Formerly burgeoning Renewable Energy Sector given no budgetary support

By Yash Budhwar

The Indian renewable energy sector (RES) is the second most attractive renewable energy market in the world as per the Renewable Energy Attractiveness Index 2017. India has the third largest capacity of concentrated solar power and the fourth largest of installed wind power. The Ministry of New and Renewable Energy (MNRE), a ministry under the Government of India, redrafted the Jawaharlal Nehru National Solar Mission (JNNSM), an action plan launched in 2010, to achieve a total capacity of 175 GW from renewable energy sources by March 2022. This will include 100 GW from solar power, 60 GW from wind power, 10 GW from biomass power and 5 GW from small hydropower. The RES has therefore seen accelerated growth in recent years and has been an attractive and flourishing market. The policies that have propelled the market are varied, from an increased allowance of Foreign Direct Investment (FDI) and tax rebates to allowance of accelerated depreciation.

Array of growth-oriented policies

India permitted FDI of up to 100 percent in the sector under the automatic route in renewable energy generation and distribution projects that are subject to the provisions of the Electricity Act of 2003. Under the Act, no prior approval of regulatory authorities is required for infusion of foreign investment. It was revealed in 2016 that the country had attracted 14 billion USD in investments for the sector between 2013 and 2016. Undertakings engaged in the generation and distribution of power have been offered a 10-year tax holiday for renewable energy plants if power generation began before 31^st March 2017. This initiative was not reinstated in last year’s budget and has not been in this year’s as well.

The Indian Renewable Energy Development Agency (IREDA) has been established under the MNRE as a specialised financing agency to promote and finance renewable energy projects. Under MNRE’s Generation Based Incentive scheme, wind power projects are eligible for an incentive of INR 0.50 per unit of power generated. The central government had provided incentives worth 1 billion USD between 2013 and 2016. Under the domestic income-tax law, companies involved in the production of renewable energy are provided with accelerated depreciation at 80 percent of the written-down-value (WDV). This percentage of the WDV has since been mandated to 40% in the last year’s budget. Such a measure leads to the concerned companies paying lesser amounts in the form of direct tax to the government. Despite this slew of growth-oriented policies and the accelerated growth in the sector over the past few years, the sector is now mired in uncertainty.

Disheartening technological advances

The RES has been hit negatively by rising technological advances made in the industry. Upgradations in the technology of the power generation and power distribution procedures, through research and development and via foreign investment, have led to a rapid and tremendous decrease in the per-unit cost of producing energy through renewable resources. This has brought about the entry of numerous players and a so-far unsustainable fall in power tariffs arrived at through auctions. This is evidenced by the plummeting of wind power tariffs to ?2.43 per kilowatt-hour (kWh) at an auction conducted by state-run Gujarat Urja Vikas Nigam Ltd. last month, beating the record low solar tariff of ?2.44 per unit registered in May.

With the tariffs of both the solar and wind falling continuously and breaking all-time low records, there are concerns that the state governments and distributors may go back on power purchase agreements (PPA) that were signed on fixed tariffs, which are higher than the current auction bids. PPAs are agreements signed between power generators and power purchasers and in the case of renewable energy, they are signed on the basis of the pre-determined tariffs, as fixed by the state regulatory electricity commissions. This freefall in auction bids has led states to put pressure on power developers to renegotiate contracts at lower tariffs, throwing investments of developers at risk. The Economic Survey, released as a precursor to the budget every year, mentioned that the renegotiation of these tariffs could result in risk for investments worth INR 48,000 crore.

Fiscal and monetary drawbacks

This uncertainty regarding the future cash flows of power producers puts more pressure on the central government to provide the industry players incentives and subsidies to support their faltering revenue streams. However, with the government slipping on its fiscal deficit target of 3.2% of GDP for this financial year, and with worsening trade balances, the government might be hesitant to decree any expansionary spending. Add to this the rising inflation, with it being clocked at 5.21% (YoY) in December 2017, and a more-than-likely rate hike by the RBI. If the rate of inflation doesn’t decrease during the first three months of 2018, a rise in interest rates will most likely occur and potential investments by the government would be very costly even though they might eventually come about.

Self-inflicted harm

What’s more is that Modi’s ‘Make in India’ scheme, designed to foster and encourage domestic manufacturing industries over and above imported goods, is coming in the way of energy producers who are trying to reduce their costs of energy generation. Such players import solar cells from countries like China, Taiwan, and Malaysia to try and make their electricity more competitive.  With the government looking to increase the customs duty on such goods, the competitiveness and bottom lines of energy producers will be taking a further hit in the name of ‘Make in India’. Further, the introduction of the GST exacerbated the problems plaguing the clean energy sector. The coal cess is now being used to increase the coffers of the GST compensation fund, used to pay states to compensate for their loss of revenue owing to GST, whereas it was used to increase budgetary allocations of the environment and clean energy-related schemes and ministries before.

A disappointing budget

With so many roadblocks in the way for the growth of the sector, the Union Budget of 2018 was expected to alleviate all or at least some of them. However, with the budget focusing on the ‘Ease of Living’, healthcare, rural and agricultural sectors along with improving the infrastructure and livelihoods of the poor, no forthcoming relief for the RES was announced. The sector was in dire need of a rejig of the direct taxes and GST, a reduction in import duties in the face of relatively uncompetitive domestic manufacturing, a stricter stance pertaining to the potential re-negotiation of PPAs, fiscal relief in the form of tax rebates or greater investment, and nuanced financing options that do not weigh further on the government’s already deficit-loaded books.

Instead, what followed was a relatively soft proposal to abolish the customs duty on solar tempered the glass from five to zero percent. The impact of this change is also doubtful as some players have reported never paying the customs duty on tempered glass in the first place due to an exemption given in 1999. The government had also announced the reduction of the income tax for enterprises earning upto 5 billion INR annually—a move which will likely benefit smaller renewable energy players to an extent.

Dismal future

However, the 10-year tax rebate for renewable energy manufacturing hubs has been absent in the last two budgets. A slew of investment options and reforms were announced, but only for the agricultural, healthcare and infrastructural sectors. There was no mention of any specifically designed financing options or of the government’s stance on PPAs. In addition, it was revealed that the fiscal slippage has worsened as this financial year’s deficit is now expected to hit 3.5% of GDP as against the original target of 3.2%, with the next financial year’s deficit also expected to touch 3.3% of GDP as against the originally proposed 3%. This might only further dampen the revenue streams of energy producers as further spending by the government will drive the inflation rate upwards therefore making it increasingly likely that interest rates will be hiked. With the budget providing no concrete relief for the once burgeoning renewable energy players, the weight on their shoulders is therefore only expected to increase going ahead.

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