How Imposition of 40% BCD on solar modules can impact Indian solar industry

India is considered to be the most attractive market for renewable energy with a target to increase non-fossil fuel energy capacity to 500GW by 2030, which includes 280GW from solar energy. To reach this target 24GW of solar power is to be added each year. India added 7.4GW of solar capacity in 2021, which is 335% more than the achievement of 1.73 GW in 2020.

India has a plan to hit the target of 100GW of solar capacity by 2022. To meet this target there would be a massive demand for solar PV modules and solar cells. Till now this demand used to be fulfilled with imported solar cells and solar panels. 

The Indian Government has decided to impose 40% Basic custom duty (BCD) on solar modules and 25% on solar cells from April 1, 2022, in order to make imports costlier and encourage domestic manufacturing. Besides meeting domestic demand, the second major objective is to emerge as a global supplier of these solar products.

The current scenario of imports of solar products

In 2021, India imported solar cells and PV modules worth $3.52 billion, which is 641% more than the import of solar modules and cells worth $475.78 million in 2020. Exports have seen a growth of 58% , amounting to $113.36 million in 2021 as compared to $84.16 million in 2020.

In 2021, the imports of solar in India increased by 63% in Q4 amounting to $1.55 billion from $953 million in Q3 2021. Whereas the exports of solar cells and modules from India increased by 9% with $23 million in Q4 as compared to $21 million in Q3.

The Indian solar energy sector is dependent on imports, especially for raw materials to manufacture solar panels domestically. According to Ministry of Commerce & Industry data, China is the largest exporter of solar products to India with 89.5% market share. China has been a major supplier of solar cells worth US$578 million in 2021, followed by Malaysia which supplied solar products worth US$20 million and Thailand selling solar cells worth US$16 million in India. 

The same financial Year India Imported solar panels worth US$2.5 billion from China, followed by Hong Kong which supplied solar panels worth US$201 million to India. India imported solar panels from Malaysia and Singapore worth US$25.3 million and US$20 million respectively.

On Other hand, India exported US$81 million worth of solar products in FY 2021-2022. The US has been the biggest importer of Indian Solar Panels worthed US$59 million and accounting for 73% of Indian Solar Panel exports. Besides the US, India exported US$6.8 million worth of solar panels to Somalia and US$4.55 million worth to South Africa. 

Basic Custom Duty (BCD) Aimed To Promote Domestic Manufacturing

Atma Nirbhar Bharat Initiative is aimed at gearing up the country towards scaling up domestic manufacturing. The Indian solar energy sector is dominated by Chinese suppliers because of their competitive prices. The government also noted that certain countries are dumping solar cells and modules to kill the nascent domestic solar industry. 

Indian solar panel manufacturers are unable to offer competitive prices as compared to similar Chinese counterparts thus creating a demand-supply gap and further leading to disincentivizing Indian manufacturers from increasing their manufacturing capacities. MNRE reported that the cost difference between domestic solar cells and PV modules as compared to those of imported ones is 21% to 22%. The 15% safeguard duty on imports from China, Vietnam & Thailand was not sufficient to help domestic manufacturers push their products into the domestic market. 

The government has decided to impose 40% BCD on solar PV modules and 25% BCD on solar cells from 1 April 2022. With the Imposition of BCD, the importer of solar products from China or other countries will not be able to get the price advantage. Along with this, scaling up domestic manufacturing of solar panels will allow India to export solar cells and modules, thus providing other countries with an alternative for procuring solar PV modules.

Concerns of Manufacturers in Special Economic Zones (SEZs)

Nearly 40% of module manufacturers and 60% of solar cell manufacturers are located in SEZs. Special economic zones are areas in which business and trade laws are different from the rest of the country. They are open markets within the economy and are international territories for trade and commerce. They were brought into being with the objective of attracting FDI to the country and promoting exports.

Local raw materials purchased by companies in SEZ are considered as exports, whereas goods produced in SEZs and sold to DTA (domestic tariff area) are regarded as imports. Due to this the modules manufactured in SEZ will qualify for 40% BCD (Basic Custom Duty). 

The imposition of 40% BCD on solar modules and 25% on solar cells is a rising concern for them resulting in a number of manufacturers moving out of SEZs. 

