Subsidies, incentives for renewables need a relook: Survey

The government needs to revisit subsidies and incentives for renewables because its tariff is approaching grid parity and some discoms are insisting for renegotiation of already inked PPAs, the Economic Survey said today.
The Survey also suggested to set up a payment guarantee fund or a foreign exchange fund for renewable developers to reduce risks along with affordable financing.
"There is a case for revisiting the subsidies and incentives being given to the renewable energy sector," said Economic Survey tabled by Finance Minister Arun Jaitley in Parliament today adding that the levelised tariff is approaching grid parity.
As per experts, the tariff's free fall last year would result in a situation where renewables would be cheaper than coal-based thermal power and thus would affect thermal plants to create another lot of bad loans or NPAs.

The Survey pointed out,"the discovery of very low (renewable) tariffs through the auctioning process, though a welcome news, possibly contributed to some demands for renegotiation of the already signed PPAs. Some discoms have hinted at possibility of renegotiating the PPAs signed by them at tariffs higher than those in the recent bids."
It also mentioned a CRISIL (2017) remark that renegotiating the tariffs could result in risk for investments worth Rs 48,000 crore.

Earlier, the (feed in tariff) tariffs were fixed by state electricity regulatory commissions based on which PPAs were made with power generators. But tariff fell sharply, particularly last year, after competitive bidding.

The Survey pointed out that renegotiation of PPAs are likely to face tough resistance from the developers and may result in legal battles which would introduce uncertainty for the sector, and banks which are already facing the issue of NPAs, may become apprehensive of lending to the sector in the future.
It also said there are cases where the developers have already made huge investments into renewable energy projects based on the expected stream of revenue.
One of the principal expectations from the Government is the enforcement of PPAs. This is especially crucial considering the governments ambitious target of achieving 175 GW of renewable energy by 2022, it added.

About making the term of future PPAs shorter, it said that it could only increase the cost of capital without much gains.
It suggested that affordable financing holds the key for financing sustainable energy projects and risk mitigating instruments such as payment guarantee fund or a foreign exchange fund available to developers could be a way forward.
The Survey observed that the government, so far, has played an active role in promoting the adoption of renewable energy resources by offering various incentives, such as generation-based incentives, capital and interest subsidies, VGF (viability gap funding), and concessional finance.
It noted that the renewable energy has been placed under the priority sector lending, and the bank loan for solar roof- top systems is to be treated as a part of home loan/home improvement loan with subsequent tax benefits.