Budget 2014-15 : What is in it for the Renewable Energy sector? – An Analysis

By now, most of you would have read about the announcements related to the renewable energy sector made in the budget. While the headlines like “Rs. 1,000 Crores for solar projects” sound impressive, what is the real impact of these incentives? Here is a look at some of the incentives announced, and what they mean.
1. Announcement – Rs. 500 Crore for Ultra Mega solar power projects in Rajasthan, Gujarat, Tamil Nadu and Ladakh in J&K
Background – The previous government had proposed 4 Ultra Mega solar projects across the country – Rajasthan(4000 MW), Gujarat(4000 MW), Kargil(2000 MW) and Ladakh(5000 MW) in Jammu and Kashmir. (More details here).
Impact – At Rs. 7 Crore/MW, the proposed Rs. 500 crore can support about 71 MW of utility scale solar project. If we are to assume that this amount will be used for Viability Gap Funding(VGF) at the rate of Rs. 2.5 Crores/MW, the amount can support about 200 MW. In either case, the allocation is a welcome step, but has very limited impact, considering the fact that the size of the proposed Ultra mega solar projects. However, if Domestic Content Requirement(DCR) is enforced on these projects, the domestic manufacturers stand to gain.
2. Announcement – Rs. 400 Crores for  one Lakh solar power driven agricultural pump sets and water pumping stations.

Background: It is estimated that there are around 25 million irrigation pumps in India. Of these, around 8-10 million pumps are Diesel-run, while the rest are electric pumps. The major challenges faced by the farmers include the frequent power outages, and the rising cost of diesel. Switching to solar water pumps not only help the farmers overcome some of their major challenges, it also helps the government save around $6 Billion a year in power and diesel subsidies according to Bloomberg. The problem is exacerbated by the fact that in several states, the free power provided to the farmers is not even metered, and there is no way to know how much of the power is pilfered. Currently, MNRE provides 30% capital subsidy for water pumps, and several states have been providing additional subsidy.  For example, Rajasthan has been providing a total of 86% subsidy on solar water pumps, whereas the subsidy is about 80% and 70% in Tamil Nadu and Punjab respectively.
Impact –  Rs. 400 Crores for 1 Lakh solar pumps translate to about Rs. 40,000 per pump. Most of the agricultural water pumps are above 3 Horse Power(HP), with 5 HP pumps being very common. The cost of a 5 HP AC solar(approximately 4.8 kWp) water pump is roughly Rs. 5 Lakh. That means that Rs. 40,000 per pump incentive translates to less than 10% of the cost of a 5 HP pump. This seems inadequate, unless this amount is over and above the 30% subsidy already provided by the MNRE.  
3. Announcement – Rs. 100 Crores for development of 1 MW Solar parks on the banks of canals

Background – As the CM of Gujarat, Mr. Modi had pioneered the concept of canal-top solar projects. In April 2012, a 1 MW canal-top solar project on the river Narmada branch canal network was commissioned. (Related news available here).  
Impact – At a cost of about Rs. 10 Crores/MW, the allocation of Rs. 100 Crores will help set up 10 solar parks of 1 MW each on canal banks/canal-top.  
4. Announcement – Clean energy Cess increased from Rs. 50 per tonne of coal to Rs. 100 per tonne.

