Focus on renewable energy with a growing solar sector has contributed a lot to India’s progress on the path of sustainability. Like any other sector, the cost component forms a core priority for the sector. SECI recently cancelled all but just one tender of lowest price at Rs 2.44/kWh of 600 MW, in an auction of 3000 MW, leaving the remaining 2400 MW allotment cancelled. It was reported that the government found the other prices to be ‘highly expensive’, where the difference between the lowest and the second lowest bid was 20 paisa.
With this strict a focus on costs, the recent judgment of the Supreme Court (SC) on imposition of a safeguard duty on import of solar panels and modules from China and Malaysia has divided industry opinions on the exact benefits to the sector. While on one hand the duty, which is intended to be phased out in two years is expected to benefit the domestic solar manufacturing landscape, many fear that it might actually result in more harm than good.
While recognising the need to protect local manufacturers, the industry fears an increase in costs for solar developers, leading to a rise in power tariffs. In fact, credit rating agency ICRA has predicted a rise of 15% in capital cost for solar power projects following imposition of the duty. High tariffs are expected to discourage discoms from buying solar power, likely to lead to an increase in cancellation of tenders. Previously, uncertainty around duty decision resulted in delay on projects, having substantial impact on the overall profitability of the project. With such expectations, announcement of the duty will only add to the woes, serving as an impediment to progress of the sector and hurting domestic manufacturers’ business, rather than facilitating it.
Furthermore, another troubling dimension of the duty is that no exemption has been provided for Special Economic Zones (SEZ) based manufacturing units. Due to the facilities and infrastructure available in such zones, they form the hub of domestic solar manufacturing in India. SEZs house about 40% solar panel manufacturing units, and 60% solar cells manufacturing units in India. The duty will increase the production cost for these units leading to a rise in prices, causing a fall in demand. This will trigger a chain reaction leading to a fall in the number of installations, forcing units to move out and also affect employment numbers.
There is a huge ongoing debate on how the duty can actually lead to job losses and not create the opposite. In India, project implementation forms the main driver of local job creation in the solar sector. The canopy of project implementation involves low skilled as well as high skilled workers, contributing to capability development and creation of economic and social value. A fall in capacity addition or commissioning of projects will therefore definitely be expected to have an adverse impact on employment generation.
The said duty is a result of a complaint being filed by domestic manufactures with the Directorate General of Trade Remedies (DGTR) on invasion by cheap imports in the market, believed to be hampering local business prospects. While it led to preliminary order of a provisional duty by the DGTR, it was stayed by the Madras High Court first and then further by the final order by the Orissa High Court. The SC however, lifted all stays and passed the order to implement the safeguard duty on 10th September 2018.
Import data demonstrates both, a rising import value as well as a dominant country share of China. While India’s import value of solar cells/ PV cells from China stood at USD 3418.96 million for 2017-18, country share of China in the import basket for the said commodity has also been increasing to attain a dominant share of 89.1% . The low cost of Chinese imported modules is the key reason for the apparent bias in the market. The cost of Indian non-Domestic Content Requirement (DCR) modules is typically about 10% more compared to Chinese modules. The World Trade Organisation (WTO) defines DCR as a “requirement that the investor purchase a certain amount of local materials for incorporation in the investor’s product”. Similar to a safeguard duty, the main aim of DCRs is to ensure that investments in the country benefit local economy, by protecting the infant industry and encouraging foreign firms to manufacture locally or outsource production to domestic firms. Under the JNNSM , DCRs were introduced to promote local manufacturing of solar PV in India. In Phase 1, it was mandatory for projects based on crystalline silicon (c-Si) technology to use domestic modules. In Phase 2, this requirement was extended to the use of domestically manufactured cells as well as modules. It was expected that the use of local inputs will bring down the cost of Indian solar modules in comparison to the world market. However, with limited local manufacturing capacities in India, Chinese modules have been found to cost much less than not just the modules without the DCR clause, but even the DCR compliant modules in India . Solar module costs form a critical share of about 60% in the total project cost. A price differential thus commands a cost benefit analysis for firms and investors to ensure an effective deal.
The DCR scheme in India was not a significant contributor to either improvement in competitiveness or job creation. It actually distorted the market towards thin-film solar cell technology when the domestic manufacturing capacity for the same was limited, restricting employment prospects . The end result was eventual scrapping of DCR due to the World Trade Organization (WTO) ruling in favour of USA under a case filed by the latter.
The high price of domestic modules traces to a huge gap that still exists with respect to the operational and technological capabilities between the local and foreign solar markets . Domestic manufacturers in India operate with limited domestic capacities both, with respect to technological as well as financial aspect, relying on imported technologies to produce their own finished products. This is further bolstered by the corresponding low export figures. The balance of trade for solar cells for 2017-18 stands at a deficit of USD 162,054.8 million, with total import and export values standing at USD 465,581 million and USD 303,526.2 million, respectively.
A safeguard duty to limit lost business to imports can prove detrimental in the long run in a scenario of low productivity potential in the sector. Past studies demonstrate failure of such measures when industry is sheltered from competition or is given protection to offset high costs. On the other hand, measures that succeed contribute to realization of economies of scale and ultimately expose the sector to competition, balancing the incentives provided .
Furthermore, different components of the solar story of India have not been following equal pace of growth. Rooftop solar has not achieved stipulated targets in past and has been lagging behind. These installations are highly cost sensitive projects, with an increase in project cost considerably reducing the rate of installations. With the pace only recently picking up, imposition of the duty may slow down growth. Slowing down the accelerating pace of development in the solar sector, with numerous dedicated efforts being implemented for greater propagation of renewable energy in the country, does not seem to be a favourable move. The duty is expected to require a certain amount of time to negate the initial preliminary effects to bring the market back to its original point. However, a two year duty still cannot be expected to provide enough time for domestic manufacturing to find its feet, and also develop the capabilities and efficiencies needed to compete in the international market.
There is no doubt that the local sector is suffering, but while the idea is to provide support to the local sector for its upliftment, the need is also to recognise the necessity of capacity building to accelerate productivity growth. A safeguard duty with development of additional support infrastructure can be expected to have a higher success rate and achieve effective results. This in turn requires a policy focus on a host of other factors such as financial limitations, facilitation of high end technologies, awareness programmes, skill development and training workshops etc.
The future of electricity in the country rests on the pillars of affordability, sustainability and energy security. With rising demand of energy, these components command equal focus to ensure a secure and sustainable future. Prioritising one at the cost of another will only create dis-balances, requiring corrections in the future. It is not hard to then miss the rise of a vicious cycle of more corrections to be catered to, deviating from the fundamental process of securing the energy usage in the country in the first place.
 Solar Energy Corporation of India (SECI)
 Photovoltaic cells
 Department of Commerce, 2018. Import Export Data Bank
 Jawaharlal Nehru National Solar Mission, changed later to the National Solar Mission (NSM)
 Mercom India, 2017. Can Domestic Manufacturers Capture a Larger Piece of the Growing Indian Solar Market?
 CEEW-NRDC, 2014. Solar Power Jobs: Exploring the Employment Potential in India’s Grid-Connected Solar Market
 Bridge to India, 2017. Trade Barriers alone unlikely to pole vault domestic manufacturing
 Sahoo, A. & Shrimali, G., 2013. “The effectiveness of domestic content criteria in India’s Solar Mission”. Energy Policy, Volume 62, pp. 1470-1480.