The approach adopted by nations in the 20th century in their quest for prosperity led to an indiscriminate and disorganised accumulation of capital, and unregulated and inefficient use of resources that resulted in the degradation of the environment and atmosphere. Due to the fact that the economic success was largely attributable to the extensive use of natural resources a substantial degradation of the environment was inevitable. So although the standard of living improved, the quality of life became immensely threatened.
There was a realisation that many resources available and relevant for human activities were diminishing, and that the natural system was being intensely and irreversibly harmed by the human activity. The 1973 oil crisis prompted energy planners to identify alternative sources of energy to ensure effective management and a proper mix of available renewable and non-renewable sources of energy.
On the road to sustainable development, nations have been at a consensus that the needs of the present are to be achieved, without compromising the needs of the future. India is no exception and having been confronted with the huge challenge of meeting its future energy demands, has explored and experimented with renewable sources of energy.
Creating a market
A significant thrust has been given to the research, development and introduction of renewable energy technologies in different sectors. In India, these endeavours were steered and overseen by the Commission for Additional Sources of Energy (Case), which was set up in 1981, and a Department of Non-Conventional Energy Sources which was set up in 1982.
The Department of Non-Conventional Energy Sources was transformed into Ministry of Non- Conventional Energy Sources in 1992, and then was renamed as the Ministry of New and Renewable Energy (MNRE) in 2006. The MNRE was entrusted with the function of facilitating research, design, development, manufacture and deployment of new and renewable energy systems and devices for the transportation, portable and stationary applications in rural, urban, industrial and commercial sectors in India.
The challenges faced by India in promoting the generation of power from renewable energy sources have been similar to those faced by other jurisdictions. The key challenge has been the creation of a market for renewable energy against the backdrop of:
- The presence of vertically integrated electric utilities focusing on generation, transmission and distribution segments;
- Disparities in consumer tariffs on account of subsidies and cross subsidies;
- Regulation of power procurement by distribution licensees;
- Absence of an independent regulator in some states;
- Costs of renewable energy technologies being higher as against conventional sources;
- Absence of an access regime casting a duty on the transmission and distribution licensee to provide access to consumers and generators; and
- Inconsistencies in the approach adopted by states for promoting non-conventional energy.
Key legislative initiatives
Legal and regulatory frameworks have played a key role in finding sustainable solutions for India's energy needs. The legislature has enacted laws which have not just targeted reducing energy consumption but have also incentivised investments in non-conventional sources of energy. Some of the key initiatives which have laid the foundation for change in the electricity sector include:
- Enactment of legislation addressing critical issues with respect to issues of air and water pollution, environment protection and forest conservation;
- Enactment of the Energy Conservation Act, 2001; and
- Enactment of the Electricity Act, 2003.
Focusing on the environment
In India, the real impetus for enacting a framework focusing on the environment came only after the UN Conference on the Human Environment (Stockholm, 1972). Under the influence of this declaration, the National Council for Environmental Policy and Planning within the Department of Science and Technology was set up in 1972. This Council later evolved into a fully fledged Ministry of Environment and Forests in 1985, which today is the apex administrative body in the country for regulating and ensuring environmental protection.
After the Stockholm Conference, in 1976 sanction was given to environmental concerns through the 42nd amendment to the Constitution of India, which incorporated them into the Directive Principles of State Policy and Fundamental Rights and Duties. Since the 1970s an extensive network of environmental legislation has grown in the country. Some of the key initiatives include the enactment of the following statutes:
- The Water (Prevention and Control of Pollution) Act, 1974;
- The Air (Prevention and Control of Pollution) Act, 1981;
- The Environment Protection Act, 1986;
- The Forest Conservation Act, 1980;
- The Wildlife Protection Act, 1972;
- The National Environment Tribunal Act, 1995; and
- The National Environment Appellate Authority Act, 1997.
