What the union budget (2016) means for Renewable Energy?

After a successful year for renewable energy (2015), the budget 2016-17 was eagerly anticipated by the Renewable Energy (RE) sector in India. Post Paris 2015 there is a great expectation from governments across the world to do more to promote Renewable Energy. I’m by no means an expert who could analyse the budget in a day and provide a review. Well, actually I want to continue what I started last year when I wrote a blog post summing up Budget 2015 (Read more).

Looking back at Budget 2015 and its progress

• There is definite progress on the 100GW solar, 75GW wind targets. Govt. expects 100GW of solar to incur an investment of INR 600,000 CR.

However in sharp contrast, an exponential increase in capacity addition is not due to investment in R&D in the sector. A recent release by the Press Information Bureau, Govt. of India (PIB, GOI) informs that an total expenditure of INR 435 CR was made in the last three years but a closer look at that reveals the annual investments have gone down year on year (yoy).

• Electricity access to all as envisaged in the budget has done better with the target now reset to 2019.
• And looking back at the FAME policy, there is not much action apart from the Govt. notification in June that specifies the cities which shall come under this scheme. The policy covers all the cities that are announced through the Smart Cities initiatives.
• On similar lines there is no update from the last budget on the outcome of  the INR 10 CR for training 50,000 Surya Mitras.(In the last update, the dates were announced for start of program)

And Now to the highs and lows of budget 2016

• Overall Plan outlay The overall budget outlay for renewable energy has gone up from INR 6,160CR to INR 10,192 CR out of which the National Clean Energy Fund (that supports Central Finance Assistance and Viability Gap Funding) is 5,000CR which is an increase from 4,246 CR This is justifiable considering the overall targets has gone up between these years.
• Increasing coal cess: For a second straight year the budget has increased the coal cess. It has doubled this time around. But, coal production doesn’t seem to suffer due to this raise. A snapshot from Coal India shows coal production is increasing yoy (over 9% in the last FY).

  

  However the Average Pooled Power Purchase Cost(APPC) is seeing an expected increase which therefore makes wind (in most states) and solar (in few) states attain grid parity.

• Increasing the fund allocation to Indian Renewable Energy Development Agency (IREDA)  IREDA which has been pioneering renewable energy financing has received a major boost. To encourage infrastructural development the Government through this ruling has permitted mobilisation of additional finances up to INR 31,000 CR by NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority through raising of Bonds during 2016-17.Is this good for renewable energy? IREDA bonds when issued during the start of the year were oversubscribed by over 5 times their base value of INR 1000 CR. So, investment flow through IREDA could definitely work.
• A big fillip to Transmission network On a slightly different note away from the announcement under New and Renewable Energy,Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) received an increase outlay of over 60%. This will be crucial to enhance the Indian Power Grid and the distribution infrastructure. The fund is also used for electrification of villages.

• Reduction in Accelerated Depreciation (AD) benefit One of the strong selling proposition of the renewable energy market especially wind and solar had been the accelerated depreciation benefit. The implication of halving the benefit from current 80% to 40% from FY 2017 is not clearly known. This will  not help small time investors who invested to get a 1 or 2MW project done just to claim tax benefits. The only major implication could be the rooftop market where industries claimed AD to install solar projects on their rooftops. But, with rising power costs and falling PV prices the parity could shift away from just having the AD claim.  However, a closer look at the Renewable Energy Certificate Registry of India a good indicator on developers who invest in RE projects just for tax benefits show a declining trend for the past few years. 
• Tax Increase in the effective service tax component by 0.5% would render O&M and EPC services costly. The marginal effect could be significant considering O&M in renewable energy will see a spike.
• The only significant incentive that aligns with ‘Make in India‘ is increasing the basic custom duty in industrial scale water heaters from 7.5% to 10% and increase in duty on import of tempered glass which makes domestic manufacturing attractive.

Overall, this budget is neither good or bad. There are definitely no big ticket announcements as expected. But, there aren’t any major drawbacks either except that a few tax incentives and not with drawing the AD benefit would have helped. Nevertheless the scale of development will continue to rise in the sector, its just that it can’t be attributed to this single budget.

For a short summary of budget announcement check this.