At the 21st Conference of Parties (COP21) held in Paris, India had committed to achieve 40% of its installed electricity capacity from non-fossil energy sources by 2030. This was also one of India’s nationally determined contributions (NDCs) under the Paris Agreement. India successfully achieved this renewable energy target in December 2021, which is an impressive nine years ahead of the deadline.
Keeping in line with its plan to become a global leader in energy transition drive, India made five major commitments at the recently held COP26 in Glasgow which include an undertaking to achieve net-zero emissions by 2070 and to increase its non-fossil energy capacity to 500 GW by 2030.
Keeping these targets and NDCs in sight, the Budget 2022 can set up a fiscal framework for achieving these targets. The Budget has to address certain issues that are necessary for the growth of the renewable energy sector. For example, this year’s budget is critical as clarifications are needed on the imposition of the basic customs duty on imports of solar cells and modules, as there appears to be a lot of apprehension around the same since the announcement made in the last budget.
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Customs burden on renewable energy sector
On March 9 2021, the ministry of new and renewable energy stated that its proposal of 40% customs duty on solar modules and 25% on solar cells has been accepted by the Union government. It is now expected that the customs rates may be finalised and introduced in Budget 2022.
While this may be of some support to the domestic solar module and cell manufacturers after the withdrawal of safeguard duty on solar cells and modules, this new duty will result in the rise of project costs and consequently, increase in tariffs. The only positive is that with firmed up customs duty rates, renewable energy developers and procurers can plan accordingly.
In addition to the above, a clarification on the imposition of customs duty on procurement of cells/modules from manufacturers located in special economic zones (SEZs) will be helpful for solar project developers. A substantial chunk of manufacturing units in India (63% of solar cell and 43% of solar panel) are located in SEZs. If the duty is imposed, it will undermine its very purpose as the price advantage offered to the domestic manufacturers will not be available to units located in SEZs.
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Production linked incentives
It will also be interesting to see what steps the government will take in the Budget to ensure a balanced approach. One possible way can be by expanding the production linked incentives (PLI) scheme for high-efficiency solar module manufacturing to encourage an increase in production capacities of the domestic industry and thereby reducing dependence on imports.
In November 2021, the ministry had proposed an additional allocation of Rs 19,500 crore under the PLI scheme to the already approved amount of Rs 4,500 crore. As per the initial outlay of Rs 4,500 crore, the selected companies will establish around 12 GW of manufacturing capacity in the country. In the PLI scheme, the incentive amount is awarded post commissioning of the manufacturing facility for a period of five years.
The PLI incentive amount is based on several factors including the actual sales of solar modules, the maximum capacity awarded to the bidder (limited to the lesser of the two) and efficiency of the solar modules produced. Moreover, if the bidder sources its raw materials from the domestic market it will be eligible for a further increase in the incentive amount for the increased local value addition.
The PLI scheme has been a huge success in the electronics manufacturing industry and if the proposal to expand the scheme is accepted in Budget 2022, it will strengthen India’s efforts to support the domestic industry in line with government’s Atmanirbhar Bharat initiative.
In other important and upcoming sub-sectors related to energy, the Union government must consider (a) introduction of incentives that will promote domestic manufacturers of solar raw materials to build a strong and self-dependent domestic ecosystem; (b) a substantial allocation for research and development to help the national hydrogen mission; and (c) a significant decision on electric vehicles as the industry is in a nascent stage and has potential for exponential growth.
(Shashwat Kumar is Partner and Amitanshu Saxena Associate at Shardul Amarchand Mangaldas & Co.)