Solar beyond safeguard duty

Although the court has granted a provisional stay on the DGTR order imposing 25 per cent safeguard duty on solar panel imports, cloud of uncertainty still looms large over the stiff targets the government has set. By Subhajit Roy, Group Editor

Of late, the Finance Ministry of India has notified the Directorate General of Trade Remedies’ (DGTR) decision to impose 25 per cent safeguard duty on solar panels imported
from China and Malaysia. Under the proposed plan, the tariff would be applicable for two years and would reduce to 20 per cent for the first half of the second year and 15 per cent for the second half. The announcement has led to rise of lots of ambiguities within
the solar power industry.

While this may help the domestic manufacturers currently crippling due cheap imports in short-term, project developers believe that the duty would increase solar power tariffs significantly as today around 90 per cent of solar equipment used in India is imported.

Commenting on how the imposition of safeguard duty will impact the country’s solar power sector, Shekhar Dutt, Director General, Solar Power Developers Association (SPDA), said, “Majority of the domestic demand is met via imported modules since the domestic supply is not enough to cater the entire national demand. Therefore, the imposition of safeguard duty would lead to additional cost burden on the developers. Further, the tariffs are likely to
increase by approximately 50 paise per unit. This would shoot up the tariff rates beyond Rs 3 and as a result DISCOMS would refrain from buying the power. Ultimately this will have a negative impact on the sector as a whole.”

Simarpreet Singh, Founder-Director, Hartek Solar Pvt Ltd opines that the imposition of 25 per cent safeguard duty will escalate capital costs for solar power projects by at least 15 per cent. He said, “The viability of power purchase agreements which have already been negotiated with developers is a major cause for concern because discoms will be reluctant
to take safeguard duty into account to rework the tariffs. The safeguard duty will impose a legal burden on developers as they will have to undergo tedious procedures to get the power purchase agreements with discoms revised.”

So as to maintain their rate of return, in Singh’s opinion, developers will have to hike tariffs by 30-35 paise per unit. He adds, “They may also use the ‘change in law’ clause in their contracts to pass on the additional cost to discoms, which may lead to an increase in working capital requirements in the short term or delay commissioning.”

Manoj Gupta, Vice President – Solar Business, Fortum India Pvt Ltd, also said, “The government’s move on imposing 25 per cent safeguard duty on solar cells imports has led the Indian solar industry been pushed back by a couple of years. We believe that there is some impact on solar power developers and also on consumers. The consumers of electricity will also be affected because tariffs are expected to rise.”

Girishkumar Kadam, Vice President and Sector Head, Corporate Ratings, ICRA Ltd observes that the imposition of safeguard duty on imported PV cells would result in an increase in the capital cost for a solar power project by 15 per cent, which in turn would result in an increase in tariff by about 30-35 paise per unit to maintain a similar level of returns for project developers. The solar bid tariffs largely remained below Rs. 3 per unit in CY2018 YTD varying between Rs. 2.44 per unit and Rs. 2.75 per unit, with expectation of favourable price movement in PV modules following the policy changes in China.

Kadam says, “The imposition of safeguard duty is likely to increase the bid tariffs to Rs. 2.9 – 3.1 per unit for the upcoming bids.” However, he feels, the solar power tariffs would continue to remain competitive against the conventional power tariffs as well as the other renewable sources.

According to Ivan Saha, BU Head Solar Manufacturing & CTO, Vikram Solar Ltd, 25 per cent
safeguard duty on solar cells imports would have helped if domestic solar manufacturing units within the special economic zones (SEZ) were exempted from this duty imposition. However, he mentions, in current form there is no exemption to SEZ based manufacturing units, which by the way is the hub of solar manufacturing in India. “40 per cent of solar module manufacturing units and 60 per cent of solar cells manufacturing units are located in SEZs. Therefore, currently, safeguard duty does not present any opportunity. The Government of India needs to prioritise domestic manufacturing and exempt SEZ-based solar manufacturing units to see any real improvement in the sector,” Saha said.

Detrimental to 100-GW target?

The Government of India has ambitious plans of generation of 100 GW of solar energy capacity by 2022, but, according to industry experts, momentum has been severely eroded in the last few months. Issues such as uncertainty around import duties and future tax rates on existing power purchase agreements have somehow dampened investor
sentiment.

With the imposition of safeguard duty on solar cells, Gupta of Fortum India believes, it has become all the more difficult. He said, “The recent development of a safeguard duty was unexpected and while it may prove to be a boon for manufacturers, developers are
being adversely affected. The cost of solar projects will straightaway go up by 14 to 15 per cent, which would affect both the on-going and upcoming projects.”

Experts also believe, considering the recent renewable energy policy in China, which has reduced the demand for solar in the country and about to bring an issue of oversupply to the global market, it may be possible for India to generate 100 GW solar energy by 2022 on a global competitive scale through imports.

However, Saha of solar power developer Vikram Solar observes, focusing on importing solar modules from China, will only lead to further damaging the Indian solar manufacturing industry and put India’s vision for solar reliance and creating jobs in question. Chinese suppliers already hold more than 80 per cent market share within Indian solar market and in 2017 India spent $3.8 bn importing solar modules from China.

Indian manufacturing industry has huge exposure currency risk, as currently we are dependent on imports in a big manner. Therefore, Saha suggests, the only way achieve 100 GW by 2022 in sustainable manner would be through the achieving parts of these targets thorough indigenous manufacturing.

The other concern is that by the time any new manufacturer comes on stream, he will not be able to get any benefit under safeguard duties and there is a doubt that any existing manufacturers will have the cash flow or the wherewithal to make any substantial benefit out of this.

