Union Budget 2021: Targeted financial incentives key to provide big push to renewable energy

While we continue to invest in new renewable energy capacity, we also need to strengthen our distribution infrastructure

Praveer Sinha January 30, 2021 00:41:33 IST
Union Budget 2021: Targeted financial incentives key to provide big push to renewable energy

Solar panel. Image courtesy ChristofferRiemer/Wikimedia Commons

By renewing our commitment to breach the 2022 renewable target, we can also pave the way for a clean recovery from the pandemic and achieve more.

In 2020, the renewable energy sector was a witness to two very important developments. While the unit price (through reverse auctioning) hit a new record low of Rs 1.99, India installed only 1.73 GW of new solar capacity over nine months to September 2020 or around 68 percent less than the 5.84 GW installed in the same period in 2019. 

The economic forecast provided by the National Statistical Office (NSO) in early January also said that only two sectors will end the fiscal (2020-21) with a positive growth–agriculture and power. This is despite the fact the NSO expects the economy to have contracted by 7.7 percent, one of the unfortunate outcomes of the COVID-19 pandemic. This clearly underlines the value of the power sector to the economy along with its innate resilience and ability to deliver against all odds. The challenges faced by the sector during the pandemic and how it overcame it are already well-known now.

Over the past decade, the renewable energy sector in India has quadrupled in terms of generating capacity.  Today, globally, we enjoy one of the lowest prices for renewable energy. This has also helped us to become one of the major economies in the world that is well on its way to achieving climate change targets agreed in the Paris Accord.

The 175 GW renewable energy target set for 2022 is a very important part of not only our climate change targets but will also play a vital role in helping achieve the GDP target of $5 trillion by 2025. In order to achieve this target over the next two years (from around 90 GW now), we have a lot of catching up to do.

Our immediate challenge is to create a more conducive green energy ecosystem backed by a robust manufacturing ecosystem to make it cost-competitive. Today, more than half of the components that go into a typical solar project in India come from China. Rising tariff and non-tariff barriers such as import duties cannot be a long-term strategy in a world fast-spinning towards globalisation. Our long-term strategy must be to start building a massive capacity increase in the components supplier ecosystem which can happen only if there is a strong financial support system.

What we need is a greater incentivisation of local manufacturing. These can be in the form of direct incentives to manufacturers such as interest subvention on the term loan and working capital loan, lower power cost and export incentives from 2 percent to 8 percent under Remission of Duties or Taxes on Export Product.

There is plenty of scope to also expand the use of renewable energy through demand-side management. For example, the initial cost of installing solar rooftop (despite the obvious long-term financial benefits) continues to be a deterrent for wider adoption of renewable energy across all user groups i.e., industrial, commercial and domestic. Targeted financial incentives such as more affordable capital cost will provide the much-needed big push in this direction.

While we continue to invest in new renewable energy capacity, we also need to strengthen our distribution infrastructure. The distribution companies or DISCOMs within the Indian power sector continue to be the weakest link that needs to be addressed more seriously. Independent estimates released in mid-2020 have suggested that DISCOM debts (owed to generating companies) could hit pre-COVID levels.

The liquidity relief scheme announced in May 2020 to help state DISCOMs through state government guarantee backed loans remain a short-term measure and this has been only partially implemented. There is a strong case to be made for higher budgetary allocation towards strengthening of the distribution infrastructure, which will help DISCOMs to improve their operational efficiencies.

The upcoming Union Budget is a good opportunity for the government to address some of these issues. There is little doubt that the government is committed to the larger nationally determined environmental targets and renewable energy is the smartest way to get there. For the long-term players, this is also a historic opportunity to benefit from the global shift in favour of green energy (and away from fossil fuel). What we do over the next few years will determine if India will be a major part of this global change and also emerge as Atmanirbhar Bharat.

The writer is the CEO and MD, Tata Power

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