Government Allows FDI into the Indian Solar Energy Market

[Akshat Bhargava is an Associate at Shardul Amarchand Mangaldas & Co and Nandini Shenai is a 4th Year BBA LLB (Hons) student at NMIMS School of Law, Mumbai]

The Indian Constitution lists electricity in the concurrent list, and both the Union and State legislatures have simultaneous authority to enact legislation on the topic. In the case of a contradiction or conflict, nevertheless, the law introduced by the Parliament will take precedence over those formed by state legislatures.

The Centre enacted the Electricity Act, 2003, which establishes the structure for energy production, transport, allocation, trade, and usage in India. The Ministry of Power (MoP) is the administrative ministry mainly concerned with the growth of electrical energy in India. The Ministry of New and Renewable Energy (MNRE) is Government of India’s primary body for promoting renewable energy, on and off the grid. The MNRE is tasked with advancement and matters connected to solar energy, biogas facilities, small hydel power, tidal energy, geothermal power, and so on, in terms of the Government of India (Allocation of Business) Rules 1961. While the Electricity Act does not define renewable energy, one can find various law and regulations that can clarify what these renewable energy sources can be. The CERC (Terms and Conditions for Tariff Determination from Renewable Energy Sources) Regulations 2017, for example, describe ‘renewable energy’ as grid-quality electricity generated from renewable energy sources.

The Electricity Act, 2003, the National Electricity Policy, 2005, and the Tariff Policy, 2016, all promote private sector engagement in renewable energy by imposing renewable purchase obligations (RPOs) on specific businesses that are required to meet them. The whole production system of the electrical industry, including manufacturing, transportation, and allocation, is made up of private sector firms. Renewable energy plants have been built up by private sector organisations, involving foreign investors, to deliver electricity to networks, private customers, or captive usage.

This post aims to navigate through the policies available to companies for foreign direct investment (FDI) in the renewable energy sector with specific reference to the solar sector. In order to do that, the post will first study the legal and regulatory framework surrounding renewable energy projects in India.

Regulatory Framework for Renewable Energy

The MNRE has established three dedicated institutions: the National Institute of Solar Energy, the National Institute of Wind Energy, and the Sardar Swaran Singh National Institute of Renewable Energy. Indian Renewable Energy Development Agency (IREDA) is another corporation that offers financing and allocates money and other activities to encourage renewable energy under the auspices of the MNRE. Furthermore, the Renewable Energy Corporation of India is active in all aspects of renewable energy, including solar power plant ownership, electricity generation and distribution, and research and development.

State agencies are in charge of channelling central-level grants, implementing pilot projects, coordinating with other local organizations, and enforcing the Energy Conservation Act of 2001. They also create strategies for local renewable energy development and monitor their execution. DISCOMS, or state distribution companies, are by far the greatest buyers of power, including renewable energy.

As a result, the DISCOMS’ capacity to acquire such electricity is critical to the accomplishment of the national change in path from conventional to renewable energy. DISCOMS, on the other hand, are currently beset by enormous debts, and their activities are frequently determined by local political reasons rather than logistical and financial efficiency. Building in favour of the nation’s ambitious renewable energy goals necessitates a complete overhaul of the power distribution system.

The Government’s Accelerated Power Distribution Programme was one of the first attempts to encourage renewable energy. This programme  accelerates asset depreciation in the first phases of the lifetime of the assets, allowing the development company to carry off a larger percentage of the asset’s value during the first years of possession, lowering the developer’s tax liability. The Generation-Based Initiative for wind power projects was launched by MNRE in 2009. The Jawaharlal Nehru National Solar Mission (JNNSM) was also launched by the government. By 2020-2022, JNNSM hopes to bring solar energy at par with traditional electricity sources.

Foreign Direct Investment

The MNRE’s policies and programmes are aimed at encouraging more capital for the funding and growth of India’s renewable energy sector, taking into consideration the government’s visionary objective. Businesses involved in non-conventional power generation can receive up to 100% foreign direct investment under the current rules. Time and again, the Indian Government has worked to bring into effect an accommodating and investment FDI policy.

