Duty spanner in the works for solar projects

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Background

The Directorate General of Safeguards (DGS) has recommended a provisional safeguard duty of 70% for 200 days on imports of ‘solar cells whether or not assembled into modules’ from all (except developing) nations. However, duty will be imposed on imports from People’s Republic of China and Malaysia despite being a part of developing countries. The safeguard duty investigation (Custom Tariff – Rule 5) was initiated by the Indian Solar Manufacturers’ Association (ISMA) which has requested the imposition of safeguard measures for four years with a request for a provisional safeguard duty while the final decision is still awaited.

Key conclusions

The imposition of a safeguard duty will make imported modules 1.5 times costlier than domestic modules (current prices), which will require minimum bid tariffs of Rs 3.6-4.0 per unit.       

Procurement of domestic modules would increase tariffs by Rs 0.4-0.65 per unit (at current prices) from the current ~Rs 2.5 per unit. However, supply-demand dynamics may lead domestic manufacturers to charge a premium on their products, triggering further increase in capital costs.

The duty will increase price competitiveness of domestic modules, with local and foreign manufacturers expected to expand/install capacities over the next one-three years in view of the increased demand opportunity.       

Consequently, bid tariffs may rise in the near term (~Rs 0.4 – 1.5 per unit, depending on the source of modules) which would lower the competitiveness of solar power versus coal-based power. Over the long term, costs may decline again once supply-demand dynamics settle and operational benefits such as economies of scale, cost rationalization etc. accrue to domestic module manufacturers.       

Capacity additions are expected to continue with a temporary blip, if at all. However, future bid tariffs could factor in the increased cost while existing projects hope for an exemption under the ‘change in law clause’.  

Tariffs may rise in the near term

The recommended 70% safeguard duty would increase the landed cost of imported modules from Rs 24.8 per wattpeak (wp) to Rs 42.1 per wattpeak. Considering that China PR and Malaysia are the main exporters of modules with 88% and 7% export share, respectively in fiscal 2017, developers would require minimum bid tariffs of Rs 3.6-4.0 per unit for solar projects constructed on such imported modules to clock an equity internal rate of return (IRR) of 9-12%.

The above-mentioned capital costs do not factor in the 7.5% customs duty plus 10% surcharge.The reclassification of modules has increased duty on imported modules from the zero duty earlier. As a consequence, if both safeguard and custom duties are factored, capital cost based on imported modules (except from exempted countries) will reach Rs 54-55 million per MW, requiring a further increase in tariffs.

Over the next six months, ~6.5 GW of capacities are expected to be tendered, which may see bid tariffs factor in this risk. Further, 3.5 GW of solar projects worth over Rs 120 billion (at the current capital cost) are at risk of lower returns or default, in case the government / electricity commissions do not provide relief via the change in law clause.

If developers bid at tariffs based on domestic modules at current prices, Rs 2.9-3.15 per unit would be required for equity IRR of 9-12%. However, domestic capacity for cells and modules is inadequate to meet the burgeoning domestic solar power demand.

Module supply could switch to domestic market; indigenous module capacities may flourish over the medium term

As the safeguard duty exempts other developing nations, solar project developers and module manufacturers may still import modules and solar cells, respectively from other regions such as Vietnam and Thailand, where several large foreign players have recently expanded. This may help solve, in the interim, the supply-demand deficit. However, pricing and technology would still remain the key monitorable in this regard.

Additionally, with inadequate domestic capacities (6.5 GW of average annual operational capacity versus 8 GW of average annual demand over fiscals 2017 to 2020), manufacturers would position their products at a premium due to demand-supply deficit. This would further increase prices of domestic modules and tariffs in the near term until domestic supply is sufficient and manufacturers benefit from a lower cost of production.

Domestic module manufacturers may charge below the 70% hike on imported modules, but this would depend on the demand-supply dynamics based on factors such as imports from other regions, domestic supply and inventories with both module manufacturers and solar project developers.

