Heavily reliant on imports, India’s solar manufacturing capacity has failed to keep pace with the rapid project development. Covid-19 and the ensuing supply chain issues have highlighted the danger of overdependence on imported cells and modules. Thus, to reduce imports, the Ministry of New and Renewable Energy has announced the levy of a basic customs duty (BCD) of 25 per cent on solar cell imports and 40 per cent on solar module imports. It aims to make imports more expensive and create a more level playing field for domestic manufacturers. Industry stakeholders, including developers, manufacturers and consultants, share their views on the advantages and disadvantages of the imposition of BCD, and the outlook for the country’s solar value chain…
What impact will BCD have on solar tariffs and projects in the short and long term?
Today, almost all independent power producers (IPPs) are buying solar cells and modules from China. If this continues after the imposition of BCDs, then the solar tariff is expected to increase by Re 0.40-0.45 per kWh. In another scenario, where solar cells are imported from China, but locally manufactured solar modules are used, the tariff is expected to increase by
Re 0.25-0.30 per kWh. Until significant cell manufacturing capacity is set up in India, IPPs will continue to meet their demands from the Chinese market. In India, currently, the total cell manufacturing capacity is just 3 GW. Premier Energies is planning a 2 GW cell manufacturing facility within the next two years. In the next two months, we will set up 750 MW of cell manufacturing facility. Despite the subdued installation of solar projects in recent years due to various factors like Covid-19 and imposition of safeguard duty, we feel the solar IPP market will grow in the range of 8-10 GW per year. In the next one and a half to two years, it is expected that 60 per cent of the cell demand will come from China and the remaining from the domestic market.
The BCD that is expected to come in from 2022 is quite significant due to which U-Solar is expecting a rush of projects this year – not only from our existing partners and clients, but also from the old pipeline that was delayed. The increase in BCD is an incentive as there will be a greater chance that project costs will start moving upwards. Even if Indian solar manufacturing picks up pace, the placement of up to 25 per cent BCD on solar cells will ensure that the costs are not going to fall any further. Therefore, the market is expected to slow down in the early quarters of 2022 following the BCDs. It can be stipulated that solar project costs in the long term will not see the trend of yearly reductions since there will be some stability and control in pricing in India.
The government has made it obvious that this is not a revenue generating measure, but is more of a tariff barrier aimed at incentivising domestic manufacturing of solar cells and panels. We have already seen the impact of this in one tender, in which the solar tariff went up to Rs 2.20 per kWh from the Rs 1.99-Rs 2 per kWh earlier. As the government has clarified that all new tenders need to factor in this tariff hike, we can safely assume that this has resulted in a 20 per cent increase in solar tariffs. While this is lower than expected, it also factored in lower module and cell price expectations of the bidders over the project horizon. Tariffs can rise further if expectations on the underlying price movement of solar cells or panels change.
On March 9, 2021, the government announced the imposition of 40 per cent BCD on solar modules and 25 per cent on solar cells, without grandfathering the bid-out projects. The BCD is higher than the safeguard duty on imported cells and modules at 14.5 per cent, which is valid till July 2021 and awaiting clarification on its continuation. The imposition of BCD will result in a higher tariff discovery in the short term, also evident from GUVNL (Phase XII) solar auction for 500 MW, in which a tariff of Rs 2.20 per kWh was discovered, 21 paise (or 10 per cent) higher than GUVNL’s previous auction for 500 MW, which had set a record for the lowest tariff of Rs 1.99 per kWh. The Solar Energy Corporation of India (SECI) has already been struggling to find buyers for the previously tendered-out capacity, like the peak power tender and the manufacturing-linked tender, after discovering record low tariffs in plain vanilla solar auctions.
In the long term, the impact of BCD is likely to be offset by the falling prices of cells and modules, aided by technology improvement, lower production cost and economies of scale. We anticipate domestic manufacturers to become more competitive with increased capacity utilisation and the vertical integration of cell and module manufacturing units in India.
Will the duties on imported cells and modules help increase India’s solar manufacturing capacity and its competitiveness globally? What more can be done?
Duties on imported cells and modules do help to an extent. Any investment decision is made keeping in mind the minimum policy visibility for around five years. The reason why safeguard duty has not been able to promote solar manufacturing is that the policy visibility was just two years. With BCDs, there is a better visibility of policy, which ensures the market for investments. We are expecting that manufacturing plants will be quickly set up by different industry stakeholders in India.
