Safeguard duty to jack up solar tariffs by 35 paise, dent solar’s competitiveness: Experts
While the duty would increase the competitiveness of domestic manufacturers, the benefit is likely to be limited due to the recent fall in imported PV module prices owing to policy changes in China
New Delhi: The government’s latest decision to levy safeguard duty on solar cells imported from China and Malaysia is likely to jack up capital costs of solar power projects by 15 per cent resulting in a 30-35 paise per unit increase in electricity tariffs for such projects, experts say.
While the duty would increase the competitiveness of domestic manufacturers of solar cells and panels, the benefit is likely to be limited due to the recent fall in imported PV module prices owing to policy changes in China. Also, with the levy imposed for a short duration of 2 years, it may not lead to any significant increase in domestic capacity, according to experts.
Tariffs for supply of electricity from solar power projects bid out in the current year so far have remained below Rs 3 per unit – between Rs 2.44 and Rs 2.75 per unit – with expectations of low module prices going ahead on the back of China’s recent policy changes.
“The imposition of safeguard duty is likely to increase the bid tariffs to Rs 2.9–3.1 per unit for the upcoming bids. For the projects already bid out, the amendment to bidding norms approved in April 2018 allowing pass-through of changes in taxation, duties and cess would allow the developers to pass through the tariff increase to the off-takers,” said Sabyasachi Majumdar, Group Head of Corporate Ratings at ICRA.
The increase in capital cost for setting up solar power projects due to the safeguard duty also means solar becomes less competitive as compared to wind power which averaged Rs 2.80 per unit in financial year 2017-18 and has also witnessed tariffs as low as Rs 2.43 per unit recently.
“However, overall capacity additions may not be materially impacted as cost competitiveness of solar with other sources, barring wind, remain high, though there could be some near-term delays in project implementation,” said Rahul Prithiani, Director, CRISIL Research.
More than 90 per cent of the solar panels and modules used in Indian solar projects are sourced from China and Malaysia. The Directorate General of Trade Remedies (DGTR) under the commerce ministry had recommended the imposition of 25 per cent safeguard duty on solar panels from these two countries about a fortnight ago for one year, followed by 20 per cent for the next six months and 15 per cent for another six.
The recommendation came on the grounds that such imports were causing “serious injury” to domestic solar manufacturers. The duty comes into effect from July 30.
The domestic industry body representing solar power producers, Solar Power Developers Association (SPDA), said the duty is not a very welcome step for the solar sector in the long run and it has requested the government for exemption from payment of duty for projects already closed.
“This would provide relief to the industry to an extent since these projects were allocated at the tariffs discovered under the competitive bidding process and would not be able to absorb the additional cost burden. As a result, the overall economic viability of these projects would get affected,” SPDA Director General Shekhar Dutt said.
Responding to the development, Gagan Vermani, Founder and Chief Executive Officer (CEO) of solar rooftop firm MYSUN said the duty could impact project financials going ahead. “A 25 per cent duty over solar panels which account for nearly 55 per cent of the solar project cost will completely derail the project financials. The tariffs for the ongoing solar tenders are expected to increase if bidders bid with financial returns as the basic criteria to win for projects,” he said.
Vermani added bidders for projects would seek clarification whether they would be compensated for this duty. “The problem is that two years is such a small window for any serious manufacturer to make long term investment plans. This move, therefore, is likely to help only a handful of manufacturers,” he said.
Solar PV panels manufacturer Waaree Energies said it welcomes the move to impose the duty but, since the duty now applies only to developed countries, China and Malaysia, the authorities would need to be vigilant towards imports from other developing nations.
“If we fail to monitor such movements, history will repeat itself, with India becoming a dumping nation for solar equipment, only from a different source. With the growth in demand and economies of scale, it is imperative to protect the interest of domestic manufactures,” Waaree Energies’ Director Sunil Rathi said.
Solar power projects of around 25-30 Gigawatt capacity are likely to be bid out in India over the next year as against the domestic manufacturing base of a mere 3-4 Gw. The industry, therefor, expects imports to continue even as tariffs move in the 25-30 paisa per unit range.
According to India Ratings analyst Arindam Som, the previously proposed duty of 70 per cent on solar imports was extremely high and the current quantum is a far better way to levy the solar duty to promote import substitution. “Many of the Chinese and Malaysian players might look to set up manufacturing facilities outside their countries. They can also prefer India to set up their manufacturing units in order to get government subventions on domestically manufactured solar cells,” he said.
Indian Solar Manufacturers Association (ISMA), on whose petition the duty investigation was initiated, said the developers should respect the government’s decision as the quantum of protection is very limited for solar cell manufacturers.
“A 15-20 paisa increment in tariff will not be a big difference to the business as the thermal tariff is around 3.20 paisa. This duty is on the lower side as compared to the 70 per cent assumption made by Directorate General of Safeguard which has now become DGTR. The government has set a target of 100 Gw solar capacity by 2022. Close to 25 Gw of this has been already achieved. Around 75 Gw of imports from China would be too much,” Rahul Gupta, General Secretary, ISMA said.
Solar modules comprise around 60 per cent of the total project cost. Imported modules are typically around 10 per cent cheaper than domestic ones. India imported solar cells and modules worth around Rs 17,000 crore last financial year (2017-18). The Director General of Safeguards (DGS) had in December last year proposed to impose a provisional 70 per cent safeguard duty on solar cell imports for 200 days, acting on an application by ISMA.