“The safeguard duty will only be justified, and the country can achieve this target if the domestic industry is able to match cheap imports within the two years,” Gupta said. He expects that soon the domestic industry will scale up and bring down the cost differential.

Though a lot of questions being raised on the competitiveness of solar power upon imposition of proposed safeguard duty, Kadam of ratings agency ICRA believes, the competitiveness of solar power remains intact even with the imposition of safeguard duty on imported PV modules and should not have any adverse material impact on future project awards. At the same time, he points out, “The implementation of the ongoing projects could face challenges in terms of getting approval from the regulators to pass-on the capital cost increase through increase in tariffs and securing funding for the additional capital cost, in a timely manner.” Based on the tendering and solar project awards, ICRA estimates solar capacity addition of about 4 – 5 GW in the utility-scale segment having
PPAs with the DISCOMS. With the increased tendering activity in CY2018 YTD, the capacity addition is expected to rise in FY2019 and FY2020.

How safeguard duty benefits domestic manufacturers

Research agency CRISIL describes the safeguard duty on solar modules as ‘both a boon and a bane for the solar value chain’. It said, “Currently, 85-90 per cent of the solar modules used in India are imported from China and Malaysia. The boon is the opportunity
it provides the domestic module industry to flourish. The bane is that the duty could raise capital costs for solar projects based on imported modules by around15-20 per cent (at current prices).”

However, Shekhar Dutt of SPDA points out: “The duty imposition would not help the manufacturing units much as the domestically manufactured cells or modules are technologically uncompetitive as they are less efficient and are not backed-up by insurance.
The first and the foremost step is to develop latest technology with high efficiency modules.”

Simarpreet Singh of Hartek Solar suggests that indigenous solar panel and cell manufacturers should take it as an opportunity to step up their R&D to come up with more cost-effective and efficient technologies that give them an edge over their Chinese counterparts. He adds, “With the safeguard duty in place for two years, domestic players should use this period to build on their solar cell manufacturing capacities. They should heavily invest in technology so that they can truly ‘Make in India’ and not just ‘assemble in
India’, as is happening now.”

The imposition of safeguard duty on imported solar cells and modules would improve the
competitiveness of domestic module manufacturers but, in Gupta’s opinion, the extent of benefit is likely to be constrained by the recent fall in the imported PV module prices owing to the policy changes in China.

Moreover, he feels, “The duty is unlikely to lead to any significant increase in the domestic solar module or cell manufacturing capacity in the near term. Safeguard duty is applicable for 2 years and this 2-year period is insufficient for any module or cell supplier to enhance their capacity to become competitive to Chinese players.”

“Instead,” Kadam of ICRA said, “The domestic solar cell manufacturing would benefit by having a longterm policy clarity on the safeguard duty or anti-dumping duty on imported cells or modules.”

India has around half-a-dozen makers of solar cells and modules, with a total capacity of around 8,000 MW, out of which around 5,000 MW is in SEZ zone, which will also be impacted from this order as supply from SEZ to domestic market is also considered as
import. The balance left out capacity of 3,000 MW is not enough to meet the country’s increasing demand. Moreover, the decision has also not gone down well with solar cell manufacturers within SEZs as their domestic sales will also attract safeguard duty. Vikram
Solar’s Ivan Saha said, “Imposing 25 per cent safeguard duty on SEZ based domestic solar module and cell manufacturing units will increase solar module production price and push domestic manufacturers in India out of business. The duty will also bring in issue of job losses, as the demand for domestically manufactured modules and cells fall.”

Industry Wish

Explaining the solutions to remove the ambiguity created due to the imposition of duty, Fortum India’s Gupta said, “The first immediate solution is to exempt projects from safeguard duty whose PPA or bids are closed and in many cases deliveries of modules are
expected to begin shortly so that there can be a smooth execution of the projects and for new biddings.”

He feels that the best solution will be to withdraw the safeguard notification and to provide the financial support to domestic manufacturer in the form of VGF or interest subsidy as the duty could also kill thousands of jobs created from the down-stream activities of solar power generation including the manufacturing sector. It could also risk availability of low cost energy to the consumers, Gupta adds.

Whereas Saha of Vikram Solar proposes, “The government should exempt SEZ to DTA clearance of solar cells and modules and exempt projects, which have already been auctioned out from the ambit of duties of Safeguard to remedy the situation.”

No safeguard duty for now!

The safeguard duty on solar cells and modules that seeks to empower domestic manufacturers is now ‘temporarily withdrawn’ followed by strong industry opposition especially from the solar power developers. Earlier, on a petition filed by ACME Solar, the Orissa High Court had issued a stay on the proposed order itself till 20th August. However, ignoring the Odisha High Court’s stay order, on 31st July the Finance Ministry had notified the imposition of 25 per cent safeguard duty with immediate effect. This has led solar developers ACME Solar, Hero Future Energies and Vikram Solar to file petitions in the Odisha High Court against the DGTR for violating the court’s order. Following this, the Finance Ministry directed all chief commissioners of customs “not to insist on payment of safeguard duty for the time being”.

Conclusion

Though the future of ‘safeguard duty’ is hanging in the balance, solar power developers urged that the ongoing projects should be exempted from the safeguard duty or allowed a pass through. Even the Ministry of New and Renewable Energy (MNRE) has urged the Finance Ministry to exempt solar power projects that have already been awarded or were at the implementation stage before July 30. However, Shekhar Dutt of SPDA believes, “The ultimate solution is the withdrawal of the duty.”

By Subhajit Roy, Group Editor