On 26th June 2014, the Ministry of New and Renewable Energy (MNRE) announced continuation of the capital subsidy scheme for rooftop solar projects (refer). Under this scheme, the government will continue to provide 30% of the capital cost of the projects as an upfront subsidy to rooftop projects implemented by MNRE “channel partners” or state nodal agencies. Three note-worthy tweaks have been made to the subsidy mechanism.

• Firstly, state nodal agencies are expected to play a more important role in the process. The state agencies can now independently approve and implement projects up to 50 KWp each and set their own targets. Up to 10% of the financial assistance can be provided at the time of approval of these targets.
•  Secondly, the maximum size for a project to avail subsidies has been raised from 100 KWp to 500 KWp.
• Thirdly, the subsidy can now be availed by not only the state nodal agencies and channel partners but also directly by other agencies such as railways, defense,  public sector units and municipal corporations. All these changes are broadly positive in our view.

However, over the past 18 months, project approval under the subsidy mechanism has come to a standstill: very few subsidies were actually paid out. Due to budget cuts, the MNRE was unable to pay the subsidy. This unresolved situation has frozen the market. Customers are aware that a subsidy policy exists and expect low system prices which channel partners cannot offer. Many customers then prefer to wait for the subsidy to be available and defer going solar. This lure of subsidies even negatively affects projects that are viable without any subsidy. Clearly, a bad subsidy scheme is worse than no subsidy scheme. Recognising this, several industry representatives and industry bodies have recently asked the government to do away with the subsidy mechanism and leave the market to operate on its own (refer).

Now that the government has decided to nevertheless continue the subsidy, the question is: will it provide the funds? In the last financial year (April 2013- March 2014), MNRE had received a budgetary allocation of INR 15.2 billion (USD 250 million) for various renewable energy programs.

However, there was a mid-term course correction due to India’s current account deficit crisis and the actual disbursement ended up to be only INR 4.4 billion (USD 72 million). For the current financial year (April 2014 to March 2015), previous government in its interim budget set the disbursement target at just INR 4.26 billion (USD 70 million).

This disbursement for all of MNRE’s activities (including other renewables) needs to be revised up at least to the previously envisaged target of INR 15.2 billion (USD 250 million)  for it to have any meaningful impact on the solar rooftop market (capacity addition of 200 MW).

BRIDGE TO INDIA is of the view that even a well funded subsidy mechanism for rooftop solar projects will only restrict the market, as budgetary constraints will continue to set the boundaries for its growth. It might be a better idea to incentivize faster adoption by focusing on larger regulatory aspects around grid connectivity and net-metering along with easier and cheaper access to finance for solar projects.

Jasmeet Khurana is a consultant at BRIDGE TO INDIA.