Budget 2017: An opportunity lost for renewable energy
The budget’s real test lay in its approach to mitigating financial risk in the renewable energy, where capital costs are high, payback periods are long and off-taker, construction and foreign exchange risks raise cost of debt
India has an ambitious target of 175 gigawatts (GW) of solar, wind and other renewable energy by 2022. The financial needs are mammoth and India needs to look beyond fiscal allocations if the signals for clean energy have to be bold and consistent. Solar, alone, would require $100 billion in debt to reach 100 GW. International debt markets, estimated at $95 trillion, are the world’s largest pool of capital and need to be made accessible to Indian developers at affordable cost. The budget must be evaluated against this scale of need and opportunity. The role of public funds should be to either catalyse action, attract investment, or underwrite risk.
Let us first examine fiscal priorities to catalyse action. Compared to last year (Rs5,036 crore), this year the allocation to the Ministry of New and Renewable Energy stands at Rs5,473 crore. As much as 74% of the outlay is directed to grid-interactive renewables, specifically mentioning the second phase of solar park development for 20 GW of capacity. The total budget is further split between Rs3,361 crore for solar and only Rs408 crore for wind, a clear indication that the government will continue to prioritise solar. Additionally, the budget extends support to power 2,000 railway stations through solar, under the Indian Railways 1GW solar mission. Smaller sums of Rs135 crore and Rs76 crore have been earmarked for small hydro and bio-power, respectively. Despite recent suggestions, large hydro remains outside the purview of renewable energy.
One continuing area of uncertainty is the role of the National Environment Fund (NEF). The cess on coal remained unchanged at Rs400/tonne. While the total cess collected (projected up to 31 March 2017) was a mammoth Rs54,336 crore, only Rs25,810 crore have been transferred to NEF. Of this, under half (Rs12,427 crore) has been spent on renewable energy projects. While nearly all of the budgetary allocation to renewables in 2017-18 will be from NEF, the budget could have clarified the proportion of the cess that would be transferred to NEF.
Another uncertainty is how the goods and services tax (GST) will impact renewables. Researchers at the Council on Energy, Environment and Water (CEEW) find that if solar components were categorised based on current levied tax rates (including exemptions and subsidies), GST would impact solar tariffs minimally. However, if preferential tax benefits to renewable energy were not accounted, then GST could raise utility scale solar tariffs by as much as 9.5%, hampering progress.
How has the budget performed in attracting new investment? Two market opportunities stood to gain significantly from strategic budgetary support. First, residential rooftop projects could create 15 GW of renewable energy capacity in India by 2022. While budgetary support was extended for housing infrastructure, no direct support was announced for rooftop solar.
Secondly, replacing 15% of India’s irrigation pumps with solar pumps could build 20 GW of capacity. Aiming to double farmer incomes within four years, the budget discusses mainstreaming and interlinking Primary Agriculture Credit Societies with District Central Cooperative Banks. If this increases access to low-cost loans, the incentive to invest in the upfront capital expense for solar pumps could increase.
The budget’s real test lay in its approach to mitigating financial risk in the renewable energy, where capital costs are high, payback periods are long and off-taker, construction and foreign exchange risks raise cost of debt significantly. CEEW research shows that 70% of the costs embedded in already low solar tariffs owe to return on equity and debt servicing. But no budgetary support was extended to any agency to address risks. Moreover, financial support to the Solar Energy Corporation of India, the nodal agency for commissioning many solar and wind projects, has been halved to Rs50 crore.
Nor has the budget given any impetus to technology development. Only Rs144 crore has been budgeted for research and development, nearly half of last year’s allocation. A recent CEEW study showed that energy storage has a number of current commercial applications for telecom towers, petrol pumps, commercial establishments, rural ATMs, and academic institutions. Yet, funding remains constrained. In 2016-17 Rs 20 crore was allocated for developing, testing and deploying energy storage technologies. In 2017-18 there is no allocation for energy storage, which could exacerbate challenges with integrating renewable energy into the grid. Again, despite some focus on transport infrastructure, no allowances have been made for electric vehicles or biofuels. While total budgetary outlay to renewable energy marginally increased, there is little to celebrate. This budget is unlikely to catalyse action, attract private investment or underwrite risks. An opportunity was lost.
Dr. Arunabha Ghosh is CEO and Kanika Chawla is Senior Programme Lead at the Council on Energy, Environment and Water (http://ceew.in), one of South Asia’s leading independent think-tanks. Dr Ghosh is co-author of Energizing India: Towards a Resilient and Equitable Energy System (SAGE, 2016).