Union Budget should set the tone to accelerate clean energy

This year hit many records with unprecedented weather conditions, from extreme winters to heatwaves and torrential rains. Rising heat-related illnesses and deaths in India and across Asia, Europe and North America this summer have laid bare the inescapable impacts of climate change.

The heatwave in India, with maximum temperatures crossing 50°C, sent power demand soaring, with peak demand touching 250 gigawatts in May 2024, an increase of 3 per cent from the peak demand across all months in financial year 2023-24 (243 GW), putting pressure on the electricity system. With government efforts to ramp up electricity generation by increasing domestic coal supply and availability of imported coal and gas, peak demand increased by 4 per cent during the same period.

Such climate change-induced extreme weather events not only have an impact on electricity demand but also other macroeconomic factors like inflation and high interest rates, crippling the economic growth of a country. The Reserve Bank of India (RBI) governor Shaktikanta Das reiterated concerns about the risks posed by global warming and how frequent climate shocks drive up food prices.

Addressing climate change is, therefore, a top priority for the government. India has pledged to install 500 gigawatts of renewable energy capacity, produce 5 million tonnes of green hydrogen a year, reach 30 per cent electric vehicle (EV) sales and cut CO₂ emissions by one billion tonnes through greater energy efficiency, all by 2030.

Later this month, when Finance Minister Nirmala Sitharaman presents her sixth full Budget in the Lok Sabha, Prime Minister Narendra Modi’s government can take decisive action to honour its pledges.

Last month’s announcement of Rs 7,453 crore ($892 million) in Viability Gap Funding for two large-scale offshore wind projects—India’s first—totalling 1GW was a significant, albeit overdue, step toward the 2030 target. The government should extend such funding to micro, small and medium enterprises (MSMEs) so they can partner with multinational investors to develop a supply chain of locally manufactured components and skills.

While renewable energy has demonstrated positive growth, it has fallen short of the 2030 target. Successful deployment and integration of renewable energy depends on a secured supply chain, smart grid infrastructure expansion, flexible generation sources and development of innovative market mechanisms. As such, the renewable energy ecosystem requires budgetary support, tax breaks, relief in import duties and tariff barriers or tax credits to expedite development and attract necessary investment.

Increase R&D spending

Despite increased investment and deployment of clean energy, India lags behind other nations in research and development (R&D) spending.

India ranks fourth in the world in renewable energy capacity. Yet, its R&D expenditure is well below the annual average spent by member states of the International Energy Agency (IEA), which is about Rs 986 crore ($118 million), based on the most complete data available from 2022.

Last year, India’s Ministry of New and Renewable Energy said it had allocated Rs 228 crore ($27.3 million) for R&D over five years from FY 2021 to 2026, which adds up to about Rs 46 crore ($5.5 million) a year.

The Institute for Energy Economics and Financial Analysis calculated that the total government spending on renewable energy R&D in FY 2021-22 was about Rs 124 crore ($15 million) across all sectors, including the national wind, solar and bioenergy institutes and other programmes. Last year, the government more than doubled that figure with its National Green Hydrogen Initiative (which has an R&D budget of Rs 400 crore or $48 million).

While laudable, the ongoing disparity between research investment and deployment puts India at a competitive disadvantage. Other renewable energy sectors will need more government R&D support if India is to achieve its goal of energy independence.

The Budget can look at promoting R&D activities by local solar photovoltaic (PV) system manufacturers through tax rebates. Ideally, the government should encourage manufacturers with an annual production capacity of less than 1GW to invest at least 3-5 per cent of their gross revenue in R&D. Further, it should push other manufacturers to invest 1-2 per cent of their gross revenue in R&D. Similar provision should be made for other technologies.

Production-Linked Incentive (PLI) schemes have been instrumental in boosting domestic manufacturing of solar modules, battery energy storage systems (BESS), EVs, green hydrogen and electrolyser manufacturing. Rather than a combined PLI for integrated PV production, the government should delink it and disburse it separately for stagewise production output.

PLIs should also include the production of ancillary components and the recycling of secondary materials. The industry also seeks the introduction of PLI support for EV charging stations.

Tax rationalisation

There is an increasing demand to bring the power sector under the goods and services tax (GST) ambit. The GST on wind projects should be reduced from 12 per cent to 5 per cent in the interim. Until wind turbine costs come down, the government should relax the restrictions on developers and original equipment manufacturers (OEMs) through reduced import duties and GST.

The energy storage industry has called for GST to be reduced on lithium-ion and other batteries (currently 18 per cent), as well as related infrastructure, such as charging stations and battery exchange services (currently 28 per cent), to promote the uptake of EVs and BESS. It can also incentivise heavy commercial vehicles to transition to eco-friendly alternatives.

A five-year custom duty exemption on the import of various other components required for BESS should be granted.

Pumped Hydro Storage (PHS) project components are levied an aggressive tax rate of 18 per cent or higher. In addition, the power delivered by PHS plants is taxed twice, once on the stored energy and again on its final supply to the offtaker. To remedy this, GST on hydropower project components should be lowered to 12 per cent (as is the case for solar and wind projects) from the existing 18-28 per cent. Electricity duty and cross-subsidy surcharge should be avoided on the input power of storage projects.

Credit enhancement

To improve investment, the government needs to raise sovereign-linked funds and provide more equity infusion to organisations, such as the Indian Renewable Energy Development Agency (IREDA), to improve the availability of funds for clean energy projects.

For the PM Suryoday scheme to achieve its goal of expanding rooftop solar panels to 10 million homes, a robust credit enhancement scheme for MSME installers is essential. The government must offer special incentives to banks and non-banking financial companies (NBFCs) that offer rooftop solar-focused financing products. The financing solution must be designed to lessen the emphasis on the requirement of strong collateral.

Financing structures, such as an infrastructure investment trust (InvIT) or an aggregated bond, must be implemented to unlock the developers’ capital.

With 2024’s summer highlighting the climate-related challenges India is likely to face in the near future, this month’s Union Budget takes on huge significance as an agenda-setter for the government’s next five years in power. It must seize this opportunity to take sweeping action to mitigate the impact of climate change for the benefit of all in India.

This article was first published in ThePrint.