Proposed safeguard duty on solar cells to increase tariffs to Rs 3.30/unit from lowest bid tariffs of Rs 2.44/unit

Around 3000 MW - 4000 MW of projects auctioned in 2017 to be impacted negatively.

Indian government's proposal to impose a 70% safeguard duty on solar cells and modules from China and Malaysia is likely to increase power tariffs to Rs 3.30 per kWh, an increase of 35% from the lowest bid value of Rs 2.44/kWh. The increase will have a negative impact on power producers who have signed low cost power purchase agreements and may further stall under-construction projects for which all the required solar panels were not imported. Experts believe around 3000 MW to 4000 MW of new capacity, auctioned in 2017 will be impacted due to the proposed safeguard duty as solar cells and modules account for 60% of the total project cost. Read On...

These power producers will also have to shell additional equity on any capital expenditure, since it would be difficult to raise new debt until any benefit of the change in law clause is obtained.

"EBITDA margins of domestic panel manufacturers can improve 7%-8%, if they are able to pass on a 10% increase in panel prices without a commensurate increase in its cost," Ankur Agarwal, senior analyst with India Ratings said.

At present India imports around 90% of its cells and modules requirement at an average price of Rs 30 million/megawatt peak (Mwp) to 32 million/MWp, which is cheaper in comparison with the domestic procurement cost of Rs 40 million/MWp to 42 million/MWp.

"With the proposed duty, this cost arbitrage gap will shrink, resulting in domestic cell and module manufacturers becoming more cost competitive, provided they develop the capability to manufacture cells and modules by importing polysilicon and wafers, which almost have non-existent production capacity in India," Agarwal said.

At present, there are 55 domestic solar panel manufacturing plants, of which 15 are non-operational. Capacity utilisation of the domestic manufacturers stands low at around 53% due to intense competition from imported cells and modules.

The All India Solar Industries Association has also said that the levy will badly impact solar manufacturers operating out of the Special Economic Zones (SEZ) across the country.

The SEZ units are treated on par with foreign manufacturers and any hence any Safeguard duty will be detrimental to the Indian solar industry as a whole, said Gyanesh Chaudhary, general secretary of All India Solar Industries Association (AISIA) and managing director of Vikram Solar.

AISIA, however, made a strong case for specific anti-dumping duty on imports from China which is flooding the Indian market with its cheap solar modules making domestic industry unvialble.

If we take the case of Solar Modules and Cells, India has 3100 MW of installed capacity of solar cells out of which 2000 MW, more than 60% is situated in SEZs. “It should be noted that out of 8.3 GW of Solar Module Manufacturing facilities of 3,800 MW are situated in SEZs. Hence, the indigenous manufactures situated in SEZ will come under the ambit any blanket duty that will be imposed on solar cells and modules which will make them uncompetitive,” Chaudhary said.

The under performance of the domestic solar industry can be majorly attributed to lack of manufacturing base for polysilicon and wafers, the upstream stages of solar photo voltaic manufacturing chain, use of outdated technology, high cost of production due to higher interest rates and restrictions on domestic content requirement-based projects as per the World Trade Organisation’s order released in October 2016.

Domestic demand grew 7 times over FY14-FY17 with clear reliance on imported solar cells and modules. Discouraging imports by imposing heavy duty could disrupt capacity addition in the short-term and increase the solar power tariffs, until the domestic panel manufacturing industry scales up. This can delay the government’s target of adding about 10,000 MW solar capacity year on year by two to three years to reach the overall target of 100,000 MW by FY22, said Anmol Jaggi, founder of Gensol Solar.

However, government expects these measures will improve domestic manufacturing of solar equipment across the value chain.

The Ministry of New and Renewable Energy has proposed a number of incentives for promoting indigenous manufacturing of solar equipment. These includes restructuring domestic content requirement to include early stages of equipment development and upward integration, capital subsidy for new capacities / upgradation to the extent of 30%, interest subvention of 3% for loans taken from nationalised banks, thus supporting public sector units such as NTPC Limited, Central Electronics Limited and Bharat Heavy Electricals Limited to set up 1000 MW polysilicon module manufacturing facility each.

MNRE believes the migration to indigenous development from import dependency in the medium-to-long term will provide further stability to solar tariffs because the domestic industry will be more competitive to its foreign counterparts and will insulate against price volatility. Furthermore, it also reduces foreign exchange risk.

"The existing cost structure of the domestic manufacturers has some buffer to absorb such shocks. An increase in capex due to an increase in landed cost of modules, additional equity (or debt, or a combination of both) may be required until the change in law consideration is applied. Although some of the large developers may have the capacity to infuse additional capital, it may impact rating on account of temporary stretch in the cash flows. There may also be a possibility for foreign players to set up greenfield projects to manufacture solar cells in India for domestic supply in the medium-to-long term,” Agarwal of India Ratings said.

Experts however opine, the change in law clause in power purchase agreements may entail legal arbitration, further delaying power generation and deterring investors from solar sector. The proposed safeguard duty will be imposed only on solar cells and modules barring polysilicon and wafers in the value chain, incentivising panel manufacturers to import wafers, and produce cell and modules indigenously.

- TradeBriefs Bureau -