Incentive insights: Navigating India’s energy transition

In the fourth episode of our ‘Incentive policies’ special series, we explore the dynamic landscape of incentives and policy benefits available for India's energy transition towards sustainability. Join our Indirect Tax Partner, Sagar Shah, as he unravels the intricacies of incentives, regulations, and subsidies that are likely to fuel the transformation of India Inc’s energy and sustainable agenda. From Production-Linked Incentives (PLI) to Carbon Credit Trading Scheme (CCTS), discover how these initiatives are reshaping the industry and propelling India towards a greener tomorrow.

Key takeaways

Incentives play a crucial role in sustainability, categorized into performance-based, regulatory compliance, and recognition through branding and labeling, emphasizing their significance in promoting sustainable practices across various stakeholders.
Production-Linked Incentives (PLI) support large manufacturers in sectors like green hydrogen and solar, under the 'Make in India' initiative.
Indian states offer additional incentives such as loan subsidies and tax refunds to encourage sustainable investments.
Regulations ensure that high CapEx investments lead to effective energy transition and environmental protection.
Subsidy schemes provide benefits and support to both large organizations and individual sustainability contributors.
The Carbon Credit Trading Scheme and Green Credit Programme incentivize entities and individuals for positive environmental actions.

Incentives drive not just investment, but innovation and infrastructure, helping shape a sustainable future for India's energy landscape.

Sagar Shah

Partner, Indirect Tax, EY India

For your convenience, a full text transcript of this podcast is available on the link below:

Welcome to our fourth episode of the series on ‘Incentive policies’ by EY India Insights Podcast. I am your host, Mohammed Poonawala, Director at Indirect Tax Practice, EY India, based out of Pune. Today, we will talk about incentives and policies around ‘New Energy’, initiatives in India.

Net zero and environmental sustainability have become a boardroom discussion where all companies have to re-think about how business must be done in the future. More importantly, investment would be required in CapEx to make the businesses compliant with the growing need to meet environmentally sustainable standards.

At the same time, the world's energy systems are undergoing rapid transitions. The short-term effects are resulting in price spikes. During these changing landscapes, organizations are asking strategic questions such as:

What is the future of energy consumption and how will it evolve?
How will that impact my industry?
What will be the impact on my budgets?

To discuss this topic, we have Sagar Shah, who is a senior Partner in Indirect Tax practice of EY India. He introduced and pioneered end-to-end automation in Global Trade and Customs. He has also extensively worked on various economic incentives for Electric Vehicles (EVs), electronic goods, auto and its components, batteries, green hydrogen and electrolyzers. Sagar has rich experience in advising organizations on incentive structuring, which helps clients clawback a portion of their CapEx cost. Hi Sagar, thank you for talking with us today.

Sagar: Thank you Mohammed. It is a pleasure to be sharing insights and talking on this very futuristic topic.

Mohammed: Businesses are taking measures to reduce carbon emissions in their operations and make them environment friendly. At the same time, is it possible to claim incentives and subsidies?

Sagar: Absolutely! I believe that this is a big shift to net zero emissions required and it requires a lot of strategic investment by the government. If these interventions are not there, how would you really push the private sector to invest and do something beyond what they are doing? So, the clear intent here is to say how does the government really promote and support domestic industries and also have global players to come into and do research & development (R&D), innovation, and create the infrastructure - these are all critical elements.

Not only in India, if you see the global picture, countries like the US, which vide its Inflation Regulation Act (IRA) approved a budget of US$394 billion on tax credits and incentives. We are getting to hear similar things happening in the UK, Germany, and Australia.

In fact, Germany today produces 40% of its energy from renewables and the government has made a specific act there – The Renewable Energy Sources Act, and it has provided various incentives. So, clearly, it was imperative for the Indian government as well. It is an important statement to say that we are supporting the entire country when it comes to providing incentives and subsidies.

