DISCOMs Could Look to Coal if Solar Tariffs Go Over ₹3.50/kWh Because of Safeguard Duty
The proposed safeguard duty would inflate project costs and crank up tariffs, making solar power less attractive to power distribution companies
The proposed 70 percent provisional safeguard duty on solar imports, if levied, has the potential to reverse India’s solar growth trajectory and send the wrong signal to the investment community and the rest of world by once again making solar more expensive than coal.
The uproar around the proposed safeguard duty started in December 2017 when the Indian Solar Manufacturers Association (ISMA) filed a petition with the Directorate General of Safeguards seeking the imposition of the duty on imported solar cells and modules from China, Malaysia, Singapore, and Taiwan.
The petition was filed on behalf of domestic manufacturers including Mundra Solar PV Limited, Indosolar Limited, Jupiter Solar Power Limited, Websol Energy Systems Limited, and Helios Photo Voltaic Limited. The companies claimed that they collectively manufacture more than 50 percent of the solar cells made in India and needed the Directorate General to immediately apply a four-year safeguard duty to protect them from low-cost imports.
The petitioners appeared to be moving closer to getting their wish fulfilled earlier this month when preliminary findings issued by the Directorate General of Safeguards Customs and Central Excise recommended the 70 percent safeguard duty be levied on solar cells and modules imported from China and Malaysia for 200 days.
But project developers have pushed back, citing the difficulties that the duty would cause for them.
Shapoorji Pallonji, a domestic project developer, recently approached the Madras High Court with a request for relief in the matter. The court deemed the petition worthy of consideration, and put a temporary stay on the imposition of any safeguard duty until February 2, 2018, after which the order is set to be reviewed.
The safeguard duty is the second trade case filed by solar manufacturers in the past 12 months. ISMA also filed an anti-dumping case in May 2017 against China, Malaysia, and Taiwan – the case is still pending. Further complicating matters is a controversial 7.5 percent port duty that is also now being levied on imported solar modules. Government intervention was needed on the port duty matter before many developers could get their modules released, but those developers are now stuck paying bank guarantees until the issue is resolved.
The cost of modules currently makes up roughly 55-60 percent of the total cost of solar projects. If the imposition of a safeguard duty raised module prices by 70 percent (depending on the tariff level imposed), project developers as well as engineering, procurement, and construction (EPC) contractors would have to increase their tariffs accordingly. These higher costs would ultimately have to be borne by the DISCOMs.
In a scenario where the project cost is approximately ₹45 million (~$0.70 million)/MW (cost estimates vary widely based on several variables), the imposition of a 70 percent tariff could cause project costs to shoot up over 35 percent to around ₹62.5 million (~0.98 million)/MW. This means that tariffs would need to increase accordingly for projects to be economically viable.
It is extremely difficult to envision that DISCOMs would be willing to procure solar at a cost of ₹3-3.50 (~$0.04-0.05)/kWh or more considering that the latest low bids for these projects fell in the ₹2.50 (~$0.03)/kWh range (the viability of a ₹2.50/kWh tariff is an entirely different topic). In fact, one of the major problems with the solar industry in 2017 was the PPA renegotiations that DISCOMs engaged in after tariffs fell below ₹3 (~$0.04)/kWh in the second quarter.
In an extremely cost-sensitive market like India, solar installation activity could decline drastically with a tariff increase of this magnitude. Installations where consumers directly purchase solar – like rooftop – residential, commercial, industrial, and open access projects – are expected to be the hardest hit. This comes at a time when the government is trying to incentivize DISCOMs to increase rooftop installations.
Expressing his disappointment with the safeguard duty recommendations, an executive with an EPC developer told Mercom, “This duty is preposterous, it will throw the entire sector off track. Imagine if project costs increased by around 40 percent. In such a scenario how will one be profitable?”
Another executive shared a similar sentiment with Mercom, saying “Sixty percent of project costs are comprised of the cost of modules. If module prices increase by 70 percent; the entire project cost will go up drastically. For example, take a project with an estimated cost of ₹5 crore (~$0.79 million)/MW. Now, add the safeguard duty to the module price. The project cost will go up by ₹2.1 crores (~$0.33 million)/MW or close to 45 percent of the project cost.”
