Has solar lost its sheen for India’s EV push?

The Indian economy is expected to expand to $3 trillion this year, from $1.85 trillion in 2014 and the government is banking on structural reforms and infrastructure investment to take it to $5 trillion in the years ahead.

Renewable energy is a key component of the government’s plan to boost overall economic growth and in particular its Make in India domestic manufacturing drive. That much was clear from the recent Union budget which announced a program to promote big investment in advanced technologies. Among the industries prioritized were solar cells, lithium storage batteries and solar electric charging infrastructure.

Key announcements

To boost the Make in India campaign “the government will invite global companies through transparent competitive bidding to set up mega-manufacturing plants in sunrise and advanced technology areas such as semi-conductor fabrication, solar photovoltaic cells, lithium storage batteries and solar electric charging infrastructure, and provide them investment-linked income tax exemptions under section 35 AD of the Income Tax Act, and other indirect tax benefits” announced finance minister Nirmala Sitharaman while presenting the budget.

The government wants to make the country a global EV manufacturing hub and expects the inclusion of solar storage batteries and charging infrastructure under its Faster Adoption and Manufacturing of (Hybrid) and Electric Vehicles (FAME II) scheme will boost its efforts.

In a lift for domestic manufacturing, capital goods used for the production of lithium-ion cells and EV parts such as e-drive assemblies, onboard chargers, e-compressors and charging guns will be exempted from customs duty. In addition, the duty on cobalt mattes – a key ingredient for advanced lithium-ion batteries – has been halved from 5% to 2.5%.

To make EVs more affordable, the government has moved the Goods and Service Tax (GST) council to lower the GST rate on electric vehicles to 5% from 12% and will provide additional income tax deductions of Rs1.5 lakh on interest paid on loans taken to purchase EVs. That amounts to a benefit of around Rs2.5 lakh over the loan period.

Among the structural reforms, the government is considering improving the Ujjwal Discom Assurance Yojana (UDAY) program, launched in 2015 to turn around the catastrophic finances of indebted power distribution companies. The central authorities will work with state governments to remove barriers including cross-subsidy surcharges and duties applied to open access sales or captive generation for industrial and other bulk power consumers.

A package of power sector tariff and structural reforms is also expected to be announced soon.

As far as corporate tax is concerned, the government will continue with a phased reduction in rates. The lower rate of 25% is currently only applicable to companies with an annual turnover of up to Rs250 crore. The budget proposes to widen that bracket to include companies with a turnover of up to Rs400 crore. That will encompass 99.3% of companies.

E-mobility picks up speed

Terming the mega investment scheme a huge boost for renewables, Ajay Shankar, distinguished fellow at sustainability thinktank The Energy and Resources Institute (TERI) said: “The Union budget demonstrates the government’s vision of putting India on the path to sustainable development and takes forward the government’s commitment to a cleaner environment, as was highlighted in the interim budget.”

The MD of clean energy solutions provider Fortum India, Sanjay Aggarwal, said he appreciated the steps being taken by government to address issues related to tax and duties in the renewable sector and electromobility.

“As Fortum India proceeds in setting up fast-charging EV infrastructure in India, the reduction in GST and import duties will accelerate the deployment and usage of electric vehicles in India,” said Aggarwal. “We now see a lot of action in the electric mobility, charging and storage space [segment] in line with the government’s green vision, which is very encouraging for the industry.”

Mixed bag for solar

However, the role that could be played by solar as a key contributor to the clean energy drive appeared to be missing from the budget.

“With the economic viability of … solar power coupled with the fact that conventional energy sources now have to match solar parity, it would have been heartening to see more focus on the solar segment to promote ecological stability,” said solar module manufacturer Waaree Energies director Sunil Rathi. “The government has been indicating some changes in the solar segment for a while; however, we believe that there are critical gaps that need to be plugged. On one hand, while the safeguard duty provided the industry with interim relief, the shortsighted implementation of [it for] a year holds the proverbial sword of uncertainty in the industry. Moreover, lack of tangible movement on the anti dumping policy has dampened the business projections in the segment.”

High upfront cost is another major barrier to rooftop solar uptake among consumers, as large banks shy away from lending for such projects. In such a situation, solar developers partner with non-bank finance companies (NBFCs) to fund projects through loans.

“[The] initiative to boost liquidity for the NBFC sector, and further capitalization of banks, will certainly help and it’s in line with our demand for bringing in more liquidity into the system, which will help revive the capital investment,” said commercial solar developer CleanMax Solar’s chief financial officer Nikunj Ghodawat. “The emphasis to bring structural reforms in the power sector to remove barriers, cross-subsidy and undesirable duties shall help direct sourcing of renewable power by large corporate customers,” he said, adding an overall reduction in corporate tax rate would have been more welcome.

Waaree Energies’s Rathi added: “The infusion of Rs70,000 crore into public sector banks to stabilize the economy will in turn benefit the NBFCs, which, in the absence of a recognized banking unit to support small and mid scale solar financing, will provide an impetus to … solar project financing. However, the invitation to foreign PV manufacturers to set up shop in India, without prior stabilization of the domestic manufacturing market, is premature and may prove to be counterproductive for the demand in the sector, which will render the NBFC financial support redundant.”

Rival solar manufacturer Vikram Solar’s chief financial officer, Rajendra Kumar Parakh, said setting up big manufacturing plants for solar cells and modules requires a larger support structure in the form of soft loans and export credits to compete globally.

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