India’s energy sector has witnessed rapid growth over the last one year fueled by interventional policies, reforms and investments. Various policy initiatives such as introduction of UDAY, amendments in National Electricity Act, new solar RPO target for states, bio fuel policy, small hydro policy, offshore wind policy, and new hydrocarbon policy have all contributed to creating an environment conducive to investments while, attracting many new investors and global power players to India.
But, despite all these developments, there are still some long standing issues which need to be addressed and resolved at the earliest. There is a need for the government to come up with some more interventional policies to accelerate the growth momentum in the sector. Hence, the upcoming budget would be very crucial to the energy sector.
Section 80 IA of the Income tax Act 1961 provides 10-year tax holidays to the infrastructure projects. Domestic energy sector has been availing tax holidays under this section in 2016-17. However, to ensure a sustained growth in the sector, extension of 80 IA tax holidays for at least two year period would be highly desirable.
It is high time Government of India (GoI) makes efforts to resolve the stressed asset situation. A stressed asset revival fund empowered to perform capital as well as operational restructuring of stressed power plants is expected to be carved out from National Investment and Infrastructure Fund (NIIF).
Hydro power plants which are best suited for meeting peaking power demand would require policy push from the government. This is important to ensure smooth integration of large amount of renewables to the grid. India has about 145 GW of hydropower potential, 70 per cent of this potential is yet to be tapped. Clean energy cess is levied at the rate of Rs 400 per tonne on production of coal. The government needs to make consistent efforts to utilize the funds earned from clean energy cess to create a viability gap funding mechanism which could be used to support new hydro installations. Hydro sector may also need a separate RPO obligation, some interest subventions; and may be some FIT support to get the sector revived.
The basic objective of imposing “The Clean Energy Cess” was to support the development of renewable energy sector in the country. The cess was doubled to Rs 400 per tonne in the budget announcements in Feb 2016. But, now that there has been a drop in price of solar panels and other equipment which has led to a reduction in solar energy tariff to a level which is close to achieving grid parity. Hence, there is anticipation that with solar tariff being very close to achieving grid parity, this cess should now be rolled back to the pre-2016 budget levels, Rs 200 per tonne.
With the implementation of Goods and Services Tax (GST), the tax benefits availed by the renewable energy sector are bound to disappear. This will raise cost of production of renewable based energy. To have as less of an impact as possible, Renewables (especially solar and wind) should be kept in the lowest tax bracket of GST.
At present, Accelerated Depreciation (AD) available to the wind sector stands at 80 per cent. AD is one of the crucial financial incentives which has contributed to the renewable energy sector being recognized as a very attractive and lucrative sector in India. However, it would now be reduced from 80 per cent to 40 per cent starting April 2017. The government should take suitable measures to restrict or eliminate the rise of cost for developers. This is also critical to ensure envisaged wind capacity addition targets are met.
Generation based incentive (GBI) for the past few years has been responsible for ensuring that the wind power projects remain attractive to the investors. However, GBI is supposed to lapse on 31 March 2017. Since, we are far from achieving our 2022 wind energy target, extending GBI by at least another 2 years is expected to maintain the growth momentum in the sector and to achieve 60 GW target by 2022.
Government is yet to finalize the solar manufacturing policy. The said policy will accelerate growth of the sector by reducing cost of solar panels, other equipment, and overall solar tariff, and by developing a solar ecosystem in the country. This policy is also critical from the perspective of achieving 100 GW of installed solar energy target.
There is a need to encourage storage solutions, off-grid solutions, mini grid financing through some guarantee funds and interest subventions.
In the coal sector, so far it was only Coal India and its subsidiaries which were responsible for commercial mining and distribution of coal in India. However, in the current evolving business landscape, it is now becoming imperative for the government to open up commercial coal mining to the private players. Private sector participation will ensure that it brings with it not only new and advanced mining technology but also lead to increased operational efficiency and market driven coal pricing. However, mere opening of the sector will not be sufficient, it will call for the government to draw a clear cut roadmap to ensure the creation of a free coal market in the country.
Realizing the importance of natural gas as fuel of the future, the Government should ensure that there is a significant increase in the consumption of natural gas in transport, industrial use, and in domestic households. In the absence of sufficient domestic production, the gas has to be imported in form of LNG. To promote consumption of LNG, import duty of LNG should be made at par with the import duty of crude petroleum, which is presently zero.
Finally, exploration of oil and gas is a risky business and at times explorers find no oil or gas. Companies invest huge amount on exploration and on setting up exploration and production facilities. No production results in sunk cost for the companies and thus companies involved in this business require support from the government. Infrastructure status for exploration and production facilities will help these facility owners avail additional benefits available to infrastructure projects and cover up for some of sunk cost.
To conclude, a more hand-on approach to resolution of the pending issues will be the key to the growth in the sector. Government has demonstrated a strong vision for the sector that encompasses energy security, clean / sustainable energy, and affordable power to all. The future of the energy sector looks optimistic as higher investment flows are envisaged owing to the various policy initiatives and the budgetary support. Today, all eyes are on India to see how it can translate words into actions as well as accelerate the reforms momentum for a more sustainable and inclusive growth.