Environment of Uncertainty

Safeguard duty row adversely impacts solar power development

By Dolly Khattar

On July 30, 2018, the Ministry of Finance (MoF) announced the levy of a 25 per cent safeguard duty on solar cells imported from China and Malaysia for the next two years. These duties were imposed to safeguard the interests of domestic manufacturing firms, which lag behind their foreign counterparts offering cheaper products.

The decision, which came after a series of consultations, court cases and a detailed submission by the Directorate General of Trade Remedies (DGTR) to the board of secretaries, was challenged in the Orissa High Court, which has put a stay on the ministry’s order. The petition against the imposition of the safeguard duty was filed by Hero Future Energies, ACME Solar, and Vikram Solar.

“It has been decided not to insist on the payment of safeguard duty, for the time being,” the Department of Revenue, MoF, said in the notification, citing the stay order. “Till further directions from the board, the said goods, namely solar cells whether or not assembled in modules or panels, would in respect of the said safeguard duty, be assessed provisionally on furnishing of a simple letter of undertaking by the concerned person.” This implies that the latest duty relief is contingent on importers issuing a bond or a letter of undertaking, that is, they will have to pay the import duty if the courts permit. But this is akin to a tax as developers would include the import duty in their tariff calculations if they had to bid for a project today.

Following the Orissa High Court order, the Madras High Court has instructed customs officials at the Chennai port to provisionally release the module shipment of Shapoorji Pallonji Infrastructure Capital without payment of the safeguard duty. However, the court has asked the customs authorities to make a provisional assessment of the safeguard duty payable in the event of the notification being upheld and to ensure that the company furnishes a bond. The Madras High Court was responding to a petition filed by Shapoorji Pallonji to clear its goods without requiring it to pay the safeguard duty.

Separately, the Ministry of New and Renewable Energy (MNRE) has written to the MoF requesting that any project already under construction be exempted from the safeguard duty. The ministry has not yet issued any notifications in response to this request. The prolonged indecisiveness on the part of the government has only increased the uncertainty in the solar power segment, which is highly dependent on imported equipment. While the government is trying to address the industry’s concerns by advising a pass-through of taxation changes in tariffs, this is easier said than done. State and central government entities are highly reluctant to accept higher tariffs.

Meanwhile, the sharp depreciation in the rupee has cast a cloud over the Indian solar energy segment. On August 15, 2018, the rupee hit a record low of Rs 70 to the US dollar. In a segment where the difference of just one paise results in winning or losing a project, this sudden currency depreciation is a cause for concern. The items most vulnerable to exchange rate risks are the cells and modules that account for 50-55 per cent of the project cost. For projects that have already been bid out, this implies a negative impact on their estimated costs. It would also adversely impact developers that did not factor in currency risks while calculating tariffs. The import duty ambiguity and the sharp depreciation in the rupee could lead to a slowdown in capacity addition. If the current situation continues, the segment’s capacity addition estimates for the next two years will see downward revisions. Already, a majority of the auctions have been cancelled citing higher tariffs, while others are facing delays in the signing of power purchase agreements (PPAs).

In light of these developments, it would be interesting to revisit the submissions made by the industry to the DGTR, most of which seem to not be in favour of such duties.

Recap of the industry submissions to the DGTR

The DGTR’s recommendation was based on the findings of the safeguard investigation concerning imports of “solar cells whether or not assembled in modules or panels” under the Customs Tariff Act, 1975 and the Custom Tariff (Identification and Assessment of Safeguard Duty) Rules, 1997. However, it became a source of concern for solar power developers, which expect a steep hike in solar power costs if these duties are imposed. This possibility led to discord between domestic manufacturers and developers in the past few months. Various contrasting viewpoints were presented to the DGTR by the relevant industry stakeholders (about 205 parties) prior to and at a public hearing held by the DGTR in June 2018. The domestic manufacturers, represented by the Indian Solar Manufacturers’ Association (ISMA), noted, “India has seen a massive surge in solar imports during the period of investigation. The product under consideration is being imported into India from various countries including China, Malaysia, Singapore and Taiwan. Imports of the product concerned increased from 1,275 MW in 2014-15 to 9,474 MW in 2017-18 (annualised), an increase of over 643 per cent during the last three years.  The surge in imports has been at extremely cheap prices, causing serious injury to the domestic industry and threatening its very existence.”

The developers’ arguments were completely different from those of the domestic manufacturers. The Solar Power Developers’ Association (SPDA) submitted, “Discoms who are the ultimate purchasers of solar power have indicated that they would purchase solar power only if the cost is under Rs 3 per kWh. In light of the impending safeguard duties, it will not be commercially feasible for the developers to offer tariffs that are under Rs 3 per kWh, which is ultimately going to affect future bids.”

Companies like ACME Solar expressed concern about the domestic manufacturing capabilities and submitted that “domestic manufacturing capabilities of solar photovoltaic modules are very low, around 10 per cent of the total requirement. The remaining can only be met by imports, which lead to developers’ predominant reliance on imports for sourcing solar cells”. Vikram Solar also expressed similar concerns in its submission. “There is a huge gap in the demand and supply of solar modules manufactured by domestic producers. The imposition of a safeguard duty would not only adversely affect developers but also make it impossible to attain the national target as large parts of the 100 GW target have to be catered to through imports. The imposition of the safeguard duty is, therefore, clearly against public interest, which is the guiding principle for imposing safeguard duties.