Energy conservation
The Energy Conservation Act 2001 stipulates measures to ensure the efficient use of energy and its conservation. This law shifted the focus to reducing energy consumption, bringing in operational efficiency in generating stations and reduction in losses in transmission and distribution. Some of the salient features of the Energy Conservation Act, 2001 include:
- Specifying appliances and equipment to be subjected to labelling regimes;
- Prohibiting the manufacture, sale, import or deals in appliances and equipment that do not meet requirements
- Mandatory energy audits in specified industries and for designated consumers;
- Prescribing energy consumption norms;
- Prescribing energy conservation building codes and enforcing compliance to building codes, mandatory norms, mandatory energy audit regime, energy efficiency measure implementation;
- Certification of energy auditors and energy managers; and
- Awareness and dissemination, pilot project demonstration and innovative financing.
A Bureau of Energy Efficiency (BEE) has also been set up to issue regulations to further the objectives of the energy conservation. The BEE has undertaken several measures to promote energy conservation, including the introduction of the Bachat Lamp Yojna Scheme (BLY). The BLY scheme promotes the replacement of inefficient incandescent lamps with compact fluorescent lights (CFLs) across households in India and the distribution of high quality CFLs at a highly subsidised price as opposed to the current market price. The Government of India has provided a platform for a public-private partnership between the Government of India, acting through the BEE, private sector CFL manufactures and traders and distribution licensees. The CFL manufacturers or traders are entitled to sell the Certified Emission Rights under the Clean Development Mechanism (CDM) of the Kyoto Protocol. The BYL was successfully registered by the CDM Executive Board on April 29 2010. The BLY is being implemented in phases in several states and is in various states of implementation. As per estimates it would lead to a peak load reduction of over 6000MW in electricity demand.
Electricity (including renewable energy)
The foundations for creation of a market for renewable energy were laid down in the provisions of the Electricity Act, 2003, which was brought into effect on June 10 2003. The Act introduced features to facilitate a change in the dominant single buyer model to a multi-buyer model which created choice for generators and consumers. The Act has:
- Provided a facilitative framework, enabling the segregation and unbundling of all or some of these activities into separate entities;
- Required the Electricity Regulatory Commissions (ERCs) to promote the development of the market in power (including trading) and be guided by policies;
- Identified generation, transmission, distribution and trading as separate activities, and provided separate set of rules for each of them;
- Created a wider market for generating companies by enabling to supply to not just licensees, (distribution and trading licensees) but also to consumers, subject to the grant of open access;
- Casts a duty on transmission licensees to provide non-discriminatory open access to its transmission system to any licensee or generating company on payment of transmission charges and any consumer (entitled to open access) on payment of charges;
- Prohibited transmission licensees from undertaking trading and segregated the wires function from the supply function;
- Introduced a regime for grant of access, creating choice for distribution companies and consumers and to attract private investments;
- Empowered the ERC to issue appropriate directions to a licensee or a generating company who commits any acts that are likely to cause or do cause an adverse effect on competition in the electricity industry.
The Act empowered the State Electricity Regulatory Commissions (SERCs) to:
- Regulate the electricity purchase and power procurement process of distribution licensee including price at which electricity shall be procured from generating companies or licensees or from other sources through agreement; and
- Promote co-generation and generation of electricity from renewable sources by:
- Providing suitable measures for connectivity with the grid and sale of electricity to any person; and
- Specifying that a percentage of the total consumption of electricity in the area of a distribution licensee would be met from renewable sources.
The Act ensured that the SERCs are guided by policy while promoting electricity generation from renewable sources of energy. The National Electricity Policy (NEP) and Tariff Policy (TP) notified by the Government of India under the Act contained directions which justified "differential tariffs" for renewable energy:
- The NEP stipulated that it will take some time before non-conventional technologies can compete, in terms of cost, with conventional sources, and thus SERCs should determine an appropriate differential tariff for sale of power generated by such sources to promote these technologies.
- The TP stipulated that SERCs must fix the minimum percentage of energy from renewable sources that must be purchase by distribution licensees and power from such sources shall be purchased at preferential tariffs.
