There is a lot of talk about the subsidies being given to green industries, but actually it is just 1% of what utilities spend to provide electricity across India
Recognising its vulnerability to energy price shocks and the inherent state of energy poverty, India was the first country to set up a ministry dedicated to Renewable Energy (RE) in 1992. A slew of initiatives and policies over the last decade have failed to capitalise on its early mover advantage. India is a leading market for RE today and has enormous untapped potential of wind and solar energy. Leveraging this resource has been inhibited by vagaries in the policy support on offer to both manufacturers and developers and limited investments in customizing globally adopted solutions for the Indian environment. Can India revitalise its RE sector and make it a key component of its energy mix?
Though the term “Green Industrial Policy” (GIP) is not prevalent in Indian policy discussions, it refers to the mix of steps taken to address market failures in promoting green/clean technologies and solutions along with other more classical policies to promote industrial development with a focus on RE. The study that is the basis of this article traces the evolution and relevance of India’s GIP with a focus on solar photovoltaic (PV) and wind energy sectors, understand the key drivers behind the policies and where they have failed and where succeeded. The study also attempts to evaluate the costs and benefits that have come along with these policies.
The policies that have been the focus can broadly be categorised into overarching, direct and indirect policies. The enactment of Electricity Act, 2003 and the subsequent National Electricity and Tariff Policy laid out the principles that would incentivise and enable a rapid scaling up of RE. While the Integrated Energy Policy (2006), was not very bullish about the prospects of RE, it certainly highlighted the demand-supply gap that would prevail with regard to conventional energy sources.
The declaration of India’s National Action Plan on Climate Change (NAPCC) was yet another watershed moment for RE as it formally recognised the role of RE in mitigating climate change and laid the foundation for the National Solar Mission (NSM). The direct policies that were the focus of the study included financial incentives – mainly feed-in tariffs (FiTs) and generation based incentives (GBI) – followed by preferential tax treatment (accelerated depreciation, tax holiday and duty exemptions), incentives to promote research and development (R&D), demand stimulation (RPOs, RECs) and finally, manufacturing linked incentives (DCR, technology transfer and investment promotion schemes).
Conspicuous by their absence are incentives like interest rate subvention, extended credit lines for export purposes and working capital provisions. Mere lip service has been paid to these instruments, even though there is agreement on the issue that lower cost financing is the key requirement for promotion of the sector. Other support mechanisms such as the establishment of the National Clean Energy Fund; perform, achieve and trade (PAT) scheme; and Renewable Regulatory Fund (RRF) were also studied.
In addition there are programmes in place to improve the quality of human resources available to the sector and an overarching policy to promote the ecosystem for science and technology in the country.
A costing exercise undertaken to evaluate the extent of support (in monetary terms) provided to green industries reveals that only a low level of outlay has been witnessed so far. A bulk of the outlay (more than 50%) was by way of preferential tax treatments (AD and income tax holidays). Financial support by way of FiTs was the single largest outlay and accounted for nearly 28% of the provisions (evaluated). The overall level of support (both revenue and foregone fiscal revenue) when compared to the cost of supplying electricity across all utilities of the country is a mere 1% (approximately).
What have the policies addressed?
The green objectives, supporting the three pillars – energy access and security, local environmental benefits, and climate change mitigation, have clearly seen success. Case studies on the role of wind in Tamil Nadu, the increased presence of off-grid solutions across the country and avoidance of emissions from the current stock of RE capacity are testimony to this impact.
The more classic industrial policy goals aimed at creating a thriving domestic industry which is competitive on its own strength, generating much needed employment and establishing R&D in a big way domestically, have delivered to a lesser extent. Despite the targeted industrial policies over the decades, which focused on specific industrial activities with a view to attaining self-sufficiency in the manufacture of goods deemed critical for the economy, the manufacturing sector has not flourished in India. At no point in the last 20 years did manufacturing contribute more than 16% per cent of GDP, according to the 2013 report of the Reserve Bank of India.
Have the policies worked?
Financial incentives such as FiTs and GBI have met with much less success than have the preferential tax treatments given by AD and income tax holidays. With no guarantees on the procurement of power from RE generating stations and the financial insolvency of many public sector utilities, developers believe that the assured returns (relatively) associated with the tax breaks is far more effective than the financial incentives. There is poor enforcement of contracts and lack of commitment on the part of the utilities towards honouring these.
As a result, measures to stimulate the demand for RE through renewable purchase obligations (RPOs) and renewable energy certificates (RECs) have not been received well, with rampant non-compliance from many quarters and with no penalties to check the rise in such cases.
Manufacturing linked incentives have not delivered as expected. One could argue that the complementary policies to make manufacturing attractive in India are missing and go well beyond the realm of “green industrial policy”. A focus on R&D is lacking and the investments from private sector are not forthcoming.
However the focus on making RE technologies more affordable and tailored to the needs of the country is certainly a step in the right direction.
Whither Green Industrial Policy?
In a world of geo-political uncertainties and major barriers in the areas of trade and technology transfer, it is difficult to envision a scenario where India would pursue capacity augmentation in RE, solely relying on external providers of the technologies and manufacturing capabilities, while focusing its own manufacturing in other favourable domains.
RE has implications for long term energy security and concomitantly, national security. Both must be given their dues in order to ensure that there are no adverse impacts on the economy in the long run. The two can reinforce each other in a positive manner – an efficient domestic manufacturing base will push the envelope of possibilities when it comes to achieving the green goals through affordable technologies, while enjoying popular support of the public on account of the benefits, both economic and environmental.
Karthik Ganesan is Senior Research Associate at the Council on Energy, Environment and Water, a think tank based in New Delhi