Costlier solar power a fallout of India-China border clash

In early July 2020, Raj Kumar Singh, India’s minister of power, said that state-owned companies would no longer import solar energy equipment from China. In addition, a mix of tariff and non-tariff barriers are being planned to discourage imports from China by other companies.

This came just days after a bloody border clash between Indian and Chinese troops.

Singh had earlier expressed concern about high imports of solar panels and inverters, especially from China, and said they were a “cause for concern in the renewable energy sector”.

India imports 8,000-10,000 megawatts of solar modules each year, of which close to 90% is from China.

Solar cells and modules are currently exempt from basic customs duty (BCD) on imports. However, they face a 15% tariff called safeguard duty, meant to protect domestic manufacturers from dumping (when manufacturers export a product to another country at a price below the normal price).

This safeguard duty is scheduled to end this July. In its place, the government plans to impose a BCD of anything between 20% and 25% on imports of solar equipment, intending to raise it to 40% next year.

Imports from China for solar projects will be exempt from this high additional cost if electricity providers and power purchasers sign Power Purchase Agreements (PPAs) before August 1.

Hitesh Doshi, chair of the All India Solar Industries Association – a group of domestic manufacturers – said solar project developers being exempt from BCD on Chinese imports will result in India losing nearly INR 50,000 crore (about USD 6.7 billion).

“We are happy the government is taking measures to promote domestic manufacturing. But at the same time, it will have to address challenges which the domestic manufacturers are facing due to lack of clarity on the policy front and delay in implementation of duties,” Doshi added.

Impact on domestic manufacturers

Bharath Jairaj, director of the energy programme at the India branch of think-tank the World Resources Institute, said imposing BCD would ease the way for domestic manufacturing. However, he said, some manufacturers think it is inadequate and may not have the desired effect.

“The industry demand is, I think, a 50% customs duty and this will result in a price increase for new projects. Those that are already bid out may not be impacted. Also, even if it does happen, ramping up of domestic manufacturing is unlikely to happen overnight and may need additional policy support,” Jairaj told The Third Pole.

According to Jairaj, the 15% safeguard duty has not had as much of an effect on domestic manufacturing capacity as was expected. “What we saw was some developers shifting to imports from other countries. Other developers chose to pass on the additional duty to end-consumers, through tariff revisions. Given the current sentiments, we may see this safeguard duty extend beyond July. Overall, while the share of China’s cells and modules import in India is reducing, it is still a significant chunk of the market.”

Downsides of higher tariffs

Auctions for solar projects are held through government-owned Solar Energy Corporation of India (SECI) and National Thermal Power Corporation (NTPC). Their tenders have a clause that insulates a bidder from changes to import tariffs. Power producers can pass on additional costs to their buyers – the distribution companies (discoms) owned by various state governments.

Vinay Kumar, founder and chief executive of solar power developer Varp Power, pointed out what this means: solar power will cost more. Reluctant discoms have slowed down on signing PPAs. Kumar said PPAs for auctions held last November are being signed now, with projects being delayed as a result.

Kumar said he felt changing the tariff from 15% (safeguard duty) to 20%-25% (expected BCD) was a marginal increase.

Jairaj of WRI felt increased tariffs would finally be passed on to consumers. “At a time when solar PV prices are reducing the world over, increasing end-consumer tariffs presents an anomaly. Consumers who have been reading about the fascinating reduction in solar PV costs will expect that the low-cost clean energy benefits would be passed on to them.”

Can Indian manufacturers step up?

Charmaine Sharma of green technology company Observing Ecotech said that India does not have the manufacturing capacity to meet the current demand. “This capacity must be built and incentivised, so that entrepreneurs get into this sector. Increased taxation on Chinese imports will only hurt our own market growth until we can manufacture goods at the prices and efficiency currently available,” she told The Third Pole.

Jairaj concurred. “Without additional support for the broader sector, it is unlikely in this period of economic downturn and pandemic-related restrictions, that the customs duty increase alone will catalyse domestic manufacturing. For this to happen, India may need to explore additional support and incentives on both supply and demand sides.”

Legislative uncertainty

Kumar pointed out that India is a signatory to the Information Technology Agreement (ITA), which is enforced by the World Trade Organisation. The ITA commits 82 countries to zero taxes and tariffs on information technology products, including solar cells and modules. “So far, we are not in breach of the ITA since BCD has been zero for a long time. Any attempt to increase the BCD will mean breach of the ITA. So, it’s coming at a cost and we are backing off from the commitment made in the ITA – this is a policy hurdle that the Ministry of Finance will have to face next month when they decide on increasing the BCD. We expect them to go ahead, nevertheless.”

The government can get out of this problem by not imposing a customs duty but extending the safeguard duty instead. India’s Directorate General of Trade Remedies (DGTR) has recommended the extension of the safeguard duty for a year.

China was already on the list of countries that would face safeguard duty on solar imports. Now the DGTR has recommended that Thailand and Vietnam be added to this list, while Malaysia (where India also imports solar equipment from) should be dropped.