Solar developers in India are facing two important dates – the safeguard duty (15%) set to end on July 29, 2021, and the basic customs duty (BCD) of 40% on solar modules and 25% on solar cells that starts from April 1, 2022.

There is a duty-free period of nine months in between, which is crucial for developers to take advantage of to procure solar modules. But it is not turning out to be that simple.

Mercom spoke with solar developers and manufacturers to understand how the post and pre-BCD implementation period will impact their businesses.

Will developers ramp up procurement before the BCD kicks in?

Many from the industry noted that there is no encouragement for developers to buy cells and modules at this point, especially from the BCD perspective.

Gajanan Joshi, who heads project development in Asia for the German company WattKraft Solar GmbH, which develops solar projects in Europe, Africa, and Asia,  said, “Developers would have imported cells and modules before BCD kicked in, provided there was a decreasing price trend. But the prices are going up, and my interactions with Chinese manufacturers indicate they are certain about prices going up but not sure how much. Even if the price goes down, it would be negligible. As far as Indian developers are concerned, buying cells and modules now could be counterproductive.”

According to Joshi, even if the prices drop, shipping would take significant time. Besides, the Chinese will sign contracts with the Indian developers only if the terms of the agreement are favorable to them.

A few others, however, added that developers would try to make the most of the duty-free window as projects before the BCD announcement would qualify for the ‘Change in Law’.

Vice President of Fortum Solar Manoj Gupta said, “Most developers will plan to procure modules before BCD kicks in as it is less likely that the bids finalized before the BCD notification will qualify under ‘Change in Law.’ The government has deliberately given a six-month window to procure the modules without BCD or safeguard duty.”

While several developers were hoping to benefit from the duty-free window, certain market trends have allegedly upset the plans.

BCD compensation under the ‘Change in Law’ clause

Commenting on the matter, P. Vinay Kumar, Founder, and CEO of Varp Power, opined, “Many have timed their orders to fall in this window. Two developments, however, have upended this expectation. The first has been the steep rise in the price of modules, which has neutralized most of the benefits that would have otherwise accrued from a mere lack of safeguard duty. Another main reason is that all older projects (before the BCD notification) benefit from the ‘Change in Law’ clause. If they pay BCD, then they would be compensated for the same. Given the price hike, they seem to prefer to wait rather than ship modules in this window because they are already compensated for BCD hikes.”

Kumar further added that projects tendered after the MNRE BCD announcement date had assumed this higher BCD rate in their tariffs.

In a webinar held by Mercom in April this year, stakeholders speculated that the BCD’s impact would be somewhere around ₹0.45(~$0.00)/kWh, and the tariffs will be in the range of ₹2.50 (~$0.033)/kWh-₹2.60 (~$0.034)/kWh. Since the prices of modules have gone up, the tariffs were expected to increase.

Digging deeper into the ambiguities surrounding the duty-free period, he said, “If they avail the duty benefits of this window, then there is a possibility that the regulator can direct compensation to DISCOMs, as their tariffs are presumably included in the BCD payment. Also, the launch of an anti-dumping investigation could result in a negation of this window. There is also another possibility. The Director-General of Trade Remedies may resort to a provisional extension of safeguard duty. Given this uncertainty, the duty-free window is more of an illusion than a reality.”

The stakeholders were not optimistic about a safeguard duty extension when Mercom spoke to them in May.

According to Kumar, the rooftop solar and open access markets would gain from this duty-free period – as these do not operate under the purview of ‘Change of Law.’ But the benefits would be marginal because of the prevailing high price levels currently.

Similar sentiments were shared by Gagan Vermani, CEO and Founder of MYSUN. Vermani told Mercom that almost every developer with an existing pipeline of solar projects due for completion in the first two quarters of the calendar year 2022 is worried about two factors.

“One, avoiding the huge BCD effective from April 1, 2022, and second, battling the availability and significant price rise issues in the module supply chain. They are also trying to convince the new clients to bring forth their plans to go solar. With BCD coming in, the cost of solar is expected to go spike, especially since the domestic manufacturers are not expected to drop their prices as they benchmark their rates with the market prices governed by global players.”

Concerns about rising prices

Several industry experts noted that this is the first time they are witnessing increasing module price trends in a decade. Trens has always been a steady decrease in prices for modules and cells, they informed.

However, pricing and supply issues have hit every industry globally since the first wave of the pandemic Last march.

According to Kumar from Varp Power, the manufacturers have already increased rates. “Module prices (for mono-PERC) are currently ruling in the $0.25 – $0.27/W range, which is a 30-40% increase in six months. Coupled with the higher freight charges, the costs have gone through the roof. The higher commodity prices in cement, steel, and copper have also increased the cost of the Balance of System (BoS) items,” he added.

Gupta from Fortum stated, “This is the area of concern and will remain so until the time we have enough manufacturing capacity of silicon, wafer, ingot, cell, and modules.”

Vermani from MYSUN told Mercom that the Chinese manufacturers have significantly dominated the Indian solar market.

“However, there is a lot of materials that are bought domestically too. And it is not just the solar modules, but the structures, cables, and the cost of almost all parts of material going into a solar project have gone up. There is a genuine increase in commodity prices, putting the viability of the existing pipeline of projects under stress. So, the timing of the BCD implementation could not be worse,” he added.

Domestic solar manufacturers have already urged the government to introduce an interim duty before BCD kicks in. Without such a protectionist measure, the industry will find it hard to thrive, believe many.

