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India’s 2016 Budget: A mixed bag for clean energy alternatives

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By Vibhuti Garg, April 22, 2016

India's 2016 budget features some important concessions for increasing clean energy, but it is not without drawbacks. 

On February 29, 2016, India’s Finance Ministry released its 2016 budget, with important implications for clean and efficient energy. The budget pledges to reform subsidies and taxes provided to fossil fuels, which will do much to support renewable and more efficient energy. This is welcome as India seeks to do its part to meet the climate change commitments made in Paris last year.

Also notable is an increase in the clean energy cess, a charge on coal use that is partially allocated to support clean technologies. Under the new budget the coal cess increases from INR 200 (USD 3) to INR 400 (USD 6) per tonne. In effect, the coal cess is trying to kill two birds with one stone. First, it raises generation costs, making coal-based power more expensive. Second, the cess payments will generate additional income which the government can use for investment in clean energy.

However, less positive is a limit on accelerated depreciation, which is likely to negatively impact investment in renewable energy project.

Levelling the energy playing field

A cost comparison of renewable energy with coal provides some hints of the impact to be expected from the higher clean energy cess. Levellized generation costs for domestic coal-based plants are in the range of INR 2.5 (USD 0.04) to 3.5 (USD 0.05) per kWh. By contrast the cost of solar is currently around INR 4.35 (USD 0.07) per kWh. While the gap between the cost of renewables and coal has narrowed, it is still significant. However, generation from imported coal, which makes up about 9 per cent of total coal-based capacity, is now comparable with solar and wind. As renewables begin to compete on cost with imported coal there will be a positive impact on carbon emissions, though this will be limited as domestic coal will remain cheaper. Moreover, the quality of domestic coal used in existing thermal power plants tends to be of poor quality.

Importantly, not all of the cess will be borne by generators. Coal-based generators with fixed power purchase agreements (PPA) will face the brunt as they will be unable to pass on the higher cost. For generators with flexible PPAs, the increased cost will be passed on to the distribution utilities, and then either trickle down to consumers in the form of increased consumer tariffs, or distribution utilities will absorb the tariff hike (with a subsequent bailout from the central government, as has been the case in the in the past).

A modest share for clean energy technologies

Some of the revenue collected from the coal cess flows into the National Clean Energy Fund (NCEF), set up to support clean energy technology. However, a key concern is over the share that clean energy technologies receive from the total pie of funds collected from coal cess. The Comptroller and Auditor General of India (CAG) estimates for 2015–16 shows a meagre sum of INR 100 crore (USD 15 million) was transferred to NCEF from INR 12,623 crore (USD 1.9 billion) of tax revenue collected from coal cess (i.e., 1 per cent of the total amount). In 2013, the IISD Global Subsidies Initiative reviewed the operation of the cess, and found that much of the fund’s expenditure was allocated to budgetary shortfalls of ministries and projects that were not directly related to clean energy technology.

Limit on accelerated depreciation will affect investment

While its impact remains to be seen, the higher coal cess is a welcome effort to create a more level playing field for renewables. However, the budget is not entirely positive for renewable generators; a limit on accelerated depreciation to a maximum 40 per cent is also included in the announcements. Accelerated depreciation reduces taxes by allowing the value of assets to be written off quickly, thereby improving the economics of eligible projects. This will immediately affect the wind power plants that have based their revenue model on accelerated depreciation clause of the Income Tax Act. Wind power in India picked up largely due to the benefits of accelerated depreciation. The impact of this scheme was visible in 2012, when the government pulled it back. For two years, very little capacity was added in the wind sector until it was restored in 2014.

A forthcoming paper by GSI analyzes India’s accelerated depreciation policy for wind energy. The study finds that the policy was hugely influential in encouraging capacity growth, but not without flaws. Most notably, it rewards capacity, not generation; as a result, there was no incentive to develop or maintain efficient projects. There is plenty of evidence showing companies were constructing wind farms solely to take advantage of the tax benefit. Secondly, only those companies with booked profits can benefit from this scheme. The scheme did not pave the way for new companies looking to enter the market, particularly dedicated renewable energy companies.  

Conclusion

To further support renewable energy, measures that promote capacity such as accelerated depreciation should be combined with other schemes that ensure efficient operation. The use of NCEF should be not only used to finance large-scale projects but to provide loan guarantees to small and mid-sized enterprises so as to enable them to access debt financing from commercial banks. This will help government achieve the twin objectives of enhancing energy access with clean energy development.