Budget 2022 | Expected: Strong policy focus on renewables

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The investment requirements in the renewable energy sector remain significant, given the strong policy focus in the segment by the Government of India. This comes in the light of Prime Minister Narendra Modi’s announcement to increase the non-fossil-fuel-based capacity to 500 GW by 2030, from 150 GW currently, so as to meet 50 percent of energy requirement from renewable sources by then.

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This implies an annual renewable capacity addition of 42 GW over the next eight years. This, in turn, implies a significant investment potential at about Rs 20-22 trillion and additional investment of about Rs 12-15 trillion to augment transmission network as well as storage capacity. Further, superior tariff competitiveness of renewables for the off-takers both in the utility and commercial & industrial (C&I) segments as well as the sustainability initiatives for adoption of renewable energy remains the fundamental and structural demand driver for renewable energy investments.

Given the significant funding requirements in renewables, the availability of adequate long-term financing avenues at cost competitive rates remains important for achieving these targets. In this context, policy measures are expected to augment the long-term financing avenues for the renewable energy sector.

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Even assuming a 300-GW of renewable energy (excluding hydro) scenario by 2030, the share of renewable energy is expected to rise to about 28 percent in the overall energy mix. As a result, the transmission network strengthening and storage capacity to ensure the grid stability and balancing requirements remains critical. With this, the incentives and policy measures are also required to promote investments in the energy storage segment (which could be either in the form of battery storage, or pumped storage segment).

Various policy measures have been announced by the Union government over the past 18-24 months through the Production Linked Incentive (PLI) scheme, the central public sector undertaking scheme, as well as duty protection through the basic customs duty (BCD), with the focus to promote the domestic manufacturing of cells and modules. Notwithstanding this, further increase in the funding outlay for the PLI scheme for solar module manufacturing is expected, given the strong interest from the prospective players under the recent tender issued by the IREDA.

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In addition, availability of fiscal concessions and/or interest subvention benefits if provided, may further benefit integrated solar module facilities (from polysilicon to module). This would in turn help augment the domestic integrated module-manufacturing capabilities.

The weak financial profile of State-owned distribution utilities (discoms) continues to remain a key area of concern for the entire value chain in the power sector. Achieving a sustained financial turnaround in the State-owned discoms remains critical, to achieve the government’s renewable energy capacity targets. This would require a proactive focus by the State-owned discoms on operational efficiency improvement, and allowing timely pass-through of cost variations through tariffs to the consumers.

As a result, a continued focus on measures to accelerate the implementation of various reforms in the distribution segment is expected with the higher budgetary allocation towards strengthening the distribution network under the ‘reforms-based and results-linked’ scheme announced in Budget 2021. Further, budgetary allocation is expected to be increased for strengthening the transmission infrastructure (both at the intra-state and inter-state level), in raising power from the regions having high renewable generation potential.

With the strong policy focus in renewables as well as for strengthening of transmission and distribution network, Budget 2022 is expected to further provide a stimulus to support the investment requirements in renewable energy, and also to aid the availability of long tenure funding avenues.

Girishkumar Kadam is Senior Vice President & Co-Group Head – Corporate Ratings, ICRA Limited. Views are personal, and do not represent the stand of this publication.

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