Expectations for energy sector reforms in 2024 budget, ET EnergyWorld

The energy sector is one of the key drivers of India’s economic growth. With the country’s economy approaching US$ 5 trillion in the next 3 years and US$ 7 trillion by 2030, it is the energy sector that is set to play a bigger role in this growth story. Renewable energy, energy and utilities, and energy efficiency are the 3 key pillars driving the growth of the energy sector. Round-the-clock availability of clean energy, resilient power and utilities, accelerated energy efficiency measures should be the focus areas for a sustainable energy ecosystem. Support in terms of budget allocations by the central government would help in the enhanced pursuit of the envisaged climate goals.Renewable energy

We expect the government to present a balanced approach to accelerate the country’s energy transition efforts, through interventions across the value chain of renewable energy markets, including solar, wind, energy storage, green hydrogen and derivatives, and other green molecules. Each has unique challenges and requires specific interventions:

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• The reintroduction of ALMM has boosted the demand for domestic solar modules. However, the supply market is currently tight to meet the demand through timely delivery, resulting in the increase in domestic module prices (up to $0.28/Wp). This is further burdensome when the global market is experiencing supply shortage at a spot price of $0.10/Wp (ex-China). While further import duty and reintroduction of ALLMM protect the investments in PV manufacturing (both PLI and non-PLI), there is a strong need to strengthen the supply chain and achieve scale in manufacturing to efficiently meet domestic demand.

• The global PV module supply deficit is expected to last for the next few years (more depends on China’s policies), but a balanced approach to easing the ALMM requirement in the meantime would reduce inflationary pressure on solar tariffs and ease the transition (it should be noted that MNRE recently lifted the ALMM requirement for green hydrogen and its derivatives projects located in SEZ)
• The offshore wind market in the country will boost local production of high-rated wind turbines. The budget will be refocused on strengthening the local manufacturing ecosystem (PLI, tax holiday, concessional corporate tax, accelerated depreciation and extension of the existing concessional duty beyond March 2025 to fiscal 2027), which will reduce the price of wind turbines and the resulting tariffs.
• Green Hydrogen and derivatives – There is a need for domestic market development to scale up investments, additional fiscal support including VGF and/or preferential carbon pricing for use of green energy molecules and/or tax breaks for adoption of green hydrogen and derivatives, especially in end-use segment operations like fertilisers, steel and refineries, would in the initial phase accelerate investments and adjustment of the country’s energy mix. This would also improve the competitiveness of Indian manufacturers and protect against global climate policy threats like CBAM. Additional budget for setting up hydrogen hub and adjustment in end-use segments needs to be allocated by the Government of India.
• Bio-CNG and Sustainable Aviation Fuel are emerging as key energy markets in the country. It is the right time for the industry to be supported by tax benefits (tax holiday, concessionary tax, AD, GST rationalization) to boost investment and consumption of green molecules by end-user segments.
• Measures like rationalisation of GST on key inputs like cement (28 per cent GST) and iron and steel (18 per cent GST) specifically used in pumped storage power plants (PSP) would optimise storage costs as civil infrastructure accounts for 60-70 per cent of the total capital expenditure. Reduction in GST rates to 5 per cent would improve competitiveness.
• Moreover, the prevailing prices of BESS in the global market are very competitive due to the oversupply and countries around the world are strategically evaluating the possibility of integrating GW-scale BESS into the power system. In the current environment, rationalization of BCD (10 percent) and GST (18 percent) for BESS components (reducing to 5 percent) would make the cost of storage more competitive and accelerate market growth.

Energy and mediaFor a resilient energy and utility ecosystem, it is crucial that the sector is firing on all (three) cylinders, i.e. Generation, Transmission, and Distribution. The sector has witnessed some significant improvements in recent years – AT&C losses have reduced to ~15.4 per cent in 2022-23 as against 21.5 per cent in 2017-18; ACS-ARR gap has reduced to INR 0.53/kWh in 2022-23 as against INR 0.92/kWh in 2020-21; power availability has increased by a whopping ~72 per cent (in rural areas) since 2015. Arrears to Gencos have reduced by ~30 per cent in the last 5 years. While the achievements are significant, there are still few areas where a little push can bring incremental change and results in the industry:

• RDSS helps in achieving some significant improvements in terms of loss reduction and improved billing and collection. Large scale deployment of smart meters has led to exponential growth in demand for smart meters. Enabling provisions need to be included in the budget in the form of PLI based support to manufacturers to increase their share in smart meter production – ensuring a minimum demand-supply gap.

