Not a dream budget for solar (a 3 out of 10)

02 March 2015 |

On the 28th of February, India’s finance minister has presented the widely anticipated first full budget of the new Modi government. After all the fanfare around growing the Indian solar market including at the recent RE-INVEST, the industry was expecting if not real boost to the sector, at least a clear directional step towards creating a sustainable and fast growing solar market. This expectation was not met.

  • A couple of measures will help solar manufacturers and solar developers
  • Many new laws were promised – but we need to move to implementation
  • The bigger picture of building a healthy economy (driving power demand), building a healthy power sector (pricing) and enabling solar to take a large share of that (grid access) were not satisfactorily addressed

Photo credit: AP

Just to clarify: we were not expecting industry handouts, such as feed-in-tariffs, subsidies or tax breaks. They don’t work. Instead, we were looking for measures that would create a sustainable solar market, one that allows professional and household investors an attractive rate of return on solar projects. Such a market can be created by: ensuring sustainable (implying: higher) power tariffs; by drafting reliable and transparent grid access rules; by investing into expanding the power grid and making it “smarter”, i.e. future ready; by improving contractual security (clearing up the legal backlogs); by making acquisition of land easier; and by fully opening up India’s financial system.

That cannot, of course, be achieved in entirety in just one year’s budget. Thus, we would have already considered clear steps in the right direction a 10 out of 10 budget. However, they are missing. At the same time, there are no specific measures for renewables. For instance, there are now tax-free bonds for rail and roads, but not for renewables. In light of the government’s earlier emphasis on providing financing solutions to achieve the ambitious renewables targets, this is surprising. Also, there was an expectation that the Minimum Alternate Tax (MAT, at 18%) was to be dropped for renewables projects. This did not happen. An interesting point made by the finance minister was that the government sees a cleaner development as part being pro-poor as environmental degradation hurts the poor most.

Overall, there is little in this budget to suggest how India is to grow to a 10 GW a year solar market, in line with the government’s goals, from the current 1 GW per year. This budget, for us, is just a 3 out of 10 – a disappointment, really, especially when measured against the large expectations this government has fuelled over the past months. This is why:

What helps

– Overall economic policy seems to be sound and could bring India back to stable, higher growth rates (and hence rising power demand) and improve the business environment. There were no big handouts (subsidies) and the government seems determined to keep the budget (and inflation) under control.

– 5% reduction on corporate tax (30% to 25% over a period of 4 years)

– This was not directly part of the budget, but to give the government its due: Instead of subsidizing petroleum products, there is now a duty, an effective “carbon tax” on them. This is hugely helpful. It might incentivize India’s 60-90 GW of diesel backup operators to consider solar hybridization or replacement.

What seems to help but does not (really)

– The coal cess is to be raised from INR 100 to INR 200 per ton of coal used. This will increase the funds in the National Clean Energy Fund and should lead to an increase in tariff of INR 0.04-0.06. The coal cess sounds like a good idea from the point of view of renewables, but it is worth keeping in mind that (a) domestic coal is given away to power plants at cost (rather than market prices) and that (b) the funds have so far not been spent on green investments. The underlying issues around power pricing remain unresolved.

– More public investments à growth driver, but not really sustainable/relevant to solar

– Less tax exemptions à makes the Indian market more transparent, accessible for professional investors

– The government affirmed that it wants to provide power to India’s un-electrified villages (it counts 20,000 of them). This is good, but there is no clarity on how it intends to do so. Previous governments have said the same and not delivered. What is different this time?

– Reduction on import duties of materials for solar cells (copper wiring, tin alloy). While this makes sense, it will have a small impact on cell manufacturing costs.

What slows down the sector

– Nothing, really. So that is good news. The only (minor) concern is an increase in service tax from 12.36% to 14%. That will affect all engineering and maintenance services which are crucial to upholding execution quality of solar.

What is missing

– No plan! The government wants to see 100 GW of solar and 60 GW of wind built in the next seven years. These are very ambitious goals and there is absolutely nothing in the budget to suggest how this might be achieved.

– No clear financing plan for renewables – there was much talk before the budget of initiatives such as currency hedging support, interest rate subvention and classification of renewables as priority sector.  But none of these measures have been accepted.

– No reform of the power markets. There is nothing to suggest how power prices might be rationalized and how.

– No grid investment plans. Evacuation of 100 GW of solar and 60 W of wind would require dedicated transmission infrastructure. Given that transmission lines take 3 years to build, the government would need to start now. There is nothing in the budget relating to that.

An afterthought: The stock market was not thrilled either. It closed a couple of point down, still near its all time high, at 29,361. Expectations, one could argue, were largely met. However, stocks of companies linked to the infrastructure and power sector, such as Tata Power, Coal India, NTPC and BHEL were amongst the day’s biggest losers.

Tobias Engelmeier is the Founder and Director of BRIDGE TO INDIA

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