The safeguard duty recommended by the Directorate General of Trade Remedies on solar modules is both a boon and a bane for the solar value chain.

Currently, 85-90% of the solar modules used in India are imported from China and Malaysia.

The boon is the opportunity it provides the domestic module industry to flourish. The bane is that the duty could raise capital costs for solar projects based on imported modules by ~15-20% (at current prices).

At present, 11-12 GW of projects are estimated to be under-construction. These developers would use ‘change in law’ clause in their contracts to pass on the rise in costs to discoms and / or the appropriate electricity regulatory commission. That can cause a temporary rise in working capital requirement or delay commissioning.

CRISIL Research’s analysis shows that to maintain current returns, the minimum bid tariffs for solar power projects based on imported modules would need to rise to Rs 2.9 – Rs 3.2 per unit for a duty rate of 25% in the first year of imposition, compared with the Rs 2.44 – Rs 2.80 per unit bid tariffs seen over the past few quarters. Duty rates at 20% and 15% applicable in the second year would need slightly lower tariffs of Rs 2.8 – Rs 3.1 per unit for the same levels of equity IRR.

Domestic manufacturers are expected to take advantage of the situation and price their products below that of imported modules, subject to demand-supply dynamics.

Consequently, a rise in capital costs and bid tariffs would be inevitable as long as the safeguard duty is in place.

“Domestic modules, which are typically 8-10% costlier than imported ones (at current prices), would become more competitive after the safeguard duty,” said Prasad Koparkar, Senior Director, CRISIL Research. “However, the industry currently lacks scale and capacity to service the more than 10 GW average annual demand from the end-user segment. The operational capacity of modules is estimated at 30-40% of the required demand, and for solar cells it is even lower.”

Additionally, the tricky issue of the status of units in special economic zones with respect to the safeguard duty remains unresolved. This can lower the domestic module capacity available if no solution is at hand. And differences in module technology often make imports the preferred way to set up units.

Most of the smaller module players import their solar cell requirements, a chunk of it from Chinese manufacturers. Given that the safeguard duty would also apply to solar cells, these module manufacturers would also be hit, raising the domestic cost of production.

Over the medium term, domestic manufacturers, especially the larger lot, are expected to expand capacity. Global players, too, would set up domestic units.

However, it will take 2-3 years for the domestic industry to scale up. Till then, solar projects will have to be supported through equipment imports, possibly from exempt regions such as Vietnam/Thailand, where limited capacities exist.

The average global price of modules is expected to come off from the current $0.30 per wattpeak to $0.27-0.28 per wattpeak by the end of this fiscal due to weakening demand in China. Consequently, supply would be directed to other large markets such as India, which would lower prices.

With a fall in module prices and additional bulk-order discounts that larger players obtain, developers may, to some extent, be able to blunt the duty impact. The only caveat to this being a depreciating rupee, which can amp up the cost pressure.

All the same, a 25% duty rate is bound to increase the cost of modules to above that of current domestic prices. Consequently, solar power tariffs, which averaged ~Rs 3 per unit in fiscal 2018, would lose some competitiveness against other sources.

“The average solar tariff was expected to remain aggressive, having touched Rs 2.44 per unit mark twice,” said Rahul Prithiani - Director, CRISIL Research. “But an increase in capital costs means solar becomes less competitive as compared to wind power, which averaged Rs 2.80 per unit in fiscal 2018 and has also seen tariffs as low as Rs 2.43 per unit. However, overall capacity additions may not be materially impacted as cost competitiveness of solar with other sources, barring wind, remains high, though there could be some near-term delays in project implementation.”