Then there are regulations around this and a lot of positive branding for recognition of the entire environment and sustainability agenda that the country is having, and the companies are expected to do.

Mohammed: Has the Indian government set aside a budget for all these measures you spoke about?

Sagar: Yes. There is a total budget and there is Strategic Interventions for Green Hydrogen Transition Programme (SIGHT). T INR19,744 crores has been set aside for the National Green Hydrogen Mission.

Another INR35,000 crores were allocated in the budget last year, where it was mentioned, it would be utilized more towards off-take. Slowly and steadily, the central government has been pushing a lot of incentives and outlays have already been defined. In addition to that, the states are also supporting.

India being a federal economy, where over and above what the central government will do, the states will also have a similar manner in which they will be having Incentives, for which will be keeping aside budgets, so that industry can really come up in different baskets.

Mohammed: Interesting, Sagar. Can you dive deeper into each of these topics for our listeners?

Sagar: When I talk about incentives and very specific specifically from the India perspective, we should look at three broader baskets:

One is where we are talking of incentives which will be based upon a certain number, say revenue or production. Then we look at some regulations, which will require companies to do certain things to support the entire agenda. And then we talk about recognition for the branding and labeling, which will actually induce even the end user to do certain things.

Broadly, if I have to talk about these three baskets, and the most critical one is: what are the incentives which are provided by the center and states in India? Clearly, the Production-Linked Incentives (PLI), which are made for larger companies, larger manufacturers in the green hydrogen and electrolyzers, or such space, or the Advanced Chemistry Cell (ACC) and solar, you will see lot of incentives so that it is in line with the Make in India initiative, where the objective is to manufacture more in India.

Then there are various other incentives which we will talk about when we are talking about off-take. So how does the user really start looking at this in a different manner? Where the buyer believes that he should purchase goods in this sector, and also gets an incentive for doing something which is more environment friendly. There are schemes like the Carbon Credit Trading Scheme (CCTS) and the Green Credit Programme. We will talk of this in little detail when we are talking of the National Action Plan on Climate Change (NAPCC) and then various other things like incentives under waste management and benefits under various agricultural programs.

There are many benefits which are there across different sectors and which probably are not only for the producers and large manufacturers, but probably across various stakeholders.

Mohammed: Starting with the Production Linked Incentives, can you briefly touch upon the larger schemes and the sectors covered under the PLI?

Sagar: PLI is one of the most talked about important things that has been done by the government over the last few years. Among the various sectors which come under PLI, under the National Green Hydrogen Mission, the government has allocated a budget of INR19,744 crores that I was talking about earlier. It is for production of green hydrogen and manufacturing of electrolyzers.

It is for pilot projects, R&D and various components. This is very interesting in terms of the various schemes which are there. The government’s intent is to say that any company that wants to invest in green hydrogen or electrolyzers largely, or green ammonia for that matter, there are broadly the parameters to say that what is the amount and the capacity of investments being proposed by the companies, and what will be the local value addition.
Obviously, as I was talking about Atmanirbhar Bharat, you need to look at it to see how much of this is going to be end-to-end manufactured in India, and that is what is going to be critical. There is a bid process which is there; the first tranche has already been closed on both green hydrogen and electrolyzers, and it has been very successful.
A lot of companies who had applied for and basis the RFP, many companies have got selected into the scheme. Then we will have the tranche-II, which will be for green hydrogen, in some time. There is a tranche-II for electrolyzers, which will close on 30 April 2024. There will be new schemes relating to pilot projects for steel, shipping, and R&D, which have also been announced. Again, this will come in sometime and we will see how the companies have really responded, what are the benefits into it for specific sectors.
Mohammed: Agreed, Sagar, on the part that there are a lot of regulations around this, and someone needs to monitor them very regularly.

Sagar: Regulations, in terms of what you need to do, will be there. That is going to be critical because the intent is that you need to have the right players to announce the capacity. These are going to be high CapEx investments, how these are going to be supported. So that the right players come in and the right players get the benefit, basis the commitment that each company will do.

