Solar power producers are staring at a sharp escalation in costs of projects under construction if they fail to complete them before the government imposes a basic customs duty (BCD) on imported solar photovoltaic cells and modules from next year.
The BCD will come into force on 1 April 2022 after the expiry of the existing safeguard duty on such imports. This is expected to give domestic manufacturers the much-needed confidence to invest in expanding capacity. Power producers will, however, be forced to rush to finish projects within deadlines with imported equipment to keep costs under control and their projects viable, industry watchers said.
The ministry for new and renewable energy (MNRE) on 9 March announced a 40% BCD on solar modules and a 25% BCD on solar cells. The ministry said it wants local companies to not only produce enough to meet domestic demand for solar cells and modules but also become a key global supplier. The customs duty will replace a 14.5% safeguard duty currently imposed on imports from China and Malaysia.
On 12 March, the MNRE also issued a list of approved models and module manufacturers for government projects, creating a non-tariff barrier for substandard imports.
India built nearly 3.6 gigawatts (GW) of utility scale and rooftop solar capacity in 2020 and 6.5GW in 2019. Nearly 90% of cells and modules used in these projects are imported, with China making up the bulk of supplies.
India is expected to add about 13.5GW of capacity this year, most of which are projects whose deadlines have been extended because of covid-related restrictions on construction. These developers are expected to import equipment to finish projects before the BCD sets in.
“The BCD will erode the cost advantage of solar (over other renewables) in the short-term,” said Vinay Rustagi, managing director, Bridge to India. “The increase will inevitably have an adverse impact on demand, particularly as distribution companies are already reluctant to purchase plain solar power. We expect rooftop solar, particularly residential market and other similar consumer centric applications, to be the worst hit.” Credit rating agency Icra estimated in an 11 March report that the BCD will raise the capital cost of solar power projects by 23-24%. Currently, domestic modules are 12-15% costlier than imported ones.
“But capacity addition over next year should see a boost as developers (and end consumers) bring forward project execution to avoid incurring BCD cost,” Rustagi said. “While most tenders now come with a standard change-in-law compensation formula, the mechanism is inadequate and leaves developers slightly out of pocket.”