The Union Budget and the future of India’s energy transition

Welcome to today’s Lights On, a newsletter that brings you the key stories and exclusive intel on energy and climate change in South Asia.

In today’s special edition, I examine India’s Union Budget to see what’s in it for the green sector.

If you missed it last week, I encourage you to check out the untold energy story behind the farmers’ protest, that since November has been making headlines in India and beyond (even Rihanna tweeted about it!)

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India’s Union Budget, where every February the government lays out its financial strategies and areas of investment for the coming year, is perhaps the most hotly awaited event for Indian industries. The bundle of documents, symbolised by a red briefcase that the Finance Minister carries on the day (although this year it was a red tablet!) covers all sectors of India’s economy, from costumes and props for the cinema industry, to precious metals and the aviation sector.

Unsurprisingly, the focus of this year’s Budget has been on strengthening India’s healthcare system after the pandemic. The Finance Minister Nirmala Sitharaman pitched an ambitious six-year programme earmarking nearly $9 billion to kickstart it. But as part of its vision for the recovery, the government is also putting thought and money towards a more sustainable future for India, where factors that played a part in the pandemic’s severity, such as air pollution, are also addressed. If you want to know where India’s energy transition is heading, the Union Budget is the place to start.

Air pollution 😷

What we know 🖋

This year’s lockdown has offered a glimpse of what clean skies look like over chronically polluted cities like Delhi. As restrictions started to ease in September and smog enveloped their cities once again, Indians were left with a heightened awareness of the air pollution problem. Identifying and eradicating air pollution sources in India is a particularly tough task, because the problem is the result of a cascade of systemic issues rooted in inequality, lack of infrastructure or unsustainable agricultural systems. The government has been trying various approaches, including a National Clean Air Programme, which requires 122 of India’s most polluted cities to come up with action plans to reduce their pollution levels by at least 20 percent by 2024. The plan has still to bear fruit, partially due to the impacts of the pandemic, partially because it’s severely underfunded. More recently, the government launched a new Commission for Air Quality Management which will cover Delhi’s catchment area, including the agrarian states of Punjab and Haryana.

What’s in the Budget 🧰

Finance Minister Nirmala Sitharaman promised to provide the equivalent of $304 million for 42 urban centres with more than one million residents. It’s important to note that the government had made a similar pledge last year, for about $603 million, of which only half has been disbursed. So the money earmarked this year roughly amounts to the gap left by last year’s unfulfilled promise. The Commission for Air Quality Management will also receive $2.7 million.

What now ❓

Action against air pollution is chronically underfunded and poorly coordinated, with a flurry of bodies operating independently from each other. Until we know more about how the money will be spent, it’s hard to tell whether it will make a meaningful impact.

Solar ☀

What we know 🖋

India has big plans for its solar transition. By 2022, it wants to connect 100GW of solar to the grid, and the government plans to have 450GW of renewable energy installed by 2030. While solar installations are growing fast and foreign investors flock in, there are some teething issues. India is still dependent on China for cheap solar components, but the government wants to move that capital away from its hostile neighbour and promote manufacturing at home. Finding the right policy recipe is proving hard. The government has been planning to slam high custom duties on solar imports, but local developers say that because Indian solar makers are not ready to meet demand, this would increase the cost of solar projects and harm the entire sector.

What’s in the Budget 🧰

To promote the development of solar energy, the government is boosting its nodal solar agencies, earmarking $137 million for the Solar Energy Corporation of India (SECI) and nearly $206 million for the Indian Renewable Energy Development Agency (IREDA). It’s also introducing a manufacturing plan for solar panels and cells, to help solar makers get up to speed. One much awaited announcement - not strictly solar, but furthering the clean energy cause - is the establishment of the Hydrogen Energy Mission, to be launched this year.

What now ❓

The government cares about the solar sector, but it also cares - perhaps even more - about ostracising China. The budget mentions that a complete list of updated basic custom duties will be announced in October, so we’ll have to wait until then to see if Indian solar developers’ concerns will be addressed.

Power 💥

What we know 🖋

India’s power sector is saddled with debt. Distribution companies, known as discoms, are chronically struggling to pay the producers they buy energy from, and are tied to the fossil fuel industry through expensive contracts. This is in part because bills don’t get paid - India doesn’t have an efficient metering system everywhere, particularly in rural areas. Corruption is rife, and by law India’s farmers get energy for free, which ends up weighing on the system too. This situation makes it difficult to integrate renewable energy into the system, because most discoms cannot afford to sell cheaper electricity that would further reduce their profit margin.

What’s in the budget 🧰

Whether public or private, distribution companies are monopolies, the Finance Minister said, and competition needs to be encouraged. The government will put in place a system to allow consumers to choose between more than one provider. It’s also launching an ambitious $42 billion reform plan that over 5 years will help discoms upgrade their infrastructure, with benefits tied to financial improvements.

What now ❓

Observers outside India may miss the fact that installing more solar and wind is only half of the story, you need that energy to reach homes and industries and for this to happen a robust transmission system is essential. This comprehensive reform could speed up or derail India’s energy transition for years to come.

Electric Vehicles (EV) 🚕

What we know 🖋

The government is banking on electric vehicles to help clean India’s air in its most polluted cities, a goal put in sharp focus after the pandemic highlighted the impacts of bad air on the incidence and severity of coronavirus infections. India has a policy for the fast adoption of electric vehicles, FAME, which offer generous incentives for switching to electric mobility, but heavily favours vehicles entirely made in India, an opportunity that Indian EV makers are not ready to take advantage of. Once again, India’s clean industry is dependent on imported components - mostly from China. The stakes are particularly high: India is one of the world’s biggest car manufacturers and can’t afford to pass on the opportunity to pivot to electric - if it wants to save one of its key sectors and the 30 million jobs that come with it.

What’s in the Budget 🧰

If industrialists in the EV space were hoping for a brand new policy to replace or complement FAME, they have been disappointed. There were no key announcements in this year’s budget, however a slight increase in custom duties for some components, including lithium-ion batteries, could help boost local manufacturing under the ‘Make in India’ campaign. And since hydrogen fuel is increasingly pitched as a viable option for heavy duty trucks, the new Hydrogen Energy Mission will represent a boost for clean mobility.

What now ❓

Like solar stakeholders, electric vehicles makers will have to wait until October to get an idea of what kind of tax the government will impose on the import of key components. But while this year the focus seems to have shifted away from policy shakeups in the EV space, the new measures reinforce the government’s commitment towards clean mobility in India. And with Tesla entering the country, this may be the year where this niche technology finds its mainstream voice in India.

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