The core intention has always been to create an FDI policy which is more capital-friendly and to remove obstacles that have stifled the influx of investment and capital into the nation. Improved FDI inflows have come from the Centre’s FDI policy changes, investor cooperation, and ease of doing business initiatives. These ongoing improvements in India’s FDI confirm the country’s position as a top investment hub for international investors.

The Ministry of Commerce and Industry updated its FDI policy by revising the existing FDI policy with the goal of preventing takeovers or purchase of Indian firms during the pandemic. If an entity based in a nation that has a land border with India makes an investment, or if the beneficiary of the investment is a resident of any of those nations, then such investment will require government permission under the new FDI policy. Previously, only Bangladesh and Pakistan were included in this category, but it has since been widened to include all bordering nations with India, which includes China and Macau.

The majority of the country’s renewable development has been made feasible by defined attainable objectives, which has resulted in a gradual increase in foreign investment in India during the preceding financial years. The Indian Government has set a lofty goal of attaining 175 GW of renewable energy production by the end of 2022, with the goal of increasing to 450 GW by 2030, making it the world’s largest renewable energy growth plan. India’s current renewable energy capacity, notably in terms of solar energy, is estimated to be at 38.79 GW.

Impact of Union Budget 2021 on Solar Energy

The Finance Minister presented optimistic remarks in the Annual Budget 2021, suggesting that the solar energy sector is part of the Centre’s ever-increasing reliance on renewable energy, by declaring an increase on  custom duty on solar inverters from 5% to 20% and solar lanterns from 5% to 15%, which will encourage native solar invertor production and induce international businesses to invest in India. Furthermore, the Government will announce a stepwise production strategy for solar cells and panels, which will help to increase local production.

The Budget revealed a financing influx of Rs 1,000 crore to the Solar Energy Corporation of India (SECI) and Rs 1,500 crore to IREDA to uplift India’s renewable energy sector. This will tackle the major hurdle of acquiring capital to construct solar plants. Lowering regulatory requirements for small businesses will benefit solar entrepreneurs. An increase in the use of electric vehicles (EVs) would help to meet the need for green energy.

The Centre has set out roughly Rs 3.5 lakh crore to help DISCOMs, which will be supplemented by end-user regulations. Commercialization is also a positive move because competitiveness would significantly strengthen electricity generating and distribution systems. As a result, low-cost power would be required, increasing demand for solar parks.

Conclusion

The Indian renewable energy market has evolved, and it now boasts a big scale, fewer risks, consistent yields, and relatively high level returns, which are precisely what foreign investors are looking for. It now has better excess returns than economies of similar stature, such as the United States or China. Altogether, this renders the Indian renewable energy sector an appealing option for FDI especially when their domestic markets are yielding lower returns.

However, the Government should do more to mitigate possible stumbling blocks, such as upgrading transmission facilities, relaxing land-acquisition regulations, guaranteeing no contractual elimination, and reviewing stringent tariff ceilings on reverse auctions. To mitigate the danger of DISCOMS failing to meet their contractual commitments, the Government should implement a repayment security system. Investors’ concerns about currency fluctuations will be alleviated by a foreign-exchange trading mechanism. If authorities can appropriately and quickly handle these concerns, risks will be reduced and FDI will increase.

The Climate and Clean Energy Agenda 2030 Partnership was launched by the United States and India at the Leaders’ Summit on Climate in April 2021 to bolster mutual trust on strategic initiatives to fulfil the objectives of the Paris Agreement and to support every nation accomplish its identified environment and green power goals. Without a strong and flourishing renewable energy  industry in India, the fight against changing climate would be lost. This would necessitate a constant flow of money in the coming years, and the existing sector profile is ideally matched with investor objectives, giving reason to believe that India’s renewable energy sector’s success story will continue uninterrupted.

Akshat Bhargava & Nandini Shenai

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