Basic customs duty on imported solar cells, modules positive for domestic OEMs: ICRA

The Government move to impose a basic customs duty (BCD) of 25 per cent on imported solar PV cells and 40 per cent on imported solar PV modules, with effect from April 1, 2022 will support domestic equipment manufacturers (OEMs) but it is likely to result in an increase in solar tariffs, according to ICRA.

However, clarification is needed on the continuation of the safeguard duty (SGD) on imported cells and modules, which is currently at 14.5 per cent, valid till July 2021.

Girishkumar Kadam, Co-Group Head, ICRA Ratings, said: “This is expected to result into an increase in the capital cost for a solar power project by 23-24 per cent (capital cost factoring non-continuation of safeguard duty beyond July 2021). This in turn would result in an increase in tariff by about 45-50 paise per unit.”

Also read: Solar modules, cells to attract basic customs duty of 40%, 25%

“The bid tariff trajectory is likely to remain well below ₹3/unit and thus, would continue to remain cost competitive from the off-takers’ perspective. For the state-owned utility off-takers, average power purchase cost and variable cost of power purchase (bottom 25 per cent in merit order dispatch) remain in the range of ₹4-5/unit and ₹3-3.5/unit respectively in many States,” he said.

Change in law

For the project already bid out and having scheduled commissioning date post April 2022, wherein modules may be imported post this date, the levy of BCD is expected to be a change in law event under the power purchase agreement (PPA). In such cases, the timely approval by the respective regulatory commissions and pass-through of the tariff increase to the off-takers would be critical from the cash flow perspective for the project developers. In addition, the module price trends remain a key monitorable for the solar power developers, in view of the recent firmness in the imported module prices.

The imposition of BCD on imported solar cells and modules is expected to improve the competitiveness of domestic cell/module manufacturers. However, the extent of benefit would also depend upon the imported PV module prices, especially from China.

Vikram V, Sector Head, ICRA Ratings, further added:, “Based on an imported module price level of 18 cents/watt and prevailing Rs-USD exchange rate, the domestic modules are costlier by 12-15 per cent without the impact of BCD. The imposition of BCD would bridge this gap and make the modules from a domestic manufacturer (using imported cells) competitive against the imported modules.”

Backward integration

The extent of benefit would be higher for manufacturers having backward integration into cell manufacturing. A large portion of the solar module manufacturing units and solar cell manufacturing units in India are currently located in the SEZs. In this context, clarity is also required on applicability of BCD on manufacturers located in the SEZs.

This apart, the Government schemes like manufacturing-linked IPP tender, Central PSU scheme and PM KUSUM scheme etc, with mandatory use of domestically manufactured modules, which provides a strong order pipeline aggregating to about 35-40 GW over the next 3-5-year period, for domestic solar OEMs. However, the timely implementation of these schemes along with policy clarity on fiscal and financial concessions including production-linked incentive (PLI) scheme to promote domestic manufacturing, remains important.

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