The right reform path to achieve renewable targets

India aims to achieve 500 gigawatts (GW) of renewable energy capacity by 2030, a key step towards sustainable energy independence. The country has successfully installed around ~192 GW by April 2024, indicating significant progress. However, achieving the 2030 target requires installations of more than 2.5-3 times that of the previous fiscal year.

BONUS

There are inherent complexities in the renewable energy sector that make it difficult to triple renewable energy installations and impede investment flows. The new government needs to focus on eight key areas of reform.

Easing of import barriers: To reduce the price gap between domestic and imported modules and increase the rated capacity, the enforcement of the Approved Model and Manufacturer List (ALMM) for solar modules should be relaxed for open access projects (including group captives) and rooftop solar projects (without government subsidies). In addition, the ALMM should include leading global manufacturers by March 2026. It should also cover cells and other components of the solar value chain.

Tax breaks: The Goods and Services Tax (GST) levied on hydropower project components should be reduced to 12% (as for solar and wind project components) from the current 18-28%. In addition, the GST on wind projects should be reduced from 12% to 5% over a transitional period. Finally, to improve the commercial viability of Battery Energy Storage Systems (BESS), a lower GST rate should be applied to sales of BESS-integrated systems and BESS components—battery and cell modules—for the next five years.

Besides, electricity tax and cross-surcharges on input power of storage projects should be avoided. A five-year duty exemption should also be granted on import of various other components required for BESS.

Subsidy support: Instead of having a combined Production Linked Incentive (PLI) scheme for integrated photovoltaic (PV) cells, there should be separate, phased payouts based on performance. PLI should also cover production of ancillary components. The Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan (PM-KUSUM) scheme should be tailored to the local context and nexus of energy, water and agriculture. States where KUSUM has not performed as expected must offer enhanced financial support to farmers such as higher subsidy rates, lower interest rates, extended repayment periods, maintenance support etc. In case of solar rooftops, there is a need to ensure an appropriate feed-in tariff for surplus units after settlement.

Regulatory reform: The 100 percent Interstate Transmission System (ISTS) tax exemption should be extended to 2030 for all renewable energy segments, including offshore wind.

There needs to be stricter enforcement of Renewable Power Purchase Obligations (RPOs) and Energy Storage Obligations (ESOs) by electricity distribution companies (discoms). A minimum penalty of Rs 1 per kilowatt-hour (kWh) of annual energy shortfall under RPOs needs to be strictly implemented. The same should apply if transmission losses exceed a pre-determined target across states for all obligated entities. In the case of solar rooftops, a dedicated agency should link customers and discoms for awareness, outreach and support. Net metering regulations vary widely across states, leading to unnecessary complications. Streamlining these regulations, including annual billing cycle to account for seasonal variations, is crucial. Special environmental approvals and forest clearance windows, as well as advance approvals, can help reduce the lead time and bid price for pumped storage. The Union and state governments need to collaborate on a detailed pan-India land adequacy study for wind projects. This will facilitate the complex and difficult land acquisition process that wind developers face.

Long-term regulatory clarity: All key national policies must have a five-year lock-in period before they can be broadly modified. To ensure long-term clarity for all stakeholders, the trajectory of the RPO must be set for at least the next five years.

Market reforms: States should strictly adopt time-of-day tariff for commercial and industrial (C&I) consumers from 2025 and extend it to residential consumers from 2026. All generating resources should be combined and transferred to Security Constrained Economic Dispatch (SCED) system for more efficient utilization and pricing. Coupling of power exchange markets is needed for better pricing and integration of renewable energy. Ministry of Energy should consider piloting of power exchange based Contract for Difference (CfD) for small power renewable energy for demonstration purposes. Peer-to-peer power selling and virtual net metering would facilitate power exchange and distribution to homes with limited roof area.

Financing reforms: Financing structures like InvITs or aggregated bonds need to be implemented to unlock developer capital. Government energy funders should also aggressively increase their debt exposure for open access renewable energy projects. The government needs to offer special incentives to financial institutions to lend for rooftop solar.

Focus on research and development (R&D): To increase the competitiveness of domestic players, manufacturers of photovoltaic installations with an annual production capacity exceeding 1 GW should be encouraged to invest at least 3-5% of their gross revenues (other manufacturers: 1-3%) in R&D activities.

Vibhuti Garg is Director (South Asia), Institute for Energy Economics and Financial Analysis. The views expressed are personal