BCD on SEZs will make them highly uncompetitive leading to underutilization of their manufacturing capacities and Loss of investments, which will further raise a question mark on their very existence.

Impact of BCD on Solar Tariffs

Solar panels alone account for 60% of the cost of a solar project, and imported panels that are of higher efficiency come at competitive prices. This is the reason why some developers prefer importing modules instead of procuring from domestic manufacturers.  

According to NSEFI (National Solar Federation Of India) the imposition of BCD may impact solar projects awarded before March 2021. 15W of solar projects may be impacted. Various projects awarded before the announcement to impose Basic Custom Duty were scheduled to achieve a commercial operation date prior to the start of BCD. 

But the actual commercial date of operation of these solar projects got delayed past 31st March 2022 due to COVID-19 pandemic and delay in the supreme court’s decision in the “Great Indian Bustard” Case. There is no provision for exempting projects already auctioned as the government didn't confirm grandfathering of these solar projects.  

The imposition of BCD will increase the overall project cost of these costs. The use of imported solar cells or modules in these specific solar projects and the price gap will burden the end consumer with at least Rs.0.30/kWh to Rs.1.50/kWh. 

Domestic solar cell manufacturing capacity is about 3GW which many solar power developers believe is not sufficient to support the demand. So, they are skeptical about the ability of domestic manufacturers to meet the present and future demand leading to a dependency on imports to meet their demands. 

To deal with increased overall project costs, developers may have to raise short-term working capital or additional equity at a much higher interest rate which would make the projects unviable economically. 

High tariffs due to the BCD may not work well for DISCOMS that are feared to terminate existing power purchase agreements (PPA) or not accept the higher tariff. It would negatively impact the overall power purchase cost.

Impact On Home Solar Power System

With a hike in the cost of materials across the solar supply chain, the cost of home / residential solar power systems is expected to rise. A solar power system for home comprises of solar panels, inverter, battery, cables and structure. Since solar modules account for 60% price of the system, so with the rise in the price of solar panels the cost of home solar power systems is expected to rise.

Will BCD have a long-term negative impact on the solar industry?

No, we can't say that. BCD has been implemented to support domestic manufacturers compete with Chinese and other international suppliers in the domestic market. And at the current point of time, both domestic and Chinese PV module manufacturers are unsure about the outcomes of the policies. The higher prices of solar panels could be just to test the market reaction or discover a new normal.

Secondly, The rise in the price of solar panels is expected to be a short-term effect until local manufacturers achieve economies of scale and start manufacturing more efficient solar panels than the imported ones.

The solar industry is at its nascent stage and the current ALMM list has a capacity of 8GW, which can pose a short-term challenge to project developers planning to procure solar panels. But with domestic manufacturers' planning for capacity expansion, more capacity will be added to the ALMM. So in a span of a few months, we can expect more suppliers to get ALMM approval.

According to ICRA, the PLI (production Linked Incentive) scheme along with the imposition of BCD on imported modules and cells from April 2022 is expected to improve the cost competitiveness of domestic manufacturers in comparison to imports. The combination creates a favorable environment for the growth of domestic solar cells and PV modules manufacturing.

The BCD and ALMM will accelerate the much-needed indigenization of the solar industry that will help to get the required size and scale of manufacturing and to create global champions who can penetrate global markets. Therefore, we can expect a period of high growth of local manufacturing in India due to policy support.

It is expected that approval of PLI allocation can lead to the setting up of 30-35 GW of solar module capacity and 25-30 GW of cell capacity by 2024. Thus reducing the dependence on imports.

Conclusion & Possible Solutions:

The Indian Government has been promoting make in India for many years, and to motivate people to choose domestically manufactured solar products a lot of preparations and better policies are required. Implementing BCD is one step necessary for a better future for the solar industry in India but several more steps are needed to make it successful.

We need to focus on infrastructure and manufacturing to fill in the demand and supply gap. ALMM lacks market assessment and BCD is not the complete solution. Indian manufacturers must be motivated by incentivizing them but not in the form of subsidies.

Another possible solution could be the encouragement of technology transfer between foreign and Indian manufacturers.

As per a senior government official breaking the PLI into different buckets for polysilicon-to-modules making, wafers to modules and cells to modules manufacturing will promote manufacturing of all the components and include more players.