Why Modi’s Solar Dream Is Faltering

Prime Minister Narendra Modi's ambitious goal of building 100 gigawatts of solar capacity in India by 2022 is suffering as inconsistent government policies hurt solar developers' sentiments.

Crisil Research expects India to add 48-50 GW of solar power capacity up to financial year 2023. “The developers' sentiment has been negatively impacted by the lack of clarity on several policy issues and arbitrary bid cancellations,” it said in a report.

Solar capacity installed in India till January was a little over a quarter of Modi's 100-GW target, that he hopes to achieve in the next three years.

“The renewable energy domain is highly dependent on policy support and any uncertainty on that front can have negative consequences,” the report said. Crisil continues to monitor it and may raise its expectations once the regulatory risk is mitigated to an extent, according to the report.

The government tried to address some of the concerns, although not in line with the industry's expectations. That posed risks to future projects.

“There were frequent bid cancellations, lack of clarity on goods and service tax procedures, and cost pressure from the imposition of safeguard duty on imported cells and modules,” Crisil said.

In December, the Goods and Services Tax Council decided that 70 percent of a solar project's cost would be taxed at 5 percent, while 18 percent would be levied on the remaining contract value. That was higher than what the industry expected, it said.

“Similarly, the safeguard duty has turned out to be a double whammy, impacting costs of solar power projects and not resulting in any significant offtake for the domestic manufacturing sector,” the report said. That coupled with the cancellation of bids after auctions as state utilities found tariffs to be higher than expected, the report said.

Pricing Deadlock And Higher Taxes

The safeguard duty imposed by India on imported solar modules last year to kickstart its domestic manufacturing industry raised project costs by 10-15 percent. That meant higher bid tariffs.

The fresh bid allocations, factoring in higher costs, resulted in “much posturing” by state utility firms, Crisil said. The already allocated capacities were cancelled, lowering developer and investor confidence and discouraging participation in auctions.

The safeguard duty, currently at 25 percent, will come down to 20 percent by Jan. 29, 2020 and to 15 percent at the end of July in the same year. That would ease cost pressures in the long term. But as of now the duty has raised capital costs by 10-15 percent while also increasing bid tariffs in the range of Rs 2.7-2.9 per unit, Crisil said.

The GST Council's decision also means higher tax across all components required to develop a solar plant, Crisil said. “The final tax rate works out to be 8-9 percent instead of the earlier expected 5 percent, leading to an increase of 3-4 percent on final capital costs.”

Target Achievable, But Conditions Apply

Crisil said it remains “fairly positive” about the government achieving its target by fiscal 2022. “We expect that the duty trajectory, which outlines a decline in safeguard duty rates over a two-year period, would help in lowering cost pressure. But this again has to be coupled with regulatory support.”

Commissioning of projects would slow down in fiscal 2019 due to the duty and GST issue, it said. It, however, will pick up again from fiscal 2020. For all that to happen, Crisil said, policy coherence from the government is needed.

“A consistent regulatory support, adequate land availability, timely implementation of grid infrastructure, and the ability of players to raise low-cost funds are key risks which constrain the outlook.”