At the COP26 summit in Glasgow in 2021, Prime Minister of India, Shri Narendra Modi pledged to cut India’s total projected carbon emission by 1 billion tonnes by 2030, reduce the carbon intensity of the nation’s economy by less than 45% by the end of the decade and net-zero carbon emissions by 2070. India, the world’s third-largest greenhouse gas emitter and highly vulnerable to the impacts of climate change, has amusingly also been ranked 3rd in the renewable energy attractive index in 2021 and 4th in Renewable Energy Installed Capacity as perREN21 Renewables 2022 Global Status Report. What are the key drivers behind this development and how is India emerging as an attractive market for the renewable energy technology industry? There is more than one factor for this advancement, however, we are confining ourselves to the incentives that India offers for the sector and its head-on comparison on the policy front with a leading market like that of the United States of America.
India, a country full of possibilities and enormous potential is all set to become the world’s third-largest economy by 2027, attracting continuous investments in the country, more so in emerging sectors like technology and renewable energy. To put into a better perspective, the“non-conventional energy sector received FDI inflow of USD 12.57 billion between April 2000 and June 2022”. India’s energy demand is expected to increase more than that of any other country in the coming decades owing to the vast market demand and enormous potential for growth and development in the sector.
2. Incentives for Clean Energy in India
There have been constant efforts to promote clean energy and reduce its dependence on fossil fuels. TheNational Solar Mission was launched in 2010 to deploy 20 GW of grid-connected solar power by 2022 and 100 GW by 2030. The Government then went on to launch theNational Wind Energy Mission in 2015, to install 60 GW of wind power by 2022. It is pertinent to mention here that, India has already achieved 166 GW of renewable energy capacity till October 2022 at a rapid speed considering that we lagged behind the developed countries in initiating this change.
TheNational Policy on Biofuels, 2018 aimed at achieving a 20% blend of biofuels in gasoline and diesel by 2030, a step that would also help in targetingIndia’s commitment to net zero carbon emissions by 2070 made in United Nations Framework Convention on Climate Change’s Conference of Parties (COP26) at Glasgow last year. The Government has also recognized the disruptive potential of electric and hybrid vehicles and initiated theNational Electric Mobility Mission Plan in 2013, to have 6-7 million electric and hybrid vehicles on Indian roads by 2030.
This goes without saying that, there still is a large gap between current trends and 2030 targets, for which India will need to deploy on average 25 GW of solar PV and 11 GW of wind power per year. TheStanding Committee on Energy (2022) estimates that this will require INR 1.5 to 2 lakh crore (USD 20.1 to 27.0 billion) of investment per year compared to around INR 75,000 crore (USD 10.1 billion) today.
A. Tax Incentives for Clean and Renewable Energy Generation in India
It is a fact that tax incentives mirrored in a country’s tax laws increase transparency and can empower the administration of tax in the country serving a range of purposes and providing a boost to industrial expansion. The Indian Government in the recent past has sensed its advantage in developing and shaping the future of renewable energy in India. Some of the key incentives are discussed hereunder:
Accelerated Depreciation: Companies that invest in renewable energy projects are eligible for accelerated depreciation, which allows them to claim a higher rate of depreciation on the assets in the first year of use. This reduces the taxable income and thus the tax liability.Accelerated depreciation worth INR 1,562 crore (USD 0.2 billion) has been offered till 2022.
Generation-based Incentives (GBI): The government provides a GBI of INR 0.50/kWh to grid-connected wind and solar power projects for the first 12 years of operation, subject to a cap of INR 0.5 crore per MW per annum, worth INR 1,067 crore (USD 0.1 billion) till 2022.
Customs Duty Exemptions: Certain equipment and components used in renewable energy projects, such as solar cells and wind turbine generators, are exempt from customs and excise duty. Lower GST and customs duty for wind power has been provided by the Government, worth INR 899 crore (USD 0.1 billion).
Concessional Finance: Concessional finance at a lower rate of interest is available to renewable energy projects through institutions such as Indian Renewable Energy Development Agency (IREDA), aimed at resolving the credit crunch often faced by private players in generating and manufacturing cleaner alternatives to existing conventional fuel-based products.
Viability Gap Funding: The government provides funding to bridge the gap between the cost of a project and the projected commercial return. It helps project developers to attract private investment and enhance their market potential.
Waiver of Interstate Transmission System (ISTS) charges for solar and wind power for 18 years from the date of commissioning, estimated at around INR 1,043 crore (USD 0.1 billion).
B. Subsidies for Renewable Energy Sources
The subsidies for clean energy generation come in the form of policy and financial incentives such as capital subsidies and viability gap funding provided by the Ministry of New and Renewable Energy (MNRE) to the State Governments and the Union Territories to promote the development of renewable energy projects. The total subsidies to all energy sources amounted to INR 2 lakh crores; and although the renewable energy subsidies have risen from INR 4,463 crore in 2014 to INR 6,767 crore in 2017,there is a fall of 59% after peaking in the fiscal year 2017 largely due to the renewable energy technologies reaching cost parity and a gradual decline in accelerated depreciation benefits as assets age.