And that is going to be very critical to see. The interest and intent of the Indian private sector has been extremely good in terms of what we are discussing, over the last year/year-and-a-half, since the discussions started on PLI. But the regulations will be required for each of these schemes which we are talking about. Also, it is not only the central government, but also the state governments who are doing a lot of things.

If you see, states like Rajasthan, Telangana, Andhra Pradesh and many states like Odisha, Karnataka are also pushing for the entire scheme in terms of how this can be pushed really beyond what the center is giving; be it loan subsidy, or refund of taxes paid and consumed in the same state or on the CapEx invested. Whenever such benefits are there, you will look at regulations which will be critical to say that finally, the end result in terms of what was expected has been achieved.

Mohammed: After what we spoke about, these initiatives and subsidies are a big boost by the Indian government, which could boost the private sector investment in this segment and assist towards energy transition and environmental protection. Can you briefly touch upon the other subsidies in each category you mentioned earlier and answer mainly three questions, which our listeners would like to understand:

Who are eligible under these schemes?
What are the regulations therein? and
What are the broader benefits involved under these schemes?

Sagar: When we speak of PLI, obviously the intent is to say who are the larger players who will invest and so the ecosystem gets developed around it. But the point is that it is not only about larger companies who will be investing and getting the benefit out of this, but there are a lot of things like the Carbon Credit Trading Scheme (CCTS), which is going to be really different as compared to the PLI, which is not yet notified, but it will happen in some time.

Now, who is going to be eligible for this? There will be various entities which will be identified under the Energy Conservation Act, 2001. The focus sectors, not just in India, but globally, include steel, cement, and fertilizers. Some of the sectors are where we have seen over a period of time that probably the largest focus required right now is going to be on these sectors when it comes to energy conservation.

What are the regulations involved? Entities will have to set a target to say that how will you reduce the Green House Gases (GHG) emissions, and you will have to give a monitoring plan. This is going to be very important in terms of how this will be calculated based on direct and indirect emissions - all these regulations will be in place.

What is it that each company will have to do? How are they monitoring and how are they actually reducing the GHG emissions? This is the basis on which they will get such benefits. What they will get in return is to say they will be getting some carbon credits, which will be like, tradable scrips, which will help them in their business.

It is a great way to incentivize the industry and really push this entire agenda when it comes to environmental sustainability. I believe that this is something which is over and above the PLI schemes that we are talking about.

Mohammed: Basis what you mentioned, I understand that only some designated sectors and entities are eligible for these carbon credits and can be eligible for these scrips. Am I right in my understanding?

Sagar: To a large extent, yes. It will be for the larger industry, larger companies. PLI will have eligibility for very limited entities, while the carbon credit scheme may have a larger basket of entities. Probably, anyone who is in that sector could get it. But let me tell you, there is something which probably would be applicable across the length and breadth of the country; that we call the Green Credit Rules, which are not yet notified, but they will come.

There is going to be a competitive, market-based approach for incentivizing any environmental action that we are talking about. This is probably that we are waiting to look at. And this probably would help everyone in the country - Green credit benefits.

Mohammed: Interesting, Sagar. Can I, as an individual, obtain such green credits under the Green Credit Rules you mentioned?

Sagar: Absolutely! That is the most interesting part. This is what we see right now. If anyone who takes any measures voluntarily or has an obligation, he or she will be eligible as an entity or even as an individual. It is going to be like a domestic platform created for scrips which are traded and what positive environment actions we have to do - it can be like tree plantation, water management, waste management, or you are looking at conservation across - maybe a mangrove conservation or sustainable buildings in the real estate sector. There are multiple things which are there. And you will be getting benefits, including for sustainable agriculture.

