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POLICY BRIEF
What is the Safeguard Duty Safeguarding?
Analysing Impact on Solar Manufacturing and Deployment in India
15 June, 2019 | Energy Transitions
Arjun Dutt, Manu Aggarwal, Kanika Chawla

Citation: Dutt, Arjun, Manu Aggarwal, and Kanika Chawla. 2019. What is the Safeguard Duty Safeguarding? Analysing Impact on Solar Manufacturing and Deployment in India. New Delhi: Council on Energy, Environment and Water.

Overview

In July 2018, the Government of India imposed a two-year safeguard duty on solar cells and modules, in an attempt to protect domestic manufacturing. This policy brief discusses the impact of that duty on the business prospects of manufacturers. It also analyses the implications of the duty on the rest of the solar sector, including facets such as project deployment, job creation, and investor sentiment.

Photovoltaic (PV) manufacturing in India has a competitive disadvantage relative to other countries, especially China. This disadvantage can be attributed to the superior policy support and favourable market conditions for Chinese PV manufacturers in comparison to those prevalent in India. The Government of India attempted to level this disparity by imposing a trade protection measure in the form of a safeguard duty. However, the duty alone has little effect. Given the falling prices of Chinese manufactured solar cells, wafers, and modules, the prices of imported modules with the safeguard duty are still competitive with or lower than those of domestically manufactured modules.

Manufacturing Solar Panels

Source: iStock

Key Findings

  • Safeguard duties only protect a section of Indian PV manufacturers. While cell manufacturers would benefit, a considerable chunk of module manufacturers are reliant on imported cells, which will result in an increase in input cost. Module manufacturing capacity far outstrips (~8.9 GW) cell manufacturing (~3.1 GW) in India. 
  • The duty does not address the causes of the competitive disadvantage associated with Indian PV manufacturing such as inferior terms of debt capital, higher electricity prices, lower-scale operations, the lack of vertical integration, the lack of investment in new technologies, and demand uncertainty. Hence, it is unlikely to encourage investments in new facilities. 
  • In the current form, the safeguard duty hinders the reduction in solar tariffs. Tariffs could be six to ten per cent lower in the absence of duties.
  • The duty has a negative impact on potential employment generation in the solar energy sector. The bulk of employment in the sector is generated through project deployment, but the uncertainty created with the imposition of the duty has resulted in sluggishness in project awards.
  • Investor confidence has taken a hit. Uncertainty regarding the applicability of pass-through provisions for projects awarded before the imposition of duties, challenges in claiming pass-through benefits from the relevant regulatory commissions, and the cancellation of projects awarded dampened investor sentiment.

Key Recommendations

  • Systematic interventions, based on an understanding of global supply chains and PV factory economics, are necessary to address the competitive disadvantage of the Indian PV manufacturing industry.
  • The benefits of targeted interventions need to be weighed up against their costs, including an assessment of the externalities of any measure to support PV manufacturing on other areas of the solar energy ecosystem.
  • Measures aimed at stimulating the domestic PV manufacturing industry should provide credible long-term support to manufacturing in order to translate into investments at scale.
  • Policymakers should expedite the processing of onerous pass-through claims for developers, especially at the state level, to bolster investor sentiment.
  • The revenues realised from the imposition of safeguard duty should be ploughed back to support the PV ecosystem in India.
  • The government should lower uncertainty pertaining to safeguard duties on two fronts: firstly, by providing clarity regarding the applicability of safeguard duties beyond July 2020. Secondly, clarifications are needed on whether imports from developing countries such as Vietnam and Thailand are still exempt from the applicability of duties.

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"The imposition of safeguard duty neither provides adequate protection nor addresses the underlying causes of competitive disadvantage of Indian PV manufacturing. The brief examines these aspects of the imposition of safeguard duty, as well as the disruption caused in project deployment, throwing the need for alternative approaches to support PV manufacturing into sharp relief."

Executive Summary

In July 2018, the Government of India imposed a two-year safeguard duty on solar cells and modules, in an attempt to protect domestic manufacturing. The measure, which majorly impacts imports from China, Malaysia, and Taiwan, resulted in a 25 per cent duty on solar cell and module imports for a year starting from July 2018. The duty rates will decline to 20 per cent for six months starting July 2019, and will further be reduced to 15 per cent for another six months. In addition to the impact on the business prospects of manufacturers, the move has wide-ranging implications for the entire solar sector, including aspects like project deployment, job creation, and investor sentiment. This policy brief analyses the potential impact of the safeguard duty on these facets of the industry, as well as the associated effects it has on the solar sector as a whole.

