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Trade protection for domestic manufacturers is misguided | February 2018

This report assesses complete solar value chain and evaluates each element on its contribution to the economy

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On 22nd January this year, the US government imposed 30% safeguard duty on imported solar cells and modules. The duty has been imposed for four years but will reduce by 5% every year. First 2.5 GW of imports every year shall be exempted from duties.

As per WTO laws, imports from specified developing countries shall also be exempt from duties up to 3% of ‘total imports’ for individual countries and up to 9% of ‘total imports’ cumulatively for all such developing countries. This provision is a silver lining for Indian manufacturers as India is one of the exempted countries. Assuming that the US imports 10 GW cells and/or modules every year, Indian manufacturers can export up to 300 MW of modules per year with a healthy pricing advantage. This is an attractive opportunity but the small scale is not credible enough to support manufacturing in India.

One big unknown is the impact of this decision on US module demand and ultimately, the international prices. The level of duty imposed is less than the US International Trade Commission (US ITC) recommendation and final solar system prices are expected to go up by only between 6-10%. That makes us believe that final impact on US demand and module prices elsewhere would be minimal.

The US decision could still have one important implication for India. India is in the midst of its own trade investigations to consider safeguard and/or anti-dumping duty on cells and modules. We feel that the Indian government has a much tougher call as the downstream market is extremely price sensitive and any price shock would detract from the vastly ambitious target of 100 GW by 2022. Nonetheless, the US decision would ring loudly in the ears of Indian policy makers, who may take a cue from the US in imposing duties of about 20-30%.

FULL STORY

Gujarat Urja Vikas Nigam Limited (GUVNL), Gujarat government holding company for power distribution and transmission businesses in the state, announced a new 500 MW solar tender last week. The tender has an innovative provision in the form of a 500 MW green-shoe option. If GUVNL deems the lowest auction tariff attractive, it can exercise an option to increase the tender capacity up to 1,000 MW provided bidders are willing to match the tariff. With this tender, total new RE capacity tendered in India from December 2017 onwards has gone up to 12,755 MW.

The Indian Finance Minister announced budget for the financial year 2018-19 last week. Being this government’s last budget before general elections due in early 2019, the focus was unsurprisingly on populist measures related to agriculture, rural development and health. But we still found it remarkable how little attention was paid to the entire energy sector.

  • Focus is on rural electrification, but funding provision seems inadequate for various ongoing and proposed schemes;
  • Increase in customs duties on lithium-ion batteries is expected to hamper storage prospects;
  • Slippage down the government’s priority list is not a good sign for the sector;

RE received precious few mentions in the budget. Those were limited to rural electrification and solar irrigation pump schemes. But here again, the funding allocations seem too small and less than expected – INR 8,485 million for off-grid solar for FY 2018-19 is 14% lower than the revised estimate for FY 2017-18. Moreover, initiatives to devise a mechanism for DISCOMs to buy surplus power from farmers seem insincere.

For FY 2018-19, the budgeted allocation is INR 51.5 billion, 6% lower over last year. Around 39% of monies are earmarked for grid interactive solar projects. Bulk of this allocation is expected to go towards solar park capital expenditure and rooftop solar subsidies but the amount seems short of promised support under ongoing and proposed schemes.

Figure: MNRE budgetary allocation for FY 2018-19, INR million    

Picture1     Source: Union Budget 2018-19 documents, BRIDGE TO INDIA research

Note: Others include expenditure on human resource development and training, autonomous bodies under MNRE including National Institute of Solar Energy (NISE), National Institute of Wing Energy (NIWE), National Institute of Bio-Energy (NIBE) and SECI.

Despite a steep slowdown in wind energy installations during the last year, budgetary allocation for wind energy remains unchanged.

In line with other hikes in import duties, customs duty on lithium-ion batteries has been increased from 10% to 20%. That is not helpful for growth of storage business, which is already struggling with viability challenges.

