In the run-up to the Union Budget 2022, industry stakeholders talk about their hopes and expectations for the sector. Their top priorities are more reforms in the power distribution segment and measures to spur renewable energy investments to meet the target of 500 GW of non-fossil fuel-based energy by 2030. Excerpts…
What are your expectations from the Union Budget 2022? What are the issues that need to be addressed on a priority basis?
Jaymin Gajjar and Abhishek Nath
The union minister of finance, Nirmala Sitharaman, will announce the Union Budget 2022-23 on February 1, 2022. This time, it is anticipated that the government will make exciting announcements to help the power sector evolve in line with India’s aspiring energy transition initiatives.
In the Union Budget 2021-22, the main focus was on discom viability and renewable energy. The Revamped Distribution Sector Scheme of Rs 3,050 billion was announced to improve the financial and operational efficiencies of discoms. The aim was to support discoms in strengthening their infrastructure including system upgradation, prepaid smart metering, and feeder separation, which would ultimately improve the power supply quality and reliability. Also, the scheme was planned to decrease aggregate technical and commercial (AT&C) losses to 12-15 per cent, and bridge the gap between the average cost of supply and average revenue realised.
The central government has launched various schemes in the past to improve the operational and financial efficiency of discoms. The Ujwal Discom Assurance Yojana was one of the flagship schemes. However, it could not achieve the desired results as AT&C losses, at 22 per cent, are still on the higher side compared to the global average of just 8.3 per cent. There are still 15 discoms with losses greater than 25 per cent in India.
Therefore, for discoms, the effective implementation of schemes could be ensured through suitable incentives and penalty mechanisms. Privatisation under the public-private partnership mode could be another option that would enable discoms to increase revenues, decrease inadequacies and deliver a good consumer experience. It is a sensitive topic and needs to be dealt with accordingly. For instance, last year, the centre announced the privatisation of six discoms in union territories. Only Chandigarh, Dadra & Nagar Haveli, and Daman & Diu have called for bids so far. For the Chandigarh discoms, the Punjab and Haryana High Court has already stayed the proceedings. Many stakeholders have also asked for scrapping the bidding process. The government should therefore take into consideration the perspectives of all the stakeholders in this budget and share revised guidelines for the successful and smooth implementation of the privatisation process. In addition, measures should be introduced to increase the accountability of discom officials at all levels (corporate to field). This would make them more responsible for the efficiency of discoms.
At COP26, Prime Minister Narendra Modi announced India’s ambition to go net zero by 2070. He also announced that India would expand its renewable energy capacity to 500 GW and fulfil 50 per cent of its energy requirements through renewable energy by 2030. As of December 2021, India has added 393.4 GW of energy generation capacity to the energy mix. Thermal capacity holds the largest share of 60 per cent, and renewable energy holds a share of 38 per cent. To increase the share of renewables, the government could allocate a budget for research and analysis to assess the feasibility of replacing ageing thermal plants with clean energy technologies such as solar and wind. Thermal plants in each state could be categorised as per their age and efficiency, and robust strategies could be developed for decommissioning old, inefficient and polluting plants.
Further, there could be a budgetary allocation for accelerating the adoption of electric vehicles (EVs) and setting up EV charging infrastructure. New and firm policies along with attractive financial incentives are expected from the government for boosting electric mobility, and developing charging and battery swapping infrastructure across the country. Many private companies are interested in manufacturing EVs. To attract them, the government could announce tax holidays for manufacturers for an initial period of four to five years. The government could also reduce the goods and services tax on EV spare parts, such as batteries and chargers, to 5 per cent from the current 18 per cent. Also, considering the huge demand for high efficiency mono PERC and bifacial solar modules, the government could consider declaring financial incentives or subsidies for indigenous solar module manufacturers. Financial support is essential to give the much-needed push to domestic solar manufacturing and strengthen the supply chain.
Apart from these measures, the government is most likely to provide budgetary support for developing a hydrogen economy. India would need financial support from both public and private sectors to develop an indigenous hydrogen supply chain (from production to supply including storage and transport) for setting up a green hydrogen electrolyser capacity of 15 GW by 2030. The electrolyser capacity of 15 GW is expected to generate 3 million metric tonnes of green hydrogen and would require 30 GW of renewable energy. Experts also expect the creation of a nodal office for coordinating all the activities of the central ministries to develop the hydrogen economy.
Privatising discoms, decommissioning ageing thermal plants, replacing ageing plants with solar and wind, strengthening the EV sector, and building a hydrogen economy should be the top priorities while planning the Union Budget for 2022-23. By doing so, India would be able to expand its renewable energy portfolio and start the journey towards a net zero future in a sustainable manner.
The renewable energy segment remains the key focus area in the power sector for the government amid the prime minister’s announcement of increasing the non-fossil fuel-based capacity to 500 GW by 2030 from 150 GW at present and meet 50 per cent of the country’s energy requirement from renewable sources by 2030. This requires an annual capacity addition of 42 GW over the next eight years, necessitating multi-billion dollar investments during this period. Therefore, the availability of adequate long-term financing at cost-competitive rates remains important for achieving these targets. Further, incentives and policy measures are required to promote investments in the energy storage segment considering the increasing share of renewables in the electricity generation mix and the need for adequate balancing sources. This apart, policy measures are required to revive the stranded gas-based projects, which would enable the availability of balancing power sources. Also, ICRA expects an increase in the funding outlay for the production-linked incentive (PLI) scheme for solar module manufacturing given the strong interest from the prospective players under the tender issued by IREDA. This would augment the domestic module manufacturing capabilities.
