Duty on Chinese solar cells may not lead to tariff hikes

The move by Directorate General of Trade Remedies (DGTR) recommending a hike in safeguard duty on Chinese and Malaysian solar cells to 25% from the earlier 15% has left domestic solar panel producers in a state of confusion. At the same time, industry officials aver that an immediate increase in solar tariffs is unlikely.

The order proposes to have a safeguard duty on the imported solar cells for a period of two years. In the first year, 25% safeguard duty could be imposed, followed by 20% during the first six months of the second year and 15% in the subsequent six months.

The demand for such a levy was made as domestic solar modules are 8-10% costlier than the imported ones, which is a major deterrent for local producers to compete in the international markets. Having a safeguard duty will give a competitive edge to domestic players.

However, among the confusions that have immediately arisen are the levy of the same on solar modules being manufactured in the Special Economic Zones (SEZs) within India, as SEZs are deemed to be foreign territories.

“If the government wants to impose safeguard duty, it should exempt SEZ to Domestic Tariff Area (DTA) clearance of solar cells and modules from the ambit of safeguard duty, otherwise it will lead to counterproductive results and destroy the domestic manufacturing industry which is already in a bad shape,” said Gyanesh Chaudhary, managing director and chief executive officer at Vikram Solar.

Vikram Solar has a solar photovoltaic manufacturing facility in one of the SEZ’s in West Bengal, and the latest recommendation by DGTR could have a repercussion on the company. According to Chaudhary, the government should come out with a specific exemption by restricting the imposition of safeguard duties to input costs for all SEZs to DTA clearance to accord equal protection to units in SEZ and DTA. Imposition of safeguard duties in the current manner will make SEZ units uncompetitive and will force them to shut their operations.

However, a Gurgaon-based analyst had a different take on SEZs not attracting such a duty. According to this analyst, the DGTR order specifies to only two countries – China and Malaysia. The order reads, “the import of product under consideration originating from developing nations except China PR, and Malaysia will not attract safeguard duty...”

On the tariff front, there is a section which believes that there will not be any impact, while there are others who believe that there may be a certain hike in the renewable energy price.

“Although, 25% safeguard duty seems extreme at the first look, with the nosedive in the cost of imported Chinese modules, this would largely be set off. In fact, the developers' returns won't change as their landed cost would still be similar to what was earlier and in any case, most of them have a pass-through clause when it comes to safeguard duty in their Power Purchase Agreement (PPA). Similarly, we don't expect much higher prices in the bidding either, so the discoms and the consumers' interests are protected,” said Puneet Singh Jaggi, founder, Gensol Group.

On the other hand, rating agencies Icra and Crisil are of the view that there would 30 to 40 paise hike in per unit price.

“The minimum bid tariffs for solar power projects based on imported modules would need to rise to Rs 2.90 to Rs 3.20 per unit for a duty rate of 25% in the first year of imposition, compared with the Rs 2.44 – Rs 2.80 per unit bid tariffs seen over the past few quarters. Duty rates at 20% and 15% applicable in the second year would need slightly lower tariffs of Rs 2.80 to Rs 3.10 per unit for the same levels of equity IRR,” shows Crisil’s analysis.

Similarly, Icra’s report states that the increase in the capital cost for a solar power project by 15% would mean tariffs rising by about 30-35 paise per unit to maintain a similar level of returns for the project developers.

In April 2018, an amendment to bidding norms was made, allowing pass-through of changes in taxation, duties and cess from developers to the off-takers.

“Imposition of 25%-20%-15% of safeguard duty may not impact viability of solar projects under implementation. The Ministry of New and Renewable Energy through a memorandum in April 2018, had clarified that imposition of any duty can be covered under Change in Law clauses. This provides a mechanism under which relief may be available to projects under development. However, there would be some impact on the tariffs for projects that will be bid out in the future as they will not be eligible for set off for an increase in safeguard duty,” said Manish Kumar Gupta, director, Crisil Ratings.

Even if the recommended safeguard duty is levied, the question that arises is whether the Indian solar industry has the capacity to meet the increased demand? Annually, an average of 10 gw of capacity is needed to service the demand from the end user. Hence, the domestic industry will have to scale up their capacity which would take around 2-3 years. Till then, imports would continue, possibly from other countries that are exempted from the levy.

Currently, 11-12 GW of solar projects are estimated to be under construction in India

• 30 to 40 paise per unit Tariff increase
   
• Rs 2.90 to Rs 3.20 per unit  for a duty rate of 25% in the first year of imposition
   
• Rs 2.80to Rs 3.10 per unit for a duty rate of 15-20% during the second year of imposition
   
• 3,825 MW out of 8,898 MW installed capacity of solar modules is based within SEZ
   
• 2,000MW out of 3,164 MW of installed capacity for solar cells is based in SEZs