Budget 2022-2023: Green Infrastructure Initiatives – the Right Path to Carbon Neutrality

Union Budget 2022-2023 provides the right impetus for climate action and energy transition and is a welcome step towards transition to a carbon neutral economy in India. This is in line with the “panchamrit” strategy for achieving climate targets announced by the Prime Minister (PM) in COP26 – that among other things aimed at increasing India’s renewable energy capacity to 500 GW by 2030. Budget has a clear focus on the renewable energy sector, laying down the blueprint for the same in the “amrit kaal” with initiatives like clean and sustainable mobility in urban areas, energy service company business model for conservation of energy in large commercial buildings, increased allocation towards production linked incentive (PLI) scheme to ensure manufacture of high efficiency solar PV modules as well as green bonds for clean energy financing.

 

While expansion of infrastructure remains the primary agenda of this year’s budget with PM Gati Shakti Master Plan taking the centre stage, the Government has retained focus on climate action by recognising energy transmission and social infrastructure as complementary forces in promoting the economy. The growth-oriented and climate-friendly budget, with increased capex outlay of INR 7.5 lakh crores, demonstrates the Government’s intent to facilitate transition towards clean energy.

 

Increased emphasis on energy transition and climate action in the budget, in addition to the PM announcing ambitious climate targets to be achieved by 2030, has created immense opportunity across various sectors within the green infrastructure sector in India, including development of sustainable and innovative business models for energy storage, 4 pilot projects for coal gasification and transition to clean and sustainable mobility in urban areas with a zero fossil fuel policy and an  EV ecosystem. Additionally, allocation of INR 19,500 crores under the PLI scheme to facilitate increase in solar power production through manufacture of high efficiency solar PV modules is a step ahead towards achieving the renewable energy capacity of 500 GW in India, as also an opportunity to increase participation of private players. The aforesaid allocation under the PLI scheme is a favourable measure for waitlisted PLI bidders and will bolster the domestic solar manufacturing ecosystem. However, achieving a 500 GW renewable energy capacity in India would mean addition of about 62 GW every year for the next 8 years, which would require large investments and a framework for long-term financing. An effective strategy to meet the above requirement is to utilise the thematic funds for blended finance which would garner confidence amongst private parties to increase investment in infrastructure for production of other sources of renewable energy such as wind, hydro power and green hydrogen, in addition to solar power. The blended finance model introduced in this year’s budget is similar to the viability gap funding of the Government for financial support to PPP projects, with the exception that the management of funds has been entrusted upon private fund managers. It will be interesting to see the operating framework the Government will adopt to put in motion the virtuous cycle of investment, where public investment will help crowd-in private investment, potentially increasing the commercial viability of PPP projects manifold.

 

In order to optimise private participation and investments in green infrastructure, a revised procurement policy with specific relaxations to bid criteria in public procurement of projects, including measures such as Finance Minister (FM) announcing acceptance of surety bonds instead of bank guarantees and a single platform for green clearances, will be welcome. This will attract private players and help create a level playing field for Indian bidders as well as foreign bidders already in the country and those intending to enter the country, thereby improving competition and enabling efficiency in the green energy sector.

 

Further, an important incentive for clean energy financing is the sovereign green bonds initiative announced by the FM, which, tied in with the push in capex, is expected to become a key driving force in achieving India’s carbon emission reduction target. While the green bond market in India is still in its nascent stage, introduction of sovereign green bonds will potentially have twofold benefits: (i) being an indication of the Government’s commitment towards climate action and sustainable development, it will foster trust amongst private investors and attract capital towards green investments; and (ii) it will give impetus to the development of the domestic green bond market in India. However, we expect further clarity from the Government on the strategy for issuing green bonds, in the absence of which there could be several challenges in implementation.

 

The Union Budget 2022-2023 exhibits an overall paradigm shift towards environment consciousness, apart from economic growth and it will be noteworthy to see how the Government will plan the implementation of climate-friendly strategies to realise its carbon-neutral ambition.


† Partner, Khaitan & Co

†† Associate, Khaitan & Co

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