There have been some notable schemes for farmers who wish to induct renewable energy products and procedures in their practices. Individual farmers having grid-connected agriculture pumps will be supported to solarise pumps videIndividual Pump Solarisation scheme. Solar PV capacity up to two times of pump capacity in kW is allowed under the scheme. The farmer will be able to use the generated solar power to meet the irrigation needs and the excess solar power will be sold to DISCOMs.
The states can also solarize the agriculture feeders through a Feeder Level Solarization and solar plants of capacity that can cater to the requirement of the agriculture load of the selected feeder can be installed for a project period of 25 years. Recently, the Government approved the proposal of the National Programme on High-Efficiency Solar PV Modules, to build an ecosystem for the manufacturing of high-efficiency solar PV modules in India and the domestic market will be incentivized through the production-linked incentives for 5 years post-commissioning of the manufacturing plants.
C. Legal Framework for Clean Technology Infrastructure in India
Clean energy technologies including the products, services, and procedures for the usage of renewable energy sources in India are governed by a variety of laws and regulations at the national and state level. TheElectricity Act of 2003 provides the basic framework for the generation, transmission, and distribution of electricity in India, and promotes private and foreign investment in the power sector. It also includes provisions for the development of renewable energy projects and the requirement of state distribution companies to purchase a certain percentage of their power from renewable sources.
In 2006, the Government came out with theNational Tariff Policy which lays down the guidelines for the tariff structure of electricity generated from renewable energy sources and specifies that tariffs for renewable energy projects should be at least equal to the tariffs for conventional power projects.
Taking into consideration, the issues of climate change and its imminent impact on our lives, the Government of India planned out a comprehensive strategy for mitigating and adapting to climate change vide theNational Action Plan on Climate Change, 2008, with a particular focus on increasing the share of renewable energy in the energy mix. Further, Renewable Purchase Obligation (RPO) regulations have been put into place that requires state distribution companies to purchase a certain percentage of their power from renewable sources. This percentage increases over time and is based on the state’s renewable energy potential. The year 2020 saw the rollout of the NationalElectric Mobility Mission Plan (NEMMP) aimed at advancing a comprehensive ecosystem to encourage the manufacturing of electric and hybrid vehicles in India and increase the number of electric vehicles in the country.
The Indian approach till now has been based on long-term planning, similar to a socialist economy where the market relies on government planning; however, the Government has provided space to the private players to have their share of growth in the renewable energy market through its indicative planning and budgetary allocations reflective of its leaning towards a more free market approach. Let us now analyze how the United States of America, with its free market structure, has approached the development of renewable energy and meeting its demand shortly.
3. Incentives for Clean Energy in the United States of America
The United States has several federal and state-level policies and incentives in place to promote clean energy and cut carbon emissions, inter alia the Renewable Portfolio Standards, whereby, 29 states and the District of Columbia have set up these standards which require utilities to generate a certain percentage of their electricity from renewable sources, like solar, wind and geothermal, nuclear, etc. nearly every state in the country has a Net Metering Law that allows customers with renewable energy systems to receive credits on their utility bill for any excess electricity they generate and supply to the grid. Besides this, the US Government funded programs likeENERGY STAR along with the availability of loans and grants from the Department of Energy (DoE) provide an option to support renewable energy projects. ENERGY STAR can save families about one-third of their energy bill with similar savings of greenhouse gas emissions.RE-Powering America’s Land Initiative encourages renewable energy development on current and formerly contaminated lands, landfills, and mine sites identifying the renewable energy potential and providing resources for these communities.
The energy market has benefitted from constant financial assistance in the research and development of renewable energy products, one of which is the bond financing option to support such projects. Bond financing is a type of long-term borrowing instrument used by the government to raise money for infrastructure development and the same is being used to address the financing gap for renewable energy projects.
A. Tax Incentives for Clean and Renewable Energy Generation in the USA
Generally, in capitalist economies, people have strong incentives to work hard, increase efficiency and produce superior products. The market rewards ingenuity and innovation while maximizing economic growth. However, it is these tax credits and reliefs in the form of subsidies that provides a boost to the growth of any sector in a country. The Federal Government in the US offers aFederal Investment Tax Credit (ITC) which provides a tax credit for solar, wind, geothermal, and fuel cell systems, as well as for small wind turbines and geothermal heat pumps. The credit is equal to 30% of the cost of the system and is available to both residential and commercial property owners. There is also aProduction Tax Credit (PTC) that provides a credit for each kilowatt-hour (kWh) of electricity produced by certain renewable energy facilities, such as wind and geothermal facilities, for a period of ten years. Furthermore, the Business Energy Tax Credit makes way for a tax credit for businesses that invest in certain types of clean energy properties, such as solar energy systems, fuel cells, small wind turbines, geothermal heat pumps, and combined heat & power systems.
