Impact of Finance Act on Energy Transition Goals

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Article by Siddharth Kohli

Introduction

Many nations across the world, including the developed ones as well as the developing nations have committed to maintaining the climate change goals which includes energy transition. Energy transition has been the priority of various governments around the world considering the effect of climate change. The developed nations are placed better while committing to the energy transition, however, the developing nations due to high costs are lagging behind.

In such a tight environment, India has emerged as one of the most successful developing nations in maintaining its climate change commitment. India is one of the fastest-growing economies in the world. To drive this growth it is important that we invest in the energy sector which will provide the necessary stimuli. It is noteworthy that while promising steadfast growth in all sectors, we are aligning ourselves with the clean energy goals and net zero emissions. As per our recent energy goals, we are set to achieve net zero emissions by 2070 and by 2030 we are expected to achieve the ambitious target of meeting 50% of energy demand through renewable energy.[1]

Considering the growth of our economy and the size of our population it is obvious that our energy needs are going to increase in the future. According to the Economic Survey of 2024, India’s energy needs are expected to grow from 2 to 2.5 times by 2047 to meet a growing economy's developmental priorities and aspirations.[2] To meet these goals we must invest in the energy sector. Investing in the energy sector involves many things like increasing domestic production, funding startups and new-age manufacturers, resourcing raw materials and sourcing technology which will help us achieve the goal. Similar efforts are necessitated in the upscaling of energy storage. Achieving storage capacity for renewable energy is utmost importance to reduce the reliance on traditional sources of energy. In absence of sufficient and advanced storage facilities, we use traditional energy sources as a backup for renewable energy. This might be a challenge while ensuring the goal of energy efficiency.

Sourcing of Metals and Minerals

The goal of a smooth energy transition can be achieved only when we have enough renewable energy produced domestically. To enhance domestic production and manufacturing, we need to import minerals and metals necessary for such production. There is also a significant increase and a greater focus on exploration at the domestic level. The total number of projects on critical minerals rose from 59 in 2020 to 123 in 2023.[3]

The availability of raw materials is the biggest hurdle in securing energy transition. The raw material is limited, scarce and located only in few geopolitical locations. Therefore, sourcing these materials and ensuring their enough supply should be the priority. The challenge in sourcing raw materials is further going to be intensified as more nations join the race towards energy transition. Further, batteries or storage technologies will also rely on critical minerals and metals for their development.

Sourcing of Technology

As mentioned previously, only sourcing raw materials won't suffice our efforts. Sourcing and sharing of technology is also necessary, especially with the developing nations. This will help them to maintain their development goals without investing significantly in R&D for already existing technology.

The BCD Reductions

The Finance Bill of 2024 introduced various changes that will be implemented in the Finance Act 2024. One of the key changes that needs to be focused on is the changes made to custom duties, particularly on the Basic Custom Duty (BCD). Reductions in BCD results in multiple benefits like lower prices for consumers. This is because the businesses can pass the cost savings to the ultimate consumer increasing the demand and exports for products. It also increases domestic manufacturing to reduce the reliance on imports. The following table showcases the reduction in BCD rates for materials used to generate renewable energy, following which we shall look at some of the benefits of these reductions.?

Renewable energy sector where certain parts are used in electronics and solar panels.[4]

Benefits of reductions in Basic Customs Duty (BCD) in the renewable energy sector

One of the most noteworthy reductions in BCD is in the renewable energy sector aiming to achieve sustainable energy goals. The finance bill, 2024 has proposed exemptions on certain parts used in electronic and solar panels with the aim to enhance local production.[5] The changes reflect the Indian Government’s efforts to support the “Make In India” initiative by incentivizing domestic energy supply and reducing dependency on foreign imports. The benefits of domesticating renewable energy sources are significant to maximize energy efficiency. Some of the examples are:-? reducing greenhouse gas emissions, enhancing energy security by cutting down on imported fuels and promoting economic growth through job creation in the energy sector. It is evident that the Indian government’s decision to reduce BCD in renewable energy culminates from the thought process of creating a clean and self-sufficient energy industry.[6]?

Implementing on-site renewable energy projects provides a hedge against the financial risks of outsourced energy requirements, resulting in improving power quality and reliability of supply. In a developing country like India, having quality and reliability in supply of energy is of paramount importance that will inevitably lead to growth and development of the economy.[7]? Additionally, local renewable energy projects also stimulate local economies and expand energy access for remote, coastal and isolated communities. There will no doubt be technical, financial and regulatory challenges that local vendors will face for example; difficulties in permit requirements of locations, communicating with local stakeholders, assessing the availability of local renewable resources etc. However, the need of the hour calls for overcoming these challenges by joining forces with the local government and other stakeholders to reach desirable outcomes. Cooperation can be expected from the government and stakeholders as the ultimate goal remains the same, which is reflected in the decision to reduce BCD in the renewable energy sector.

Conclusion:

The changes introduced through the Finance Act and the Union Budget aim to realign the economic priorities and the energy transition needs. The change in BCD and exemption in few cases of raw materials will enable us to source sufficiently and hence have a positive impact on the production capacity.

This will also help us to strengthen the domestic industry and will contribute positively towards job creation in the renewable energy sector. Lastly, it is well understood that apart from the availability of technology and raw materials, affordable finance is also a significant challenge that can impact the transition goal. However, with new and attractive schemes for MSME such as enhancement in loan limit from 10 lakhs to 20 lakhs under the MUDRA scheme will help startups from the energy sector to sustain and flourish.

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[1] India Brand Equity Foundation, Renewable Energy, IBEF (Aug. 2024), https://www.ibef.org/industry/renewable-energy .

[2] Ministry of Finance, Economic Survey (2024), https://www.indiabudget.gov.in/economicsurvey/doc/Infographics%20English.pdf .

[3] Ministry of Finance, Economic Survey 2023-24 (2024), https://www.indiabudget.gov.in/economicsurvey/doc/Infographics%20English.pdf .

[4] The Finance (No. 2) Bill, 2024, Bill No. 2 of 2024 (India)

[5] Finance bill, 2024: Key direct and indirect tax amendments. azb. (2024, July 25). https://www.azbpartners.com/bank/finance-bill-2024-key-direct-and-indirect-tax-amendments ??

[6] Gupta, M. (2024, July 24). Government slashes 7.5% customs duty on solar capital goods to boost renewable energy sector. SolarQuarter. https://solarquarter.com/2024/07/24/government-slashes-7-5-customs-duty-on-solar-capital-goods-to-boost-renewable-energy-sector/#:~:text=By%20making%20solar%20energy%20more,greener%20and%20more%20sustainable%20future .

[7] Ibid