen roadmap up to 2030. Green hydrogen certainly has a future and the time to start is now. Some fiscal support should come for demonstration projects. Off-shore wind and floating solar are two other areas where we need big support to set up at least 5 or 10 commercially proven role models. Since the tariffs are likely to be higher due to higher Capex, state support is essential in the early days before it sustains on its own.

Battery storage also needs greater thrust wherein enhanced policy clarity will enable better demand certainty and creation of supplier/ manufacturer ecosystem.

While the Production Linked Incentive (PLI) Scheme envisions the support to this sector, it needs to be further expanded with greater budgetary outlay. In an effort to support local manufacturing, safeguard duties on imported modules, batteries or even EVs need to be evaluated. We should have a higher budgetary outlay to incentivise investments in R&D in renewables and storage space.

The writer is Partner and Leader, Power & Utilities, EY India.

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