Duty on Imported Solar Cells May Hurt India’s Clean Energy Goals

India’s ain to generate 100GW of solar power by 2022 will be hit if duties are imposed on imported solar cars.

India’s clean energy sector could take a hit if the proposed 25% safeguard duty on solar cells gets approved. Image used for representation.

(Photo Courtesy : Wikimedia Commons) 

After a year of record growth, India’s clean energy sector could take a hit if the government approves a proposed 25 percent safeguard duty on solar cells and modules imported from China and Malaysia.

Safeguard duties are a temporary measure aimed at curbing import surges to protect the domestic industry.

Once imposed, the duty would make cells and modules coming from China and Malaysia costly. These countries cater to more than 80 percent of India’s needs.

The duty could therefore derail India’s solar power sector from meeting its target of quadrupling capacity over the next five years to reach 100 gigawatt (GW) by 2022.

The Directorate General of Trade Remedies (DGTR), an arm of the commerce ministry, has recommended the duty in order to protect domestic manufacturers from the “serious injury” that overseas suppliers have caused or could cause.

The duty would apply for two years–25 percent in the first year, 20 percent for the first six months of the second year, and 15 percent for the balance six months.

Imposition of the duty would be formally notified by the revenue department of the finance ministry.

It would increase the cost of solar capacity installation and eventually the tariffs that winning bidders quote in reverse auctions to win projects. The prices “discovered” at such auctions have steadily fallen over the past few years, helping the country to install more renewable capacity than coal in the financial year 2017-18.

While eroding solar power’s attractiveness compared with coal, the duty could also worsen the financial health of electricity distribution companies (discoms), experts say.

How Discoms May Suffer

“[T]here is likely to be an increase in the price of solar power,” said Kanika Chawla, clean energy expert at the Delhi-based think-tank Council on Energy, Environment and Water(CEEW).

The final solar power tariff would shoot above Rs 3 per unit (1 kilowatt-hour), from the current Rs 2.5 per unit, the Business Standard reported on 17 July 2018.

The reason is that domestic manufacturers’ capacity is both more expensive and inadequate to meet the demand, Chawla told IndiaSpend.

India’s annual domestic manufacturing capacity for solar cells is about 3 GW, or 15 percent of the country’s requirement of 20 GW. A capacity of one watt costs about Rs 62 for India-made solar cells and Rs 25 for Chinese cells, IndiaSpend had reported on 25 January 2018, weeks after the directorate general had recommended a provisional 70% duty on solar imports. This proposal was rejected.

In May this year, the government merged the two agencies handling anti-dumping duties and import safeguards to form the DGTR, the body which has now recommended the 25 percent duty.

Cheap solar imports were among the reasons why India was able to realise record-low solar tariffs in 2017, lower than the rate of power generated by coal-based generators.

The lowest solar tariff recorded was Rs 2.44 per unit, as against Rs 3.20 for coal-fired power, the IndiaSpend report had noted.

Increase in solar costs and tariffs would make coal-based generation attractive once again, leading to faster conventional capacity addition which would be detrimental to the climate, Vibhuti Garg, an energy specialist associated with the International Institute for Sustainable Development (IISD) and the Institute for Energy Economics and Financial Analysis (IEEFA), said.

The duty could also increase the costs of projects already under construction if they are not compensated in the form of higher per unit costs, Chawla said.

Some Power Purchase Agreements (PPAs)–signed between a power producer and a discom–have a ‘pass-through’ mechanism to ensure that projects in the pipeline do not incur losses, Chawla said. These provisions protect power producers from losses if the production cost increases due to factors out of their control–for instance, duties and taxes.

This would imply that discoms have to hike the tariffs paid to solar power producers whose capital costs have increased due to the safeguard duty. “[As a result], the financial burden on the utilities will increase, resulting in potential overburdening,” Chawla told IndiaSpend.

For the first time, India added 11.77 GW of renewable capacity in financial year 2017-18, according to an IndiaSpend analysis of government data. This was twice the capacity of thermal and hydro installations combined (5.3 GW) during the same period.

This record growth was single-handedly driven by solar. The year 2017-18 recorded 9.36 GW of solar capacity installation, 70% more than 2016-17, and about 80% of the total 11.77 GW renewables capacity installed in India in 2017-18.

“A surge in tender issuances during late 2015 and early 2016 is the primary reason behind installations in 2017-18 crossing 9 GW,” said Surbhi Singhvi, renewable energy expert at Bridge To India, a Gurugram-based consultancy.

Solar module prices fell by Rs 11 per watt, from Rs 33 per watt in March 2015 to Rs 22 per watt in March 2017, a drop of 33.33 percent.

One of the main reasons behind power producers’ increased interest in solar after 2015 was the rapid fall in solar module prices due to surplus supply, which reduced the cost of solar installation.

The window of two years is too small to allow for significant manufacturing capacity addition, Garg said, adding that policy uncertainty scares foreign manufacturers away from investing.

The safeguard duty will make the prices of imported products uncompetitive, Garg said, adding that progress towards meeting solar targets will be affected because “protectionism like safeguard duty will not ensure upscaling of domestic manufacturing capacity to meet the target”.

Policy Conundrum Has Affected Wind Power Earlier

Before solar, the wind power sector had taken a hard blow due to a change in government policy.

Until February 2017, wind tariffs were set individually by the power regulators of wind-power producing states. Producers would enter into PPAs with the respective discoms as per tariffs already fixed by the regulator concerned.

Then, the Solar Energy Corporation of India (SECI), a unit of the Ministry of New and Renewable Energy (MNRE) responsible for shepherding India’s renewables capacity addition, conducted the first wind auction, where the prices were decided through competitive bidding and the lowest bidder won.

The reverse auction in February 2017 realized per unit tariff of Rs 3.46, lower than the Rs 4 to Rs 6 per unit that regulators recommended earlier. Soon, almost all the states moved to the reverse auctioning model.

In an auction held in October 2017 by SECI, wind prices touched a record low at Rs 2.64 per unit.

The shift has impacted the older projects more as discoms are now reluctant to buy power at the higher tariffs in older PPAs, said Singhvi of Bridge To India. They have attempted to renegotiate older PPAs, and power producers have cried foul.

With the doubling of installed capacity from 17 GW to 34 GW over six years to March 2018, the wind sector, which has been the earliest and until recently strongest driver of India’s renewables capacity growth, saw a drop in capacity addition of 67% year on year.

A total of 1.76 GW wind capacity came online in 2017-18, against 5.5 GW the year before. The sector is not expected to revive anytime soon.

“A shift to auction-based allocation generally results in a lag of 18-24 months,” said Singhvi, explaining that a sudden price change affects the pipeline of projects as project developers take time to adjust. “Hence, we don’t expect activity in the [wind] sector to pick up pace until early 2019.

A Slowdown

The year 2018 will only see 6.3 GW of solar capacity addition, a decline of 25% from 2017, according to Bridge To India estimates. This decline was already expected because of a slowdown in new solar tender issuances in 2016-17 and 2017-18, Singhvi said.

Now, once the safeguard duty is implemented, there might be a further dent.

The duty could cause a slowdown in capacity growth in the near term, Garg said, which could be avoided “if developers are able to win bids with increased cost”.

However, this policy uncertainty is bad for business. “Such policy risks should be minimised or it becomes very difficult to operate in uncertain conditions,” Garg added.

(The writer is a principal correspondent with IndiaSpend.)

(The story was originally published on IndiaSpend and has been republished with permission.)