Renewable energy ambition needs more money
The 2018 budget announcement expected on 1 February will be the last full-year budget before the country goes to polls in 2019. Three years after the first formal announcement of the upscaled renewable energy targets in finance minister Arun Jaitley’s budget speech of 2015, will the upcoming budget signal the government’s continued commitment to clean energy?
India’s renewable energy capacity, as of October 2017, stands close to 61 GW. Wind energy dominates with 33 GW of installed operational capacity, followed by 15.5 GW of solar, 4.4 GW of small hydro, and 8 GW of bio-power. While sizeable, this is significantly short of the 175 GW renewable energy capacity target set for 2022.
Will the government back up its vision with effective policies to scale up renewable energy, support domestic manufacturing, and skill the workforce? Or will the sector merely rely on wishful thinking?
The renewable energy industry, once growing at a rapid pace, has become mired in uncertainty. Financial year 2017-18 has seen a dampening in the dynamism of the renewable energy sector, due to a lack of policy clarity, fiscal changes, trade policy uncertainty, regulatory hurdles, and reduced commissioning of projects. While some of these challenges could be addressed with non-budgetary action, it would be wise for the budget to respond to some pressing issues that could result in market failures if left unaddressed.
The most important fiscal reform of 2017 exacerbated some of the challenges plaguing the clean energy sector. The adoption of the goods and services tax (GST), which brought down the tax on coal to 5%, previously taxed at 11.69%, was also accompanied by the coal cess being subsumed in the GST compensation fund. Coal taxed at Rs400 per tonne, previously accrued into the National Clean Energy Fund (NCEF), was used to make budgetary allocations to environment and clean energy related ministries and schemes. Additionally, the unspent cess amount collected over the years has been used to compensate states for their loss of revenue due to GST dealing a further blow to the renewable energy sector.
Since 2011, a bulk of the budgetary allocation to the ministry of new and renewable energy (MNRE) came from the NCEF. In 2017-18, of the Rs5,473 crore allocation to MNRE, Rs5,342 crore came from the NCEF. In the absence of the NCEF, the budgetary allocation to MNRE, as well as financing of mechanisms and schemes that spur further renewable energy deployment, would be the acid test of the upcoming budget.
Another source of uncertainty in solar is the duty being considered on imported solar modules, either in the form of a temporary safeguard duty or a long-term anti-dumping duty. China, Taiwan and Malaysia currently manufacture 90% of the solar modules used in Indian projects. India’s domestic solar manufacturing capacity is too small and inadequate to meet the growing demand from developers. The solar manufacturing sector that has long argued for budgetary and policy support, will also see this budget as a watershed moment for the government to walk the talk on its “Make In India” programme.
However, while making domestic manufacturing more competitive, the imposition of duties on imported solar products will raise the cost of solar power for developers. This, in turn, will lower the competitiveness of solar electricity, and increase the burden on the already financially overburdened utilities. This presents a real tightrope for the government to walk.
Will making the solar manufacturing industry more competitive make solar power uncompetitive? A more strategic manufacturing policy is needed. In the long run, trade remedies do not help build an industry.
New and innovative means are needed to build new markets for visionary targets. In addition to large renewable energy projects, policies to spur greater development in the solar rooftop and electric mobility sectors have become increasingly important. In the 2018 budget announcement, the government must focus on ways to use public money most effectively. Ring-fenced pools of public money could be earmarked for innovative financial mechanisms that result in greater investment of private capital, especially from relatively untapped sources such as pension funds, insurance companies, and sovereign wealth funds. Using this budgetary support to underwrite risks, increase the flow of private capital, and lower the cost of finance, could result in the creation of deep, vibrant and self-sustaining markets in renewable energy and its affiliated sectors.
Internationally, a seat has opened up at the global climate leadership head table with the exit of the US from the Paris Climate Change Agreement. India, with its mammoth clean energy transition ambitions, is well-placed to take that seat. However, we must demonstrate real leadership by translating our ambition into action. This will require the development of clear policy pathways and support mechanisms to nurture these new markets.