Home / News / India /  Solar power projects to cost 25% more if government imposes customs duty

The government’s decision to impose a basic customs duty of 25% on imported solar photovoltaic cells and 40% on imported solar modules from April 2022 is likely to see solar energy tariffs rise. However, this will support domestic original equipment manufacturers (OEMs) by giving them the confidence to expand local manufacturing capacity as demand for imported modules falls.

However, clarity is awaited on the continuation of the safeguard duty (SGD) on imported cells and modules, which is currently at 14.5%, and valid till July 2021, a note from credit ratings agency Icra said.

“This is expected to result into an increase in the capital cost for a solar power project by 23-24% (capital cost factoring non-continuation of safeguard duty beyond July 2021)," Girishkumar Kadam, Co-Group Head, ICRA ratings, said in the note. “This in turn would result in an increase in tariff by about 45-50 paise per unit. Nonetheless, the bid tariff trajectory is likely to remain well below Rs. 3/unit and thus, would continue to remain cost competitive from the off-takers’ perspective. For the state-owned utility off-takers, average power purchase cost and variable cost of power purchase (bottom 25% in merit order dispatch) remain in the range of Rs. 4-5/unit and Rs. 3-3.5/unit respectively in many states."

For projects already bid out and having scheduled commissioning date post April 2022, the levy of BCD is expected to be a change-in-law event under the power purchase agreement (PPA). In such cases, the timely approval by the respective regulatory commissions and pass-through of the tariff increase to the off-takers would be critical from the cash flow perspective for the project developers. In addition, the module price trends remain a key monitorable for the solar power developers, in view of the recent firmness in the imported module prices.

The imposition of BCD on imported solar cells and modules is expected to improve the competitiveness of domestic cell/module manufacturers. However, the extent of benefit would also depend upon the imported PV module prices, especially from China.

Vikram V, Sector Head, ICRA Ratings, further added, “Based on an imported module price level of 18 cents/watt and prevailing INR-USD exchange rate, the domestic modules are costlier by 12-15% without the impact of BCD. The imposition of BCD would bridge this gap and make the modules from a domestic manufacturer (using imported cells) competitive against the imported modules. The extent of benefit would be higher for manufacturers having backward integration into cell manufacturing. A large portion of the solar module manufacturing units and solar cell manufacturing units in India are currently located in the special economic zones (SEZs). In this context, clarity is also required on applicability of BCD on manufacturers located in the SEZs."

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