Safeguard Duty Proposal May Increase Solar Tariffs From Record Lows
A security guard sits beside an array of parabolic troughs at the Godawari solar-thermal power plant, operated by Godawari Green Energy Ltd., near Nokh, Rajasthan. Photographer: Kuni Takahashi/Bloomberg

Safeguard Duty Proposal May Increase Solar Tariffs From Record Lows

Solar project costs and tariffs in India may rise from record lows if the government accepts a proposal to impose up to 25 percent safeguard duty on photovoltaic panels imported from China and Malaysia for two years.

Girishkumar Kadam, vice-president and sector head of corporate ratings at ICRA Ltd., told BloombergQuint the proposed levy would increase capital costs for solar power projects by 15 percent and to maintain returns, developers may have to hike tariffs by 30-35 paise per unit. A statement from rating agency Crisil echoed his views, “The duty could raise capital costs for solar projects based on imported modules by nearly 15-20 percent (at current prices).”

Cheaper imports from China—that energy consultant Bridge To India said caters to nearly 85 percent of India’s solar panel requirements—had helped power producers quote record low tariffs in auctions. Solar modules imported from China now cost 28-29 cents per watt, down from 35-36 cents per watt a little over four weeks ago, according to Kadam. Panels account for over half of a solar power project’s cost and a safeguard duty may affect 11-12 gigawatts of projects that are under construction.

The amendment to bidding norms approved in April 2018 allowing pass-through of changes in taxation, duties and cess would allow developers to pass through tariff hikes to the off-takers. Timely approval by the regulators and pass-through of the tariff increase to the off-takers remains critical from their cash flow perspective
Girishkumar Kadam, Vice-President & Sector Head of Corporate Ratings, ICRA

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The recommendation follows an application by the Indian Solar Manufacturers’ Association in November 2017, which said the domestic industry sustained heavy losses due to a surge in solar cell imports.

The Directorate General of Trade Remedies recommended the safeguard duty even as solar tariffs remained at record lows in India’s largest federal auction of 3 gigawatts of projects. A 25 percent safeguard duty has been recommended on imported solar cells and modules for the first year. The duty will be lowered to 20 percent in the first six months of the second year and 15 percent in the next six.

Crisil said solar project developers would now use the ‘change in law’ clause in their contracts to pass on the rise in costs to electricity distribution companies or electricity regulatory commissions. “That can cause a temporary rise in working capital requirements or delay commissioning.”

An analysis by Crisil shows that to maintain current returns, the minimum bid tariffs for solar power projects based on imported modules would need to rise to Rs 2.9-3.2 per unit for a duty rate of 25 percent in the first year of imposition, compared with the Rs 2.44–2.80 per unit bid tariffs seen over the past few quarters.

Duty rates at 20 percent and 15 percent applicable in the second year would need slightly lower tariffs of Rs 2.8-3.1 per unit for the same levels of equity internal rate of return.

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‘Duty To Hit Windfall Profits’

Puneet Jaggi, director of Ahmedabad-based Gensol Group, which specialises in the design, engineering, operation and maintenance services for solar projects, doesn’t expect a drastic impact on costs. Although the 25 percent safeguard duty seems a tad extreme at first glance, the fall in prices of Chinese solar modules will offset the impact, he told BloombergQuint

In fact, developers’ returns won’t change as their landed cost would remain constant. Most of them have a pass-through clause for safeguard duty in their power purchase agreements.
Puneet Jaggi, Director of Ahmedabad-based Gensol Group

Jaggi said the duty will, however, impact profits. “Without the safeguard duty, we (project developers) used to get 5-8 percent windfall profit depending upon the type of project. That won’t be the case once it’s imposed. It’s quite significant.”

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