In a key development this month, the central government has approved the imposition of basic customs duty (BCD) of 40 per cent on solar modules and 25 per cent on solar cells from 2022. While this would help scale up domestic solar equipment manufacturing, the move is expected to impact tariffs and power offtake by discoms. Power Line invited industry stakeholders to share their views on the impact of the move on the solar power segment as well as the key issues and concerns…
What is the likely impact of the imposition of BCD on imported solar cells and modules on the solar power industry? What are the key issues and concerns? What are the measures needed to promote domestic solar equipment manufacturing?
The Government of India has approved a proposal to impose a BCD of 25 per cent on imported solar PV cells and 40 per cent on imported solar PV modules with effect from April 1, 2022. As per ICRA, while this will support domestic equipment manufacturers (OEMs), it is likely to result in an increase in solar tariffs. However, clarity is needed on the continuation of safeguard duty (SGD) on imported cells and modules, which is currently at 14.5 per cent and is valid until July 2021. Thus the imposition of BCD is expected to increase the capital cost of solar power projects by 23-24 per cent, as per ICRA. This, in turn, would result in an increase in tariffs by 45-50 paise per unit. Nonetheless, the bid tariff trajectory is likely to remain well below Rs 3 per unit and thus would continue to remain cost competitive from the offtakers’ perspective. For state-owned utility offtakers, the average power purchase cost and variable cost of power purchase (bottom 25 per cent in merit order despatch) remain in the range of Rs 4-Rs 5 per unit and Rs 3-3.50 per unit, respectively, in many states.
For a project already bid out and having scheduled commissioning date post April 2022, wherein modules may be imported post this date, the levy of BCD is expected to be a change-in-law event under the power purchase agreement (PPA). In such cases, the timely approval by respective electricity regulatory commissions and pass-through of the tariff increase to offtakers would be critical from the cash flow perspective for project developers. Given the expected increase in solar tariff rates, the timely signing of PPAs and power sale agreements (PSAs) are also highly important in the near term.
The imposition of BCD on imported solar cells and modules is expected to improve the competitiveness of domestic manufacturers. However, the extent of benefit would also depend on the imported PV module prices, especially from China. Based on the imported module price level of 18 cents per watt and the prevailing INR-USD exchange rate, domestic modules are costlier by 12-15 per cent without factoring in BCD. The imposition of BCD would bridge this gap and make the modules from a domestic manufacturer (using imported cells) competitive vis-à-vis imported modules. The extent of benefit would be higher for manufacturers having backward integration into cell manufacturing. A large portion of the solar module as well as solar cell manufacturing units in India are currently located in SEZs. In this context, clarity is required on the applicability of BCD on manufacturers located in the SEZs. This apart, the government has notified multiple schemes such as the manufacturing-linked IPP tender, central PSU scheme and PM KUSUM scheme with mandatory use of domestically manufactured modules that provides a strong order pipeline aggregating 35-40 GW over the next three to five years for domestic solar OEMs. However, timely implementation of these schemes, along with policy clarity on fiscal and financial concessions, including the production-linked incentive scheme to promote domestic manufacturing, remains important.
In order to promote domestic solar cell and module manufacturing in India and reduce the dependence on imports, the Ministry of New and Renewable Energy (MNRE) has proposed the BCD structure with effect from April 1, 2022, of 40 per cent on solar modules and 25 per cent on solar cells. This is without grandfathering of the bid-out projects.
With the introduction of the BCD regime, solar power tariffs are expected to increase by 25-30 paise per kWh in case only solar cells are imported and by around 40-45 paise per kWh in case modules are directly imported. As a result, capacity utilisation of existing domestic manufacturers is expected to get a fillip. India has set an ambitious target of achieving 175 GW of installed renewable energy capacity, including 100 GW of solar power, by 2022. At present, the solar power sector in India is heavily dependent on imported solar cells and modules, considering that the country imports 80-90 per cent of solar equipment from China, Malaysia, Vietnam and Thailand. As on March 10, 2021, the solar project pipeline stood at around 53 GW and the projects are expected to be implemented over the next two to three years. Currently, there is a 14.5 per cent SGD applicable on the import of solar cells and modules from China, Thailand and Vietnam valid till July 2021. As the BCD would be applicable from April 1, 2022 there is lack of clarity regarding the duty applicable from August 2021 to March 2022.