Interestingly, individuals can also claim a credit of 30% of the cost of installing solar water heaters, solar panels, and small wind turbines through the system of ResidentialRenewable Energy Tax Credit. The question that comes here is how this system of tax credit works. A tax credit is a dollar-for-dollar reduction in the amount of taxes that an individual or business owes to the government. It is different from tax deductions, which lower your taxable income rather than the taxes you owe. It is both refundable and non-refundable. A refundable tax credit can be used to offset taxes owed and any remaining credit will be paid out to the individual or business as a refund, whereas, a non-refundable tax credit can only be used to offset the amount of taxes that an individual or business owes and any remaining cannot be applied to future tax obligations.
B. Legal Framework for Clean Technology Infrastructure in the USA
The use of clean energy technologies in the United States is governed by a complex web of federal, state, and local laws and regulations. They provide the overall framework for the development of clean energy projects in the US, but their implementation and effectiveness vary across different states and sometimes even local jurisdictions. TheEnergy Policy Act of 2005 gives space for tax incentives and funding for clean energy development, as well as mandating certain levels of renewable energy production by utilities.
The Clean Air Act regulates emissions of pollutants, including greenhouse gases, and requires certain industrial facilities to obtain emissions permits; additionally, the Clean Water Act regulates the discharge of pollutants into the nation’s surface water, including wetlands. It can be applied to some renewable energy projects, such as hydroelectric dams, to ensure compliance with regulations.
Similar to the Renewable Purchase Obligations in India, there exists aPublic Utility Regulatory Policies Act (PURPA) which requires utilities to purchase power from qualifying facilities at a rate based on their avoided costs. The Federal Energy Regulatory Commission (FERC) is responsible for regulating the interstate transmission of electricity and natural gas, as well as licensing and inspecting hydroelectric projects.
4. The Findings
India, unlike the USA, relies more on government funding instead of raising funds from the market. The USA enables the economy to flourish by providing tax credits and offering investment opportunities as the biggest incentive, whereas, India offers tax cuts and subsidies as the primary source of financing. There is also a difference in the development of more efficient technologies like Nuclear Power Generation. As part of its plan to increase energy security, the Indian government planned an expansion of nuclear energy, and produced around 3% of India’s total electricity in 2020. The progress has been relatively slow, considering that the plan is to expand it to 25% by 2050. On the other hand, the use of nuclear power in the USA contributes nearly 20% of the electricity generated in the country. This comparison is, however, unfair as theUS has used nuclear power for more than 60 years to produce reliable, low-carbon energy and to support national defence activities. That being said, it cannot be denied nuclear energy is still an untapped resource for a country like India. Currently, the nuclear energy policy has surrounded itself with debates over the risks and benefits involved facing arguments from both sides as to what weighs more. India, owing to its non-alignment during the Nuclear Non-Proliferation Treaty (NPT) in 1970, has managed its indigenous nuclear program without fuel imports from foreign countries. The Nuclear Suppliers Group agreement in 2008 allowed India to negotiate civil nuclear cooperation agreements which enabled the government to think about the prospects, however, popular support from the public, experts, and policymakers is still missing. It remains to be seen if, with all the financial and social factors involved, India would be able to harness its true potential and reach parity in terms of nuclear power as a clean energy alternative with that of the developed countries. The future progress would answer whether this is a question of “if” or a question of “when” India would achieve substantial nuclear progress as a source of renewable energy.
Incentivization and advancement of clean technology play a crucial role in offsetting the heightened economic implications of clean energy technologies. The Indian Government has realized the importance of self-reliance in satisfying its energy needs and what the future holds for the fast-depleting fossil fuels as a source of energy. If that wasn’t enough, the Russia-Ukraine war once again highlighted the need for diversifying the energy sources from different regions as well as developing better alternatives. The recent national policies are directed towards determining the future of clean energy technologies in the country and attracting investments from across the world. It is important to sustain the level of commitment shown by the country and prioritize the development of clean energy technologies in tune with the goals of sustainable development.
About the Authors
Mr. Aishwary Bajpai is an Advocate at the Supreme Court of India.
Mr. Sathvik R Sudireddy is a 4th Year Law Student from Amity University, Noida, and an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Hamna Viriyam and Muskaan Singh
Senior Editor: Naman Jain
Associate Editor: Sathvik R Sudireddy
Junior Editor: Intisar Aslam
Preferred Method of Citation
Aishwary Bajpai and Sathvik R Sudireddy, “A Comparative Study of Clean Energy Incentives in India and the USA” (IJPIEL, 20 January 2023)