Tax clouds over solar power: Still a long way for the sun to shine in India

Import duties on modules and cells from April 1 will add to the regulations and legacy issues confronting solar power developers

For centuries, Indians have worshipped the sun god, realising its potential for unbridled, clean energy — in less than two hours, the earth receives from the sun the amount of energy we consume annually. Today, solar and wind together contribute 25 per cent of India’s total power capacity and 8 per cent of the electricity produced. There’s still a long way for the sun to shine in India — after the Narendra Modi government set a 500 gigawatt (Gw) renewables installation target by 2030, a five-fold jump from current levels.

One can argue that, after missing a previously proposed renewable target by 40 per cent, New Delhi would conjure up as near-perfect a condition as possible to meet the current goal, which even in the best of conditions would be seen as challenging. Instead, solar power developers are grappling with new taxes and regulations while legacy issues linger, threatening ambitious renewable goals.

The government has refused to reconsider a 40 per cent basic import duty on modules and 25 per cent on cells from April despite protests by developers. There is no sunset clause to the tax either. China supplies most of India’s solar equipment, meaning the capital component of the money invested in India’s 50 Gw solar projects actually went to Chinese companies, for lack of domestic manufacturing capacity. India spent $3.5 billion on solar imports in 2021, with China accounting for over 80 per cent of supplies.

The Modi government’s intentions are well meaning but the timing of the tax is wrong, especially in the face of global headwinds. The Russia-Ukraine conflict and the pandemic have added to uncertainty for renewables, increasing project costs and choking supplies. Ostracising Russia, one of the world’s biggest commodity producers, has created an artificial shortage of metals and fuels. Prices of polysilicon and wafers increased amid Covid-19 because of disruptions to operations in China, the world’s biggest supplier, while demand surged after Europe accelerated efforts to embrace renewables by 2030 to reduce reliance on Russian energy.

“The biggest hurdle to solar project execution momentum are supply chain-related issues,” said Hetal Gandhi, director, Crisil Research. These concern surging upstream component pricing, additional taxation on imported produce and inadequate availability of domestically produced PV components. 

“While upstream component pricing is largely due to policies external to India, specifically relating to production in China coupled with constraints on supply, the latter two are due to internal policies aimed at supporting the domestic manufacturing of modules, which will help the segment over the long term but will lead to short-term hiccups,’’ Gandhi pointed out.   

Domestic capacity of 14 Gw seems adequate but not all of it is sufficient in terms of capacity and technology, an executive with a leading solar panel maker said.

“At any point of time, India’s domestic manufacturing capacity must exceed local demand,” said Shekhar Dutt, head of Solar Power Developers Association. “The Ukraine conflict has made it imperative that we start producing in India.” India must also develop technologies to make panels durable and compatible with the country’s harsh and dusty climate. 

“The challenge for domestic manufacturers will be to offer the same quality as imported panels, be in line with technology developments and meet domestic demand,” said Manoj Gupta, vice president, solar, Fortum, a Nordic renewables company. Fortum seeks to invest Euro 200–400 million in solar projects in India. But, he pointed out, the domestic industry should be competitive without duty protection over time.

There are downside risks to India's solar power growth, if domestic manufacturing of solar equipment does not match the quantity and quality required for the market, ratings agency Fitch said.

In July 2021, India removed 15 per cent import duty on solar cells and modules from China and Malaysia, which was initially set to be removed in July 2020. 

Higher import taxes are supposed to address the gap between Indian manufacturing and demand for solar panels. The duties are designed to encourage investors to set up facilities to make solar photovoltaic (PV) cells and modules, initially to meet domestic needs and subsequently to cater to exports. There’s an approved list of manufacturers of domestic solar original equipment manufacturers (OEMs), which developers follow to participate in any state-linked solar projects.

“A heavy reliance on imports of upstream components for the solar energy industry has resulted in foreign suppliers having substantial control on the prices, restricting the ability of domestic manufacturers to cut costs and be price-competitive in the global market,” said Tulsi Tanti, chairman of CII’s Renewable Energy Council and chairman of Suzlon group. Of the Rs 2 trillion allotted to the production-linked incentive scheme (PLI), nearly 12 per cent is expected to support the setting up of additional cell and module manufacturing capacity of up to 40 Gw, according to ICRA. 

The government’s initiatives would have perhaps made sense if India were to run a marathon. But a 500 Gw renewable target in eight years is a sprint, and taxes have added one more hurdle for developers to jump.

Developers will continue to depend on expensive imports for the next few years until a domestic solar manufacturing ecosystem comes up. That, industry officials estimate, will take two or three years. The additional customs duty is expected to increase capital costs by 25 per cent and lead to an increase in tariffs of up to 30 paise/kilowatt hour, according to Gandhi.

It’s a double whammy for consumers and citizens. Using taxpayer money to promote manufacturing is common, from Arizona to Gujarat. But it’s uncommon for nations to also post high import barriers, which may not only make domestic makers complacent but also encourage cartelisation. 

Developers need to add 40 Gw of renewable capacity every year to meet the 500 Gw target. But India will add only 11 Gw of solar capacity, the biggest renewable component, in 2021-22 fiscal, and a further 13 Gw this fiscal, Crisil estimates. Fitch has forecast solar power capacity to increase by an annual average of 11 per cent from 59 Gw in 2022 to 140 Gw in 2031.

This newspaper recently outlined how most states in India still have a long way to achieve the 2030 target, with India using only 6.3 per cent of its renewable potential by 2020-21. Legacy issues like a slow build-up of transmission infrastructure, mounting dues, and contract reviews continue to linger.

India’s success in solar has been historically dependent on quality solar equipment imports from Asian nations. That makes it imperative for Indian manufacturers to meet both quantity and quality requirements, which may take a couple of years. Until then, some tax relief may go a long way to dispel looming clouds, and light up Indian homes.