At present, India’s solar cell and module manufacturing capacity is 3.1 and 8.9 GW per annum, respectively. A sizeable proportion of this capacity is located in special economic zones (SEZ). Indian manufacturers situated in SEZs will also be subject to the duty, reducing their competitiveness. However, while the sales of modules cleared from SEZs to the domestic tariff area (DTA) are subject to safeguard duty, the duty is applicable only on the value of imported inputs and not on the value added inside the SEZ. Cells manufactured in SEZs and then sold in the DTA are exempt from safeguard duty (imported wafers-the raw material used in cell manufacturing-are not subject to safeguard duties). Stand-alone module manufacturers located in the domestic tariff area (DTA) will face increased costs as a result of the safeguard duty as they often import cells for their modules. However, cells manufactured in the DTA would benefit from the safeguard duty.

The relatively underdeveloped state of Indian PV manufacturing can be attributed to the competitive disadvantages of PV manufacturing in India vis-à-vis other countries, particularly China. China accounts for close to 88 per cent of India’s PV imports and dominates global PV manufacturing. Upon assessment, the policy support received by Chinese solar PV manufacturers presents a stark contrast to the conditions in which manufacturers in India operate. While the safeguard duty aims to correct this disparity, it alone has little effect. This is better understood when we consider the supply glut in the PV manufacturing market, created as a result of a reduction in solar deployment targets (with subsidy support) in China. This has caused the prices of solar cells, wafers, and modules manufactured in China to fall further. As per estimates from active industry players in India, the prices of imported modules have crashed to as low as USD 0.21/Watt. Thus, in the current market, the prices of imported modules with the safeguard duty are competitive with or lower than those of domestically manufactured modules.

Further, the revision of commissioning timelines for solar projects in India from 13-15 months to 21-24 months (from June to early January 2019) and 15-18 months (from January 2019 onwards) allows developers to delay the procurement of modules and pay lower safeguard duties or bypass the duty all together. Thus, the safeguard duty offers only a limited competitive edge to domestic manufacturing, but it also has significant adverse effects. It has created uncertainty in the market, which has marred investor confidence and industry appetite significantly. In its current form, the safeguard duty will hinder the decline of solar tariffs; it will also increase regulators’ administrative burden as they adjudicate pass through of the cost of the duty as per the change in law clause in the power purchase agreement to the discoms.

Globally, trade protection measures have historically been ineffective in reviving domestic solar PV manufacturing. The Chinese industry avails numerous benefits spanning fiscal support schemes, access to affordable capital, integrated value chains, and affordable input variable costs; thus, a declining short-term safeguard duty will not be adequate to balance the scales. Systemic interventions, based on an understanding of global supply chains and PV factory economics, are necessary to address the competitive disadvantage of the Indian PV manufacturing industry. Measures such as capital subsidies, domestic procurement, investment in the R&D of frontier technologies, interest rate subvention, and the provision of concessional electricity could help the resurgence and growth of the domestic PV industry. The imposition of the safeguard duty has resulted in additional flows into the Indian exchequer. The duty amount collected, approximately INR 1,500 crore for the period of August to December 2018, could be used to implement a combination of the proposed marketmaking incentives to strategically advance the domestic solar PV manufacturing market without creating uncertainty for solar developers or causing setbacks to the tariff advances made by the solar sector.

Conclusions

Trade protection measures have historically not been effective in reviving the fortunes of PV manufacturing globally.

  • The imposition of anti-dumping and countervailing duties in the US and the EU has not translated into a revival in the fortunes of their respective PV manufacturing industries. Manufacturers in exporting countries have been able to circumvent these duties by using a variety of tactics: sourcing raw materials from jurisdictions exempt from duties, and routing exports through, or relocating manufacturing facilities to, such jurisdictions. In addition, market developments such as the decline in module prices have mitigated the effect of these trade protection measures.
  • Though there is not enough data to definitively comment on the impact of the safeguard duties imposed by the US on PV imports in early 2018, preliminary data does suggest some gains in market share for domestic module manufacturers. However, it is hard to gauge at this stage whether the duty is sufficient to facilitate a structural improvement of the US PV manufacturing industry. 
  • Similar to trade protection measures imposed in other jurisdictions, the effectiveness of India’s safeguard duties in protecting the domestic PV manufacturing industry will depend on its interactions with policy and market developments.

Safeguard duties only protect a portion of Indian PV manufacturers

  • Not all Indian PV manufacturers benefit from the imposition of safeguard duties. While cell manufacturers located within the DTA and in SEZs would benefit from improved competitiveness resulting from the imposition of duties on competing imported cells, the same is not true for module manufacturers.
  • Indian module-manufacturing capacity (~8.9 GW) far outstrips cellmanufacturing capacity (~3.1 GW), and a considerable chunk of module manufacturers are reliant on imported cells. Module manufacturers located within the DTA and reliant on imported cells will witness an increase in input costs. Module manufacturers located in SEZs and reliant on imported cells will suffer from a loss in competitiveness as their sales in the DTA will be subject to safeguard duties to the extent of the value of the imported cells used as raw materials.

