Taxing times for solar power as govt frowns at imports, pushes local

A new tax on solar equipment imports plus mandatory purchase of local modules will raise costs significantly and dim the outlook for meeting green energy targets

Will the Modi administration’s quest for “atmanirbharta”, aka self-sufficiency, take the shine off India’s solar goals?

India needs $225-250 billion in investments over the next eight years to add around 350 Gw of additional renewable energy capacity and meet the ambitious climate goals, Moody’s reckons. It’s a sprint, not a marathon.

But the Indian government has turned what should be a dash to the clean energy goalpost into a hurdles race by refusing to postpone a new tax on imports of solar equipment, and coupling it with mandatory purchase of local modules.

Installations are slowing. Soaring costs will affect returns on 5 Gw of solar projects, Manish Gupta, senior director, CRISIL Ratings, said in a recent note. These projects, a tad less than 10 per cent of current solar capacity, were bid at relatively low tariffs of below Rs 2.35 per kWh during the pandemic, when module rates were benign and Ukraine was free.

Gupta is yet to factor in new import duties imposed on modules and cells into his calculations because these projects were grandfathered from the latest levies. In the case of new projects, return on investment will dip further.

India, which aims to triple its renewable energy capacity to 500 Gw by 2030, imports around 90 per cent of its cells and modules from China, a figure that will not change dramatically, because it will take at least three years for Indian producers to build capacity.

“The key enabler will be the competitiveness of wind and solar generation over coal-fired power because of supportive government policies and private sector participation,” said Abhishek Tyagi, a Moody’s vice-president, in a note.

Far from being supportive, government policies have turned regressive and protectionist, industry officials say, pointing to a 40 per cent import tax on modules and 25 per cent on cells from April 1. Tagged along was a list, comprising only Indian manufacturers that solar developers must source their equipment from.

On the one hand, the Modi government — after failing to meet a 175-Gw renewables target by this year despite a benign pricing environment and liberty to import — announced a mega renewable goal of 450 Gw; on the other, it placed several tariff and non-tariff import barriers to cut imports and build local manufacturing, eroding the competitiveness of solar and wind as energy sources. In doing so, it also ignored pleas by the Solar Power Developers Association that the new duty will sound the death knell for developers.
 

The additional custom duty is also expected to increase capital costs by 20-25 per cent on an average leading to an increase in tariffs of up to 30 paise/kWh, said Hetal Gandhi, director, CRISIL Research. The additional taxation and inadequate availability of domestically produced photovoltaic (PV) components will help over the long term but will cause short-term hiccups, she added.

India may add only half of the 35-40 Gw solar capacity annually required to meet the target, industry officials said. The 2030 timeline has become even more imperative after the current power crisis. Blackouts will continue as India’s demand for electricity grows amid a shortage of coal, and the administration’s antipathy towards imports. The Modi government’s plan to reach net-zero emissions by 2070 also revolves around a shift to clean energy because coal-fired plants are the biggest emitter of greenhouse gases.

The government had burnt its fingers, once earlier, when, in July 2018, it introduced safeguard duties on solar PV cells to protect domestic makers from imports. That led to a sharp increase in module costs, which sent tariff bids higher for solar projects compared to record lows in 2017. Tendering agencies cancelled nearly 5 Gw of project awards because the bid-based tariffs were very high. Imports did not decline, either.

This time, the government laid fiscal incentives on top of protectionist policies — under a Rs 240-billion production-linked incentive scheme (PLI) to lure Tata, Adani, Jindal and Reliance to build integrated solar factories. The government expects production capacity to rise over threefold from 15 Gw, geared to produce mainly modules. Over half the PLI allocation is earmarked for end-to-end manufacturers, from polysilicon to modules.

Restrictive trade measures by India, including increases in import duty on solar equipment, increase input costs for solar power generation, Moody’s said. It expects solar and wind tariffs to move higher to Rs 2.7-3/kWh from Rs 2.3/kWh during 2019-2020.

Smaller developers are susceptible because unlike larger renewable companies they lack large financial investors as key sponsors, Moody’s said. That in turn hurts installation of rooftop solar, and non-utility projects, a shortage of which made India fall short of a 175-Gw renewable goal.

Imported modules are of 550 W capacity but modules of the same size by Indian makers generate less than 400 W. It’s a cost issue, reliability issue, technology issue and an efficiency issue, said an official from a small solar developer.

The current ill-timed duties come on top of soaring material costs of steel, polysilicon and freight. A shortage of shipping containers and high polysilicon prices, a raw material for solar modules, has sent landed costs of modules, which constitutes as much as 60 per cent of project costs, higher by 40 per cent from last January 2021, CRISIL estimates.

Module prices have nearly doubled in the last 18 months, and will rise further after the imposition of customs duty, an official from Avaada Group, a renewable project developer, said at an event. Prices will be sticky because large domestic capacities will take three years to come on stream.

Soaring prices of key metals used in solar panels or wind turbine manufacturing could

delay 100 Gw of contracted renewable capacity, the International Energy Agency warned in December. Higher costs alone will push down returns for investors in a fifth of the 25 Gw solar projects awarded by 140-180 basis points to 7 per cent, Gupta said.

Marquee investors including SoftBank, Singapore’s GIC, BlackRock, Goldman Sachs, Abu Dhabi sovereign fund, Canada Pension Plan Investment Board and French oil major Total invested billions of dollars in companies including Greenko Energy, ReNew Power, Azure Power, Tata and Adani on the promise of good, steady returns. That requires a steady policy hand, not flippant policies.

The government’s goal to encourage domestic production and innovation while creating quality jobs is laudable, but policies cannot be at cross purposes. In this case, given New Delhi’s reluctance to review its decision, renewables may be the loser. So will returns for investors.