Overall, it is disappointing for such a vital sector of the economy to receive such little attention. There is a dearth of new ideas and little attempt is being made to harness new technologies and business models – gasification, electric vehicles, storage, smart grids – to achieve India’s energy transition. The budget confirms our view that energy is slipping down the government’s priorities in the fog of elections and other ‘more important’ concerns.

FULL STORY

Karnataka announced results of an 860 MW state solar tender last week. 11 developers have won 48 projects aggregating 760 MW at tariffs ranging between INR 2.94 – 3.54/ kWh. Big winners include Shapoorji Pallonji (185 MW), Acme (106 MW), ReNew (99 MW), Asian Fab Tech (85 MW) and Greenko (45 MW). Prominent losers include Aditya Birla, Avaada, Orange and EdF. 100 MW of the allocated capacity was reserved for domestic module manufacturers, but we expect this to be cancelled in view of the ongoing WTO dispute.

2017 was an extraordinary year in many ways for the Indian RE sector. The year will be known for record capacity addition, drastic fall in tariffs and start of the new trade investigations by Indian government into imports of cells and modules. We look at 5 charts summarizing key trends for the sector in 2017.

Sector added record new capacity

2017 RE capacity addition is estimated to touch a record 13.3 GW (+61% over 2016) – utility scale solar added 8.2 GW (+110%), rooftop solar 0.8 GW (+60%) and wind 4.0 GW (+11%). This was also the year when solar outpaced all other sources of power for the first time. We believe that 2017 will be a record year for RE capacity addition in India for some years to come.

Chart: Annual capacity addition, MW

Chart1

Source: BRIDGE TO INDIA research

Note: Thermal capacity addition numbers are ‘net’ of decommissioned plants. Also, these numbers are for financial years from Apr-Mar. 2017 thermal power capacity addition number is for Apr-Dec.

Tariffs continued to go down despite rising costs

SECI’s 750 MW of utility scale auction in Bhadla solar park saw tariffs fall to a new low of INR 2.44 falling below the previous lows seen in Rewa and Kadapa tenders. Intense competition meant that tariffs went up only marginally in subsequent auctions despite significant increases in module costs, GST and import duty. Wind tariffs fell even lower to INR 2.43, beating all market expectations, in December 2017.

Chart: Tariffs hit record low even as cost rise

Chart2

Source: BRIDGE TO INDIA research

Note: Wind tariff for Q4-2016 is taken as the average of feed-in-tariff for select states.

Tender pipeline remained sluggish because of weak power demand

Weak power demand growth meant that DISCOMs were relatively reluctant to buy new power despite falling tariffs.

Chart: Tender issuance and auction completion, MW

Chart3

Source: BRIDGE TO INDIA research

Commissioning delays badly affected state tender projects

Commissioning delays affected the sector badly as developers grappled with various issues related to land acquisition, connectivity, completion permits and GST etc. Worst affected tenders include Karnataka’s 1,200 MW tender and Telangana’s 2,000 MW tender. The following chart shows cumulative scheduled and actual commissioning status of Karnataka’s 1,200 MW, 920 MW SECI and 500 MW NTPC tenders, Uttar Pradesh 215 MW tender, Telangana 2,000 MW tender and Madhya Pradesh 300 MW tender.

Chart: Commissioning performance of selected tenders

Chart4

Source: BRIDGE TO INDIA research

India continued to be heavily reliant on imported modules

Despite DCR and other incentives offered to domestic manufacturers, India remained heavily dependent on imported cells and modules with Chinese suppliers dominating the market because of low prices and huge capacity. That has put pressure on the Indian government to consider trade protection measures to support Indian manufacturing.

Chart: Source of modules procured for the projects commissioned in 2017

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Source: BRIDGE TO INDIA research

Note: This data is for 8.2 GW of modules used in utility-scale projects commissioned in 2017.

FULL STORY

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