Energy sector wish-list by Manish Aggarwal, Partner and Head of Energy and Natural Resources, KPMG in India.
The year 2016 was an eventful one for the Indian energy sector. Various interventional policies such as introduction of UDAY, amendments in the National Electricity Act, new solar RPO target for states, draft windsolar hybrid policy, offshore wind policy, and a new hydrocarbon policy, had been instrumental in contributing to the growth momentum in the sector. These initiatives have helped create an environment conducive for investment with many new investors.
Yet, despite the progress the sector has made, there are some long standing issues which need to be addressed and resolved on an urgent basis. The government needs to initiate new interventional policies to accelerate the growth momentum in the sector. Hence, the upcoming budget would be very crucial.
To start with, Budget 2017 should focus on resolving the long pending issue of stressed assets. Stressed assets in power sector have long haunted the stakeholders who are now in dire need of financial support from the government. The upcoming budget should carve out from NIIF a stressed asset revival fund that is empowered to perform capital as well as operational restructuring of stressed power plants.
Talks on private sector participation in commercial mining have been around for long. Private sector participation has an edge as it will bring with it a host of benefits such as advance mining technology, increased operational efficiency and market driven coal pricing.
But, mere opening of the sector will not be sufficient. Budget 2017 should also draw a clear cut roadmap to ensure creation of a free coal market in the country. And in parallel there is strong need to delink having a PPA to get coal disbursement. This condition was brought in at a different context of time and has outlived its utility at present.
With implementation of GST from July 2017 onwards, the cost of producing power from renewable energy sources especially solar and wind is expected to increase substantially as tax benefits available to the sector will disappear. Lowering of accelerated depreciation (AD) from 80 to 40 per cent and elimination of Generation based incentive (GBI) from April 2017 onwards will further heat up the cost of generation of power from wind. To accomplish the RE target by the set timelines, budget 2017 should consider placing RE in the lowest slab of the GST, extending GBI for at least 2 years, and devising an alternate mechanism to compensate for the rise in cost from lowering of AD.
There is also a need to institute a limited play guarantee fund only for renewables that can take care of payment delays to IPPs beyond a defined time-frame of say three months. This will go a long way to get an exponential jump in investments from overseas investors, as well as domestic players. Fund can charge guarantee commission, states that failed to deliver can be penalised through funding / grants under UDAY. This fund can be constituted through funds from clean energy cess and can be at play only for say the first 100 GW of capacity for renewables.
The government should finalise the solar manufacturing policy and announce its implementation during budget 2017. The said policy is expected to accelerate growth of the sector by reducing the cost of solar panels, other equipment, and overall solar tariff, and by developing a solar ecosystem in the country. This policy will also be critical from the perspective of achieving 100 GW of installed solar energy target.
The other areas of focus in Budget 2017 should be encouraging storage solutions, off-grid solutions, mini grid financing through some guarantee funds and / or interest subventions.
India has about 145 GW of hydropower potential and 70 per cent of this potential is yet to be tapped. Hydropower plants are best suited for meeting peaking power demand. Budget 2017 should utilise funds from clean energy cess to create a viability gap funding mechanism that could be used to support new hydro installations. The hydro sector may also require a separate RPO obligation, interest subventions and FIT support to revive the otherwise ailing sector.
Realising the importance of natural gas as a fuel of the future, the Government of India in the past few years has been encouraging an increase in the consumption of natural gas in transport, industrial use, and in domestic households. In the absence of sufficient domestic production, the gas has to be imported in the form of LNG. To promote consumption of LNG, import duty of LNG should be made at par with the import duty of crude petroleum, which is presently zero.
We are well aware of the fact that exploration of oil and gas is a risky business and at times yields no oil or gas. Companies invest a huge amount on exploration and on setting up exploration and production facilities. But, the fact remains that no production results in sunk cost for companies. This means huge funding is required and companies involved in this business require support from the government. Infrastructure status for exploration and production facilities will help these facility owners avail additional benefits available to infrastructure projects and cover up for some of the sunk cost.
Government may need to consider an Annuity, Operate, Transfer (AOT) model for transmission assets owned by PGCIL and state utilities as well on the lines that was recently conceptualised for the highways sector. It can bring in a lot of investments into this space and money generated can then be ploughed back to create new capacities.
The significant Budget 2017 announcements which the energy sector is looking forward to with eagerness are a reduction of clean energy cess to the pre-2016 budget levels, i.e., Rs 200 per tonne, and extension of 80 IA tax holidays for at least a two year period.
Going forward, what is required is a more hands-on approach to find a solution to the above mentioned pending issues. Once resolved, these will drive growth in the sector. The government has demonstrated a forward-looking approach for the sector that encompasses energy security, clean / sustainable energy, and affordable power to all.
The future of the energy sector looks promising as higher investment flows are envisaged owing to different policy initiatives and the budgetary support. Today, all eyes are on India to see how it can translate words into actions as well as accelerate the reforms momentum for a more sustainable and inclusive growth.