According to Bharat Bhut – Co-founder & Director, Goldi Solar, “The local manufacturers can focus on projects mandating domestic content requirement (DCR). They may also have to work on a no-profit, no-loss basis until then. Meanwhile, countries exporting to will certainly get a chance to sell at lower rates with the absence of an interim duty before BCD.”

Implications of the BCD provision on future projects

Kumar told Mercom that the MNRE has advised that future government projects should quote tariffs keeping the higher BCD in mind. “So, in a sense, they would be protected; however, this would result in firming up the tariffs, making it more difficult for Solar Energy Corporation of India (SECI) and the central aggregators to sell costlier power to the DISCOMs,” he added.

Fortum’s Gupta said, “BCD will be affecting 60% of the project cost, which is effectively escalating the project cost by 25-30% and increase the tariff by 25-30%.”

According to Vermani, a 40% BCD means an increase of ₹5 (~$0.067)/W in capital expenditure (CAPEX) costs and about ₹0.50 (~$0.0067)/kWh in terms of tariff.

He said, “In the long run, the markets, developers, and customers will factor this into their plans. However, this increase in solar costs will dent the leverage solar has against the traditional grid tariff.”

“One positive result expected from BCD is a significant jump in domestic manufacturing capacity addition. Still, if this domestic capacity addition does not lead to cost reduction, then the government will have to step in to assess the long-term benefits of BCD,” noted Vermani.

Expecting domestic module prices to be eventually lower than Chinese modules is extremely naïve thinking. The Indian manufacturers currently lack the scale and have not invested in developing any new technology so far.

“The need of the hour is for the government to intervene to ensure power purchase agreements are signed on time, and auctioned projects are not canceled and re-auctioned, and that dues and reimbursements are paid on time, especially since liquidity may become important,” Bhut added.

Joshi opined that the duties and tariffs are bound to rise, and the government will earn income, but the customers will bear the higher tariffs.

“Lower tariffs were never the prudent way to run the business. It is not just the prices of Chinese modules and cells that have gone up. The cost of raw materials needed to manufacture these goods has also increased. Indian manufacturers need to have the complete supply chain needed for vertical integration. There is no point blaming China for dumping its products,” he said.

Does India have sufficient manufacturing capacity to cater to the solar sector?

Manufacturers mentioned that they are more than equipped to handle the demands of the upcoming projects. With the introduction of the production-linked incentive program, some manufacturers are in the process of establishing or have already set up additional capacities.

However, according to Kumar, India’s domestic demand has not crossed 10 GW in the best of years in the recent past. “Domestic module manufacturing capacity, in MW terms, on the face of it can meet this requirement. The rub, however, comes in the technology upgradation of the capacity. Mono PERC modules, the industry’s workhorse for current projects, is not being made on scale in India,” he said.

“For some allied materials and components like glass, aluminum frames, and others, we have even lesser manufacturing capacity than solar modules. With a target of more than 200 GW of solar by 2030, India needs to significantly ramp up its manufacturing capacities in all aspects of the value chain and not just cell and module manufacturing,” Vermani added.

While pointing out the gap in local manufacturing capacity, Gupta stated that India doesn’t have more than 2-3 GW of manufacturing capacity available to independent power producers.

“Few of the large manufacturers are also developers and are using the modules they produce. On the one hand, India wants to reach 350 GW solar by 2030. On the other hand, the government restricts the import of modules by introducing the approved list of models and manufacturers (ALMM). Therefore, there is a mismatch between plan and implementation. To reach 350 GW by 2030, they have to come out with 15-20 GW solar tender every year, similarly manufacturing capacity needs to be scaled,” Gupta said.

ALMM is another bottleneck in procuring imported solar modules and has the developers seriously concerned.

How will the new duty regime affect small and big players?

According to Kumar, larger developers with utility-scale projects have shelter and protection under the ‘Change of Law’ clause.

He said, “They will find it difficult, however, to pass on the full impact of the duty hikes to DISCOMs, in the form of tariffs. As a result, we expect the developer’s internal rate of return (IRR) to shrink. Developers of rooftop solar and smaller projects would see demand from commercial and industrial customers adversely affected. In terms of its attractiveness vis-à-vis grid power, the economics of rooftop solar would be considerably diminished and could result in weakening of demand.”

Many, however, believe that big developers are already impacted as their project pipeline could become unviable unless they have factored in this BCD impact.

“However, as the BCD comes into effect, over time, the market dynamics will drive tariffs up for everyone. Integrated solar module manufacturing will surely have a distinct advantage as they would stand a better chance to control their overall costs. Meanwhile, smaller solar project developers may see a delay in client acquisition for a couple of quarters. But again, here too, as the price increase will be all across the board, the clients will start getting back to their solarization goals as overall there is a largely growing consensus in the industry to reduce their energy costs using solar as well as increase their sustainability footprint,” Vermani said.

India has so far largely concentrated on the demand side, and the government is now shifting its focus on manufacturing. The introduction of BCD, production-linked program, and ALMM are all government initiatives in support of domestic manufacturing.

“Whatever the intentions may be, unless properly executed, too much focus on supply and the resulting increase in prices and shortages due to lack of capacity can easily diminish demand. The government needs to ensure there is robust demand for this shift towards manufacturing to work,” said Raj Prabhu, CEO of Mercom Capital Group.

The stakeholders meanwhile expect the government to at least not add to the already existing challenges.