Background – The National Clean Energy Fund(NCEF) was announced in the General budget of 2010-11. While the primary stated objective of NCEF was “funding research and innovative projects in clean energy technology”, NCEF has been used for various purposes like supporting Viability Gap Funding(VGF) under Phase 2 Batch 1 of JNNSM(Rs. 1875 Crores earmarked. Read more here) and subsidy for installation of solar water heaters(Rs. 108 Crores sanctioned in January 2014. Read more here). There have been criticisms that NCEF is misused(read here) or not being utilized at all. A recent article by Economic Times mentions that the Government has collected about Rs. 40,000 Crores so far through the NCEF, but of that,only about 1% has been allocated for MNRE, and even in that, only Rs. 1.6 Crores was spent on clean energy projects in the last 3 years as of June 2014(The entire article is available here). (Note: The article does not seem to take into account the amount earmarked for VGF).
Impact : According to Coal India Limited, the NCEF will receive about Rs.5,200 Crores as a result of the increase in clean energy cess(details here). The impact is unclear at this stage, since there is no information on how the funds will be used by the new government. The Finance Minister mentioned that the implementation of Green Energy Corridor Project will be accelerated, and additional funds could come from NCEF.
5. Announcement – Excise duty exempted for EVA and backsheets, tempered glass and  copper wires used in PV modules. (These components attracted an excise duty of 12.36% till now). Forged steel rings used in the manufacture of bearings of wind operated generators also get duty exemption
Background – The solar PV manufacturers have been pushing for addressing the “inverted duty structure” for solar components. Under the “inverted duty structure”, the imported raw materials like EVA, tempered glass, etc  were subjected to excise and other duties, whereas the finished goods(PV modules) had lower duty or no duty at all. This put the domestic manufacturers at a disadvantage.
Impact – In PV module manufacturing, the cell is the costliest raw material, accounting for above 60% of the total cost of the module. The EVA, backsheet, glass and copper wires together account for approximately 20% of the cost. With the removal of excise duty of 12.36%, the input cost of these components that contribute to 20% of the cost will get reduced. Overall, the total cost reduction for manufacturers is expected to be in the range of 2-5%. One of the largest PV manufacturers in the country, Tata Power Solar, has stated that the “inverted duty structure” has not been properly addressed. (Read more here).
Conclusion The budget has ensured continuity when it comes to renewable energy, and has good incremental steps. The increasing of Clean energy cess is a step in the right direction, but more clarity is required on how the funds will be used. We feel that more could be done to help the PV manufacturing sector. We also feel that in some cases, like the incentives for water pumping systems, the intentions are good, but the funds will be inadequate for the scale that is being proposed. Overall, it is a good beginning for a new government, but lot more follow-up action will be required to make the incentives impactful.
PS: The entire budget document is available here.  

6 thoughts on “Budget 2014-15 : What is in it for the Renewable Energy sector? – An Analysis”

  1. not quite sure there is much benefit for the solar generation industry this budget, except for solar pumps and canal tops. nothing on rooftop, nothing on antidumping (which does not help any new tender pricing), nothing. Not even an outlook whether the government is keen to push solar power!!! given the benefits to coal based generation by way of raw material supply improvements, lowered duties, extended tax holidays (which could benefit solar too), improved logistics (road/rail), new ports – all which reflect preferences towards the primary fossil fuel based economy. a directionless central govt, will do little to incentivise states – and with that dies the idea of a vibrant solar industry. the UMP are also deem ed to be driven by the public sector (or tendered thru them) but that leaves little for innovation/alternatives and cost management. Is it time to hang up your boots and search elsewhere?

  2. I complement to Resolve’s ratings & comments on Budget 2014 /Re-energy (Solar) allocations. But should appreciate the new Government and the finance minister, showing a very calculated and measured incentive proposals for solar power & applications area. A Good start at national level – but need much more in near future.

  3. Excellent, much needed analysis for folks like me with ADD ( attention deficit disorder, not the solar ADD)
    IMHO, too little, too scattered, looks like a quickie last minute work rather than a well thought out strategy
    But if I were piyush goal, I would hv done exactly this when it came to recommendation to Arun jaitley. Solar is going to be hardly a blip on my radar for quite sometime to come when compared to conventional power, and this is all the attention I would hv given to it
    Having a separate MNRE minister could have made better for solar and other renewables

  4. Thanks to RESolve for understandable analysis. Govt. gave Penates and publicizing like anything despite of knowing coal is dangerous to the environment especially for agriculture based country. However welcoming polity initiatives which seems more important and money allocation.

  5. Jayesh Rathi ---

    The budget analysis given above does not cover the any change in import duty for those who want to import machinery for manucfuturing of cell and modules . Any announcement in budget for this?
    please respond .

    1. The budget says that ” machinery and equipment required for setting up of a project for solar energy production” will be exempted from excise duty. This however applies only power generation projects, and is not applicable for manufacturing equipment.

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