Anti-dumping duty on PV cells and modules November 2017

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1 India Solar Policy Brief Anti-dumping duty on PV cells and modules November 2017 Introduction In July 2017, India Solar Manufacturers Association (ISMA) filed a petition with Directorate General of Anti-Dumping & Allied Duty (DGAD), Ministry of Commerce and Industry, Government of India for investigating imports of solar cells and modules from China, Taiwan and Malaysia. The investigation petition covers both thin film and crystalline technologies and affects imports making up more than 85% of total cells and modules used in India. Decision process and timelines DGAD is required to conclude the investigation and give its recommendation to the Ministry of Finance within 12 months, subject to a 6-month extension in certain cases DGAD may also decide to impose a provisional duty, is levied under critical circumstances in which there is a clear evidence that imports have caused serious injury to the domestic industry DGAD has the mandate to provide the domestic solar manufacturing industry a level playing field against the impact of unfair trade practices like dumping and subsidies by other countries. It can use trade remedies like anti-dumping duty (ADD), countervailing duty, import quotas etc under appropriate framework of WTO, Customs Tariff Act & Rules and other relevant laws and international trade agreements. Anti-dumping investigations involve a detailed examination of: Dumping Margin difference between the export price and normal value (price in the exporting country); Injury margin difference between the non-injurious price (or fair selling price) in domestic country and the landed value of imports; Causal Link establishing a causal link between dumping and material injury to the domestic industry; As described in Section 9A (1), Customs Tariff Act, 1975, DGAD may recommend an anti-dumping duty not exceeding dumping margin or the injury margin. DGAD is required to conclude the investigation and give its recommendation to the Ministry of Finance within 12 months, subject to a 6-month extension in certain cases. Final decision on appropriate trade remedies is taken by the Ministry of Finance. Under the Act, the anti-dumping duty is imposed for a time-period of 5 years. At the end of this period, DGAD is required to conduct a sunset review to determine if the imposed duty needs to continue. It can also conduct an interim review to examine need for continued imposition of the duty. Analysing timelines of 35 anti-dumping cases from in India in which anti-dumping duties were levied, we observed that the anti-dumping duty decision took an average of 15 months from initiation of investigation. For instance, an anti-dumping petition was filed in Jun-2016 for colour coated, prepainted flat steel products imported from China and EU and the anti-dumping duty was imposed in Aug-2017, 14 months after petition submission date. As per this time line, final decision on anti-dumping duty on import of PV cells and modules may be expected by October Some industry experts feel that DGAD may also decide to impose a provisional duty. Provisional duty is levied under critical circumstances in which there is a clear evidence that imports have caused serious injury to the domestic industry. 1

2 The trend of past cases shows that provisional duty is generally announced about 7 months after initiation of investigation. In the case of colour coated, prepainted flat steel products also, the provisional duty was imposed in Jan-2017, 7 months from commencement of investigation. This suggests that a provisional duty on import of PV cells and modules may be announced by Feb Petition filed Jul Figure 1 Anticipated decision timeline Sep Nov Jan Mar May Jul Sep Nov Aug Oct Dec Apr Jun Aug Dec Feb Oct Expected provisional duty Expected anti-dumping duty But there is a very strong buzz in the industry that a duty announcement is about to come anytime now. The government is under pressure about the poor state of manufacturing despite its Make in India initiative and ten times growth in module demand in the last three years. If DGAD and the Ministry of Finance are sympathetic to the case, it is certainly possible that a provisional or anti-dumping duty may be imposed imminently. Impact on solar project pipeline As on September 30, 2017, India s total utility scale solar project pipeline, comprising projects allocated to project developers and EPC contractors, stood at 10,842 MW. All these projects face threat of provisional or anti-dumping duty depending on when the decision is announced. Figure 2 Solar projects potentially impacted by ADD decision Capacity, MW 4,000 3,000 2,000 1, , , ADD imposed in 2017 Provisional duty is imposed in Feb ,500 ADD imposed in Oct Pending pipeline Pending pipeline Karnataka-1,200 MW SECI-Andhra Pradesh-100 MW SECI- Bhadla-250 MW SECI-Bhadla-500 MW Q Q Q Q Q Q Tamil Nadu-1,500 MW NTPC-Kadapa-250 MW NTPC-250 MW Gujarat-500 MW Madhya Pradesh- REWA-750 MW Commissioning timeline Open DCR Notes: 1. Q capacity numbers include projects scheduled for commissioning in this quarter plus projects delayed from previous quarters. 2. This chart does not include the Jharkhand 1,200 MW tender and APGENCO 500 MW EPC tender. 2

