India’s taxes and subsidies threaten clean energy growth in the country

After a slowdown during the first two years of the covid-19 pandemic, India’s renewable energy sector seems to be bouncing back in terms of investments. But recent studies raise doubts about the overall pace of the sector’s growth with finance emerging as a major impediment.

According to the studies, renewable energy is facing a reduction in subsidies, an increase in tax, and restrictions on the import of equipment for solar and wind energy projects. One such research is a joint study by the Council on Energy Environment and Water (CEEW) and the International Institute of Sustainable Development (IISD) which notes that since 2017 the subsidy for the renewable energy sector has dipped by 59%. It also said that funding for the renewable energy projects by public financial institutions in the country was also not in coherence with the energy targets.

India aims to achieve an installation of 450 gigawatts (GW) of renewable energy capacity by 2030 to decarbonise its energy sector while pursuing its commitment to becoming a net-zero country by 2070. Currently, India’s installed renewable energy capacity is 111.39 GW. According to the latest data, India in the last fiscal year (2021-22), added 15.5 GW of renewable energy capacity with $14.5 billion (Rs11,338.8 crore) investment pouring into the sector.

The CEEW study “Mapping India’s Energy Policy 2022” claimed that, in 2017, the subsidy for the renewable energy sector stood at Rs16,312 crore but in the last fiscal (2021-22) it went down to Rs6,767 crore. However, during the same period, the subsidies for electric vehicles almost tripled. The report emphasised that the major support for clean energy projects in the country was through the non-banking financing companies (NBFCs) and selected private banks while the investments of public sector lenders were more towards the fossil-fuel-based energy projects.

Experts who co-authored the study claimed that such a scenario could hurt the country’s pace if it wants to achieve the 2030 target. They called for more subsidies and efforts to clear the finance-related bottlenecks and other hurdles.

“More subsidy support will be needed to scale up solar manufacturing, green hydrogen, and promising decentralised renewable energy technologies. To manage the intermittency of the sector and the grid integration aspect, the supporting ecosystem including storage and transmission would also need government support and additional investment,” said Prateek Aggarwal, programme associate at CEEW and a co-author of the study.

He said the sector would need more investments from different financial institutions, as the situation demands large-scale mobilisation of capital through debt instruments. In terms of volumes, CEEW’s study estimated that $200 billion would be needed to set up the generation capacity alone whereas the combined current exposure of banks and the NBFCs to the entire Indian power sector stands at around $160 billion.

“Clearly, the banks and NBFCs do not have an evident headroom to meet the funding requirement. To address this issue, solutions such as subsidised credit enhancement holds the key to unlocking the flow of capital from the bond market to the RE sector,” Aggarwal emphasised.

The study said that the total financial support the sector received in total through subsidies, public sector utilities (PSUs) investments and loan disbursements from financial institutions through debt, stood at Rs5.4 lakh crore for 2021-22. It said a lack of transparency in reporting on financial support by banking institutions and a failure in having a clear mandate of financial targets for the sector are among the impediments to the growth of the sector.

Financial regulations needed

When asked if India’s central bank, the Reserve Bank of India (RBI), needs to intervene in terms of specific interventions to give an impetus to clean energy financing in India, Swasti Raizada, a policy advisor at the IISD, said that the there has been hardly any “green” element in the reporting of annual loan disbursements for India’s public sector banks (PSBs).

“Since the PSBs have a wide asset portfolio, the absence of clear sectoral data makes it difficult to assess renewable energy financing channelised through them. This shows that there is a clear role for regulators like RBI, to improve transparency through mandates and promote supportive policy initiatives to boost renewable energy financing by the PFIs (private finance initiative),” she said.

In India, PSUs play a key role in terms of their control over vital energy resources such as coal, oil, natural gas, clean energy and others. The study advocated a clear roadmap for these PSUs to enable a target-specific movement of these government units on their pathway to decarbonisation by ensuring a sustainable energy mix for the country.

“PSUs must identify diversification options in clean energy that align best with their existing business practices. Next, they must commit to investment targets and periodically ratchet up their ambition. Such planning is also critical to explore their diversification pathways, capital allocation strategy, and the kind of strategic acquisitions that can be financed using existing balance sheets,” Raizada said.