All these things, basis activities which will be notified and there will be standard norms which will be notified. Once these are notified, you will be looking at, how do you fulfill, what are the regulations, and if you do that, you have to track and record these activities and basis that you will be eligible to green credits, and this is going to be something which will give a big boost to the entire country to do something positive in this area.

Mohammed: As you mentioned, Sagar, there seems to be about seven sub schemes under the Green Credit Programme, and each having its own qualification procedures and measures to determine and calculate the positive environmental action, basis which the green credits will be issued. That is quite a scheme, Sagar..

Sagar: If you look at the National Action Plan for Climate Change (NAPCC), it has eight sub-schemes and waste management has further six sub-schemes. There are multiple schemes and each of them have different kind of eligibility criteria, where finally what the intent is to say that how do you bring a positive environment action?

If you are able to do that, then each of these can culminate into different potential incentives. The waste management that is sub schemes that I was talking about, is not only about incentivization, but also there are regulatory requirements like manner of disposal of certain hazardous and notified materials, and so on. So, on one side there will be incentives, but other side, if you don't do certain things, you can be penalized for that.

And this is going to be very important as it cannot be only one-sided, it is not like a choice to say you do certain things, then you going to get benefits, but there will be regulations to say if you do not do certain things, then you can be penalized for that as well. That is something that all of us will have to understand that this probably is going to be more like a compulsion as we go ahead.

Mohammed: Waste management is quite a vast topic and area, which is applicable to both individuals and organizations. What is the length and breadth of coverage here?

Sagar: That is a very good point. Generally, if you ask anyone, when we talk of waste management, people will largely think of plastics, or some chemicals. But let me tell you that it is not only these, it is about construction and demolition waste, electronic waste, solid or semi-solid domestic waste from various sectors, and it is also about how do you utilize some of them. Can you look at using plastic, say, for road construction?

Mohammed: Thanks, Sagar. There are a lot of regulations and incentive and subsidies at the international level, which are going to impact India as well. Can you briefly touch upon these?

Sagar: When we talk of incentives, probably when you are looking at India out-bound, not much will happen beyond which is normally happening in line with country's foreign trade policy.

But let me tell you some very critical aspects on the recent thing which has happened in EU, related to exporting any products like cement, fertilizers, and steel. You need to comply with Carbon Border Adjustment Mechanism or CBAM regulation. This is extremely critical to say that EU have specified the accepted/acceptable level of CO2 emissions in each of the manufactured products, which is getting imported into EU.

What it means is that any manufacturer in India who is currently exporting anything out of these products (cement, fertilizers, and steel), he will have to mention that what is the amount of CO2 in the product which is being manufactured. This is to ensure that that the least amount of emission has gone into products which are exported from any country to EU.

This has already been enacted. The voluntary compliance has already started from October 2023 and from January 2026, it is going to be mandatory. So, it is important for the Indian industry to wake up to say it is not only about Indian exports to EU, but now you are competing not only with the Indian companies, but any global companies, not only on pricing but also on emissions.

To just give you a small example: when you are a steel manufacturer and the energy which you are using is thermal vis-à-vis if you move to renewable energy, then the emission is going to go down.

This is what every company will have to think: how do I use more renewable energy so that my CO2 emissions come down?

Mohammed: You mentioned January 2026. That is two years from now and a very short period of time for anyone who wants to redefine or revamp their processes and, especially for novel topics like measuring CO2 emissions and accounting for it.

Sagar: Yes, I agree, but that is the speed which we are looking at. It is going to impact supply chain, procurement, everything. A lot of things have to be done; no doubt about it

Mohammed: I would like to thank you for the time today and providing your insightful thoughts on this very interesting topic. With that, we have come to an end of this episode. There are other episodes in the pipeline that will focus on other states and other sector specific incentives. Please do let us know in case you want to hear about a specific topic. Thank you for listening. This is your host Mohammed, signing off for today.
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Podcast

Episode 04

Duration

20m 27s

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Incentive insights: Navigating India’s energy transition

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