Solar power producers are faced with a significant escalation of project costs in projects that are currently running if they do not complete them before the planned increase in the basic tariffs on imported solar photovoltaic cells and modules from next year.
While the government's decision to impose a basic tariff on imported solar photovoltaic cells and modules will not take effect until next year, once the current protective tariff has expired on such imports, it will give domestic manufacturers the confidence they need to invest in capacity expansion. However, industry watchers say this will put utility companies in a rush to end project deadlines with imported equipment to keep costs under control and make projects profitable.
On March 9, the Ministry of New and Renewable Energy (MNRE) announced a base tariff of 40% (BCD) for solar modules and 25% BCD for solar cells from April 1, 2022. The ministry wants Indian manufacturers not only to produce enough to meet domestic demand for solar cells and modules, but also to become a major global supplier. The tariff will eventually replace a 14.5% protective tariff currently applied to imports from China and Malaysia. On March 12, the MNRE also published a list of approved model and module manufacturers for government projects, creating a non-tariff barrier to substandard imports.
In the 2020 calendar year, India installed almost 3.6 gigawatts (GW) of electricity supply capacity and solar capacity on the roof as well as 6.5 GW in the previous year. Almost 90% of the cells and modules used in India are imported, with China making up most of the shipments. India is expected to add around 13.5 GW of capacity in 2021. Many of these are projects whose deadlines have been extended due to covid-related building restrictions. These developers are expected to import equipment to complete projects before the BCD kicks in.
“The BCD will in the short term undermine the cost advantage of solar (over other renewable energies),” Vinay Rustagi, managing director of Bridge to India, told Mint. Many government tenders are now associated with compensation for changes in the law to pass on the additional tariff burden. However, these are costs that the developer must incur first and which are then reimbursed through a regulatory mechanism that they do not receive I think the developers will try to do as much project work as possible of what has already been advertised before BCD kicks in to avoid the process of changing the law. “
In a March 11 report by rating agency ICRA Ltd, it was estimated that the BCD will increase the cost of capital of solar power projects by 23 to 24%, which in turn will lead to a tariff increase of around 45 to 50 pa per unit. Currently, domestic modules are 12-15% more expensive than imported ones, ICRA said the BCD, which allows for a stable INR-USD exchange rate, will fill this gap.
“The short-term increase in tariffs will be stronger for solar and open access customers on the roof,” said Rustagi. “This will be a direct increase in the required capital and effective cost of solar energy.”
However, the BCD is expected to boost the domestic manufacturing sector, which currently has a capacity of around 3 GW per year. Industry experts believe that the existing protection obligation and the upcoming BCD will give manufacturers the confidence they need to invest in capacity building and that ultimately only Indian products and top-notch Chinese products will remain in the market. Last September, India received proposals to build up 10 GW of solar production capacity under the government's Atmanirbhar program.
“The BCD implementation will provide the necessary impetus to create a self-sustaining ecosystem for solar manufacturing in India, creating jobs and reducing solar imports,” said Gyanesh Chaudhary, Managing Director of Vikram Solar Consider Exempting the BCD – Tax for production units in special economic zones (SEZ). Given that 43% of the solar module production units and 63% of the solar cell production units are located in SEZ, the introduction of BCD on SEZ units affects the domestic solar production ecosystem and makes them very uncompetitive. There will be a question mark on the existence and survival of module manufacturers in SEZ units. “
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