Key regulatory initiatives
In terms of the Renewables Global Status Report 2010, measures adopted globally to promote renewable energy generation include inter alia the following:
- Feed in tariffs (adopted by around 50 countries until 2010);
- Renewable portfolio standard policies (enacted by 10 national governments and 46 state/provincial governments around the world);
- Direct capital investment subsidy, grant, or rebate (offered in at least 45 countries);
- Investment tax credits, import duty reductions, or other tax incentives at national and state or provincial levels;
- Capital subsidies and tax credits for solar photo voltaic (PV) markets; and
- Energy production payments, sometimes called premiums.
In India, the SERCs issued regulations under the Act specifying the terms and conditions for determination of tariff, the regime for open access and licensing and specifying the percentage of power to be procured by distribution licensees from renewable sources at a preferential tariff. The target set by SERCs for distribution licensees within the State viz, procurement from renewable energy sources, is termed as Renewable Purchase Obligation (RPO).
Regulators in India have played a key role in evolving methodologies that encourage investment in renewable energy. There was a realisation that the distribution of renewable sources is not uniform across the country and that while some states are rich in terms of renewable potential, others have very little potential to explore. The regulators observed that these challenges were restricting the holistic development of renewable energy potential and required a suitable mitigating mechanism to enable all states to meet the RPO obligations.
There was realisation that while SERCs had stipulated preferential tariffs for the sale of renewable energy within the state, there was no regulation setting out tariffs for inter-state sales. Therefore the Central Electricity Regulatory Commission (CERC) framed the CERC (Terms and Conditions for Tariff Determination from Renewable Energy Sources) Regulations 2009.
The Forum of Regulators, constituted under the Act, in its report on Policies on Renewables recommended that the mechanism for inter-state transaction of renewable energy sources was necessary for recognising procurement of renewable energy from one state to other state and to ensure compliance with RPO. Following a public debate, the CERC has recently issued the CERC (Terms and Conditions for recognition and issuance of Renewable Energy Certificate for Renewable Energy Generation) Regulations 2010.
The Renewable Energy Certificate (REC) mechanism is aimed at addressing the mismatch between the availability of renewable energy resources in state and the requirement of the obligated entities to meet the RPO. Under this mechanism, renewable energy generators would have the option to either sell the renewable energy at the preferential tariff or sell electricity generation and environmental attributes associated with renewable energy generations separately.
The REC is a transferable and saleable credit certificate, which can be freely traded at power exchanges. It is a market-based instrument aimed at the development of a market in power from renewable sources by facilitating inter-state transaction. Since the purchase of an REC is deemed as the purchase of power generated from renewable energy sources, it is therefore recognised as a valid instrument for compliance with RPO by the distribution licensees.
Key policy initiatives
The expert committee set up by the Planning Commission has formulated an "Integrated Energy Policy" covering all sources of energy including renewable energy sources. The policy document highlighted the need for exploiting renewable energy. The main features of the policy included interalia the following:
- Power regulators should create alternate incentive structures such as mandated feed-in laws or differential tariffs or specifying renewable portfolio percentage in total supply; and
- Appropriate policies, regulatory systems and fiscal measures duly leveraged by funding available under global climate mechanism should be designed to accelerate the development of solar technology for large-scale deployment.
India's first National Action Plan on Climate Change (NAPCC) outlined existing and future policies and programs addressing climate mitigation and adaptation. The plan identified eight core national missions and other initiatives. The promotion of renewable energy is one of the focal points of the efforts undertaken to combat climate change. The NAPCC envisages increasing the share of renewable energy in total electricity consumption of the country. It also envisages renewable energy to constitute approximately 15% of the energy mix of India in 2020. Considering the past pace of growth of power generation from renewable sources and the trend in renewable energy purchase, a quantum jump in the deployment of renewable energy across the country is required to achieve the targets set forth in the NAPCC.
The MNRE has taken several steps to promote investments in the renewable energy sector. Sectors which have witnessed investments include wind, small hydropower, biomass, urban and industrial waste to energy and solar (PV and thermal). Some of the schemes introduced in the recent past for incentivising investments in the renewable energy include:
- Scheme for Implementation of Generation Based Incentives for Grid Interactive Wind Power Projects viz., approximately $0.01 per unit of electricity fed into the grid and 12 rupees (approximately $0.026) per kilowatt hour for solar power plants.
