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Paranjoy Guha Thakurta

Safeguard Duty Throws India’s Solar Sector Into Confusion and Chaos

The Finance Ministry’s decision to impose a 25% safeguard duty on imported solar panels and modules will benefit only a small section of the industry while hurting consumers. The decision is going to get mired in legal disputes. The Adani group, dissatisfied with the duty, continues to lobby for a duty exemption on its products manufactured in Special Economic Zones. By Nihar Gokhale and Paranjoy Guha Thakurta.

Date published: August 6, 2018Publication: NewsClick Link to original article

On 30 July, the Ministry of Finance notified a two-year safeguard duty regime on imports of solar cells and modules. The decision ratified a 16 July recommendation by the Directorate General of Trade Remedies (DGTR) in the Ministry of Commerce and Industry that is ostensibly meant to protect Indian manufacturers of equipment to generate solar energy from incurring losses on account of “dumping” of cheap imports.

However, the decision will benefit only a small section of the domestic industry because a much larger proportion of the capacity to manufacture solar equipment in India is located inside “export-oriented” Special Economic Zones (SEZs) and will not be exempt from payment of safeguard duty. Hurt by the decision, Adani group company Mundra Solar PV – located in the Mundra SEZ in Gujarat, is the largest facility of its kind in the country – is lobbying the government to re-interpret the rules in favour of units in SEZs.

That has not happened. Compounding the chaos, the Finance Ministry’s notification prima facie appears to be in violation of an order of the Odisha High Court. In the ensuing confusion, those that are certainly going to be adversely affected are consumers of electricity because tariffs are expected to rise.

The safeguard duty, which is set at 25% for the first year and 15% and 10% for the subsequent six-month periods respectively, is expected to bring the price of foreign solar panels and modules – almost 90% of which are imported from China and Malaysia – closer to the prices of products produced within the country. There will, however, remain a gap of 5-7% between domestic prices and the landed cost of imported goods, industry sources said.

The Finance Ministry’s decision, in its present form, seems designed to fail as it would not just slow down the pace of growth of India’s solar energy programme (which has been widely promoted by Prime Minister Narendra Modi) but would at the same time not help most domestic manufacturers of solar equipment. Moreover, the decision is expected to be legally contested and could get embroiled in lengthy court battles.

No Relief to Units in SEZs

As NewsClick had reported barely hours before the duty was notified, the government had to take a difficult decision of whether or not to make special exemptions for solar cells and panels produced in SEZs and sold in the domestic market. Under the Special Economic Zones Act of 2005, such sales are subject to applicable import duties, including safeguard duty, as if the products had been imported into India.

The logic is simple: SEZs are supposed to be export-oriented industrial areas and units situated in such zones get a variety of fiscal and legal concessions from the government to keep the prices of their products low so that these can compete effectively with similar products in the international market. Thus, the imposition of the safeguard duty would bring the prices of their products closer to the product prices of producers located outside SEZs.

As far as solar panels are concerned, barring a brief period, the Indian government had not imposed any import duty. Thus, since there was zero import duty on solar panels, around three-fourths of India’s total solar equipment manufacturing capacity chose to be located in SEZs – 1,600 megawatt out of a total annual manufacturing capacity of around 2,000 MW; Mundra Solar is the biggest player in the industry with a capacity of 1,200 MW.

The imposition of the safeguard duty was sought in December 2017 by the Indian Solar Manufacturers Association (ISMA) on behalf of five firms, three of which are in SEZs including Mundra Solar. The association had argued that despite being in SEZs, these three units should be considered to be a part of “domestic industry” and hence, needed protection from cheap imported solar panels from China and Malaysia that were being “dumped” in India.

As our earlier article in NewsClick article had detailed, the companies had made a representation to the government arguing for a reinterpretation of the law pertaining to SEZs claiming that goods sold from SEZs in the domestic market do not constitute “imports” and hence, the safeguard duty should not be applicable on such products.

The DGTR had recommended their exemption from the safeguard duty as not doing so would defeat the purpose of imposing the safeguard duty. Even the erstwhile Directorate General Safeguards, which had first examined the application, had strongly supported the exemption in view of the dominance of SEZ units in the Indian solar equipment manufacturing industry.

The government though, in its final decision, stayed away from making such an exemption.

Gyanesh Chaudhary, Managing Director and CEO of Vikram Solar, an SEZ-based solar manufacturer, said in a statement that not giving the exemption “defeats the very purpose of (imposition of a) Safeguard Duty, which is to protect and promote domestic industry… it will lead to further job losses and harm the manufacturing ecosystem in India, which is already bleeding.”

Vikram Solar is not among the group that sought a reinterpretation of the rules. For Chaudhary the exemption is “logical” given that “the whole purpose of applying Safeguard Duty is to protect domestic industry against imports… so why should they pay these duties? Unfortunately, the policy-makers seem to be in (a) dilemma.”

Rise in Electricity Tariffs

The duty is going to affect those executing solar projects – known as solar project developers – who purchase the modules, assemble power plants at locations around the country, and then bid in auctions to supply the power to state electricity distribution companies or discoms.

Their tariff bids are based on input costs. With the 25% safeguard duty raising these costs, power tariffs – which had touched a record low of ₹2.44 per unit of electricity (or kilowatt hour) due partly to cheap imported equipment – will now rise.