Interaction of safeguard duties with policy and market developments limit their effectiveness

  • The effectiveness of safeguard duties in offering protection to Indian PV manufacturing is limited by the decline in module prices resulting from the curtailment of Chinese state support for its solar programme. Coupled with the extended commissioning timelines for solar projects (21 to 24 months between June 2018 and early January 2019, and 15 to 18 months thereafter), developers have the leeway to procure modules in periods characterised by low incidence of duties. 
  • Only 45 per cent of the projects awarded till December 2018 that need to procure modules during the safeguard duty period would do so while 25 per cent duties are active. About 54 per cent of these projects can procure modules in the period of 15 per cent duty, while one per cent of these projects can do so in the period of 20 per cent duties. Projects awarded from January 2019 onwards will have the leeway to procure modules in the period of 15 per cent duties or beyond.

Sources of competitive disadvantage for Indian PV manufacturing

  • PV manufacturing in India suffers from a range of competitive disadvantages as compared to its counterparts in foreign jurisdictions, particularly China. These include inferior terms of debt capital, higher electricity prices, lower-scale operations, lack of vertical integration, outdated technology, and lack of demand visibility. These factors disincentivise the setting up of PV manufacturing facilities in India, across the value chain.
  • The lack of investments in upstream manufacturing can specifically be explained by high electricity prices and cost of capital in India, as the competitiveness of upstream manufacturing industries is particularly reliant on these factors. In addition, constraints on the availability of high-purity polysilicon discourages the setting up of ingot and wafer manufacturing plants.​

Impact of safeguard duties on the solar PV ecosystem in India

Ineffectiveness of safeguard duties in reviving Indian PV manufacturing

  • The imposition of safeguard duties does not materially impact any of the competitive disadvantages associated with Indian PV manufacturing. Thus, it is unlikely to trigger large-scale investments in the setting up of new PV manufacturing capacities. It is unlikely to support the structural adjustment of Indian PV manufacturing (as envisioned by the structural adjustment plan submitted to the DGTR by petitioners) through forward and backward integration, the signing of bulk raw material supply contracts, or investment in new technologies.
  • The imposition of safeguard duties could provide a short-term boost to the capacity-utilisation levels and cash flows of existing facilities.

Hindering decline in tariffs

  • The imposition of safeguard duties could hinder the realisation of lower tariffs possible in the absence of safeguard duties. Tariffs could be six per cent to ten per cent lower in the absence of safeguard duties, depending on the time frame of procurement of modules.

Negative impact on employment generation in the solar energy sector

  • The uncertainty generated by the lack of clarity pertaining to pass-through provisions, combined with the impact of tariff caps on PV tenders, has slowed project awards. In addition, the safeguard duty is not likely to result in the setting up of new manufacturing capacities on a large scale. The slowing of project deployment represents losses in potential employment generation in the solar energy sector, without significant additional employment generation in manufacturing.

Dampening of investor sentiment

  • The uncertainty regarding the applicability of pass-through provisions to projects tendered before the imposition of duties has dampened the pace of project awards and investment flows. In addition, the process for availing pass-through benefits is quite onerous and subject to delays. Any delays in the awarding of pass-through benefits could negatively impact the viability of projects, dampening investor sentiment pertaining to solar PV generation particularly, and for foreign investors in India more broadly.
Recommendations

Improving understanding of manufacturing processes across the PV supply chain

  • Setting up a vibrant PV manufacturing industry needs a holistic understanding of global supply chains and PV factory economics. Targeted interventions to mitigate the competitive disadvantages faced by Indian producers relative to foreign manufacturers could be part of the solution. The MNRE could undertake a detailed analysis of the PV value chain in order to identify the most impactful interventions. Measures such as capex subsidies, interest subvention, tax breaks, the provision of concessional electricity, and domestic procurement are some of the steps that could potentially help encourage the setting up of domestic PV manufacturing facilities. The implementation of these interventions could require inter-ministerial coordination between the MNRE and one or more of the Ministries of Finance, Power, and Electronics and Information Technology.
  • The extent of support needed to make the domestic industry competitive would vary depending on the outcome desired. At the same time, measures must not run afoul of WTO regulations, as they could then be subject to challenges by other member countries.

