Policy Confusion, Cost Issues Cast a Shadow on India’s National Solar Mission Target

Safeguard duties, a lack of long-term buyers and inefficient cost structures are all holding back Modi's ambitious plan.

New Delhi: The national solar mission target looks doubtful as policy uncertainty takes its toll on investor sentiments.

The reluctance of state-owned utilities to sign long-term contracts to buy costlier solar energy is not helping the matter either.

India has envisaged adding 1 lakh MW (megawatt) solar power capacity by 2022. Against that, it has added a little over 23,000 MW so far.

The initial pace of solar capacity addition was quicker than expected thanks to cheaper imports of equipment. But under pressure from local manufacturers, the Narendra Modi government has curbed solar equipment imports, hurting investor sentiments.

Currently, investment of Rs 15,000 to Rs 20,000 crore is facing an uncertain future after the government levied safeguard duty on imports of solar cells from China and Malaysia, which together account for 90% of supply.

These projects are entitled to recover additional costs emanating from the imposition of the additional import duty on equipment. But for that, they will need regulatory approval. Solar companies fear that loss-making power distribution companies (discoms) could resort to litigation to delay coughing up extra money. If that happens, their cash flows could get disrupted.

Developers are already feeling the pinch due to regulatory delay in allowing pass-through of 5% Goods and Services Tax (GST). The Central Electricity Regulatory Commission (CERC) passed an order last week only after a year’s delay.

Companies fear they could face similar regulatory delays in recovery of additional costs on account of safeguard duty on solar cells. Moreover, there are fears that discoms could mount a legal challenge to regulatory orders as a delaying tactic.

Manoj Upadhyay, founder and managing director, ACME, a leading solar power company, agrees that policy uncertainty is a challenge for investors and should be avoided.

“Even if there is a policy change, the government should ensure that existing projects are not affected,” Upadhyay told The Wire.

Discoms drag their feet

Meanwhile, discoms are dragging their feet over signing power purchase agreements (PPAs) with solar plants, sending alarm bells ringing in the policy corridors.

R.K. Singh, minister for new and renewable energy (MNRE) has warned installed capacities could get stranded if they fail to find buyers for electricity.

If any discom purchases renewable energy at Rs 2.44 per unit, then along with the fixed cost (which they will have to pay to thermal stations under PPAs, whether or not electricity is procured), the total per unit cost would come to Rs 4.04, which is higher than the average price of Rs 3.25 a unit that discoms pay for thermal power, Singh wrote to finance minister Arun Jaitley recently.

Since renewable energy is intermittent, he added, the achievement of renewable energy capacity of nearly 88,000 MW (71,300 MW established and 17,500 MW under construction) could only happen after constantly pursuing with states, but states have flatly refused to sign PPAs for renewable energy if rates are any higher.

The minister also cautioned that the state-run Solar Energy Corporation of India (SECI), the intermediary for renewable energy projects, will have to Rs 40 lakh annually for every MW of solar power that remains unsold, a liability that it cannot afford. Long-term PPAs are normally signed for 25 years.

States like UP and Gujarat have recently scrapped tender for nearly 4 GW solar capacity because of high bid prices.

Safeguard duty

On July 30, the finance ministry levied safeguard duty on solar cells imported from China and Malaysia for two years.

A duty of 25% has been imposed for imports in the first year starting July 30, and 20% and 15% for two subsequent six-month periods, respectively, as per the department of revenue’s notification.

Meanwhile, the Modi government’s plan to encourage solar project developers to manufacture solar equipment is struggling to find takers

A tender floated by the SECI for setting up 5 GW manufacturing capacity – what was called “India’s largest solar tender” –  has received a lukewarm response from investors, forcing the agency to extend the bid submission deadline for a second time till October 12. The original bid submission deadline was August 27.

The tender that asked developers to make 50% of the panels used in a project elicited response from just one bidder, Azure Power, media reports noted, quoting unidentified sources.

As per the tender document, the proposed manufacturing capacity has to be linked to inter-state transmission system (ISTS)-connected solar PV projects.

The manufacturing unit and the linked solar PV projects have to be developed on build own operate (BOO) basis.

Developers are to be selected through competitive bidding, followed by e-reverse auction. They will be allowed to sign PPAs for double the capacity of the solar manufacturing plant. Accordingly, the total solar PV project capacity would be 10 GW for a manufacturing capacity of 5 GW.