Yes, a lot more can be done to promote domestic manufacturing in India. If we are comparing with the Chinese market, we should understand the factors that have promoted manufacturing in China. These include easy and low-cost access to finance with interest rates of 1-4 per cent, around $30 billion credit line for promoting domestic manufacturing, various tax incentives, free land, and subsidised and uninterrupted electricity. These incentives promoted the manufacturing of junction boxes and glass. I believe that backward integration will boom in India once the cell and module manufacturing capacity is set up. Indians are entrepreneurial and only want a stable market to make investment decisions.
It is important to note that domestic manufacturing of wafers is the key to promoting the manufacturing of solar cells and modules in India. China dominates 98 per cent of the wafer market. To compete and successfully manufacture wafers in India, there is a need to ensure the procurement of land with limited constraints, and uninterrupted and economical (does not mean subsidised) electricity. Further, solar manufacturing park policies should be drafted in the states where land and uninterrupted power supply is guaranteed. These parks can be set up near hydropower projects, which can be ramped up and down easily as compared to thermal power plants. R&D activities should be initiated by the government given that China spends a lot on such activities. We are often laggards in technology adoption. This must be changed going forward.
While some level of BCD is necessary to boost the Indian solar manufacturing capacity, the recently proposed scheme is very high. In any globally competitive environment, the protection duty should not be so high. The duties should be nominal, which could be in the range of 4-10 per cent to sufficiently endorse local manufacturing, but also place a premium on imported materials. The proposed duties, 25 per cent on cells and 40 per cent on modules, are abnormally high, which will inadvertently lead to the creation of a monopolistic market, where the control of prices is with a few select manufacturers rather than the competitive market at large. This could lead to an increase in solar energy production prices in India, since modules contribute to 70 per cent of the system costs. An incentive scheme has already been provided to increase India’s solar manufacturing capacity, which is why these BCDs are a bit surprising. Crores have been allocated already to certain large players to scale up their manufacturing capabilities, over and above which import duties will further fuel monopolistic tendencies. This is unhealthy for competitive project pricing.
We seem to have unnaturally narrowed down the whole Atmanirbhar Bharat initiative to a tweak here and a tweak there. A tariff barrier, however high it may be, cannot alone augment India’s solar manufacturing capacity. The safeguard duty, which has lasted for three years, could not achieve the same objective. I am really doubtful if this tariff hike can achieve the same objective with a higher tariff level. We need much more than tariff hikes. The demand for power needs to pick up, discoms should buy solar power, land and evacuation issues must be expeditiously addressed within the project timelines, and access to debt funding must be eased for the augmentation of manufacturing capacity.
The imposition of import duty is bound to increase the cost of solar generation, thereby putting an additional burden on discoms. However, it will yield results only if new manufacturing capacity comes up in the country. There have been instances where domestic manufacturers would not cut down prices as there was visibility for offtake through domestic content requirement and other measures. Import barriers can only be temporary and Indian manufacturing will succeed only if it is able to compete in the global marketplace in terms of price, technology and scale.
The intent of the government is positive, with the introduction of a lower corporate tax rate of 15 per cent to make manufacturing competitive in India. The recent announcement of BCD offers protection, central PSU tenders offer demand, and production-linked incentives (PLIs) offer the motivation to manufacture in India.
After the sunset of the Modified Special Incentive Package Scheme, the sector has been waiting for a central incentive scheme, which has now been announced in the form of PLIs. The sector now anticipates a lucrative variable subsidy that incentivises the manufacturing of high quality cells and modules. There is also a need for states to attract giga-scale solar manufacturing facilities through financial and administrative incentives, necessary trunk infrastructure, easy clearances and an enabling ecosystem.
With large-scale solar capacity additions planned over the next decade, how will the BCDs on cells and modules impact the development of projects? Will they impose a financial burden on bulk power offtakers like discoms?
Like the disruptions caused by the Covid-19 pandemic, the offtaker risk is unsystematic. Also, tariff increases are expected in the next one and a half to two years until the cell and module manufacturing line comes up in India. After two years, a perfect competitive market for solar cell and module manufacturers may emerge from the current oligopoly of Chinese markets. With this, the prices will start stabilising provided BCDs remain effective for five years and the industry continues to invest in the market.
