India’s Solar and Wind Power Industries: Scope for Investors

In June 2015, India announced that it would develop 175 gigawatts (GW) of renewable energy capacity by 2022. To this end, federal and state governments introduced a number of tax and financial incentives to make India’s nascent solar and wind sectors appealing for investors. These benefits allowed the renewable energy industry to become cost-competitive with other conventional fuels.

Cut back to 2018 and the gradual roll-back of some of these incentives – the federal government defending the move as a way to ensure a level playing field for all resources, even as it threatened to make renewable energy production financially unviable.

In this article, we take an in-depth look at investing in India’s renewables sector, and discuss the major incentives still available for investors and producers.

Investing in India’s renewable energy sector

India’s amended Electricity Act, 2003 allows up to 100 percent FDI under the automatic route for renewable energy generation and distribution projects. No other law specifically deals with renewable energy in India.

The under-regulation of the rapidly innovating renewable energy market along with technological upgrades makes doing business a complicated process.

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Most companies operating in this sector in India do so as limited liability partnerships (LLP), either forming joint ventures or wholly owned subsidiaries.

Since the early 2000s, incentives offered by the federal government to attract FDI have allowed the country’s emerging wind and solar power industries to lower their per unit generation cost, thereby making them cost-competitive with other fossil fuels.

The most significant of these incentives are:

• Renewable Purchase Obligations (RPO) that require power distribution companies (discoms) and large industries to source a fixed percentage of their power requirements from renewables. Each state has set its own RPO requirement, which may usually vary from 2-14 percent.

• 10 percent of power production from new coal and lignite capacity additions (upgrades or new generating units) must come from renewables, according to the Renewable Generation Obligation (RGO).

Tax incentives offered to the wind and solar energy industry

The government’s policy to enhance India’s renewable energy portfolio has led to the introduction of a slew of tax incentives to encourage investment.

These are as follows:

• Firms are exempt from the payment of income tax on profits from power generation for the first 10 years of their operation.
• Some imported products are exempt from payment of excise duty. For instance, certain components of wind-energy electricity generators and solar photovoltaic (PV) ribbons are liable for full exemptions.
• Select components for the manufacture of solar modules, solar water heaters, and associated systems are granted complete or partial Basic Customs Duty (BCD) waivers.
• Solar and wind power projects are excluded from inter-state transmission charges or taxes on transmission losses for 25 years from the date of commissioning.
• The Goods and Services Tax (GST) on solar and wind energy components is limited to 5 percent.

Financial incentives for the wind and solar energy industry

The federal government has switched to an auction-based allocation of wind and solar capacity. The lowest wind and solar tariffs now amount to US$0.04 (Rs 2.44 for solar and Rs 2.50 for wind).

Incentives to bring down the costs of solar and wind energy include:

• Wheeling charges (charges for transmission of electricity over the grid on a per megawatt hour basis) are comparable with those offered to fossil fuel based power. Considering the irregular nature of wind and sunshine, this is a vital incentive offered to companies.
• Viability Gap Funding (VGF) assistance, up to a maximum of US$153,846.2/MW, through reverse e-auction for ultra large solar power projects of 5,000 MW capacity, which will be implemented by the Solar Energy Corporation of India (SECI).
• A subsidy of 30 percent of project costs, after which off-grid solar projects can also avail soft loans.
• 40 percent accelerated depreciation in a written down value (WDV) basis.
• Rooftop solar installation as accommodated in housing loans provided by banks or National Housing Boards.
• To protect against defaults by state distribution companies, solar power is included in the Tripartite Agreement between India’s federal government, state governments, and the Reserve Bank of India (RBI) for payment security.

A combination of these incentives and other favorable policies helped attract about US$2.05 billion (Rs 13,000 crores) in investments in India’s renewable energy sector between April 2014 and December 2016.

Withdrawal of incentives a challenge for the renewables sector

India’s target of generating 175 GW through renewables by 2022 is the world’s largest such renewable energy capacity expansion. Yet, despite significant private investment in recent years, the energy capacity secured amounted to only 58 GW in December 2017.

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Meanwhile, government support such as the ten-year tax break and Generation Based Incentives (GBI) were withdrawn in 2017. In addition, the relaxed rate of 80 percent of accelerated depreciation was reduced by half.

This is because federal regulators hope that the gradual withdrawal of support mechanisms will help create a market-run power industry. The renewables sector disagrees – calling the move premature, before the industry can effectively compete with leading energy players, especially coal.

In another let down for the sector, the government diverted funds from the US$8.3 billion National Clean Energy and Environment Fund (NCEEF) – towards compensation for states during the implementation of the GST.

India’s energy market – Is a level playing field possible?

The rapid growth of renewables in India showcases the importance of incentives for an emerging industry to be able to compete with established energy players.

To illustrate this, an example from a recent business bid may be considered, where the lowest solar bid of US$0.04 (Rs 2.44) at Bhadla in Rajasthan was achieved through a combination of the following:

a) Viability Gap Funding (VGF);

b) A state-backed long term Power Purchase Agreement (PPA); and,

c) Land acquisition by the government of Rajasthan.

Incentives are key to reducing the prices of solar and wind power generation in a market dominated by an extensive and cheap coal-fired generation capacity. The incorporation of ‘clean coal’ technologies, having improved efficiency rates, within Ultra Mega Power Projects (UMPP) of 4,000 MW capacity poses a serious challenge to renewables. The coal industry also receives several subsidies like reduced freight rates for the transport of coal from mine to plant.

Hence, if a true level playing field is to be achieved, any withdrawal of incentives for the renewable energy industry should be commensurate with the withdrawal of subsidies granted to the coal industry.

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