The 11th year Plan (2007-2012) of the Government of India has indicated the importance of energy in the following words: ĎAvailability and access to energy are considered as catalysts for economic growth. The envisaged growth of the economy at 9% in the Eleventh Plan cannot be achieved without a commensurate increase in the availability of energy.

RENEWABLE ENERGY IN INDIA: SCOPE FOR FOREIGN INVESTMENT

Arkodeb Sinha, Advocate (F 993/04) | Fox & Mandal, Advocates


I.          INTRODUCTION
 
There is little to doubt the importance of Power and Energy in contributing to the growth and development of a country and for a developing economy like India, they play is a very crucial role in fuelling the economy.
 
The 11th year Plan (2007-2012) of the Government of India has indicated the importance of energy in the following words:
 
‘Availability and access to energy are considered as catalysts for economic growth. The envisaged growth of the economy at 9% in the Eleventh Plan cannot be achieved without a commensurate increase in the availability of energy.’[1]
 
Although there may not be severe dearth in availability of energy but it becomes increasingly important to improve and expand the available energy sources. As per the 11th Year Plan India currently ranks as the world’s seventh largest energy producer, accounting for about 2.49% of the world’s total annual energy production and is also the world’s fifth largest energy consumer, accounting for about 3.45% of the world’s total annual energy consumption
in 2004.[2]
 
Adequate measures need to be taken so that existing sources of energy are utilized not only in an efficient manner but also in a cost effective manner and with an aim to explore alternative sources of energy. The 11th Year Plan mentions that India would need to rely increasingly on imported oil, gas, and coal in the medium term (2032). Against this backdrop, the role of new and renewable energy assumes added significance, irrespective of whether it replaces coal or oil.[3]
    
The importance of exploring non-conventional sources of energy has gained momentum across the globe to reduce the effects of green house gases. Countries like United States of America, Germany, United Kingdom, France, Japan and other developed and developing countries are taking initiatives to develop non-conventional sources of energy. The demand for non-conventional energy is mostly due to reduce adverse effects on the environment, achieve economies of scale in generating energy, create employment opportunities and to reduce emission of green-house gases.

In India there is not yet a specific legislation on renewable energy. Renewable energy in India is statutorily recognized primarily through the Electricity Act, 2003 and other legislations like the Energy Conservancy Act, 2001 (both being Central Acts) and also through policies (which have the force of law) of the Government of India like the National Electricity Policy 2005 and Integrated Policy Report 2006 . The said Electricity Act empowers regional or State (Federal) electricity regulators to frame regulations governing the distribution and utilization of renewable sources of energy. As such, several Federal State Regulators have framed their own set of regulations in consonance with the Central Acts and Policies. The Article here would discuss the scope of foreign investment in renewable sector in India through the incentives available to investors for investment in renewable energy sector and the policy of Government of India on foreign investment in the renewable energy sector.  

 
II.        ELECTRICITY ACT, 2003
 
The Electricity Act, 2003 consolidates the earlier enactments governing distribution, generation, transmission, trading and regulation of electricity being the Indian Electricity Act, 1910, Electricity (Supply) Act, 1948 and the Electricity Regulatory Commission Act, 1998.   However, the Act includes provisions in the nature of ‘savings clause’ with respect to acts done in accordance with the repealed Acts mentioned herein.      
 
Under the Electricity Act, 2003[4] electricity is defined as follows:
“electricity”[5] means electrical energy -
(a)    generated, transmitted, supplied or traded for any purpose; or
(b)   used for any purpose except for transmission of message.
 
The said Act provides for creation of Electricity Regulatory Commission by State Governments (Federal Government). The State Electricity Regulatory Commissions have been empowered inter-alia to promote cogeneration and generation of electricity from renewable sources of energy by providing suitable measures for connectivity with the grid and sale of electricity to any person, and also specify, for purchase of electricity from such sources, a percentage of the total consumption of electricity in the area of a Distribution Licensee[6];
 
Although the term ‘renewable sources’[7] has not been defined in the Act, however the same may be construed to refer to sources likes Solar (Solar Thermal, Solar Photovoltaic), Gas (Biogas Plants and Appilances), Water (Hydro Power) and Wind (Wind Farming).
 
The said Act states that the Government of India shall prepare a National Electricity Policy[8] and Tariff Policy[9] from time to time for development of the power system based on optimal utilization of resources such as coal, natural gas, nuclear substances or materials, hydro and renewable sources of energy.

 
III.       FISCAL INCENTIVES
 
A.        Government of India Policies[10]
 
  • Section 80IA of the Income Tax Act, 1961 provides for a deduction of an amount equal to 100% of the profits and gains for ten consecutive assessment years from the gross total income of an assessee derived by an undertaking or an enterprise from the following eligible business:
    • ­business of generation or generation and distribution of power during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March, 2011;
    • ­ transmission or distribution by laying a network of new transmission or distribution lines during the period beginning on the 1st day of April, 1999 and ending on the 31st day of March, 2011;
    • ­undertakes substantial renovation and modernisation of the existing network of transmission or distribution lines during the period beginning on the 1st day of April, 2004 and ending on the 31st day of March, 2011. 
Under the said Act, the deduction as aforesaid may be claimed by the assessee for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise generates power or commences transmission or distribution of power or undertakes substantial renovation and modernisation of the existing transmission or distribution lines and in the manner as prescribed in the said Act.
 