Today, the price gap between Indian and Chinese modules is roughly 20-25 per cent. Despite import restrictions, Indian modules are expected to be 8-10 per cent more expensive. This price gap should be acceptable given that the supply chain is safe and that employment is generated in India. With cheaper access to financing, Indian modules can become even more competitive.
As a result of the previous incentives and future BCDs, it is obvious to expect India’s manufacturing of modules and cells to pick up. The government’s plans to increase large-scale solar capacity will support the initial climb of local modules and cells. However, over time, due to the large BCD, there will be lethargy in the system as a result of lack of global competition in the market and it can be expected that solar prices will begin to go up over the next decade. The levellised cost of energy (LCoE) of solar will be higher as compared to the very comfortable prices we are seeing today, which will not only make it a more difficult decision to adopt clean energy, but also will reduce the obvious incentive that exists in the present market. The LCoE might actually get offset at the discom level since the price increase will have to be reflected somewhere.
Both the US and Europe have imposed tariffs on solar cells and modules from China, and it did not lead to any significant addition in domestic manufacturing capacity. India is a much smaller market compared to these countries. A purely domestic market-driven capacity addition appears to be a chimera. All in all, the annual Indian market size is around 8-9 GW in the best of years. This is a small market to drive large-scale capacity additions. Indian manufacturers cannot write business plans for augmenting cell and module manufacturing on the basis of the domestic market alone.
Discoms have been reluctant to buy power as they see tariffs going up. The discovery of a record low tariff of Rs 1.99 per kWh is likely to offer resistance in power procurement at Rs 2.20-Rs 2.50 per kWh in the short term. We had witnessed this previously in August 2018, when 2,400 MW of auctioned capacity was cancelled by SECI as the discovered tariff was higher than Rs 2.44 per kWh (discovered under a previous SECI bid). The marginally higher solar tariff is still significantly lower than the average pooled power purchase cost for most of the state discoms, making it an attractive proposition.
Regardless of the reasons behind the low tariffs, distribution companies are delaying the signing of PSAs, hoping the tariffs would be as low if not lower in the future.
Since there is no sunset period specified for the new BCDs, how long do you think they should remain effective?
As I understand, there is no sunset clause for BCDs and they keep on changing. In my view, if the current BCDs stay for five years, they will provide a good incentive for kick-starting not only solar cell or module manufacturing, but also solar wafer manufacturing in India.
A more long-term sustainable outlook needs to be considered for the implementation of BCD, such as a drop of 5 per cent every year till Indian manufacturing is able to scale up reasonably. Currently, the BCDs are considerably high and need to be fixed at a more reasonable level.
No sunset period has been specified for the higher BCD that has been indicated. One would have liked to have a scale-down plan for this hike, just like we had for safeguard duty. With such tariff hikes, India will breach the Information Technology Agreement (ITA). As a signatory to the ITA, we are under obligation to maintain a nil BCD rating on solar cells and modules. Bringing in a tariff hike through the safeguard duty or the anti-dumping duty route would have been a better option to avoid a challenge before the World Trade Organisation and a breach of the ITA. All projects have a pass-through “change in law” clause, so this additional cost will be passed on to discoms and end-customers. Individual developers that have won projects will not be affected, but an across-the-board tariff hike will attenuate the appetite of discoms for solar power in general.
The BCD will give an impetus to create a self-sustaining ecosystem for solar equipment manufacturing in India. If domestic manufacturers become competitive with time vis-à-vis imported cells and modules, the BCD could also come down.
Short-term enforcement does not instill confidence in potential manufacturers as they cannot plan capacities with a short-term view. Safeguard duty is a fine example. India had imposed SGD for a period of two years, and then starting from 25 per cent in the first year, reduced to 20 per cent for the next six months and to 15 per cent in the last six months. The two-year window did not instill enough confidence in manufacturers to make an investment decision, but led to an overall increase in the tariff. To further stimulate manufacturing, the government can announce a phased manufacturing plan for a 10-year period, much like in the case of electric vehicles, for which BCD in a phased manner is conveyed in advance so that a higher import duty is levied on the final product (which gradually comes down as domestic manufacturing matures) while the raw material attracts lowest import duty.