• Moreover, several categories of consumers (such as agricultural consumers) are excluded from the current tranche of smart metering under RDSS. Including such consumers with marginal increase in capital outlay (and GBS) can bring multi-pronged benefits. For example, including agricultural consumers would result in more efficient energy billing as well as rationalization of subsidy allocation.

• With 50 percent of DISCOMs operating at losses, optimisation of DISCOM finances has become a priority. Smart meter deployment and asset modernisation (through RDSS) are expected to help DISCOMs improve their performance and optimisation of power procurement and human resource costing can generally help in improving profitability. However, DISCOMs (Tamil Nadu, Kerala, Rajasthan and Delhi) continue to enjoy increasing regulatory assets (over ~1.6 Lakh Cr. INR). Required support (in coordination with the state and regulators) can be provided in the form of loss absorption grants for liquidation of regulatory assets in all affected DISCOMs.

• Power transmission sector has witnessed ~65% growth in transmission network and ~130% growth in transformative capacity during the period 2014-2023. GECs (Phase I and II) are rightly addressing the need for evacuation infrastructure in distributed generation sources. Over INR 54,300 crores is planned to be spent in GECs. However, with continuous implementation of additional ~351 GW of RE by 2030, additional ~5,00,000 MVA of transformative capacity is expected to be required. Hence, higher participation of CFA through REC/PFC/IREDA can help in expedited implementation of future tranches of GECs.

• India has suffered damages worth over ~7.5 Lakh Crores due to climate related hazards (or disasters) during the period 2013-2023. Power sector is one of the sectors/infrastructures most exposed to such hazards, e.g. Cyclone Fani (2019) damaged power infrastructure worth over $1.2 billion (~9600 Crores) in Odisha. Climate resilient infrastructure budget can be created for states which are highly vulnerable to disasters. Grants provided can be used to enhance resilience of essential services (like power, transport, telecom etc.)

Climate change mitigation and energy efficiency

While global energy efficiency intensity improved by 2 percent in 2022, it needs to double to 4 percent per year by 2030 to achieve the net-zero emissions target by 2050. Based on an analysis of total energy supply (TES) per unit of GDP data, India’s rate of energy efficiency improvement would need to improve by more than 2.1 percentage points compared to the Business as Usual (BAU) scenario to achieve the doubling of energy efficiency scenario.

Moreover, to cope with the complexities of climate change, energy efficiency will be a key lever, given India’s commitments made at the G20 and COP28 summits. In light of the NDC commitment to reduce emission intensity to 45 per cent by 2030 from 2005 levels and achieve net zero emissions by 2070, the Central government can give a sensible impetus to promoting energy efficiency in the upcoming Union Budget.

To promote faster and large-scale implementation of energy efficiency projects in various economic sectors such as industry (large and SMEs), construction (commercial, public and residential), municipalities (street lighting and water pumping) and agriculture, the following measures could be considered in the upcoming budget:

• To accelerate decarbonisation in hard-to-reduce sectors to achieve net zero emissions, financial incentives in the form of tax breaks/preferential financing for the deployment of CCUS and other emerging technologies should be introduced.

• Leveraging the energy efficiency financing platform, the Budget envisages an interest subsidy scheme of around Rs 2,000 crore for MSMEs to enable them to adopt energy efficiency technologies.

• Capacity building and tailored support programmes for SMEs and small businesses to help them cope with the complexities of energy transition and decarbonisation.

• Promotion of energy-saving devices such as super-efficient air conditioners, BLDC fans, IE4 motors, LED lighting, etc. through appropriate financial mechanisms.

• Expanding the issuance of green bonds and creating dedicated climate/green funds to support energy efficiency and sustainable projects.

• Allocating funds for creating smart and energy-efficient infrastructure at the village/gram panchayat level.

• Construction practices and materials that reduce the energy consumption and carbon footprint of buildings. This includes insulation materials, energy-efficient windows, and green roofs. The promotion and standardization of such efficient building materials can be one factor.

• To encourage emission reductions, the introduction of a carbon market could be an important step.

The Union Budget 2024 has the potential to accelerate India’s climate action and drive the transformation towards net zero emissions. By focusing on clean energy, climate finance, strengthening and expanding robust energy infrastructure, creating a carbon market, promoting energy efficiency across sectors and encouraging the adoption of new technologies, the Budget can lay the foundation for a sustainable and resilient future. With comprehensive strategies and robust financial mechanisms, India can enhance its environmental sustainability and contribute significantly to achieving global climate goals.

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