The MNRE provided clarity about the duty structure almost a year in advance which is a welcome step. However, as the effective levy will increase from April 2022, the majority of developers are likely to try and push their project completion timelines to before end of March 2022. The sudden surge in the demand for imported cells and modules could result in an increase in their prices in case there are insufficient supplies. Any unforeseen rise in solar cell and module prices would be challenging for developers as the bid-out tariffs are highly competitive.
According to the MNRE, India has a limited domestic solar manufacturing capacity of about 3 GW for solar cells and 15 GW for solar modules. However, the capacity utilisation of domestic manufacturers is 40-45 per cent. For a long time, the domestic solar cell and module manufacturing industry has been seeking a clear BCD structure, however, this demand is still not fulfilled, as there is no clarity on the period for which BCD will be applicable. Earlier, it was expected that the BCD structure will have a clause for grandfathering of the bid-out projects. However, the proposed BCD structure would be applicable without grandfathering of the bid-out projects, and accordingly, projects which are scheduled to achieve commercial operation by March 31, 2022 but fail to do so for some reason will not be entitled to change-in-law compensation and this would have a direct impact on the returns and debt servicing capability of those projects.
Projects which are already bid out and scheduled to achieve their CoD after April 1, 2022 should be eligible for change-in-law compensation but it is a lengthy process to get the change-in-law compensation. Also, it would, in turn, increase the power cost for offtakers.
Measures required to promote domestic solar equipment manufacturing: The country needs to make massive investments in research and development in the renewable energy sector, supported by capital grants, subsidies and tax exemptions. This might enable the industry to manufacture components across the solar manufacturing value chain with highest quality standards at low costs. At present, India does not manufacture the ingots and wafers required for solar cells. The domestic solar sector can become more effective by going down the value chain and manufacture the raw materials instead of importing them.
Efforts should be directed at providing subsidised land, which would serve as a cost advantage to domestic manufacturers. Also, the cost of debt in India is 10-12 per cent, which is very high when compared to the 3-5 per cent in China. Interest subsidy for manufacturing to enhance investment in the initial years could be considered. Solar manufacturing parks need to be established. This may help private players to set up manufacturing units at a greater pace.
The high level of duty would inevitably slow down growth. The 40 per cent duty level would be compounded by 10 per cent social welfare surcharge, raising the effective level of duty to 44 per cent and increasing solar tariffs by about Re 0.52 per kWh. The extra cost would not be welcome by discoms particularly when they are already reluctant to purchase vanilla solar power. The duty improves the relative cost attractiveness of wind and solar-wind hybrid power. Higher cost would dampen long-term growth prospects in rooftop solar and open access solar although there would be a temporary demand boost around the first half of 2022 to avoid the BCD burden.
While “change-in-law” provisions are enshrined in most PPAs now, the proposed compensation increase of Re 0.005 per kWh tariff for every Rs 100,000 per MW increase in the project cost leaves project developers slightly out of pocket. On the flip side, discoms would be even more reluctant to sign PPAs for nearly 18,000 MW of project capacity tendered in the past year – at tariffs ranging between Rs 2.36 and Rs 2.92 per kWh because of the extra change-in-law cost. As a trade barrier, BCD does little to improve cost competitiveness of domestic manufacturing. Lack of domestic supply chain and the dependence on imported technology mean that India’s self-sufficiency hopes would remain elusive for the foreseeable future. We expect 10-12 GW of module manufacturing capacity to be developed over the next three years. Interest in solar cell and other upstream manufacturing is expected to be significantly lower because of higher capital cost and technology risk (and lower duty).
The imposition of BCD would be in breach of the information technology agreements signed by India under the WTO framework. The government seems aware that the decision may be challenged by China, the US and other countries but it is banking on the dispute resolution process to take many years.