25% safeguard duty on solar modules is both a boon and a bane: Crisil

V Rishi Kumar Hyderabad | Updated on July 17, 2018 Published on July 17, 2018

The safeguard duty of 25 per cent recommended by the Directorate General of Trade Remedies on solar modules is both a boon and a bane for the solar value chain.

Crisil says while this is a good move to protect the local industry, high import content in projects would jack up bid tariffs in the near term. Currently, 85-90 per cent of the solar modules used in India are imported from China and Malaysia.

At present, 11-12 GW of projects are estimated to be under-construction. These developers would use ‘change in law’ clause in their contracts to pass on the rise in costs to discoms or the appropriate electricity regulatory commissions. This can cause a temporary rise in working capital requirement or delay in commissioning of the project.

According to Crisil Research, to maintain the current returns, the minimum bid tariffs for solar power projects based on imported modules would need to rise to Rs 2.9 to Rs 3.2 per unit for a duty rate of 25 per cent in the first year of imposition, compared with the Rs 2.44 – Rs 2.80 per unit bid tariffs seen over the past few quarters.

Duty rates at 20 per cent and 15 per cent applicable in the second year would need slightly lower tariffs of Rs 2.8 – Rs 3.1 per unit for the same levels of equity IRR.

“Domestic modules, which are typically 8-10 per cent costlier than the imported ones (at current prices), would become more competitive after the safeguard duty,” Prasad Koparkar, Senior Director, Crisil Research, said in a statement.

“However, the industry currently lacks scale and capacity to service the more than 10 GW average annual demand from the end-user segment. The operational capacity of modules is estimated at 30-40 per cent of the required demand, and for solar cells it is even lower.”

Additionally, the tricky issue of the status of units in special economic zones with respect to the safeguard duty remains unresolved.

A 25 per cent duty rate is bound to increase the cost of modules to above that of current domestic prices. Consequently, solar power tariffs, which averaged Rs 3 per unit in fiscal 2018, would lose some competitiveness against other sources.

“The average solar tariff was expected to remain aggressive, having touched Rs 2.44 per unit mark twice,” said Rahul Prithiani - Director, Crisil Research.

“But an increase in capital costs means solar becomes less competitive as compared to wind power, which averaged Rs 2.80 per unit in fiscal 2018 and has also seen tariffs as low as Rs 2.43 per unit.”

Published on July 17, 2018
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