Elaborating on the other adverse effects of safeguard duties, Amplus Solar noted that the “imposition of this duty will make it impossible for the company to supply at the tariff contracted in PPAs with leading global companies. This will shake the investors’ confidence in the Indian policy and regulatory regime and hinder further expansion. The company’s financial distress will result in the loss of jobs for 2,700 people, which is higher than the employment in the domestic cell industry. The impact on employment will be worse in large solar development firms and the engineering, procurement and construction (EPC) industry. Therefore, duties shall be imposed only after the provision of an adequate grace period for domestic solar EPC industries.”

Findings of the DGTR investigation

The various submissions made by industry stakeholders were considered by the DGTR for its assessment. The final findings of the DGTR’s safeguard investigation concerning solar cell imports identified a significant increase in imports over the entire period of investigation. As per the DGTR report, the market share and profitability of the domestic industry have suffered serious impairment due to the increased market share of imports over the period 2014-15 to 2017-18 (annualised).

In fact, 2014-15 saw total imports of 1,275 MW against 170 MW of domestic production. This has risen to 9,833 MW against 842 MW of domestic production as of 2017-18 (annualised). Hence, when imports are calculated as a percentage of domestic production, an increase from 750 per cent in 2014-15 to 1,169 per cent in 2017-18 can be seen. The impact on the domestic industry has been more severe due to the continued low import price of solar cells, which makes imported cells the preferred choice of module suppliers and developers. The DGTR also admitted that the safeguard duty may have an adverse effect on solar power developers and consumers. The duty may lead to an escalation in solar power tariffs, ultimately impacting the attainment of the targeted 100 GW of solar capacity by 2022. However, the DGTR believed that this duty would be in the public interest.

In view of these findings, the DGTR recommended a 25 per cent safeguard duty on solar cell imports from China and Malaysia for the first year, followed by a 20 per cent safeguard duty for the first six months of the second year and a 15 per cent duty for the remaining six months of the second year. It also recommended that no safeguard duties be levied on imports from other developing countries as, individually and collectively, they do not account for more than 3 per cent and more than 9 per cent respectively of solar cell imports.

The spillover effect

The solar equipment trade dispute is no longer restricted to imported solar cells, but has spilled over to other sub-segments as well. A new dispute seems to be cropping up in the solar glass and ethylene vinyl acetate (EVA) sheet segments, anti-dumping cases for both of which are currently pending. Until the cases are finalised, there will continue to be uncertainty in the market. The anti-dumping petition regarding solar glass was filed by Gujarat Borosil, which claims to be the only producer of solar glass in the country. Meanwhile, in April 2018, the Directorate General of Anti-Dumping and Allied Duties initiated an investigation into the import of EVA sheets for solar modules imported from China, Malaysia, Saudi Arabia, South Korea and Thailand. This was done in response to a petition filed by Renewsys India Private Limited, which sought the imposition of anti-dumping duty on EVA imports. An oral hearing was scheduled on July 19, 2018, and there has been no further development in this case.

A tough call

The back and forth on the safeguard duty on solar cells and the spillover of the trade dispute to other equipment have left the segment in a state of flux. There are over 10 GW of solar projects for which letters of intent (LoIs) have been issued or signed as of July 2018. The ambiguity surrounding the import duty structure will impact the cost of these projects. In a recent report, credit rating and research agency ICRA said that this 25 per cent duty would result in an increase in the capital cost of solar power projects by 15 per cent, which, in turn, would result in an increase in tariff by 30-35 paise per unit to maintain a similar level of return for project developers.

The imposition of duties will also delay the construction and commissioning of existing projects. As far as the ongoing tenders are concerned, most of them are already stranded. The need of the hour is a holistic policy, wherein capacity addition measures and domestic manufacturing promotion go hand in hand. Many industry analysts doubt if the proposed safeguard duty will actually help in achieving the objective of promoting domestic manufacturers as it is also applicable on manufacturing facilities in special economic zones, where a majority of the local capacities are situated. Further, the two-year duration of the safeguard duty is seen to be too short a time for the local manufacturing sector to gain a firm foothold. Indian solar manufacturing has been plagued by a lack of scale, outdated machinery and the lack of depth in terms of backward integration. Overcoming these challenges within two years seems unlikely and will only adversely impact costs and capacity addition.

When making a final decision, the government will have to assess external factors as well, the key among these being a slowdown in capacity additions in China, which is expected to drive down the prices of solar modules. With large capacity addition targets, India can be a key beneficiary of this fall. As a percentage of EPC costs, module costs in India are one of the highest in the world. But the safeguard duty will temper the benefit of the steep drop in global module prices in the country.

In light of the national solar target being impacted by the safeguard duty, it will be a tough call for the government to go ahead with its decision to impose the proposed safeguard duty. On the other hand, if it withdraws the duty, it will mean walking away from the Make in India mission.

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