Evaluating costs and benefits for each intervention

  • While targeted interventions could help the domestic industry become more competitive, and trade protection measures could provide it with support, the benefits of such measures must be weighed against their costs. The most obvious cost is the dollar value of the support needed to achieve the level of competitiveness desired, or support required, for the domestic manufacturing industry.
  • In addition, it is necessary - before implementation - to assess the externalities of any measure to support PV manufacturing on other parts of the solar energy ecosystem. For example, the imposition of safeguard duties created uncertainty which constrained the pace of new projects awarded and prevented tariffs from declining further. This also implies losses in terms of potential employment generation stemming from foregone project deployment. The MNRE must consider the costs of these externalities while determining the appropriate intervention for boosting the competitiveness of PV manufacturing.

Planning for long-term impact

  • In addition to the assessment of costs and benefits, any measures aimed at stimulating the growth of the PV manufacturing industry in India should provide credible long-term support to manufacturing in order to translate into new investments at scale. Short-term or halfhearted measures may not translate into investments in new manufacturing facilities, and at the same time could end up hindering project deployment, causing more harm than good overall.

Timebound compensation for pass- through claims

  • The process of claiming pass-through of safeguard duties from regulatory commissions is an onerous task for developers, particularly for those without specific provisions pertaining to safeguard duties in the change in law clauses of their respective PPAs. This could generate protracted litigation, uncertainty, and a dampening of investor sentiment. 
  • Policymakers at both the central and state level need to expedite the process for claiming pass-through benefits. While the Ministry of Power has accordingly issued directions to the CERC under Section 107 of the Electricity Act, this needs to be replicated at the state level in order to simplify processes for developers with PPAs at that level.142

Plough back collections from duty to support PV ecosystem

  • The imposition of the safeguard duty on the imports of cells, whether or not assembled in modules, has translated into considerable additional inflows for the Government of India. The collections obtained should be used to support the solar PV ecosystem in India. Between August and December 2018, the collections from the imposition of safeguard duties generated revenues of around INR 1,500 crores.143 The total for the two-year application period of duties is expected to be much higher. The MNRE should request the Ministry of Finance to consider earmarking these proceeds for the support of the solar PV ecosystem. 
  • Collections from the safeguard duty could be used to ensure low tariffs in solar PV auctions through the provision of viability gap funding support for project developers. Considering a hypothetical tariff cap of INR 2.50 per kWh for auctions-as per the recommendations of the MNRE to SECI in August 2018 for projects without safeguard duty144 - VGF support from the safeguard duty collections till December 2018 would have been sufficient to mobilise 4 to 5 GW of project capacity awarded at higher tariffs, at the tariff cap of INR 2.50 per kWh.145 
  • Alternatively, collections from safeguard duties could be used to fund the pass-through of safeguard duties for eligible projects.
  • Collections from safeguard duties could also be used to support domestic manufacturing. The support could take the form of one of the measures described in Section 10.1.

Reduce uncertainty going forward

  • While the safeguard duty is currently applicable till July 2020, a review investigation should be conducted well in advance in order to provide visibility to stakeholders about the period beyond this timeframe. The DGTR is mandated to conclude any review of safeguard duty within a period of eight months.146 The MNRE should request the DGTR to initiate a suo moto review investigation by the end of the first year of imposition of safeguard duty (August 2019), in order to provide sufficient clarity to all stakeholders as to the applicability of duties beyond July 2020.
  • The imposition of the safeguard duty has resulted in a sharp increase in the market share of imports of cells (whether or not assembled in modules) from Vietnam and Thailand, countries which are exempt from the application of duty by virtue of being developing countries which account for less than three per cent of imports of the product into India. As per CEEW analysis, the share of imports from both these countries in MW terms since the imposition of duties is nearing the three per cent limit.147 Considering these developments, the Ministry of Finance should clarify whether these countries would remain exempt from safeguard duty so that developers can plan their purchases accordingly.

Better recording of trade data for better policymaking

  • The Ministry of Commerce and Industry could consider recording trade data pertaining to solar cells at a more granular level, following similar practices in other jurisdictions. Currently, trade data pertaining to solar cells is recorded under an eight-digit Harmonised System (HS) code, which aggregates data for all cells whether or not assembled into modules. However, in other jurisdictions such as the US, trade data is recorded at a more granular level (10-digit HS codes), which captures data separately for stand-alone solar cell imports and for solar cells assembled into modules. Recording data at a more granular level would enable the formulation of more targeted policies for the two separate products (cells and modules).
  • The Ministry of Commerce and Industry’s trade data pertaining to solar PV imports could also be improved by recording data in MW terms, in addition to the existing data in value terms and quantity. This would present a clearer picture pertaining to the trade of solar cells and modules, and would eliminate the effect of price fluctuations that impact data in value terms.

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