- Small Hydro Power Programme (up to 25MW capacity).
The Jawaharlal Nehru National Solar Mission (JNNSM) under the brand Solar India is one of the key initiatives to establish India as a global leader in solar energy. The JNNSM has set a target of 20,000MW and stipulates implementation and achievement of the target in three phases (first phase up to 2012-13, second phase from 2013 to 2017 and the third phase from 2017 to 2022) for various components, including grid connected solar power.
The Indian Renewable Energy Development Agency Limited (Ireda), which has been established under the aegis of MNRE, is a specialised financing agency to promote and finance renewable energy projects throughout India, and has incentivised investments in the renewable energy sector by introducing:
- Income tax breaks for renewable energy projects;
- Duty free import concessions for import of equipment to setup renewable energy projects;
- Interest subsidy on loans taken to finance renewable energy projects;
- Incentives for preparation of detailed project reports and feasibility reports; and
- Accelerated depreciation on the renewable assets.
The potential for renewable
The Report on Global Trends in Sustainable Energy Investment 2010 analysed the trends and issues in the financing of renewable energy and energy efficiency and has interesting observations and statistics. This Report observed that financial investments in clean energy in India stood at $2.7 billion in 2009, ranking it eighth in the world and applauded investments in the wind energy sector.
As per statistics, India moved up to fifth place in the world for installed wind power during the year. Capacity rose by 12%, from 9.7 gigawatts (GW) to 10.9 GW, during 2009. In terms of the Report, India's current five-year plan targets 12.5GW of added renewables by 2012 (including wind, small hydro, and biomass power), and in 2009 the country adopted targets for solar power of 1GW by 2013 and 20GW by 2022 including 1GW of off-grid solar PV by 2017).
The Renewables Global Status Report 2010 analysed the trend adopted globally for promoting renewable energy. The Report observes that by 2009, over 85 countries had some type of policy target, for example shares of electricity production, and sets out that the renewable energy targets are increasing globally:
- Europe's target (20 % of final energy by 2020) is prominent among OECD countries;
- Brazil (75 % of electricity by 2030);
- China (15 % of final energy by 2020);
- India (20 GW solar by 2022);
- Kenya (4 GW of geothermal by 2030)
It is clear that investments in the renewable energy sector are bound to grow by leaps and bounds in the coming years on account of the support received from legal, policy and regulatory frameworks in India. Some of the factors that make India a preferred destination for investors targeting renewable energy include interalia the following:
- India's consumer market will be the world's fifth largest in the world by 2025;
- India is identified as one of the most favourable locations for investments;
- India is among the world's youngest nations with a median age of 25 years as compared to 43 in Japan and 36 in USA;
- India will remain among the top five attractive destinations for international investors;
- India has a liberal environment for foreign direct investment in renewable energy; and
- There are several fiscal and tax benefits and incentives for investors.
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About the author
Prabjot Singh Bhullar is a partner in the infrastructure and projects practice at the Delhi office of Khaitan & Co.
Prabjot represents developers, investors, lenders, licensees, and regulatory institutions on diverse legal, regulatory, policy, financing, contractual and transactional matters including acquisitions, investments and financings. Prabjot has advised clients operating in diverse sectors including electricity (generation, transmission, distribution & trading), transport (roads, airports, railways) communications, mines & minerals, water and oil & gas. Prabjot also advises clients on issues related to renewable energy (wind, solar, hydro, biofuels). He has spoken at several national and international forums on issues related to the infrastructure sector.
Prabjot holds a Bachelor’s degree in English and Law from the University of Delhi. He was enrolled with the Bar Council of Delhi in 1992 and has over 18 years in legal practice.
The author acknowledges the research support offered by his colleague, Karanvir Gill, associate. |
Contact information
Prabjot Singh Bhullar
Khaitan & Co
801 Ashoka Estate
24 Barakhamba Road
New Delhi 110 001, India
Tel: +91 11 4151 5454
Fax: +91 11 4151 5318
Email:prabjot.bhullar@khaitanco.com
Web:www.khaitanco.com |