Supply deficit of solar cells and modules viz a viz demand from domestic solar capacity additions  Source: CRISIL Research 

kjmj    mjjmj            

At the cell stage, the installed capacity has always trailed modules, and the capacity utilisation has averaged ~50% for cell manufacturers and ~60% for modules, respectively. Hence, as the safeguard duty would be on solar cells and not solar wafers, the production capacity of solar cells would need to match that of solar modules; otherwise cells would still need to be imported to manufacture modules domestically.

Even if we factor in capacity expansion announcements by domestic players, new capacity and expansion projects would take at least a year for implementation. Hence, domestic capacity expansion would happen over the next one-three years. Players such as Adani, Vikram, Waaree, Tata and BHEL can benefit from the opportunity and strengthen their capacities to meet higher demand.

Additionally, Chinese players such as Longi Solar, Trina Solar etc. have expressed interest in setting up Indian manufacturing units in the past, which would make more economical sense with the duty. Their units in India would also have access to upstream inputs (wafers, polysilicon and silica) from their own facilities elsewhere, as no duty is proposed on these items as of yet. With a lack of indigenous manufacturing capabilities for these inputs, domestic manufactures would have to purchase these, which may still lead to a price differential. 

Solar power to move from being the most competitive power source

Currently, the average solar power tariff is near Rs 2.6 per unit and was expected to stay at Rs 2.5-3.0 per unit in fiscal 2018, considering all factors remained same. This is 20% lower than average coal-based power tariffs across major states and ~40% lower than the last competitively bid thermal auction of June 2015 for Andhra Pradesh’s 2400 MW. However, with the imposition of duty, solar tariffs would close the gap. Despite being lower than thermal, the competitiveness between solar and other REsources such as wind would reduce. However, capacity additions would continue with a minor blip if at all, as players are expected to factor in higher costs going ahead.

Solar power tariffs rise to narrow the differential versus coal and other RE tariffs 

hmjm

Note: Coal-based tariff is for the competitively bid auction of June 2015 for Andhra Pradesh’s 2400 MW based on domestic coalSource – CRISIL Research

By,Rahul Prithiani Director, CRISIL Researchrahul.prithiani@crisil.com

Background

The Directorate General of Safeguards (DGS) has recommended a provisional safeguard duty of 70% for 200 days on imports of ‘solar cells whether or not assembled into modules’ from all (except developing) nations. However, duty will be imposed on imports from People’s Republic of China and Malaysia despite being a part of developing countries. The safeguard duty investigation (Custom Tariff – Rule 5) was initiated by the Indian Solar Manufacturers’ Association (ISMA) which has requested the imposition of safeguard measures for four years with a request for a provisional safeguard duty while the final decision is still awaited.

Key conclusions

The imposition of a safeguard duty will make imported modules 1.5 times costlier than domestic modules (current prices), which will require minimum bid tariffs of Rs 3.6-4.0 per unit.       

Procurement of domestic modules would increase tariffs by Rs 0.4-0.65 per unit (at current prices) from the current ~Rs 2.5 per unit. However, supply-demand dynamics may lead domestic manufacturers to charge a premium on their products, triggering further increase in capital costs.

The duty will increase price competitiveness of domestic modules, with local and foreign manufacturers expected to expand/install capacities over the next one-three years in view of the increased demand opportunity.       

Consequently, bid tariffs may rise in the near term (~Rs 0.4 – 1.5 per unit, depending on the source of modules) which would lower the competitiveness of solar power versus coal-based power. Over the long term, costs may decline again once supply-demand dynamics settle and operational benefits such as economies of scale, cost rationalization etc. accrue to domestic module manufacturers.       

Capacity additions are expected to continue with a temporary blip, if at all. However, future bid tariffs could factor in the increased cost while existing projects hope for an exemption under the ‘change in law clause’.  

Tariffs may rise in the near term

The recommended 70% safeguard duty would increase the landed cost of imported modules from Rs 24.8 per wattpeak (wp) to Rs 42.1 per wattpeak. Considering that China PR and Malaysia are the main exporters of modules with 88% and 7% export share, respectively in fiscal 2017, developers would require minimum bid tariffs of Rs 3.6-4.0 per unit for solar projects constructed on such imported modules to clock an equity internal rate of return (IRR) of 9-12%.

