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Solar tariffs underscore need for strategic planning.

Date: 26-03-2021
Subject: Solar tariffs underscore need for strategic planning
Tariffs will merely increase costs for consumers; India has missed the bus on domestic manufacture of solar modules and batteries

The government recently announced that basic customs duty (BCD) would be levied for import of solar cells and modules with effect from April 2022. While the duty would be 25% in respect of solar cells, it would be 40% for the modules. The notification does not have any sunset clause, implying that the BCD would be levied till such time the government changes its mind.

The imposition of BCD will replace the safeguard duty which was imposed in July 2018 for a period of two years for imports from China, Vietnam and Thailand. The duty was 25% for the initial year, followed by 20% for the next six months and finally, 15% for the final six months. Safeguard duty is a temporary relief provided when imports of a product increase unexpectedly to a point where they threaten domestic manufacturers. Just for the record, the imposition of this duty provided no succour to the domestic industry because it was too short lived. No investor is going to put his money in a business where the protection ceases to exist so soon. In fact, the duty proved to be counter-productive, since the developers simply postponed their investment decisions by two years, adversely affecting the pace of solar capacity installation!

The imposition of BCD will raise solar tariffs because of the increase in capital costs. There are estimates that tariffs may rise by about 50 paise per unit, which would be about 25% more than the latest market-discovered tariff. When it comes to import of cells, the tariffs will rise about 30 paise per unit. This may not really affect the generation mix in the future years since the tariff differential between the variable cost of coal based plants and that of solar plants will still be significant and solar plants will remain relatively cheap. The imposition of BCD, however, will ensure that Indian consumers would be paying more for their power purchase compared to what they would have paid without the BCD.

Economic theory has taught us that by imposing customs duty, one provides protection to the domestic industry, which then tries to bring down its cost of production by taking advantage of economies of scale and also through ‘learning by doing’. At some later stage, the duties are expected to be removed once the domestic industry becomes competitive. It is a well-known fact that this policy has not really worked in India and that a number of import duties were in vogue till 1991, though they were slowly dismantled thereafter. The moot question is what works better in this case: subsidies or custom duties? To arrive at a credible comparison, it would require more than ‘a back of the envelope’ calculation, but perhaps, duties would cost us more because of the multiplier effect of a higher power-purchase-cost across the economy. It would be interesting to see what China did to reach the stage that it is in today.

The Chinese government saw the potential of the solar industry way back in the early 2000s and invested heavily in the supply chain, and everything was available just kilometres away, which significantly reduced their production costs. According to a report published by the IEEFA (2021), the government provided subsidies for land acquisition, ensured subsidised electricity to manufacturing facilities, and manufacturers were provided loans with phenomenally low interest rates for setting up manufacturing units. Following the 2008 financial crisis, the country set up the China Development Bank that supplied a line of credit to the tune of $30 billion to module and cell manufacturers. The government also extended cash grants to manufacturers for large-scale demonstration projects. Moreover, the Chinese Export-Import Bank lent support by providing export credits and export conditional loans at preferential rates. In addition to these policies, the Chinese government also provided refunds on interest paid on loans and electricity costs, granted tax holidays, provided subsidies on leases, etc.

The net result of doing all this was that China landed up with a gigantic capacity for manufacture of solar cells/modules. China’s own domestic push towards renewable generation played a complimentary role in boosting its manufacturing capacity. In fact, more than two-thirds of the world production of modules and cells is based out of China. China’s total solar generating capacity today is about 200 GW, compared with India’s cumulative solar capacity of only about 39 GW (including a little more than 4 GW of roof top). It is estimated that the Chinese have a manufacturing capacity in excess of 100 GW whereas the Indian manufacturing capacity is only about 10 GW. The economies of scale that China reaps on account of this huge production capacity is simply stupendous. Incidentally, readers would be interested in knowing about Swanson’s law which states that the price of solar photo voltaic tends to drop 20% for every doubling of cumulative shipped volume.

The story about solar PV cells would be incomplete unless we touch upon mega watt scale storage batteries. With decreasing battery costs, storage today is economically viable. For India, with a target of 450 GW of renewable generating capacity by 2030, we will not be able to move ahead towards our target after a few years without batteries due to issues of grid stability. In the case of batteries too, China seems to have monopolised the business. China is investing large amounts of money in the complete battery supply chain, be it cobalt or lithium. Sumant Sinha, in his book Fossil Free, mentions that China is investing in cobalt mines and also extending large infrastructure loans to Congo and Zambia, countries that control more than 50% of the world’s cobalt supply. Similarly, China is investing in Chile’s largest lithium production and reserve company and has also made investments in Australia. Sinha adds that, as of September 2019, about 360 GWH of lithium-ion battery-cell-manufacturing capacity was set up around the world and about 75% of that was in China alone. The same story is being repeated in respect of capacity-under-construction where China’s share is even more dominant at 85%.

In conclusion, it can be said that India seems to have missed the bus when it comes to domestic manufacture of solar modules and batteries. The moral of the story is that there is no substitute to strategic planning. India should now look ahead and work in the area of green hydrogen which is going to be the next game-changer. Green hydrogen is made through electrolysis using renewable power. We need to lower the cost of green hydrogen by reducing the cost of electrolysers and also by increasing their efficiency. Let us hope that the recently-announced Hydrogen Mission is able to leverage the synergies between the government, research laboratories and the industry and help us recover the lost ground.


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