Village electrification done, it’s time for universal access. The road is tough. But a mix of policy and fiscal interventions can turn the dream into reality
In April 2018, India completed electrification of all villages and now plans to achieve universal access to electricity by the early 2020s. Power demand is also poised to grow, largely driven by consumption.
In this context, it is apparent that the new government’s focus shall be primarily on improving access of energy to households at affordable rates – a theme central to the policy design.
Keeping this vision in mind, there are multiple policy and fiscal interventions needed. Such interventions would require a year on year budgetary allocation for all policy matters.
Continued fiscal support for renewable energy
India has now clearly demonstrated that solar and wind energy in particular is the most affordable form -- both utility and distributed types. These technologies also have multiple applications for urban and rural consumer segments. Therefore, a stronger fiscal support will be needed for these segments.
Continuation of accelerated depreciation, tax holiday, priority sector lending, interest rate subsidy and capital subsidy (roof-top solar) should continue.
Coal cess to promote new technologies
Several renewable technologies such as off-shore wind, battery storage, charging infrastructure for EVs and the like are still to take off in a big way. The higher technology cost is one of the biggest hurdles for mass scale adoption. It is pertinent for the government to bring schemes to promote mass scale adoption.
Fiscal support in the form of VGF (20-30 percent depending on the maturity of the technology) for each emerging technology may be considered. It is worthwhile to mention that the ecosystem for such technologies (primarily components) will initially be imported. Import duty and GST on key components need to be initially pegged at minimal tax slabs.
Several entrepreneurs have come forward and started their own venture with reasonable success at pilot and commercial scale. However, many entrepreneurs often struggle to raise equity or unsecured debt to scale up the business.
The Indian venture capital ecosystem has very little exposure to power / renewable energy startups. Mass scale adoption of rooftops and other distributed energy asset deployment has, therefore, not taken off in a big way. One key enabler to upscale the renewable energy programme -- particularly distributed energy -- is to provide access to capital through a dedicated fund designed to cater to such entrepreneurs.
Such a fund should be able to provide innovative structured products that can suit the business models of such entrepreneurs and be able to secure an investment in the range of $5-20 million depending on the business plan and upscaling programme.
While a detailed assessment of the UDAY scheme is awaited, one unique feature is its focus on operational improvements through indicators such as reduction of Aggregate Technical and Commercial losses (AT&C) and reducing the gap between Average Revenue Realisation (ARR) and Average Cost to Supply (ACS).
States accepting the scheme and performing as per the operational milestone are given additional or priority funding through various other schemes of the respective ministry. Availing grants / incentives linked to the performance on the ground should be continued as a principle for any restructuring or fiscal support scheme designed for reducing discom debt.
Furthermore, there are several state discoms which are attempting to raise bonds without any state government support. Such discoms are likely to face liquidity issues which will in turn have cyclical effects. A credit enhancement scheme may be conceptualised for such discoms having credit ratings below investment grades to help raise funds from the market.
Gas holds all the aces
The country is sitting on ample gas-based power plants that can play a key role in peaking requirements and renewable energy integration. Gas-based power plants are much cleaner from the emission perspective than coal-based power plants. The central government had notified a scheme of utilisation of gas-based power generation capacity for 2015-16 and 2016-17.
The outlay for the support from Power System Development Fund (PSDF) had been fixed at Rs 7,500 crore (Rs 3,500 crore and Rs 4,000 crore for 2015-16 and 2016-17, respectively. While the beneficiaries of the scheme were limited, it can be certainly brought back with a higher outlay from PSDF and a longer term support (say 5 years).
This will give the gas-based power plant owners a good visibility of cash flows and may in turn revive some of the stressed assets in the gas segment.
Ramping up National Electricity Fund
Distribution infrastructure upgrade is one of the key pillars to improving operational efficiency of discoms and better service for consumers. While there are specific programmes designed to meet the capex requirements (IPDS, DDUGVY, RAPDRP etc.), the National Electricity Fund was created to support the state facing resource crunch.
The NEF (interest subsidy) scheme should be revived to promote the discoms’ capital investment in the distribution sector by providing interest subsidy linked with reform measures (on the lines of UDAY). A bigger allocation -- two to three times the previous size -- however is needed, considering the government’s vision on energy inclusion.
The goal of universal access to electricity at affordable prices is an ambitious one and requires multiple interventions even at the policy level. However, some of these fiscal support to the sector will set the right direction for the respective ministries to design policy and achieve the goal in a time-bound manner.Somesh Kumar is Partner & National Leader - Power & Utilities, EY India. Views expressed are personal.