Budget to help India along energy switch journey

The government has already announced  ₹3,760 crore viability gap funding (VGF) for BESS and rolled out incentives under the National Green Hydrogen Mission, but experts suggest further support would be required to make their commercial availability and adoption more viable.
The government has already announced 3,760 crore viability gap funding (VGF) for BESS and rolled out incentives under the National Green Hydrogen Mission, but experts suggest further support would be required to make their commercial availability and adoption more viable.

Summary

The interim budget in India, set to be presented on 1 February, may include revisions in taxes and duties on battery energy storage systems and green hydrogen supply chain components. This move would provide a boost to the growth of these sectors.

New Delhi: The Union Budget for fiscal year 2025 (FY25) is expected to emphasize India’s energy transition amid a continuing policy focus on renewable energy.

Industry executives and sector experts suggest relaxations on levies on sectors such as green hydrogen may be part of the upcoming interim budget that finance minister Nirmala Sitharaman is set to present on 1 February.

“The Indian economy has performed strongly in recent times, despite geopolitical challenges and slow economic growth in export markets. The interim budget, despite being a vote on account, should be seen as an opportunity to spur even further capital inflows into India and keep up the growth momentum. It will, therefore, be good to see continued thrust on the government’s capex," said Sumant Sinha, chairman and chief executive officer of ReNew, the first Indian renewable energy company to list on Nasdaq.

Noting that 2024 is the first year of India’s global climate commitment to add 50GW of renewable capacity every year for the next five years, Sinha said the tripling of the pace involved would require progress on tenders, approvals and infrastructure development.

“Though not a usual practice for votes on account (as they deal with expenditure, not revenue), the government may consider a revision in taxes and duties on battery energy storage systems and green hydrogen supply chain components to provide a fillip to growth of these from the first quarter itself of the fiscal year," the ReNew chairman added.

Both battery energy storage systems (BESS) and green hydrogen are in a nascent stage and require government support for scaling up facilities and mass adoption. The government has already announced 3,760 crore viability gap funding (VGF) for BESS and rolled out incentives under the National Green Hydrogen Mission, but experts suggest further support would be required to make their commercial availability and adoption more viable.

Ashwin Jacob, leader for energy, resources and industrials at Deloitte India, noted that currently indirect taxes become a major cost component for green hydrogen. He listed these as “the customs duty paid on import of solar modules or solar cells, used in setting up of solar power plant for supplying renewable energy to green hydrogen plant; and secondly, loss of GST (goods and services tax) input pertaining to all procurements made by solar/wind power plant in setting up the unit, since the output electricity is exempt."

Jacob said the supply of electricity by a solar or wind power plant to a green hydrogen unit should be considered a deemed export, so that the power plant is eligible to claim refund on input GST, which then doesn’t become a cost to green hydrogen. Alternatively, the Central Board of Indirect Taxes and Customs (CBIC) should also allow direct refund of GST paid on all capital goods, inputs and input services used in generating power by a solar or wind power plant, with the condition that the output electricity is supplied exclusively to a green hydrogen unit.

“In terms of customs duty, CBIC should either provide upfront exemption from basic customs duty of 40% on import of solar modules, with specified end-use condition of using such solar power plant for supplying electricity exclusively to a green hydrogen project, or provide the benefit of project import with concessional basic customs duty of 7.5% on ‘solar power plant or solar power project, being set-up for supply of electricity exclusively to green hydrogen project’," he said. Jacob also recommended a hydrogen purchase obligation on specific sectors like refineries and fertilizer manufacturers to drive domestic demand.

The India Energy Storage Alliance (IESA), in its recommendations to the government, has sought tax holidays to boost investment in the energy storage sector, extension of production-linked incentives (PLI) for advanced chemistry cell (ACC) battery manufacturing, and duties for imported cells and supply chain components.

Rahul Walawalkar, founder and president of IESA, said: “We expect the upcoming Union Budget 2024 to consider a special incentive programme for battery raw materials and chemical processing and tax incentives, which will bring more investments to India’s fast-growing energy storage industry. Also, the rationalization and reduction of of GST rates to 5% for batteries for different applications across e-mobility and stationary storage would result in a reduction of overall system cost immediately. The tax incentives will support the industry by generating immediate demand by providing reduced costs, which will enable domestic manufacturing to pick up in the long run."

Rating agency Icra has suggested that a significant capital outlay be allocated for energy transition and net-zero objectives with a focus on new-age fuels including green hydrogen, ethanol and other biofuels. It said sovereign green bonds are likely to make a comeback in this budget, which would address the funding requirements for the wind, power and hydropower sector.

On 14 January, Mint reported that the Union Budget may propose issuing sovereign green bonds worth at least 20,000 crore as part of the borrowing programme for FY25 with a large chunk sold in the second half of the next financial year.

Girishkumar Kadam, senior vice-president and group head for corporate ratings at Icra, suggested exempting liquefied natural gas (LNG) from customs duty in order to boost the usage of natural gas, which is considered a cleaner fuel than oil.

“LNG imports attract customs duty of 2.5%. Exempting LNG imports from customs duty like crude, which attracts nil duty, would promote the use of natural gas as a fuel," he said. The government has been looking at boosting the use of natural gas and taking the share of natural gas in India’s energy basket to 15% by 2030 from the current 6%.

The budget may also propose a much- anticipated VGF for offshore wind projects with an allocation of around 6,000 crore.

Recently, Mint reported that the Union ministry of new and renewable energy has made the proposal to the finance ministry for the allocation of funds for the VGF in the budget. The initial allocation is expected to be specifically aimed at supporting 1GW of offshore wind capacity.

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