The sun, the wind and the Chinese dragon

For about a decade, the prices at which renewable energy companies sold electricity to the utilities have been falling consistently. The factor behind this was China. Now, the tariffs are set to rise and, ironically, the factor again is China.

All along, cheap solar modules and wind turbine components (mainly castings) imported from China helped India roll out a respectable quantum of renewable energy capacity. But now, from the signals emanating from the government, India is determined to pare imports from China. If the upshot is a rise in wind and solar tariffs, so be it.

The government has indicated a basic customs duty of 25 per cent on imported modules and cells, likely to be raised to 40 per cent next year — levels that the Indian solar manufacturing industry is not satisfied with.

The industry expects tariffs to go up to between ₹3.25 and ₹3.50 a kWhr for both wind and solar, rising sharply from ₹2.36-₹2.38 a kWhr, seen in the latest solar capacity auctions (2,000 MW, SECI, ISTS-IX). Wind tariffs are also expected to be allowed to rise to similar levels.

Few people grudge this rise. The country seems to be in line with the thinking expressed by diplomat Gautam Bambawale, former Indian ambassador to China, that India should absorb the pain of de-coupling from China as it is in its long-term interests. Thus, it is clear renewable energy (RE) prices will rise. This has several implications.

The various electricity distribution companies (discoms), most of whom are already in the red and owe power suppliers ₹1.23 lakh crore, are those who will feel the pinch of the tariff rise. It is not as yet clear as to how the Central government would help them defray the higher costs of their power purchases, though, even after the expected tariff hike, the prices of wind and solar energy will be substantially below the ‘average power purchase cost’ of the discoms.

The ₹90,000-crore liquidity infusion promised as part of the Atmanirbhar scheme is moving slow, because of strings attached to it. According to Emkay Research, as of June 30, five States (Tamil Nadu, Andhra Pradesh, Maharashtra, Rajasthan and Punjab) had sought relief under the scheme of ₹33,100 crore but only ₹12,300 crore has been sanctioned (to four States other than Tamil Nadu.) “Even after the disbursements of these sanctioned amounts is paid to the electricity generating companies, the total outstanding dues of the discoms would be ₹1.1 lakh crore, which is worrying,” says a recent research paper of Emkay. As such, the increase in solar and wind tariffs is not going to be liked by the discoms, which may have no option but to petition for hiking the electricity prices they charge their customers.

Protection from competition

If this is the negative fallout of the rise in RE tariffs, there is better news on the flip side. The mood among the solar module and cell manufacturers (such as Adani Solar, Waaree and Tata Power Solar) and wind turbine companies (Suzlon and Siemens Gamesa) is palpably upbeat. Sensing the mood of the government, solar manufacturers have come up with a long wish-list: protection in the form of high import duty for at least 10 years, capital subsidy for building new plants, loans at concessional interest rate, money for upgrading technology and waiver of duty on products sold in India from their units in Special Economic Zones.

But whether or not the government accedes to grant them this largesse, it is clear that protection from competition from abroad is coming in the form of a basic customs duty which, by itself, is sufficient to create business for Indian module and cell manufacturers. A look at the Commerce Ministry’s import data shows that when the rate of ‘safeguard duty’ was 25 per cent, India bought less from China, but when the rate was reduced to 20 per cent and later, 15 per cent, India bought more.

Thus, if the government brings in even 25 per cent basic customs duty on modules and cells (cells are assembled into modules), there is likely to be enough business for Indian manufacturers. Industry insiders say that unless the tariff is higher (40-50 per cent), there is bound to be the nagging fear that Chinese products will still come in when their prices fall further — they are 17-18 US cents a Watt-peak today and are expected to decline by 12-15 per cent due to the glut in China.

Unless the market is assured, domestic manufacturers show reluctance in investing in R&D, critical for the industry. Regardless, the proposed 25 per cent (from zero today) is a big positive.

There is one issue, though. For the solar projects already awarded under auctions, the government is thinking of allowing ‘pass through’ of the impact of the customs duty on imported products — which means that the domestic manufacturers would have little business from the awarded projects. Regardless, with the assurance of the market and other sweeteners in the form of orders from government entities (public sector companies, railways, etc.), the unfolding scenario for the Indian solar manufacturers is much better.

Likewise, the smile is back on the face of the wind turbine manufacturers. Any tariff hike (in the Atmanirbhar or self-reliance spirit,) will improve their margins. Margins have come down from around ₹1 crore a MW in 2016 to ₹25 lakh, now — which, on a sale price of ₹5 crore a MW, is just 5 per cent. Capacity auctions are expected to pick up in the second half of the year, a refreshing zephyr, particularly for Suzlon, which desperately needs volumes to cover its costs, and Inox Wind, which is today sick.

In both wind and solar products, India has potential to export big. Exports of both are buoyant, even if small. Wind components worth $500 million were exported in 2018-19; even bulky, low-value products such as steel towers are being exported from places like Tiruchi, Tamil Nadu, and Halol, Gujarat, to the US. Similarly, solar exports are also on the rise, though still in small numbers. In 2019-20, India exported modules and cells worth ₹1,506 crore, almost twice as much as in the previous year.

The next few years will reveal how the Indian industry is able to blossom in a helpful policy environment. History shows that an indignant India does well and if a robust manufacturing base develops as is hoped, the country will have much to thank China for.

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