The above-mentioned capital costs do not factor in the 7.5% customs duty plus 10% surcharge.The reclassification of modules has increased duty on imported modules from the zero duty earlier. As a consequence, if both safeguard and custom duties are factored, capital cost based on imported modules (except from exempted countries) will reach Rs 54-55 million per MW, requiring a further increase in tariffs.

Over the next six months, ~6.5 GW of capacities are expected to be tendered, which may see bid tariffs factor in this risk. Further, 3.5 GW of solar projects worth over Rs 120 billion (at the current capital cost) are at risk of lower returns or default, in case the government / electricity commissions do not provide relief via the change in law clause.

If developers bid at tariffs based on domestic modules at current prices, Rs 2.9-3.15 per unit would be required for equity IRR of 9-12%. However, domestic capacity for cells and modules is inadequate to meet the burgeoning domestic solar power demand.

Module supply could switch to domestic market; indigenous module capacities may flourish over the medium term

As the safeguard duty exempts other developing nations, solar project developers and module manufacturers may still import modules and solar cells, respectively from other regions such as Vietnam and Thailand, where several large foreign players have recently expanded. This may help solve, in the interim, the supply-demand deficit. However, pricing and technology would still remain the key monitorable in this regard.

Additionally, with inadequate domestic capacities (6.5 GW of average annual operational capacity versus 8 GW of average annual demand over fiscals 2017 to 2020), manufacturers would position their products at a premium due to demand-supply deficit. This would further increase prices of domestic modules and tariffs in the near term until domestic supply is sufficient and manufacturers benefit from a lower cost of production.

Domestic module manufacturers may charge below the 70% hike on imported modules, but this would depend on the demand-supply dynamics based on factors such as imports from other regions, domestic supply and inventories with both module manufacturers and solar project developers.

Supply deficit of solar cells and modules viz a viz demand from domestic solar capacity additions  Source: CRISIL Research 

kjmj    mjjmj            

At the cell stage, the installed capacity has always trailed modules, and the capacity utilisation has averaged ~50% for cell manufacturers and ~60% for modules, respectively. Hence, as the safeguard duty would be on solar cells and not solar wafers, the production capacity of solar cells would need to match that of solar modules; otherwise cells would still need to be imported to manufacture modules domestically.

Even if we factor in capacity expansion announcements by domestic players, new capacity and expansion projects would take at least a year for implementation. Hence, domestic capacity expansion would happen over the next one-three years. Players such as Adani, Vikram, Waaree, Tata and BHEL can benefit from the opportunity and strengthen their capacities to meet higher demand.

Additionally, Chinese players such as Longi Solar, Trina Solar etc. have expressed interest in setting up Indian manufacturing units in the past, which would make more economical sense with the duty. Their units in India would also have access to upstream inputs (wafers, polysilicon and silica) from their own facilities elsewhere, as no duty is proposed on these items as of yet. With a lack of indigenous manufacturing capabilities for these inputs, domestic manufactures would have to purchase these, which may still lead to a price differential. 

Solar power to move from being the most competitive power source

Currently, the average solar power tariff is near Rs 2.6 per unit and was expected to stay at Rs 2.5-3.0 per unit in fiscal 2018, considering all factors remained same. This is 20% lower than average coal-based power tariffs across major states and ~40% lower than the last competitively bid thermal auction of June 2015 for Andhra Pradesh’s 2400 MW. However, with the imposition of duty, solar tariffs would close the gap. Despite being lower than thermal, the competitiveness between solar and other REsources such as wind would reduce. However, capacity additions would continue with a minor blip if at all, as players are expected to factor in higher costs going ahead.

Solar power tariffs rise to narrow the differential versus coal and other RE tariffs 

hmjm

Note: Coal-based tariff is for the competitively bid auction of June 2015 for Andhra Pradesh’s 2400 MW based on domestic coalSource – CRISIL Research

By,Rahul Prithiani Director, CRISIL This email address is being protected from spambots. You need JavaScript enabled to view it.

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