Indian budget ramps up commitment to renewable energy development, domestic manufacturing

India's recently released national budget ramped up the government's commitment to the development of the country's renewable energy sector, especially the solar industry, while also demonstrating an intent to make the country and its energy sector self-reliant.

The budget for April 2021 to March 2022 released on 1 February reflects the strategic intentions of the Indian government, in which certain initiatives have been brought to the fore due to the COVID-19 pandemic. Infrastructure and energy are two key areas of focus, said Babita Ambekar, partner and head of the India practice at CMS Cameron McKenna Nabarro Olswang in Singapore.

"Basically, the strategic intent is to establish a 'self-sufficient India'. This translates into a renewed impetus to [develop] various core areas, of which energy and renewables is one [of them]," she said.

The budget outlined a significant commitment to support renewable energy and domestic manufacturing, said Ashish Singla, IHS Markit associate director, climate and sustainability, South Asia power and renewables, based in Gurgaon, India.

"The budget talks about providing an additional capital infusion of INR 1,000 crore ($136.7 million) to Solar Energy Corporation of India (SECI) and INR 1,500 crore to Indian Renewable Energy Development Agency (IREDA). These entities are responsible for running various, but not all, centrally-controlled incentive programs," he said.

Gagan Malik, international tax leader for APAC at EY in Singapore, highlighted other measures in the budget aimed at supporting the solar sector. These include increasing customs duties on solar lanterns (from 5% to 15%) and solar invertors (from 5% to 20%); putting transmission assets into Infrastructure Investment Trusts (InVITs); allowing foreign portfolio investors to enter InVITs, and a power distribution sector scheme that has approximately $42 billion allocated for infrastructure development over the next five years.

The infrastructure development, which seeks to support domestic power distribution companies, will include installation of pre-paid smart metering, feeder separation, and systems upgrades, according to Malik.

"These are all clear directions where [India] wants to go. India is moving toward focusing more on renewable energy and [in] ensuring it is self-reliant and not too dependent on oil," he said.

Making India self-sufficient

Encouraging local manufacturing of most of the components for the solar sector is an initiative under the government's "Made in India" campaign of self-reliance. The move is described by officials not as protectionist, but as ensuring India will be able to produce goods in a competitive manner locally rather than relying on overseas imports, Malik said.

"The government is saying that if you invest more, you will get more incentives, which is why, in line with that, they have increased the custom duties on solar lanterns and solar invertors . The only intent is to push for domestic manufacturing," he said.

While the Indian government welcomes foreign investors, it is not offering profit-linked incentives, he added.

"… they are saying that If you invest more in my country, if you generate more employment, more alternatives in terms of building the infrastructure, we will give you benefits and you can start manufacturing, which is why on the solar side, they have increased the custom duties," Malik said.

Duties on oil won't be cut

The government, however, has not reduced any of the duties on oil. This is to discourage the dependence on oil in the overall energy mix, while encouraging the move toward renewable energy.

The Indian government has also created InVITs with a view to monetizing transmission assets, which are mostly lines that transfer power from developers' facilities to distribution companies. InVITs work like mutual funds or real estate investment trusts, which allow investors to invest in infrastructure and earn income as return. Monetizing the transmission assets allows the Indian government to generate more funds for further investment.

"It's a very promising move that will have transmission capacity to match the rapid pace of electricity generation," Malik said.

Power distribution sector reforms

In the budget, Finance Minister Nirmala Sitharaman also highlighted the viability of distribution companies due to a perennial problem they face when dues fail to be collected. In response, the Indian government has come up with a "reform-based, result-linked" power distribution sector scheme that will see $42 billion allocated over the next five years for infrastructure development.

"Infrastructure development in the power sector will provide assurance to distribution companies. It will benefit significantly solar and renewable energy development. What [the government is] saying is power distribution companies need to have prepaid smart metering, feeders, separation, etc. — essentially all the infrastructure [development] to make them viable," Malik said.

Solar energy targets

India launched its national solar mission in 2010 when it unveiled a climate change action plan involving generating more power through solar. The country has since achieved a number of milestones in generating power through solar energy, said Malik.

"India's solar generation capacity increased nearly five times from 2014 to 2017. In 2018, the amount of power generation through solar was highest than any of the years. When the solar mission was initiated, India had a target of 20 gigawatts (GW) by 2022 and a renewable energy target of 450 GW by 2030. But it had already surpassed the 20 GW target in 2018. Now India wants to achieve 100 GW by 2022," he said.

India's solar cell production capacity is expected to be around 4 GW to 6 GW from 2020 to 2024, and its solar module output is set to be around 10.5 GW to 16 GW for the same period, according to IHS analysts. As of the end of 2020, the top Indian module suppliers by capacity were Waaree Energies, Adani, and Vikram Solar.

Coal contributed around 72% to power generation in India in 2019 while solar and renewable energy contributed 4% and 10%, respectively, according to Singla. But coal's share of the generation stack declined over the last five years from 77% in 2015.

In 2015, India set a renewable generation capacity target of 175 GW (100 GW of solar, 65 GW of wind, and 10 GW of biomass and small hydro) to be achieved by 2022, but revised it to 450 GW to be achieved by 2030. Of the 175 GW target, only 92 GW of solar, wind, small hydro, and biomass had been installed at the end of 2020, according to Singla.

"The government still indicates that they will achieve 175 GW by December 2022. IHS Markit expects the number [to] be less, around 125 GW," he said.

Original reporting by Soo Cheng Bernadette Lee