Budget 2024’s primary renewables challenge is to find the funds for speedier energy transition

Deepening of the bond markets would nurture fixed and long-term finance for energy infrastructure.

Ensuring a sustainable and resilient development trajectory is critical as India strives to become a $5 trillion economy. In the current milieu, it becomes imperative to accelerate India’s energy transition journey by scaling up green investments.

To deliver on the country’s economic goals and support its climate change commitments, the government can deploy a combination of policy, finance and trade levers across clean energy technologies.

The impending vote-on-account can set the ball rolling in this direction.

Financing The Transition

First things first: the transition will require funds. Rs 39 lakh crore is expected to be invested in the power sector (generation, grid and efficiency) between fiscals 2024 and 2030.

Given the scale, conventional finance sources will likely be inadequate. Therefore, we need to tap alternative pools of capital and innovative financing mechanisms.

Exploring blended finance by utilising concessional public capital to crowd-in private capital, especially for emerging green technologies, would help develop a favourable ecosystem.

Deepening of the bond markets would nurture fixed and long-term finance for energy infrastructure. For the same, creating a credit guarantee fund, giving a regulatory push for investment eligibility in bonds and developing a vibrant secondary bond market will be critical.

Given that over three-fourth of our projected power sector investment is expected to be in green energy, an emphatic thrust towards the sustainable finance market is called for. A clear taxonomy, along with supportive regulatory framework, tax incentives for investors and mandates for financial institutions would go a long way to finance the energy transition.

Take-out financing is another critical tool where institutions such as the National Bank for Financing Infrastructure Development (NaBFID) can help ensure adequate long-term finance availability.

Investing In Technologies

As an energy vector, green hydrogen (GH2) has deep decarbonisation potential across multiple end-use applications.

The GH2 Policy and the SIGHT (Strategic Interventions for GH2 Transition) programme offer benefits to reduce GH2 production cost, which is currently about 2x that of grey hydrogen. Augmenting incentives for producers, as seen in the United States and Germany, would help reduce the premium.

Lowering the Goods and Services Tax (GST: 18 percent) on electrolysers and GH2 will further narrow the price differential. Supporting build-out of transport and storage infrastructure through benefits such as accelerated depreciation and long-tenure debt financing will help develop a favourable ecosystem.

The government could introduce a phased GH2 consumption obligation. In conjunction, users blending GH2 beyond a threshold could be offered direct subsidy to encourage adoption. Developing CfD (contract for difference) schemes as seen in Japan to bridge the gap between strike/ bid price and reference price (‘grey’ sources) can help, too.

On the export front, the government can consider a demand aggregator on the lines of Solar Energy Corporation of India to benefit from higher negotiation power. This would also help transform India into a global hydrogen export hub.

Fortifying Energy Storage

Energy storage is critical to facilitate renewable energy (RE) integration and improve grid security, thus helping India meet its ambitious goal to achieve 500 GW RE by 2030. However, the proposed viability gap funding (VGF) scheme to develop 4 GWh of battery-based energy storage by 2031 is negligible compared with the Central Electricity Authority’s estimate of 236 GWh requirement by fiscal 2032. Thus, a significant scale-up is warranted.

To be sure, battery-based energy storage manufacturing has received an impetus through the Production-Linked Incentive (PLI) scheme. However, leveraging government-to-government relations for upstream battery minerals would be critical.

Pumped storage hydro plants (PSP) are crucial for energy storage. To exploit the available potential of PSPs, availability of reservoir data across sites, expediting development of open-pit coal mines through public-private partnership models, adequate support for project preparation and state backing would be instrumental.

The government also needs to place strong emphasis on solar rooftop and distributed energy to further improve access to and quality of electricity, curtail discom losses and reduce cost for consumers. National- and state-level awareness and capacity-building programmes, timely disbursal of subsidy to eligible consumers, identifying a demand aggregator (municipal corporation, discom or other nodal agency) and extending incentives on achieving capacity targets are a few measures that can encourage installations. Financing, a key challenge in this segment, could be addressed through a credit wrap from a public sector financial institution (such as IREDA, REC or PFC) or multilateral development banks.

Solar manufacturing has been incentivised through PLI. However, lowering GST rates on solar panels is important to further support indigenous manufacturing. Also, ancillary component manufacturing – EVA sheets, backsheets and solar glass – has failed to match the pace of module manufacturing growth and requires impetus through similar PLI schemes.

Identifying priority emerging clean energy technologies and laying thrust on research and development (R&D) would support India’s long-term energy transition journey and improve energy security.

An R&D fund can be established through budgetary support to set up centres of excellence and research labs. The R&D fund can shortlist established and start-up/ micro, small and medium enterprises based on a predefined criterion to undertake R&D in identified priority areas, and partly fund the cost (based on agreed milestones) and supporting in product commercialisation and marketing. The fund could partly recover its investment through royalty, equity stake in the special purpose vehicle or licensing arrangements.

The vote-on-account can give a directional push towards clear prioritisation and phased implementation of the above highlighted measures would aid India meet its long-term global commitments even as the country accelerates its growth momentum.

Pranav Master is Senior Practice Leader & Director – Energy and Sustainability, Consulting, CRISIL Market Intelligence & Analytics. Views are personal and do not represent the stand of this publication.