But these are not the only issues plaguing the sector. In fact, some studies in the past have highlighted a higher rate of interest by banks on clean energy projects, diversion of clean energy funds for other purposes, higher debt costs in India for renewable energy projects compared to other countries, and defiance in complying with the Renewable Purchase Obligation (RPO) target by the states.

Coal versus clean energy

There are also apprehensions about India’s energy security with disruptions due to the growth of the clean energy sector. How can the Indian economy be affected due to the phasing out of coal?

A recent study by the Centre for Study of Science, Technology and Policy (CSTEP), a think tank, claimed that the transition from fossil fuels to renewables will actually result in a positive net effect on the Indian economy. It said increasing the share of renewable energy in electricity generation leads to higher Gross Domestic Product (GDP) and household income, with rural households benefiting more than urban households. It claimed that increased deployment of renewable energy could lead to increased annual per capita income in rural areas by Rs2,172 on average. The report supported the enhancement of subsidies in the sector than increasing fossil-fuel tax, as support for renewable energy could lead to more benefits to the economy.

Krithika Ravishankar, the co-author of the study and an analyst in the Climate, Environment and Sustainability sector at CSTEP told Mongabay-India, “Investing in renewable energy and the related subsidies is recommended instead of increasing fossil-fuel tax, as the former has higher benefits for the economy, especially in the short-term.”

“Only when there are enough low-cost and accessible alternatives to fossil fuels, will a tax on fossil fuels be effective in reducing their use. Taxes can then be imposed on unrefined fossil fuels, to encourage industries to invest in low-carbon technologies for avoiding the tax burden. This would simultaneously discourage fossil-fuel use and avoid any negative impacts on households (since the tax burden is borne by the industries),” she said.

The CSTEP study also claimed that reducing the share of coal-based power alone was not sufficient for reducing overall coal demand. This was because the industrial demand for coal was expected to increase over time. However, it added that decarbonisation of key industries (iron, cement) is also needed to ensure significant emissions reduction and phase-out of coal.

Increased taxation woes

In addition to the decrease in subsidies, another financial challenge that the sector has been facing is the increase in taxation on solar products. For instance, the goods and services tax (GST) on solar products was enhanced in September 2021 from 5% to 12% affecting the capital investment of solar developers who were engaged in developing several solar projects in the country.

Similarly, to safeguard the domestic manufacturers of solar panels and solar modules after a few years of relaxation, India increased the basic customs duty (BCD) against the imports of solar panels (up by 25%) and solar modules (up by 40%) from April this year. The union minister for new and renewable energy, RK Singh has already claimed that the government was not going to reconsider the move.

While it was certainly a welcome move for the domestic manufacturers, it could affect the solar developers in the country who are dependent on imports for solar panels and solar modules. However, there are also claims that India’s domestic manufacturing capacity is not enough to cater to the high demand of the renewable industry.

The National Solar Energy Federation of India (NSEFI) has written to RK Singh that this decision could escalate the input cost of solar projects in the country. This is in addition to other plans of the country, to make imports costly for the sector.

According to CRISIL, a credit-ratings and research agency, the increase in GST on solar panels could lead to an increase in the cost of solar projects and eventually lead to the rise in the tariff of clean energy for the consumers, besides affecting the solar energy developers.

A study by the Institute of Energy Economics and Financial Analysis (IEEFA) released in June 2022, authored by energy economist Vibhuti Garg, claimed that there is a post-covid-19 recovery in terms of investment in the sector. The year 2021-22 saw 125% more investment in the sector compared to 2020-21 when it was 72% more than the pre-pandemic period of 2019-20.

The report claimed that while $14.5 billion poured into the renewable energy sector in 2021-22, the country actually needs around double the investment if it wants to achieve its clean energy targets of 2030. The study claimed that India needs around $30-40 billion per year for the 2030 target from the present $14.5 billion per year.

Meanwhile, the Indian government claims that it has been aiding the sector through several subsidies and other schemes to boost the sector. In March 2022, RK Singh told parliament that to attract investment in the renewable energy sector in the country, India has allowed 100% foreign direct investment (FDI) in the sector, waived inter-state transmission charges for inter-state sales of solar and wind power, and declared trajectory for renewable purchase obligation for 2022.

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