India Ratings and Research (Ind-Ra) says the imposition of basic customs duty (BCD) on solar cells and modules with effect from 1 April 2022 will lead to an increase in solar tariffs on account of a rise in the overall project costs. Thus, it would reduce the overall attractiveness of solar projects to off-takers and finally end-consumers.
Asmita Pant, Senior Analyst, Ind-Ra says “The increase in tariffs will increase power purchase costs for solar off-takers by INR 9 billion annually, considering that around 10GW of solar capacity will come on stream in the next 12 months. This amount will keep on increasing exponentially with the commissioning of new projects, till the time 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”.
The BCD would also be applicable for already bid out projects. The timeframe for which BCD would be applicable is uncertain, creating additional risk for domestic manufacturers in incurring significant capex. The existing safeguard duty (SGD) regime expiring in July 2021 is applicable on imports from China, Thailand and Vietnam. However, as BCD covers all the countries, it minimises any scope for imports being routed from any country outside of India. Clarity is also required if manufacturers based in SEZs will have to pay BCD, and if existing investments in the sector based in SEZs will be at risk, given that majority of domestic cell/module manufacturing capacity in India is based out of SEZs.
Tariff Rates to Move in Tandem with BCD: As per Ind-Ra’s discussion with some of its rated issuers, the landed cost of imported solar modules (including transportation and hedging cost) without considering SGD of 14.5% is lower than that of domestically manufactured solar modules by around 25%. However, considering that SGD would be completely replaced by BCD, the cost of imported modules is likely to be 6%-8% higher than the current domestic module prices. Although the cost of modules manufactured using imported solar cells will likely be lower by 4%-5% than the current domestic module prices, as per Ind-Ra’s estimates. However, to completely meet the demand for solar capacity, the existing domestic cell/ module manufacturing capacity can be a constraint.
The government aims to support the domestic cell and module manufacturing industry by imposing BCD, as it will make the price of domestic cells comparable to imported cells. If domestic manufactures become competitive with time by reducing their cost against the imported modules and cells, BCD could also come down. Moreover, investments into the domestic manufacturing sector are needed. Increased capacity utilisation along with vertical integration of cell and module manufacturing units in India will lead to economies of scale, thereby reducing the overall cost of manufacturing. Global players can play a vital role to make the domestic industry more viable and internationally competent.
According to Ankur Agarwal, Associate Director, “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 BCD 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 SGD/BCD is applicable on imported cells/ modules. This is due to the fact that overall project cost (landed cost at the project site) for solar plants (considering that no SGD is applicable) is likely to go up by 20%-25%, considering imported modules are utilised”.
Ind-Ra’s estimates are almost in line (considering the fact that solar cells are imported and modules are manufactured domestically) with the recent tariff of INR2.20/kWh discovered after BCD imposition in the latest solar auction conducted by Gujarat Urja Vikas Nigam Limited.
The existing solar tariff is lower than the average pooled power purchase cost (APPC) for most of the state discoms. This makes the solar projects an attractive cost mix for discoms. However, an increase in solar tariffs due to BCD may lead to increase in APPC of solar power for the discoms, reducing the overall inclination of power off-takers towards solar projects.