India’s Budget 2022 shows the government has missed a pressing opportunity to accelerate the energy transition.
The government has missed a pressing opportunity
Finance Minister Nirmala Sitharaman’s Budget speech delivered on 1 February 2021 referred to energy transition and climate action as two of the key priority areas of the union Budget. Despite this, the Budget lacked support for some of the key areas of the transition.
“The Budget appears to have fallen short of promoting clean energy in an accelerated manner,” says India lead, energy economist Vibhuti Garg.
“At a macro level, an increase in Capex will boost economic growth, however, not much additional budgetary support or tax incentives have been provided to clean energy, both grid and off-grid, including solar rooftop, storage technologies and green hydrogen.
“This is despite the big expectation that support would be provided to these new technologies to improve their commercial viability and accelerate the transition.”
Budget 2022 extended support for domestic solar module manufacturing by allowing additional funds of Rs19,500 crore (US$2.6Bn) under the Production Linked Incentive (PLI) scheme.
Energy analyst Kashish Shah says in FY2021/22, the PLI tender’s first round provided support of Rs4,500 crore (US$600m) for setting up 10GW of fully integrated solar module manufacturing.
A Budget increase in solar manufacturing was expected
“This received a tremendous response from the industry with the tender being heavily oversubscribed,” says Shah. “As a result, a Budget increase in solar manufacturing was expected.”
Shah says the PLI scheme for battery manufacturing for EVs had similarly received a strong response.
“In this case, budgetary support of Rs18,100 crore (US$2.4Bn) was provided to set up a battery storage capacity of 50GWh. This tender was oversubscribed by 2.3 times.”
Garg says the increase in allocation for the manufacturing of high efficiency solar modules, and the inclusion of new/updated policies on zero fossil fuels, electric vehicles (EVs), coal gasification and battery swapping, are moving in the right direction.
The Budget’s proposed policy on battery swapping is aimed at overcoming constraints in building battery charging infrastructure in urban areas, and modelling ‘battery or energy as a service’.
“This is a welcome step,” says energy analyst Purva Jain, “with the proposal to include energy storage systems, including charging infrastructure and grid-scale battery systems in the harmonized list of infrastructure, bringing its own benefits.”
The Budget speech emphasised that private capital would play a pivotal role going forward.
We are pleased with the announcement of plans to issue sovereign green bonds
“We are pleased with the government’s announcement of plans to issue sovereign green bonds for projects that will help reduce the carbon intensity of the economy, enabling access to large pools of money for the energy transition,” says Garg.
Energy finance analyst Shantanu Srivastava agrees, saying while no details were shared regarding the issuance size and allocation of green bonds for specific industries and technologies, they are, however, a welcome move.
Sovereign green bonds have been issued by several countries recently including France, Germany, the UK, and Indonesia, among several other nations. Some twenty-one sovereign green bonds were priced in 2021 globally.
“Green bonds are an essential source of capital attracting global ESG-aligned investors and reflects India’s requirement for US$1 trillion to fund its energy transition,” says Srivastava.
“A key deliverable will be to channel this finance to not just mature technologies such as solar and wind energy generation, but also towards new technologies in the energy storage space such as batteries and green hydrogen which have not yet achieved commercial viability and may need government support.
“It will be interesting to see where these funds will go, given green bonds are ‘use of proceed’ instruments which means funds raised must only be used on specific projects that qualify on certain environmental quantifiable parameters such as greenhouse gas (GHG) emission reductions.”
Budget 2022 shortcomings
India has set up a huge target of 500 gigawatts (GW) of non-fossil fuel energy by 2030.
Garg says while renewable energy is already competitive with existing fossil fuel plants, newer technologies will require support.
The Budget didn’t include any mention of support for the closure of inefficient fossil fuel plants
“The Government should have provided a budget allocation and a reduction of duties to allow the further deployment of rooftop solar, off-shore wind, green hydrogen, and so forth,” says Garg.
“The Budget also didn’t include any mention of support for the closure of inefficient fossil fuel plants, nor did it deal with increasing air pollution problems.”
The Solar Energy Corporation of India (SECI) and the Indian Renewable Energy Development Agency (IREDA) also missed out on receiving budgetary support.
“This indicates that these organizations may rely heavily on debt raising during the coming fiscal year,” says Srivastava.
Shah says the power industry expected further support through tax relief for battery energy storage systems.
Necessary for an effective energy transition, battery storage systems currently attract a very high GST of 28% and basic customs duty (BCD) of 10% on imported battery packs.
“This makes it extremely expensive to build utility-scale storage projects in India,” says Shah.
Green hydrogen also missed out in the Budget
“Although a critical area already identified by the government to achieve India’s decarbonisation goals, the budget did not grant this wish of the power industry.”
Green hydrogen also missed out in the Budget despite being touted as a new sunrise industry with massive potential to boost India’s energy economy.
“However, the Ministry of Power is expected to come up with a hydrogen policy in the next few days,” says Shah.
Gas infrastructure left behind – a change in heart?
Jain says there was no mention of any gas related schemes or infrastructure in Budget 2022 – including the city gas distribution (CGD) network – even though the 11th round of CGD bidding was recently concluded.
“The pricing of LPG cylinders and the removal of subsidies was also avoided in the Budget speech,” says Jain. “LPG subsidies look like they won’t be making a revival any time soon.”
The Ministry of Petroleum and Natural Gas (MoPNG) has also taken a hit, being allocated a budget of Rs8300 crore versus upwards of Rs40000 crore back in the FY2019/20 budget.
LPG subsidies look like they won’t be making a revival any time soon
And only Rs50 crore was allocated for loans for bagasse-based co-generation of power projects compared to Rs125 crore in 2019/20 and Rs200 crore (BE) in 2018/19.
Even though the energy transition was announced as a key pillar of the budget, the announcements didn’t follow suit.
Many critical aspects of the energy transition were not mentioned in the Finance Minister’s speech, such as green hydrogen, biomethane, and so on.
“Largely, the Budget maintained a status quo on some of the critical areas of the energy transition,” says Shah.
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