Ratings agency ICRA has said that the safeguard duty would increase power tariffs by amounts varying between ₹2.90 and ₹3.10 per unit. An industry source said the increase in tariffs will not be less than 70 paise per unit depending on the quality of the equipment used to generate solar power. This is bound to make solar power barely competitive in comparison to the relatively reliable, round-the-clock coal-based thermal power (which is also polluting).

The Solar Power Developers Association (SDPA), in their submission to the DGTR, had said that “discoms have indicated that they would purchase solar power only if the cost is around ₹3 per unit.”

The increase in power prices will not only be felt by the end consumer but will also negatively impact the exchequer as the government subsidises solar power. In April, the Ministry of New and Renewable Energy (MNRE) had said that the duty costs could be “passed through” in calculating tariffs of solar power.

However, solar energy project developers say that far from being a relief, the pass-through imposes a legal burden as they will have to go through lengthy procedures to amend power purchase agreements (PPAs) with discoms.

Said an office-holder of the SDPA: “Pass-through will lead to a tedious, long-drawn process to change tariff. It can run into years. Each project will need to separately approach the State Electricity Regulatory Commissions (SERCs) as each project has a unique cost structure, solar radiation level, etc… Internally, the cash flow models have to be modified. Banks are already holding on to loan proposals as they want to know the revised project costs based on the duty.”

Another industry source added that certain disputes could go up to the Central Electricity Regulatory Commission and from there to the Appellate Tribunal for Electricity and even the Supreme Court of India. “If we lose two years’ time in revising tariffs, by then the economics of the projects would have gone haywire and technology would have changed completely,” the source apprehended.

The office-holder of the SDPA said that while 9,000 MW of projects are under construction, the safeguard duty will affect projects with a total capacity of around 18,000 MW that had won in tariff auctions before the duty was imposed, but are yet to order modules. One way to reduce the compliance burden would have been to specifically exempt such projects from paying the duty. But the Finance Ministry has been silent on this demand.

This person added: “Nearly 27 gigawatts worth of projects will be under a cloud now. Honestly, we did not expect the investigation to see the light of the day. These were also the feelers we got from the MNRE. We are now deciding what our next step should be as we feel the investigation was done hurriedly and was not thorough enough.”

Apparent Violation of Court Directive

The 30 July notification imposing the safeguard duty has apparently violated an order of the Odisha High Court. On 23 July, a division bench of the court comprising Justices I Mahanty and B Mohanty admitted a petition filed by Acme Solar, a solar developer, against the DGTR’s recommendations. On the same day, the bench passed an interim order restraining the central government from notifying the duty “without leave of the Court” until the next hearing on 20 August. Acme Solar was represented by P Chidambaram, former Union Finance Minister and Home Minister in the Manmohan Singh government.

When contacted, an official of Acme Solar said he and his colleagues had no information on whether such a leave was granted, if the High Court injunction was vacated by the Supreme Court, or if the government had obtained the opinion of the Ministry of Law or the Attorney General of India before notifying the safeguard duty.

Amit Kumar, “cleantech” partner at consulting firm PricewaterhouseCoopers told the news website Quartz: “This will become a full-blown legal case now. What people will do is they will go to courts; somebody will file a case against (the safeguard duty) … It brings in certain uncertainty into the whole programme.”

When the imposition of the safeguard duty was recommended on 16 July, the renewables energy consultancy, Bridge to India, had put out a note that concluded: “It is also possible that some developer(s) will find a spurious reason to hold up the process through legal appeal(s) as (had) happened last time. Moreover, we understand that domestic manufacturers are considering another petition for anti-dumping duty. The industry should brace (itself) for an extended period of uncertainty on this front.”

In an interview with NewsClick, Shashi Shekhar, Vice Chairman and Director, Acme Solar, said: “What is a matter of concern for us is the fate of the projects that are under currently construction for which solar panels and modules have been ordered and are being manufactured, or projects for which equipment has already been shipped or is about to be shipped. I would urge the government to at least not impose the safeguard duty on equipment for such projects.”

Shekhar, who retired from the Indian Administrative Service as Secretary, Water Resources, and is a civil servant who had earlier served as a Joint Secretary in the MNRE, added that Acme Solar was currently executing projects with a total capacity of more than 700 MW in states like Madhya Pradesh, Rajasthan and Karnataka that were 40-50% complete. “Our company will have to bear an additional financial burden of around ₹130 crore because of the safeguard duty which will put us under severe stress.”

Job Losses

The uncertainty would affect thousands of jobs in the solar sector. Just days before the safeguard duty was notified, on 26 July, Parliament’s Standing Committee on Commerce headed by Naresh Gujral had stated in its report that imports of cheap solar panels could have caused the loss of 200,000 jobs. This figure, observers claim, is highly exaggerated and alarmist. They claim that in the total solar power chain, only 10% of the jobs are created during the manufacturing stage while the remaining 90% of jobs are created after the projects are set up and start generating electricity.

Said one such observer: “The country is trying to set up new capacities to increase the total solar power generating capacity from 20,000 MW and 30,000 MW each year and this safeguard duty will ostensibly help manufacturers with a total capacity of only 400 MW. This decision defies logic and rationale.”

Date posted: August 7, 2018Last modified: August 7, 2018Posted byParanjoy Guha Thakurta