Duty On Solar Gear To Push Up Tariffs, Discourage Buyers, Says India Ratings
Customs duty on solar equipment will lead to higher project costs and eventually lead to higher tariffs, the rating agency said.
India's decision to levy customs duty on solar cells and modules from next year will increase tariffs as the overall cost of projects will rise, according to India Ratings and Research Ltd. That could hurt the demand for solar power.
“The increase in tariffs will increase power purchase costs for solar off-takers by Rs 900 crore annually, considering that around 10GW of solar capacity will come on stream in the next 12 months,” Asmita Pant, senior analyst at India Ratings, said in a research note on March 23. “This amount will keep on increasing exponentially with the commissioning of new projects, till the duty is in place or import costs and cost of local manufacturing achieve parity.”
“This may also affect the government’s plan to achieve the targeted solar capacity of 280GW by 2030,” Pant said.
India plans to levy a 40% customs duty on the import of solar modules from April 1, 2022, as it seeks to reduce dependence on foreign supplies and boost manufacturing. The proposal, already approved by the finance ministry, also includes a 25% duty on the import of solar cells. The duty will also apply to projects that have already been bid and will be commissioned after April 2022.
India Ratings said existing solar tariffs are lower than the average purchase cost for most state power distribution companies, making it an attractive proposition. “However, an increase in solar tariffs due to basic customs duty may lead to increase in the average pooled power purchase cost of solar power for the discoms, reducing the overall inclination of power off-takers towards solar projects.”
Besides, the lack of a time-frame for which customs duty would be applicable will also create risk for domestic manufacturers in incurring significant capital expenditure, the rating agency said.
India already has a safeguard duty regime for imports from China, Thailand and Vietnam—which form 93% of India's solar imports. That regime will expire in July 2021 and replaced with the basic customs duty that covers all countries and minimises the scope for re-routing imports to evade the duty.
According to India Ratings, solar tariff rates are likely to move in tandem with the customs duty. Currently, the cost of importing solar modules, excluding the 14.5% safeguard duty, is 25% lower than that of domestically manufactured ones, it said based on discussions with the industry. Considering that safeguard duty would be completely replaced by customs duty, the cost of imported modules is likely to be 6%-8% higher than the current domestic module prices, the agency said.
“To maintain a similar equity return on solar projects, the increase in the module cost (60%-65% of the overall project cost) due to imposition of the customs duty will lead to an increase in current tariff rate by 40-50 paisa per unit if complete modules are imported and by 30-35 paisa per unit if only solar cells are imported, compared to scenario when no safeguard duty/customs duty is applicable on imported cells/modules," India Ratings Associate Director Ankur Agarwal said in the note.
"This is due to the fact that overall project cost (landed cost at the project site) for solar plants (considering that no safeguard duty is applicable) is likely to go up by 20%-25%, considering imported modules are utilised," he added.
The rating agency also pointed to the lack of clarity in the proposal for basic customs duty. It is unclear whether manufacturers based in special economic zones will have to pay customs duty and if existing investments in SEZs will be at risk as most of India's domestic solar manufacturing capacity is based out of such zones.
The intent is in the right direction, Agarwal said. But in the short run, it could hurt the government's target to add around 25GW of solar capacity every year till 2030. That, India Ratings said, is because most of the projects being set up under government schemes would utilise domestically manufactured modules. And existing domestic capacity won't be enough to fulfil that.
India Ratings said it expects the short-term demand for solar cells and modules will continue to be met through imports, thus pushing up tariff rates for solar projects as imports will become costlier.