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Article published on 9th December 2019
The Indian government is attempting to improve renewable energy market conditions by introducing further changes. The progress and the expansion of the renewable energy sector continues to be one of the main goals of Prime Minister Narenda Modi, who was re-elected in May 2019. Nonetheless, to be able to achieve the ambitious climate target of producing 450 GW from renewable energy sources by 2030, India first needs to address some still existing issues. The first measures have already been taken and it remains to be seen how they will further develop.
With the re-election of Prime Minister Narenda Modi and his governing party Baharatiya Janata Party ("BJP"), the Prime Minister was allocated a clear task as regards renewable energies. The government had already set itself a climate target of producing 175 GW from renewable energy sources by 2022 and 450 GW by 2030. In the past 5 years, measures have focused mainly on identifying, exploiting and incentivising the use of India’s geographic advantages for the renewable energy market. But India still has a long way to go before bringing about an Indian energy revolution. In order to get closer to accomplishing this goal, the government, as in recent years, bets on one measure: attracting investors to India. In order to attract investors to India, the Indian government has taken many effective measures in the renewable energy sector, such as the introduction of the Power Purchase Obligation (“PPO”), the revision of the tariff policy, the introduction of reverse bidding for awarding power purchase agreements, as well as the provision of diverse direct and indirect subsidies. Already today, this has helped generate nearly 22 % (21.95 %) of the produced electricity in India from renewable energy sources.
India-source wise installed power generation Capacity in % (as on: 31/03/2019)
Now, however, the focus should be on pursuing a renewed market upswing because the sector has recently been dampened, especially by dumping prices in the area of awarding PPAs. In addition, the wind power market has stagnated. The most common problem that investors have to deal with in this area is the still complicated and lengthy land acquisition process in India and the lack of infrastructure.
These problem areas have been recognised by the Indian government which has already taken the first measures and announced further steps to improve the renewable energy market conditions and bring about a new upswing. The Indian government has already disbursed INR 800 trillion to the federal states to improve the infrastructure and has instructed them to use the money to purchase transformers, set up transformer stations and purchase masts and meters. Further planned and launched measures include, among other things, easing land acquisition, the standardisation of PPAs, the enactment of a new Electricity Act, and recently, the reduction of the Indian corporate tax rate.
At present, it is very difficult for private companies to acquire land in India. The land acquisition process is generally believed to be lengthy and complicated. This should now change for private companies as the government plans to change the model applicable to land acquisition. In the future, the renewable energy project award system will be switched to the so-called “plug and play” model, which should minimise major risks. Under the “plug and play” model, land will basically be acquired by the government which will also handle the first and most important permits later on. After that, the acquired land and projects will be allotted to private companies as part of the renowned bidding procedure. It is, however, questionable whether this procedure will actually make it easier and quicker to acquire land and whether it will shorten project duration times.
The government is currently contemplating standardising all power purchase agreements (“PPAs”) nationwide in the areas of solar and wind power. According to the announcement of the Ministry of New and Renewable Energy, the new power purchase agreements should provide for a strict penalty in the event of breach of obligations or default by the state. In addition, letter of credit should be allowed as a payment method.
The government plans to enact a new Electricity Act that will supersede the previous Electricity Act with its overall 75 legal amendments. In this process, the position of renewable energies should be immensely strengthened, mainly from the legal point of view, and the “Ease of doing business” rank should be improved. The new act should increase transparency of the bidding procedure, strengthen the significance of the Renewable Purchase Obligation and allow paying by letter of credit also in this area.
Furthermore, the new Electricity Act is also to regulate the direct transfer of subsidies, the obligation to ensure power supply “24 hours a day, 7 days a week”, the legal consequences of breach of duties under a PPA as well as the establishing and development of smart meters and prepaid electricity meters.
In the new budget of the newly elected Indian government, the Minister of Finance Nirmala Sitharaman has also made it clear that the government will launch a programme that aims to attract global enterprises to India through transparent tender procedures and thus encourage them to implement large-scale renewable energy projects. This is intended to promote economic growth and the "Make in India" programme.
In September this year, the Indian government surprisingly slashed the general corporate tax from 30 % to 22% for Indian companies. Thus, India has adjusted its corporate tax to the corporate tax rates applicable in other Southern Asian countries. This brings about an upswing and a general improvement in conditions for companies in all industry sectors, which will also have a beneficial effect on the renewable energy sector. At present, companies operating in the renewable energy sector are heavily dependent on such indirect state incentives because there are no specific regulations or guidelines on the protection of the renewable energy market as yet.
Because the corporate tax rate is now one of the lowest in the world, Indian companies will be more competitive in the global market. They will want to stay in India and expand their business there. New domestic companies established on or after 1 October 2019 and operating only in the manufacturing sector may opt for a 15% personal income tax. This tax advantage is offered to companies that will start manufacturing on or before 31 March 2023. The effective tax rate for such companies is 17.01%.
This measure would be beneficial not only for the manufacturing sector but for the entire business activity in India and would contribute to the general revival in the sector.
The Indian government has recognised India’s potential for renewable energy. Although, with the above-mentioned planned changes, the government does come closer to achieving its target of producing 450 GW from renewable energy sources by 2030, India still has a long way to go and is yet to contend with the existing issues such as land availability, infrastructure, and stable policy and regulations, such as the anti-dumping price regulation.
As for the dumping prices, especially in the solar sector, various groups call for either a regulation or a kind of an anti-dumping duty, which should stop the predatory competition especially from China. The imposition of such a protective tariff on solar modules would support the government initiative “Make in India” at the same time. It therefore remains exciting to see how the government will embrace further economic and industrial developments and cushion any adverse trends.
Rahul Oza
Partner, Office head
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