Talking to Mercom, an engineer at ReNew Power suggested that project costs could shoot up by over 30 percent if the safeguard duty was levied. This would present a major hurdle for project developers and cause many of them to turn to inorganic ways of expanding their market shares, the engineer said. For smaller players, the safeguard duty would spell their doom because they lack the capital and borrowing capacities needed to adjust to changing module price trends.
Elaborating on how the imposition of the duty would inflate project costs, the engineer added, “On average, a MW-scale project costs about ₹5.5 crore (~$0.86 million). Modules account for approximately 50-60 percent of the project cost depending on project specifications. If a 70 percent safeguard duty is levied on modules, then the project cost will go up by ₹2.31 crore (~$0.36 million)/MW on an average.”
An executive at Suzlon told Mercom, “We are new to the sector (solar), but such a policy fluctuation has shocked us. How can a 70 percent duty be levied when there is no quality domestic manufacturing base to support the project developments? If this duty is levied, the project cost per MW will go up by a few crores. Where will the developer arrange the extra cost from? And here we are talking about hundreds of MWs, not just a few small pilot projects.”
While project cost estimates differ from developer to developer, generally the trend is clear. Projects costs and tariffs will go up 30 percent or more based on variables.
Concerns over high tariffs have already prompted Jharkhand, Uttar Pradesh, and Tamil Nadu to renegotiate PPAs. If the safeguard duty is imposed, it would result in rising module prices and create higher tariffs that would lead to a serious dearth of off-takers.
The ongoing trade uncertainties highlight how the contradicting policies of India’s government agencies are pulling the industry in different directions. While renewable energy agencies are working toward meeting the country’s goal of achieving 100 GW of solar installations by 2022, the “Make in India” initiative is driving the ministry of finance and the trade agencies toward a protectionist stance that would make it harder for the country to reach its renewables goal.
“The proposed safeguard duty would cause project costs to increase and ultimately make solar more expensive than coal. When the three-rupee barrier was first breached, DISCOMs began to procure more solar as it become cheaper. This trend will reverse with the safeguard duty,” said Raj Prabhu, CEO and co-founder of Mercom Capital Group. “DISCOMs are definitely not in a position where they can afford higher solar tariffs. They are simply going to slow down their solar procurement and look to wind to fulfil some of their renewable obligations. Coal power will start to look attractive again to DISCOMs.”
This move is not in tune with Prime Minister Modi’s climate change goals and plans to install 100 GW of solar by 2022. After the levying of an unexpected 7.85 percent port duty on panels, adding a 70 percent safeguard duty on top of that would bring the sector to a standstill. “This sends a message to investors that, in the Indian solar market, anything can happen at any time. That is not what investors want to hear,” said Prabhu.
When contacted, the officials at state-run DISCOMs declined to comment on whether they will procure solar at higher tariffs. The officials steered clear of any speculation, essentially saying, “Right now we cannot say anything as our decision depends upon the prices fixed by the state and the central regulatory commissions, it is binding for us. If something is said now, the sector can take it in many ways and then DISCOMs will be called in for questioning. Even now, the safeguard duty has not been imposed and no one knows what will be done to balance the cost. We cannot indulge in such market speculation right now.”
Moreover, it is unclear how the imposition of the proposed duty could hamper projects that are already being developed. An official at the office of the DG of Safeguards said, “As of now, the duty has not been levied and we are awaiting communication from other stakeholders. Once that is clear, only then can anything be communicated further.”
Recently, the Minister of Power and New and Renewable Minister R K Singh said, “Nothing can jeopardize India’s renewable energy target of 175 GW by 2022.” The minister has also given assurances that projects which were already bid out before the implementation of the proposed duty would not be affected during installation.
But all of these uncertainties are taking a toll, and Mercom expects 2018 solar installations to be lower than 2017 installations.
Prime Minister Narendra Modi recently spoke out against the protectionist policies of certain countries at the World Economic Forum in Davos. But India itself looks to be taking a protectionist stance when it comes to the solar industry and the pending trade cases. Now, the world is watching to see how these cases are resolved to determine India’s true stance on trade and solar.