All around the world, a decisive shift has emerged in favor of the adoption of renewable energy sources. Reflecting this, is the international consensus that fell behind the Paris Agreement in record time. As of October 5, 79 countries have ratified the Convention to the historic climate accord, including India, which signed it on October 2. Having surpassed the required ratification threshold, the Paris Agreement will come in force on November 4, 2016.
Aside from its political support for the tackling of climate change, India is a keen partaker of the shift to renewables. Under the present government, the country has set itself ambitious targets for clean energy production backed by investor incentives and regulatory changes. This article will discuss India’s rapidly expanding solar generation capacity, which is at the forefront of the country’s clean energy vision, the investment outlook of the solar sector, and finally the challenges to be addressed.
India’s Solar Infrastructure
India’s pro-renewables mindset is evident in the UN Environment Program’s (UNEP) ‘Global Trends in Renewable Energy Investment 2016’ report that ranked India among the top ten countries investing in renewable energy. In the solar sector alone, India’s performance saw a leap in utility-scale financing by 75 percent to reach US$ 4.6 billion in 2015.
The National Solar Mission is a major initiative of the current government, which has put in place a long-term policy calling for large scale deployment goals, aggressive research and development, and the domestic production of critical raw materials, components, and products.
Government estimates show that India’s annual solar installation capacity will grow by over four times by 2017. India’s photovoltaic solar installations have so far reached 3.8 GW, and is expected to grow to 4.8 GW by the end of 2016. As of September 2016, India’s cumulative solar installation capacity stood at 8.6 GW.
Four Indian states have crossed 1 GW solar installation capacity, with Tamil Nadu, Rajasthan, Gujarat, and Andhra Pradesh states also accounting for about 59 percent of the country’s total installations. In addition, there are 14 GW of solar projects in various stages of development and another 7 GW waiting to be auctioned. It is forecast that approximately 9 GW of solar power will be installed next year. Further, about 6,100 MW of solar projects were awarded between January and August, supported by the central and state governments.
India offers unlimited growth potential for the solar power industry as the country enjoys about 300 clear, sunny days in a year. Further, the theoretically calculated solar energy incidence on its land area alone is about 5000 trillion kilowatt-hours (kWh) per year.
This is why the National Solar Mission has targeted the development of 100 GW solar capacity by 2022, which will require US$ 100 billion in investments. To achieve this, a 100 percent foreign direct investment (FDI) is permitted under the automatic route for renewable energy generation and distribution projects subject to provisions of The Electricity Act, 2003.
Investors should note the following incentives offered by the Indian government for the development of the solar energy sector:
- Exemption from excise duties and concession on import duties on components and equipment required to set up a solar plant;
- A 10-year tax holiday for solar power projects;
- Wheeling, banking and third party sales, as well as buyback facility by the states;
- Guaranteed market through solar power purchase obligation for states;
- Generation-based Incentive (GBI) schemes for small solar projects connected to a grid below 33KV;
- Reduced wheeling charges as compared to those for conventional energy;
- Special incentives for exports from India in renewable energy technology under renewable sector-specific SEZ;
- A payment security mechanism to cover the risk of default by state electricity distributors (discoms);
- A subsidy of 30 percent of the project cost for off-grid PV and solar thermal projects; and
- Loans at concessional rates for off-grid applications.
Finally, the Indian government will be revising its mandatory domestic sourcing norms after the US won a petition in the WTO, which ruled against India’s buy-local policy.
Challenges Facing the Solar Sector
According to a study by the investment information and credit rating agency ICRA, regulatory challenges continue to obstruct the potential of the solar sector in India. Some of these persistent challenges are the non-enforcement of renewable purchase obligations (RPOs) and stringent scheduling and forecasting norms. While the National Tariff Policy revised the solar RPO to 8 percent from 3 percent till 2022, a majority of the states have yet to comply. This needs to be immediately corrected as low tariff rates impact debt financing and the ability of project developers to maintain their costs within budgeted levels.
Further, while India represents a huge market with robust business potential, delays in grid evacuation and land acquisition are major concerns for investors and private players as they can derail returns on a project.
The reason behind India’s strong backing of indigenous renewable energy production is the fact that it is the fourth largest importer of oil and the 15th largest importer of petroleum products and LNG globally. This is why the government has played an active role by offering various incentives, such as generation-based incentives (GBIs), capital and interest subsidies, viability gap funding, concessional finance, and fiscal incentives. What now remains is successfully redressing the persistent regulatory challenges and delays in grid evacuation and land acquisition. Without addressing these deficiencies, the government will be unable to sustain investor interest or attract sufficient private sector participation.
This article was first published October 2016.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.