Tariffs, policy ambiguities blocking India's road to green future

Tariffs and ambiguities in policy could slow the country's progress as it races to reach its 2022 renewable energy target earlier than previously thought

Though still heavily dependent on coal-fired power, India is fast turning to cleaner sources of energy. Evidence: Solar installations in 2017-18 were double that of coal additions, which declined 28 per cent over the year. 

But does this fast pace of growth mean the country can confidently meet its 175 GW of renewable energy capacity target by 2022 and even exceed it to reach 225 GW? Union minister of state for power and renewable energy RK Singh thinks so, though in his four-year achievement press conference, he stopped short of enunciating 225 GW as the new target.   

The 2022 renewable energy target of 175 GW, that includes 100 GW of solar, 60 GW wind, 10 GW from biomass and 5 GW small hydro power, was set in following India’s Paris Climate commitments. But despite Singh’s optimism and two years of government efforts, achieving the initial goal itself is a tall task. 

Rajendra Kumar Parakh, chief financial officer of Kolkata-based Vikram Solar, says even to achieve 100 GW of solar deployment by 2022, the country has to commission 20 GW every year till 2022. Twenty one GW of solar power projects have been commissioned so far and India achieved almost 10 GW in 2017-18. 

But the pace of new additions could slacken. “According to some reports, deployment is expected to decrease by 35-40 per cent in FY 2018-19 due to uncertainties like safeguard duty, Goods and Services Tax (GST), anti-dumping duty and slowdown in auctions,” says Parakh. He cites ambiguity over the tax rate for solar-based EPC power projects, because of contradictory rulings from various advance ruling authorities, as one of the problems. 

Another, he says, is embedded in the rates relating to goods and service tax. The government had put solar modules in the 5 per cent tax bracket under GST. However, due to solar power projects being classified as work contracts, they attract 18 per cent tax. 

Parakh argues that if the solar sector remains mired in these problems it will be difficult to achieve even 100 GW by 2022.  “Targets can only be achieved if there is clarity and predictability in the policy ecosystem and these critical issues are addressed,” he says. 

Crucially, the acceleration in renewable energy capacity addition is required in the Indian market at a time when China is planning to cut down subsidies to its developers. This, it is feared, will encourage solar panel manufacturers in that country to direct more imports towards countries like India, causing further stress to domestic manufacturers. 

There is, however, a counter argument emerging from what has happened in the United States. Despite tariffs on imported panels, the US installed more solar energy than any other source of electricity during January-March 2018. Developers there installed 2.5 GW solar during the period, up 13 per cent from a year earlier, according to a report of the Solar Energy Industries Association and GTM Research. 

There are, however, fears of US installations being flat in 2018 as tariffs and tax reform drive up costs. 

But India’s target looks achievable to many. Tulsi Tanti, founder and chairman and managing director of Suzlon Group, the country’s largest wind equipment player, is optimistic about the bullish government outlook. “India’s renewable energy target echoes the government’s commitment to increase the share of renewables in India’s energy architecture and enable the transition to a low carbon economy. The additional 52 GW will also boost government's ‘Make in India’ vision apart from creating new jobs in the country,” he says.  

With cumulative installation of 34 GW at the end of FY18, wind energy has crossed the half-way mark despite a change of regime from feed-in-tariff to tariff-based bidding. “Wind energy is competitive with respect to other energy sources. It has emerged as a mainstream energy source and has entered into industrialisation phase backed by huge demand,” says Tanti.

“Volumes are set to grow exponentially with 10-12 GW auctions each year from Solar Energy Corporation of India and state bids combined, as well as from projects less than 25 MW based on FiT (Feed in Tariff). Emerging areas such as Wind-Solar Hybrid, Offshore and Repowering will further enhance the rapid growth of clean energy in the country.” 

To push the Make-in-India agenda, however, not just developers but equipment makers would need to have the capabilities to meet the intended capacity addition. Currently India has 9 GW of module manufacturing capacity, out of which only 3GW is operational because domestic manufacturers face fierce threat from Chinese and other foreign manufacturers, says Parakh. 

“India used to deploy domestic content requirement (DCR) (for local sourcing) but since the WTO decision, there is no elbow room for government to apply DCR policy. However, Central Public Sector Undertakings can still procure modules from domestic manufacturers and this will provide domestic manufacturing facilities a secure market,” he says. 

In all of this, government support is crucial. The ever-evolving technology for renewable means companies have to be constantly on their feet deploying fresh capital to bring themselves up to speed.

“So, unless there is upfront support in terms of capital subsidy, it is very difficult for manufacturers to survive, or to start a new facility or upgrade an existing one,” says Parakh.

He pitches for India achieving its renewable energy targets, not by deploying imported equipment but domestically produced equipment. 

One of the pitfalls of imposing safeguard duty could, however, be the impact on units located in the special economic zone. If a blanket duty is levied, solar manufacturing units located in SEZs will be liable to pay duty. “Indigenous manufacturers located in SEZs will be caught on the wrong foot in case a blanket safeguard duty is imposed as they are considered to be outside the domestic tariff area,” says Parakh. 

While the tariff issues may need immediate attention, adherence to contractual commitments by the state utilities and a continued pipeline of tenders are essential for any further growth in renewables.