The solar energy sector in India is headed for a major shake-up as the government agreed on July 30 to a recommendation to impose customs duties on imported solar cells and panels.
On July 16, the Director General of Trade Remedies (DGTR) recommended a two-year safeguard duty on solar products, starting with a 25% duty in the first year reduced to 20% and 15% in the following six-month periods.
The decision is meant to protect India’s fledgling solar cells and modules industry from alleged price undercutting by manufacturers in China and Malaysia. However, analysts said the duty will benefit only just a fraction of the production capacity in India while threatening to make nearly 27 Gigawatts worth of under construction projects unviable. A number of legal challenges mounted against the duty add to the uncertainty.
The Ministry of Finance, which has to approve the DGTR’s recommendation, has the unenviable job of choosing between its own ambitious renewable energy program against the potential collapse of the local manufacturing industry.
India uses about 11 gigawatts of capacity from solar panels each year as solar installations grow in line with the government’s objective to install 100 gigawatts of capacity by the year 2022.
Nearly 90% of this demand is met by imports, largely from China and Malaysia, because they are cheaper, while the manufacturing capacity of domestic companies is insufficient. Cheap panels have helped developers of solar power plants compete with coal-fire plants and wind power in bidding for supply to state power distribution entities.
Solar power tariffs fell to a record low of Rs 2.44 per unit in May 2017 at an auction for a power plant in Rajasthan – the tariff is nearly half the Rs 4.63 per unit in November 2015.
The solar boom is certain to come to a halt as tariffs rise due to increases in the cost of panels.
Renewable energy consultancy group Bridge to India said the duty would entail a 15% rise in capital costs and a consequent rise in tariffs by Rs 0.40 per unit. Other market research firms in India, including ICRA and CRISIL, also expect tariffs to rise by Rs 0.30 to Rs 0.40 per unit to touch Rs 3.2 per unit.
The duty would change the economics of a large number of projects under construction, whose winning tariff bids were linked to earlier module prices.
Moreover, the duty would change the economics of nearly 27 Gigawatts worth of capacity under construction, whose winning tariff bids were based on earlier module prices. Although the Ministry of New and Renewable Energy has said that the developers can “pass through” the duty to power buyers, this has not assured the industry.
“Our members are getting jittery,” said Ravikant Verma, a governing council member of the Solar Power Developers Association. “Many are calling us to find out what can be done. We are analyzing the situation and will take a decision soon.”
“We feel that the investigation wasn’t thorough and was done hurriedly. We are deciding our next step,” he added.
Others are concerned that solar power may not be in demand at the higher tariffs. The Solar Power Developers Association has already told the government during the safeguard duty investigation that “DISCOMs [state power supply distribution companies] have indicated that they would purchase solar power only if the cost is around Rs 3 per unit. The safeguard duty in range of around 12-15 cents a year would increase the duty up to Rs 4 per unit.”
The director of a major solar power developer told Asia Times that because of the fluctuations and timing restrictions inherent to solar power, developers need to give significant discounts over the more reliable and round-the-clock coal-fired power.
“Companies including ours are already operating on the lowest possible margins so that the tariff is cheap enough. This is how solar power has been growing in India. The duty makes us unviable,” the director said.
The safeguard duty is being sought by the Indian Solar Manufacturers Association, a group of domestic industries, which contend that because of price undercutting of imported modules, its production lines are lying idle and “heavy losses” have “crippled” the companies.
In December 2017 the association filed an application to the Director General of Safeguards under the Ministry of Finance – in May 2018, the DGS office was brought under the newly formed DGTR. The application was filed on behalf of five companies including India’s largest solar cell manufacturer, Mundra Solar PV Limited, part of the Adani Group.
Indeed, data accessed by the DGTR showed that while the import of modules had grown eight times since 2014, the market share of local manufacturers has halved to a meager 7%.
The DGTR’s recommendations state that the duty is necessary “to prevent the complete erosion of the manufacturing base of solar industry in the country” and the overriding public interest despite “some impact” on solar plant developers and consumers.
In January, the DGS recommended immediately imposing a 70% safeguard duty for a period of 200 days to protect the industry from “critical circumstances.” Although this decision was stayed by the Madras High Court, it spooked developers and foreign exporters, practically halting solar development in India.
The DGS’s office received nearly 200 representations from companies and associations in India, China and Canada and diplomatic missions from countries including China, South Korea, the UK, Germany, Singapore, Malaysia, Norway and Thailand opposing the duty.
Several auctions held at the time failed due to a lack of bidders and the sector has been reeling under regulatory uncertainty ever since. The Ministry of New and Renewable Energy’s decision to allow developers to revise tariffs to reflect changes in the duty structure has not stopped the concerns.
“Ministry of Non Renewable Energy has been promising protection from duty for projects where auctions have already been completed but there is no clarity available on that,” Bridge to India, a renewable energy consultancy, said in a research note.
There are expectations of a supply glut of solar panels after China decided in June to go slow on developing solar plants in the country, and uncertainty over whether the safeguard duty applies to panels sold into India from Special Economic Zones, where half of India’s solar manufacturing capacity is situated.
“It is also possible that some developer(s) will find a spurious reason to hold up the process through legal appeal as happened last time,” the BTI note said. “Moreover, we understand that domestic manufacturers are considering another petition for anti-dumping duty. The industry should brace for an extended period of uncertainty on this front.”