2018 showed why import duties can’t save India’s solar-panel makers

[Tipup]

2018 was slated to be a sunshine year for solar energy in India.

Power generation capacity touched 22 gigawatts (GW) in financial year 2018, a phenomenal growth of more than 75% over the previous year. A low base notwithstanding, India’s ambitious target of 100GW by 2022 under the National Solar Mission now seemed within reach.

What’s more, prices were dipping. In 2017, reverse auctions by the government to develop large-scale solar projects had thrice attracted all-time low bids of Rs2.44 per unit of electricity. This made solar power even cheaper than coal-based power, which generally sells north of Rs3 per unit in the country.

The boom, however, was powered by imports of cheap solar cells and panels from China, while Indian manufacturers raked in losses. Up to 85% of the solar panels used by Indian solar developers are made in China. Their prices have been falling rapidly as China has invested and taken the lead in mastering the technology.

This, in turn, forced the government’s hand. In July 2018, authorities shocked the solar industry by imposing a 25% import duty on foreign-made solar cells and panels.

Big chill
In fact, an import tax had been looming since the beginning of 2018.

On Jan. 05, the directorate general of safeguards (now the directorate general of trade remedies, or DGTR), the authority responsible for all trade remedial measures like anti-dumping duties and safeguard measures, said it was considering a 70% safeguard duty on imported solar cells and panels.

Under the World Trade Organization (WTO) rules, a country can impose a temporary safeguard duty on a foreign product if a spurt in imports due to unforeseen developments threatens the domestic manufacturing industry.

Chinese panels have for years faced anti-dumping duties in the US and in the European Union (the latter lifted its duties in August 2018). In January 2018, US president Donald Trump imposed new tariffs on Chinese solar imports. 

However, based on a petition filed by the US, the WTO’s appellate body in 2016 ordered a ban on the Indian government’s policy of favouring solar projects that use locally made panels.

The DGTR said this order, restraining the Indian government’s support for local manufacturers, qualified as an “unforeseen development” to justify a safeguard duty. The government also cited rising imports due to India’s heightened renewable energy targets under the Paris climate agreement and increased production by Chinese manufacturers. It also noted that anti-dumping duties in the US and the EU have prompted Chinese companies to sell more aggressively in the Indian market, putting pressure on Indian manufacturers like Vikram Solar and Adani Solar, based in Kolkata and Ahmedabad, respectively.

Indian solar power developers—unlike local panel makers, power firms benefit from cheap imports—and Chinese manufacturers, however, denied that these trends justified the import duties. The rise in import was only natural after India raised its solar energy goals, they said, adding that Indian panel makers have also raised supply and utilisation of existing production capacity. 

The share of imports in India’s total consumption of solar cells has been stable after spiking in 2015-16, industry body Solar Power Developers Association argued.

Since 2014, Indian panel makers have nearly halved their prices in the export market, said the China Chamber of Commerce for Imports and Exports of Machinery and Electronic Products, an industry group based in Beijing. “The real cause of injury to the domestic industry is aggressive pricing practices of other Indian producers and not imports,” it said.

The DGTR partially relented. Instead of the proposed 70%, it finalised a 25% safeguard duty that would ease out over two years.

Year    Safeguard duty
First year    25%
Next six months    20%
Next six months    15%
Before the duty was officially notified on July 30, Indian developers stepped up their cell and panel imports, and their demand dipped right when the duty came into effect.

The safeguard duty has been at least partly responsible for the dampened activity in India’s solar market in 2018. The government has been cancelling auctions of solar development projects after bids quoted by developers have risen from the low levels of 2017. Additions of new solar power capacity have slowed down in 2018.

“There will be an increase (in the cost of solar power) of close to 30 paise or 35 paise (per unit). While we are seeing tariffs of around Rs2.44 per unit, the lowest going forward should be around Rs2.75 per unit,” Ankur Agarwal, an analyst with India Ratings and Research, had told Quartz when the safeguard duty was imposed.

Ripping off the band-aid
Few believe that two years of safeguard duty will turn the tide for India’s solar panel makers.

In June, to manage the state-run renewable energy fund’s $15.6 billion deficit, China unexpectedly suspended huge subsidies to its solar project developers. This cut the demand for cells and panels in its domestic market, intensifying their glut in foreign markets and further driving down prices.

While the safeguard duty does add to the price tag of Chinese imports, they are still cheaper than domestic panels and cells, according to The Council on Energy, Environment and Water (CEEW), a New Delhi-based think tank.

Further, in December, the government announced that Indian manufacturers such as Adani Solar, Vikram Solar, and Websol Energy System, which operate from special economic zones (SEZs), will also have to pay this safeguard duty. “The duty has not benefitted domestic manufacturers since most of the cell and panel manufacturing capacity is located in the SEZs,” said Manu Aggarwal, a programme associate at CEEW.

While China marches ahead on its technology curve, the Indian government’s efforts to increase the scale of manufacturing have been fruitless.

The ministry of new and renewable energy’s scheme of incentivising developers to set up manufacturing units is struggling to take off as the industry reels under the impact of the safeguard duty. CPSU, another scheme of public sector investment in manufacturing, has remained in limbo since it was proposed in 2017. 

Meanwhile, hope is dimming for India’s plans to keep making solar panels.

“Safeguard is an artificial band-aid and will not help manufacturers’ competitiveness in the long run,” said Raj Prabhu, CEO of Mercom Capital Group, a US-based consulting firm. “We don’t see manufacturers investing in R&D or trying to come up with new technologies. Relying on price difference created by safeguard duty is not a strategy, it is just postponing the inevitable.”