India to Consider Direct Subsidy to Solar Panel Manufacturers

India’s solar panel dispute: Is direct subsidy a way out, or will it invite WTO’s ire all over again?

Workers carry photovoltaic solar panels for installation at the Gujarat solar park. (Photo: Reuters)

India may extend direct subsidy support for domestic solar equipment manufacturers after it failed to defend existing benefits before a World Trade Organization panel. In response to a BloombergQuint query on how the government intends to continue supporting domestic solar manufacturing in India, Coal, Power and Renewable Energy Minister, Piyush Goyal said “We will continue to defend the domestic solar panel manufacturing industry in India. I can give the subsidy directly to the solar manufacturer, this is permissible under the WTO law.”

Why India Needs to Change Its Solar Subsidy Policy

India’s Jawaharlal Nehru National Solar Mission (JNNSM) mandates all solar power project developers to locally source a portion of their solar panel requirements. This Domestic Content Requirement (DCR) clause is to boost the sale of solar panels in India as they are currently more expensive than imported panels.

The cost of domestically sourced and produced solar panels is 8-10 percent higher than imported ones.

Jasmeet Khurana, Associate Director – Consulting, Bridge to India

Bridge to India is a consultancy and knowledge services provider for India’s renewable energy market.

The rationale for the DCR is to boost domestic manufacturing, say ministry officials – an extension of sorts of the Make In India program. But more expensive solar panels lead to more expensive solar power. To offset this the Indian government subsidises the power cost so that it can find buyers. This is done via a Viability Gap Fund (VGF) support of Rs 1 crore per MW for solar power project developers.

Solar panels installed at a solar plant in Guna district of Madhya Pradesh. (Photo: Reuters)

The DCR and VGF protect Indian solar panel manufacturers and solar power project developers prompting a dramatic fall in the import of solar panels, especially from the US. The Office of the US Trade Representative (USTR) complained to the WTO and the international trade body ruled against India in the matter.

• WTO recently ruled India cannot discriminate between foreign and domestic suppliers of components for solar panels.
  
• And so, India will have to rework benefits for domestic solar panel manufacturers.
  
• Cost of domestically sourced and produced solar panels is 8-10 percent higher than imported ones.
  
• Power Minister Piyush Goyal said India will directly subsidise solar panel manufacturers.
  
• Ministry officials are examining how best it can be designed so that it does not violate WTO norms.
  

Following the WTO panel order against India, the USTR in a press statement said, “The United States initiated this dispute in February 2013 because it considered that India’s domestic content requirements are inconsistent with WTO rules that prohibit discrimination against imported products.”

US companies have been effectively blocked from competing for an important share of India’s solar power equipment market. Since India enacted these domestic content requirements in 2011, US solar exports to India have fallen by over 90 percent.

USTR Statement

Direct Subsidy to Indian Solar Panel Companies?

With the DCR clause being struck down, India will have to rework benefits for domestic solar panel manufacturers.

India may have to do away the domestic content requirement clause within the solar mission. This would put domestic solar panel manufacturers in a dire situation.

Narasimhan Santhanam, Co-founder, Energy Alternatives India (renewable energy consulting and research firm)

File photo of Piyush Goyal. (Photo: IANS)

To protect against that Goyal intends to directly subsidise solar panel manufacturers. He told BloombergQuint,

We will continue to defend the domestic solar panel manufacturing industry in India…I can give the subsidy directly to the solar manufacturer, this is permissible under the WTO law.

Piyush Goyal, Coal, Power and Renewable Energy Minister

Reacting to that statement, Jasmeet Khurana of Bridge to India says, “Going by Piyush Goyal’s statement, the subsidy could move on to the other side of the spectrum, which is to the manufacturers directly. It makes sense but again it will have to be seen how they structure it and who gets how much support.”

Waree Energies is one of India’s largest domestic solar panel manufacturers. The company has a solar panel manufacturing capacity of 500 MW and its management welcomes news of the government’s intentions to directly subsidise domestic solar panel manufacturers.

This subsidy will definitely help the industry. The government has been in talks with the industry to encourage solar panel manufacturing. One of the options discussed was of extending a direct subsidy.

Sunil Rathee, Director – Sales & Marketing, Waree Energies Rathee

Rathee estimates the direct subsidy will mimic the viability gap funding currently extended by the Indian government. He says, “The VGF funding was used to offset the higher costs incurred to developers under the DCR clause. It was earlier set at Rs 2.5 crore per MW. It has been brought down as costs have fallen. We estimate that a support of Rs 1 crore per MW should be able to make domestically sourced and produced panels competitive with imported ones.”

A solar panel is cleaned using a wet sponge. (Photo: iStockphoto)

Officials in the renewable energy ministry say they are still working on the quantum of the direct subsidy. It may also vary based on whether solar panel manufacturers are using locally produced or imported solar cells. Solar panels depend on cells to convert solar radiation into energy and India is terribly short of solar cell capacity. According to information available on the Power Ministry website, the installed capacity of solar cells in India is 1212 MW whereas the installed capacity of solar panels stands at 5620 MW.

This is why most Indian solar panel manufacturers use solar cells made in China. They are cheaper as well. EAI’s Santhanam explains, “Domestically produced solar cells cost 37 to 39 cents while Chinese solar cells cost 29 to 30 cents. This translates to higher costs for locally sourced and produced solar panels that cost 60 cents while those using Chinese cells cost 50 cents each. This brings a cost difference of Rs 6 per watt. If we extrapolate this, domestically sourced and produced panels alone are dearer by Rs 60 to 65 lakh per MW.”

Ministry officials indicate that companies using domestically produced solar cells may enjoy a higher subsidy. They are also examining how best it can be designed so that it does not violate WTO norms.

Will a Direct Subsidy Draw WTO Censure?

Legal experts say a direct subsidy may not draw the WTO’s ire.

India wouldn’t be the first country in the world to provide support to local manufacturers. WTO regulations does not support subsidies as such, but if the government’s support does not qualify as a subsidy under the Agreement on Subsidies and Countervailing Measures (SCM), it wouldn’t be possible to establish trade remedial action either before the WTO DSB (Dispute Settlement Gateway) or at the domestic level.

Santanu Mukherjee, Partner, Luthra & Luthra

The WTO prohibits only export and local content subsidy. The US’ challenge is mainly for the local content requirement and not for the subsidy. The matter is also under appeal. India can grant a subsidy for domestic manufacturers as this is permissible under the WTO norms, provided the subsidy is not contingent on local content.”

Abhijit Das, Head and Professor, Centre for WTO Studies, Indian Institute of Foreign Trade

The solar power mission has been a pet project of the Narendra Modi government. The current installed solar power capacity is 6762.85 MW, the target for 2022 is 100 GW. India will have to be careful that the push to Make in India doesn’t compromise this lofty target.