  • For establishing industry in the filed of Non-conventional and renewable sources of energy sector, no industrial clearance is required;
  • The Central Electricity Authority has generally allowed setting up projects amounting to Rs.1 billion; 
  • Benefit of 80% accelerated depreciation under the Income Tax Act for renewable energy devices like Solar cookers, Solar water heaters and systems, Air/gas/fluid heating systems, Solar power generating systems, Solar pumps based on solar-thermal and solar-photovoltaic conversion, Solar-photovoltaic modules and panels for water pumping and other applications, Wind mills and any specially designed devices which run on wind mills, any special devices including electric generators and pumps running on wind energy, Biogas-plant and biogas-engines, etc and machinery and plant used in the manufacture of any of the such items;
  • IREDA financing for manufacture of Renewable Energy equipments;
  • Customs duty concession on Renewable Energy spares and equipment;
  • Excise duty concession in form of reduced duty or exemption on specified capital goods in the Renewable Energy sector;
 
The 11th Year Plan[11] proposes several forms of subsidies for the renewable energy sector. The Plan describes the rational for providing subsidies in the following manner:
 
The chief reason for proposing subsidy for renewable energy systems/devices in electrified/to be electrified rural areas is to make them affordable in a situation of low household paying capacity and for attaining the national goal of Energy for all by 2012. Provision of renewable energy services is expected to go a long way in maintaining the fragile ecological balance and raising the level of living of targeted population. Fossil fuel based commercial energy options are not only unaffordable and require a higher level of subsidy as in the case of kerosene but their availability too is also a major issue. Thus, renewables emerge as the natural choice but like kerosene would require subsidy till such time as the level of living of rural households can be raised.’[12]
 
B.         State (Federal) Government Polices
 
State Governments have their own subsidies and incentives to encourage investment in renewable and non-conventional sources of energy. Subsidies include purchase of electricity from Biomass, wind energy, and small hydro power projects, concessions or exemptions from value added tax/state sales tax, reneweable energy purchase obligations or minimum procure of renewable energy by distribution licensees, etc. [13]
 
 
IV.       FOREIGN INVESTMENT
 
A.        Foreign Direct Investment
 
Under the Foreign Exchange Regulations[14], Foreign Direct Investment (FDI) upto 100% is allowed in the Power sector under the Automatic Route which includes generation, transmission, distribution and trading of Power. FDI in new and renewable sources would fall within the ambit of Power sector and hence 100% FDI would be permissible under the Automatic Route. However, Atomic Energy is excluded from the purview of Power Sector.
 
Under the Automatic Route, no prior approval would be required of the Government of India. However, the Indian Company receiving FDI would be required to report to the Reserve Bank of India (RBI) the receipt of FDI within 30 days of such receipt and file form FC-GPR within 30 days of issue of shares in the prescribed manner. It is pertinent to note that the shares have to be issued to the Foreign Investor within 180 days of receipt of FDI by the Indian Company. In case, the shares are not issued within the said 180 days, the share consideration is required to be refunded immediately. Failure to do so could attract penal provisions under the Foreign Exchange Management Act and Regulations.         
 
B.         Joint Venture
 
A Foreign Investor may also enter the energy market through joint venture with an Indian Company by way of technical collaboration agreement. Such a joint venture is permitted under the Automatic Route provided the foreign collaborator does not have an exiting joint-venture in India in the same field prior to 12th January 2005.[15]       


[1] Para 10.1: 11th Five Year Plan (2007-12), Planning Commission, Government of India
 
[2] Para 10.2: ibid
 
[3] Para 10.11: ibid
 
[4] Notified on 2nd June 2003. Certain provisions of the Act have been put into effect at a later date. 
 
[5] Section 2(23) of Electricity Act, 2003.
 
[6] Section 2 (17) of Electricity Act, 2003,
 "distribution licensee" means a licensee authorised to operate and maintain a distribution system for supplying electricity to the consumers in his area of supply.
 
[7] Meaning of the term ‘renewable and non-conventional sources of energy’ have been explained later in the Article.
 
[8] Part II; Section 3(1) of Electricity Act, 2003. 
 
[9] ibid
[10] Ministry of New and Renewable Sources, Government of India. http://mnes.nic.in/
[11]XIth Plan Proposals for New and Renewable Energy, Ministry of New and Renewable Energy, Government of India, December 2006. The Plan is available at http://mnes.nic.in/
 
[12] Paragraph 4.5.1: XIth Plan Proposals for New and Renewable Energy.
 
[13] Ministry of New and Renewable Energy, Government of India. http://mnes.nic.in/
 
[14] Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.
[15] Press Note 1 of 2005 dated 12th January 2005 and Press Note 3 of 2005 dated 15th March 2005 , Ministry of Commerce and Industry, Government of India. The Press Notes are available at http://siadipp.nic.in/policy/changes.htm
 

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