Weekly update: MNRE revises subsidy benchmarks for off-grid and decentralized solar

Last week, the Ministry of New and Renewable Energy (MNRE) announced revised subsidy benchmarks for various off-grid and decentralized solar applications (refer). The subsidy amounts have been fixed in absolute Rupee terms instead of as percentage of capital cost. BRIDGE TO INDIA welcomes this change as it brings more transparency into the process.

Revised subsidy benchmarks announced by MNRE, fails to address the critical issue of delay in subsidy disbursement
BRIDGE TO INDIA agrees that discontinuation of subsidy mechanism might be a better step
Better incentive mechanisms to ensure quality of installations, which is plant performance linked could be more effective

Image source: dwih.in

However, the core issue of unavailability of subsidy funds is still unresolved. The minister indicated that some funds may be released by December’14. This is over and above the funds released for 25 MW of rooftop solar in August 2014 (refer). However, the amount is far too small in comparison to the demand. All new funds released are allocated to servicing the backlog of project applications.

According to a BRIDGE TO INDIA analysis, less than 15% of the installed rooftop solar capacity in India has been able to avail capital subsidy (around 40 MW out of 285 MW – refer to our upcoming “India Solar Rooftop Map”, to be published on the 18th of November’14). Since the subsidy scheme covers only a fraction of the market demand – and that without any discernible rationale, it creates investment and business insecurity, indecision at the customer end and inefficiency in public expenditure (read more to know how a large part of the disbursed subsidy does not even reach the end customer).

Even though it may sound counter-intuitive to outsiders, most solar industry players in India have long been asking MNRE to scrap the subsidy mechanism altogether. BRIDGE TO INDIA agrees that such a step would be overall positive for the market. Our analysis shows that non-subsidized grid parity is already the single largest driver for rooftop solar market growth in the country. BRIDGE TO INDIA projects that even without any government incentives, the Indian rooftop solar market is poised to reach 1.5 GW of cumulative installed capacity by 2018.

However, we suggest better incentive mechanisms in view of the multiple significant advantages of distributed solar from an economic, environmental and social perspective – to ensure quality of installations, a plant performance linked incentive such as a generation based incentive (GBI) can be considered. Also, MNRE could revamp the accelerated depreciation benefit by decoupling the tax incentive from investment in the same way that, say a carbon credit or a renewable energy certificate can be traded independently of the power output. Then, the tax benefit could be generated by one party (say, a professional rooftop investor) and sold to another party that wants to use it to reduce its tax burden. This approach has been very successful in the US. It helps transform the market from one driven by one-off investors into one driven by institutional capital, where professional approach, competition and reasonable return expectations help make solar power a scalable opportunity and a mainstream choice for end-customers.