Rising tensions add doubts over future of India's ambitious solar targets

New Delhi is considering fresh tariffs on China, which provides 80% of the country’s solar panel imports

A man rides a rickshaw along a street near India Gate in heavy smoggy conditions in New Delhi on December 6, 2019. (Photo by Jewel SAMAD / AFP)

India's power developers are bracing for a projected increase in solar panel costs as South Asia’s largest economy plans to levy additional taxes on Chinese panels – its biggest driver of solar-powered growth.

New Delhi is planning to impose 20 per cent tariffs on solar cells, modules and inverters imported from China starting on August 1. The move comes in the wake of a widespread backlash against Chinese investments following clashes between the two Asian countries along their shared Himalayan border. India, cancelled key contracts with Chinese developers and banned 59 apps, including the popular ByteDance-owned Tiktok, which enjoys huge popularity in the country.

India’s plan to target the solar parts manufacturing sector is particularly significant as China provides 80 per cent of its imports.

Both countries have underpinned the growth of their booming economies on renewable transition. Plagued by smoggy skies and very high pollution levels in metropolises such as Delhi, Shanghai and Beijing, India and China devoted significant political capital to realise their renewable energy targets.

China plans to drive 16 per cent of its power from renewables by 2030, while India has more ambitious targets of reaching 57 per cent renewable capacity by 2027.

India’s commitments are over and above its pledge to the Paris Agreement signed in 2016, which stipulates a target of 40 per cent renewable electricity generation by 2030.

For now, renewables account for just over a fifth of India’s power generation. However, New Delhi plans to add 175 gigawatts of renewable energy capacity by 2022. Of that, 100GW will come from solar, 60GW from wind, 10GW from biomass and 5GW from hydroelectricity.

With clean energy goals looming on the horizon and much of the capacity to come from solar, tariffs on the country’s biggest source of solar equipment could prove to be a set back.

But tariffs on Chinese panels are not new. In 2018, the Indian government imposed a 25 per cent tariff on solar cells and modules imported from China and Malaysia. The main motive then was to kickstart domestic manufacturing capacity, which has been unable to keep up with the country’s aggressive solar power generation targets.

The safeguard duty, as the levy is known, was subsequently lowered to 20 per cent in 2019 and to 15 per cent earlier this year. The government is considering a possible extension of the duty beyond its expiry on July 29, 2020.

However, despite the incentive, Indian domestic capacity has been unable to keep up with stiff Chinese competition.

"Indian modules are 33 per cent more expensive than imported Chinese modules,” said Kanika Chawla, director, centre for energy finance at the New Delhi-based Council on Energy, Environment and Water (CEEW).

Poor utilisation of available domestic manufacturing capacity is one reason, she added.

"If we were able, without adding any infrastructure, just to use the domestic manufacturing capacity at scale, we would already bring down this price difference to about 21 per cent," Ms Chawla said. "So we go from about being a third less competitive to being a fifth less competitive.”

While new tariffs could put Indian producers on an equal footing with their Chinese competitors, there would be a significant mismatch over the pace at which additional manufacturing can be brought on stream and the country’s plans to add more solar power.

"As it currently stands, India’s domestic manufacturing capacity will not be able to support the country’s ambitious solar growth,” said Xiaojing Sun senior analyst, solar systems and technologies at Wood Mackenzie.

The country’s manufacturing capacity for solar modules and cells will reach 10GW and 6GW, respectively by the end of the year, according to the consultancy. India’s demand for solar power is set to reach 9GW in 2020 and will be above 12GW annually between 2021 and 2025.

"Unless the manufacturing capacity continues to expand in the next few years to beyond [the] 15GW level, domestic Indian manufacturers alone won’t be able to make up for the lost imports,” Ms Sun said.

India’s entrepreneurial solar developers are navigating a vexing conundrum.

An executive at a leading solar energy company in India said plans were being considered to ramp up domestic capacity, while continuing to import Chinese-made solar panels. Indian companies are bracing for solar panel costs to surge by 10 to 15 per cent, he added.

A silver lining in the evolving showdown is that projects that have already been tendered are likely to be exempted from the proposed new tariffs.

With movements in China restricted because of the coronavirus pandemic in the first part of the year, solar panel imports into India remained slow, with the South Asian country still processing backlogs from earlier projects.

China exported around 5.9GW worth of modules to India in 2019, according to Wood Mackenzie.

A possible “full-scale ban” on Chinese solar panels – which has not yet been considered by the Indian government – would impact Chinese manufacturers as India is a key market for them, said Ms Sun.

"However, India represents about 8 per cent of the total Chinese module exports and about 5 per cent of the total shipment of Chinese manufacturers in 2019," she added. "It’s a small scale that manufacturers can manage. The impact on the cost of solar in India should be a bigger concern here.”

The Covid-19 pandemic and policy uncertainty could weigh on the growth of non-hydro renewables capacity, according to Fitch Solutions, the research arm of the credit ratings agency Fitch, which lowered its India forecast for the short-term.

Non-hydro renewables capacity is expected to grow 6.3 per cent this year to reach 88GW, below an earlier projection of 10.1 per cent growth. Only 252MW of wind and 1,184MW of solar capacities were added in the first five months of the year, according to official statistics.

“We highlight risks of a double taxation on solar, which will increase project costs, change solar tariff rates and jeopardise the economic feasibility of several projects in the pipeline,” Fitch Solutions said in its report.

While the agency forecast a pick-up in non-hydro renewables capacity for the second half of the year, the first half of 2020 also had a few bright spots.

In late June, India selected bidders for a mammoth 12GW solar energy project tendered by the Solar Energy Corporation of India (SECI). The $9 billion (Dh33bn) scheme also has a local manufacturing component with an annual capacity of 3GW. The tender is the first of its kind to incorporate manufacturing alongside power generation to the grid. The size of the project is also significant as it eclipses the total value of solar power added in 2019, which was 7.3GW.

In another glimmer of hope for India’s solar sector, the SECI attracted a record low tariff of 2.36 rupees (Dh0.11/$0.03) per kilowatt hour from a Spanish developer for a 300MW segment of a 2GW auction in June.

“The support to renewable energy actually is one that is quite deep and clear,” CEEW’s Ms Chawla said, citing India’s renewable growth story as one of intersectionality with several development priorities.

Whether India is able to achieve its solar ambitions of 175GW in 2022 is of secondary importance, she said.

"It's less important whether we reach there in 2022 or 2020 to 2024," Ms Chawla. "But more than that, the 175GW is really the floor and not the ceiling. So we will actually continue to grow beyond that as well, if you take a 2030 outlook."