BCD Will Raise Solar Purchase Cost by Rs 900 Cr pa for Off-takers: Ind-Ra

The imposition of BCD will lead to an increase in solar tariffs which will increase power purchase costs for solar off-takers by Rs 900 crore annually

India Ratings and Research (Ind-Ra) has come out and said that the imposition of basic customs duty (BCD) on solar cells and modules with effect from 1 April 2022 will lead to an increase in solar tariffs on account of a rise in the overall project costs. And that it would result in reducing the overall attractiveness of solar projects to off-takers and finally end-consumers. 

According to Asmita Pant, Senior Analyst at Ind-Ra “the increase in tariffs will increase power purchase costs for solar off-takers by Rs 900 crore annually, considering that around 10 GW of solar capacity will come on stream in the next 12 months. This amount will keep on increasing exponentially with the commissioning of new projects, till the time the duty is in place or import costs and cost of local manufacturing achieve parity. This may also affect the government’s plan to achieve the targeted solar capacity of 280 GW by 2030.”

It further adds that the BCD would also be applicable for already bid-out projects. And that the timeframe for which BCD would be applicable is uncertain, creating additional risk for domestic manufacturers in incurring significant capex. 

The existing safeguard duty (SGD) regime expiring in July 2021 is applicable on imports from China, Thailand and Vietnam. However, as BCD covers all the countries, it minimises any scope for imports being routed from any country outside of India. Clarity is also required if manufacturers based in SEZs will have to pay BCD, and if existing investments in the sector based in SEZs will be at risk, given that majority of domestic cell/module manufacturing capacity in India is based out of SEZs.

As per Ind-Ra’s discussion with some of its rated issuers, the landed cost of imported solar modules (including transportation and hedging cost) without considering SGD of 14.5 percent is lower than that of domestically manufactured solar modules by around 25 percent. However, considering that SGD would be completely replaced by BCD, the cost of imported modules is likely to be 6 percent-8 percent higher than the current domestic module prices. Although the cost of modules manufactured using imported solar cells will likely be lower by 4 percent-5 percent than the current domestic module prices, as per Ind-Ra’s estimates. However, to completely meet the demand for solar capacity, the existing domestic cell/ module manufacturing capacity can be a constraint.

BCD Solar

The analysis goes on to add that the government aims to support the domestic cell and module manufacturing industry by imposing BCD, as it will make the price of domestic cells comparable to imported cells. If domestic manufactures become competitive with time by reducing their cost against the imported modules and cells, BCD could also come down. Moreover, investments into the domestic manufacturing sector are needed. Increased capacity utilisation along with vertical integration of cell and module manufacturing units in India will lead to economies of scale, thereby reducing the overall cost of manufacturing. Global players can play a vital role to make the domestic industry more viable and internationally competent.

According to Ankur Agarwal, Associate Director, “to maintain a similar equity return on solar projects, the increase in the module cost (60 percent-65 percent of the overall project cost) due to imposition of the BCD will lead to an increase in current tariff rate by 40-50 paisa per unit if complete modules are imported and by 30-35 paisa per unit if only solar cells are imported, compared to scenario when no SGD/BCD is applicable on imported cells/ modules. This is due to the fact that overall project cost (landed cost at the project site) for solar plants (considering that no SGD is applicable) is likely to go up by 20 percent-25 percent, considering imported modules are utilised.”

Ind-Ra’s estimates are almost in line (considering the fact that solar cells are imported and modules are manufactured domestically) with the recent tariff of Rs 2.20/kWh discovered after BCD imposition in the latest solar auction conducted by Gujarat Urja Vikas Nigam Limited.

The existing solar tariff is lower than the average pooled power purchase cost (APPC) for most of the state discoms. This makes the solar projects an attractive cost mix for discoms. However, an increase in solar tariffs due to BCD may lead to increase in APPC of solar power for the discoms, reducing the overall inclination of power off-takers towards solar projects.

Current Manufacturing Capacity Unlikely to Meet Short-term Demand for Solar Cells and Modules

India has a target to achieve an installed solar energy capacity of 280 GW by adding around 25 GW capacity every year till 2030. India’s installed solar capacity increased to 37 GW in January 2021 from 2.6 GW in March 2014, at a CAGR of around 47 percent. As per the recent circular of the Ministry of Renewable Energy (MNRE), on the approved list of models and manufacturers, the ministry has enlisted solar module manufacturers having a total capacity of 8,182 MW whose modules would be eligible for use in government/government-assisted projects/projects in India. Enlistment under this circular is valid for two years and the list would be updated by the government every month.

The majority of the solar projects being set up under government schemes would utilise domestically manufactured modules and cells. However, the existing domestic capacity would not be sufficient to achieve the targeted capacity of 25 GW every year. Ind-Ra expects the short-term demand for solar cells and modules will continue to be met through imports, thus pushing up tariff rates for solar projects as imports will become costlier. However, an additional manufacturing capacity needs to be set up in the long-term. Major domestic equipment manufacturers in India along with new players have already announced their plans to increase/ setup their module and cell manufacturing capacity.

As per the MNRE website, India has an installed module manufacturing capacity of around 10 GW and cell manufacturing capacity of around 3 GW. Assuming 100 percent utilisation of existing installed capacity, in the most optimistic scenario with a growth rate of 25 percent, India would be able to completely meet its demand for domestically manufactured solar modules and cells of 25 GW only in 2025 and 2030, respectively. Hence, the duty imposition is positive for the industry in the long-run.

Assumptions: Yearly growth rate from 2021 for the most probable scenario has been assumed at 15 percent, for the optimistic scenario at 25 percent, and the pessimistic scenario at 10 percent.

Achieving a domestic manufacturing capacity of 25 GW for solar modules and solar cells by 2025 would require the manufacturing capacity to be increased at a CAGR of around 20 percent and 53 percent, respectively, which seems a stiff target especially for solar cells.

Other Regulatory Risks: The BCD will also be applicable to the projects that have already been bid and whose commissioning will be post April 2022. Due to an increase in the project cost, the tariff increase will have to be passed on to off-takers, for the projects to be viable. As per the recent power purchase agreements of the solar projects rated by Ind-Ra, any increase in taxes and duties is considered as a “Change in Law” and the developers have to approach the respective regulatory commissions for seeking approval for the same. It could lead to delays in the commissioning of solar projects and the cost of such delay will have to be borne by additional equity if lenders insist on approvals for continuing disbursements. However, Ind-Ra does not envisage any challenges with respect to getting the approvals as there is sufficient timeline of one year for imposing the duty.

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Ayush Verma

Ayush Verma

Ayush is a staff writer at saurenergy.com and writes on renewable energy with a special focus on solar and wind. Prior to this, as an engineering graduate trying to find his niche in the energy journalism segment, he worked as a correspondent for iamrenew.com.

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