The weak financial profile of state-owned discoms continues to remain a major area of concern for the power sector. Achieving a turnaround in the distribution segment remains key to achieving the renewable capacity targets announced by the government. This would require a focus on operational efficiency improvement and allowing timely pass-through of cost variations through tariffs to the consumers. ICRA expects the budget to focus on accelerating the implementation of reforms in the distribution segment including the proposed delicensing initiative.
Further, the budgetary allocation is expected to be increased towards strengthening the distribution infrastructure under the “reforms-based and results-linked” scheme announced in the previous budget by the Government of India. Also, ICRA expects the budgetary allocation to be increased for strengthening the transmission infrastructure (both at the intra-state and interstate level), towards evacuating power from regions with high renewable generation potential.
Rajiv Ranjan Mishra
India’s progress in the renewable energy space over the years has been truly remarkable. We are one of the most attractive investment destinations in the world today for renewable energy. The industry is looking forward to the upcoming Union Budget with certain expectations. We hope that the government resolves the financial issues of discoms and ensures that the awarded contracts are respected on the fiscal front. Seeing the excellent response that the PLI scheme attracted, we would like for it to be extended to the future as well. We would also like import duties on items such as batteries and electrolytes to be lowered so that we can strengthen our capabilities in areas like green technologies and hydrogen. Last but not the least, we request that electricity be included in the ambit of GST as it will help in the reduction of costs and ultimately benefit India’s consumers.
As a player in the energy and power sector, we are really hopeful that the Union Budget 2022-23 will set a path to recovery this year. The energy sector is pinning a lot of hope that the upcoming budget will offer the much-needed push for the revival of consumer confidence, especially in the renewable energy sector. The Union Budget 2022-23 must focus on incentivising technology adoption in the renewable energy sector through tax concessions and credit guarantee. For the entire renewable industry to grow, structural incentives need to be built in the ecosystem to enable both the industry as well as consumers to adopt and utilise technology efficiently. Whether it is related to EV usage, investment in battery, lithium imports, lithium converter and lithium refinery set-up, or green hydrogen adoption, it is imperative that the high costs associated with these technologies are socialised and given enough government protection.
The government has set an ambitious target of increasing the installed renewable capacity to 430 GW by 2030 and at the same time increasing the GST on solar modules from 5 per cent to 12 per cent, which should certainly be reconsidered as huge investments have been planned in this sector going forward. There is also a need to bring generation and sale of power under the purview of GST.
Another important step we hope is taken is utilisation of the GST compensation cess for making existing coal-based plants environmentally compliant by installing FGDs. Allocating money in grants will help avoid the increase in tariffs and will be a positive move by the government to mitigate pollution.
Further, if we look at strengthening the interstate transmission network, it will help restrict grid curtailment and ensure power flow from renewable-rich states to other states with waivers on interstate and intra-state transmission charges.
Going forward, there will be a much anticipated shift in the energy sector, with a focus on ESG and renewables. Thus, the steps should complement that change. To start with, we expect the government to consider reducing customs duty on electrolysers required for green hydrogen generation in order to make India a global manufacturing hub.
Infrastructure development: Capital expenditure towards smart and clean infrastructure including railways, power transmission and power grid upgradation should be enhanced to create a multiplier effect in investments and create new employment opportunities to uplift the economy.
Given India’s commitment at the COP26 summit, we can hope to see a massive push for public mobility infrastructure and renewable capacity addition in the 2022-23 budget. Although India is making remarkable progress in meeting its ambitious renewable energy target, the public e-mobility space leaves a lot of scope for charging infrastructure. As per an EV industry report, for India’s 2030 EV target the country needs to add 400,000 stations by 2026, that is, more than 200 charging stations a day.
Climate tech: To reach net zero emissions by 2070, much higher fiscal support for low-carbon innovation and new climate technologies such as smart charging infrastructure and energy storage will be needed. We look forward to incentives and tax benefits for technology players who are enabling the development of sunrise sectors in India through new technologies – internet of things, machine learning and artificial intelligence, battery energy storage systems (BESS), and more – and building the local manufacturing ecosystem and supply chain.
Transition financing: India’s aim is to become a manufacturing hub for EVs, data centres, solar PV and green hydrogen. This vision is dependent on energy transition financing, which is vital to improve energy efficiency, enable digitalisation of power equipment and help climate technology reach scale locally. This will be equally important for the MSME sector, which consumes about 30 per cent of the energy delivered to formal industrial units.
The recent spike in raw material prices, increase in freight charges and disruptions in the global supply chain can slow down the energy transition at a precarious time. The government can assist by promoting demand through easier access to capital. Also, we expect to see the rationalisation of import duties especially in energy storage, green hydrogen and carbon capture technologies to help build the local market. Taxes should also be revisited to ensure faster development of the clean energy ecosystem. Discom dues remain elevated despite the recent liquidity infusion. We can look for an appraisal of the expected reforms and financial performance parameters, especially for renewable IPPs that will contribute significantly to India’s COP26 goals.
Boost to research and development (R&D): R&D in domains related to energy transition, especially power quality, smart grids, BESS, green hydrogen and carbon capture, are crucial. Companies investing in the same need to be supported by proactive policies.
Preparedness: We need corporates, governments and financial institutions to be well aligned on investment and research programmes. Only then can we bring new technologies to commercial and climate-stabilising scale as well as upscale existing industrial systems. All said, given the rough start to the year because of Omicron, pandemic preparedness and collaboration with corporates to facilitate relief and curtailment measures will help India recoup from the third wave faster.