3 While the domestic content requirement (DCR) pipeline should not be directly affected by ADD, we expect these projects to also face cost increases as domestic module manufacturers would hike prices immediately in the event of any duty imposition. Operational and financial impact on pipeline projects Modules contribute to approximately 60% of the total project cost of solar projects. At current price of USD 0.36/ Wp, a duty of 30% would increase project cost by 18%, or INR 895 million (USD 14 million) for a 100 MW project. Project returns are expected to fall significantly in such a scenario. The following chart shows impact of different levels of duty on a project earning 10%, 8% or 6% unlevered project IRR, other factors remaining constant. Figure 3 Impact on project IRR from ADD Project IRR, % % 10% 20% 30% 40% Anti-dumping duty, % Source: BRIDGE TO INDIA analysis As the negative impact of duties is significant about 3% fall in returns at a duty level of 30% - the petition is a major risk to the viability of all pipeline projects, where modules have not yet arrived on site. The immediate impact for these projects is significant completion delays as the developers are anxiously waiting in anticipation of a decision. More critically, if a provisional or antidumping duty exceeding 10% is imposed and no recourse is provided to the developers, the pipeline projects face the risk of abandonment except where material capital has been already committed to the projects. This would be a grave scenario for the sector and all concerned stakeholders. The optimistic scenario for the sector is that projects auctioned before the date of petition (July 2017) are grandfathered or that the central or state governments compensate them for extra costs. We are however, not aware of any such precedence across different sectors and believe that the probability of such an outcome is at best 50%. Some developers have argued that they would seek change-in-law protection if a provisional or anti-dumping duty is imposed. Our analysis shows that if 30% duty is imposed and module cost is USD 0.36/ Wp, tariff will need to go up by 3

4 about INR 0.48/ kwh (17%) to restore pre-duty financial returns of the solar project. We believe that the probability of getting change-in-law compensation is minuscule as such provisions in most PPAs are rather weak and the DISCOMs would fiercely resist any cost pass through. Upcoming auctions Solar auctions in India are so aggressive that it seems unrealistic a developer building a sufficient financial buffer would be able to win any capacity Any auctions conducted while a duty decision is pending also face an uncertain future. As of September 2017, there are 2,655 MW (2,087 MW in open category and 568 MW in DCR category) of tenders, which have been announced and are awaiting auctions. SECI is expected to imminently conduct an auction for 750 MW in Bhadla solar park. The challenge for developers is how to price duty risk. Solar auctions in India are so aggressive that it seems unrealistic a developer building a sufficient financial buffer would be able to win any capacity. The recent Gujarat 500 MW auction in September 2017, is a good example it was won by Azure Power, GRT Jewellers, Gujarat State Electricity Corporation Limited and Gujarat Industries Power Company Limited at extremely competitive tariffs between INR / kwh. There are two broad range of possibilities for auctions held in the intervening period, both equally unappealing developers continue to bid aggressively, in which case, the projects would be financially unviable if a duty is subsequently announced; or the developers exercise restraint, resulting in less competition and higher tariffs, in which case, the DISCOMs might retreat and refuse to sign PPAs as seen in many tenders recently. Impact on domestic manufacturers and manufacturing investments In FY , 89% of solar modules used in India were imported from China and other countries. Indian project developers favour Chinese module manufacturers as these are approximately 10% cheaper than domestic modules. The projects using domestic modules did so only because of DCR stipulation, without which, the share of imported modules could have been as high as 95% or possibly, even greater. Figure 4 Source of modules used in India in utility scale projects Others 10% India 11% China 79% Note: This data is for 6,387 MW of utility scale projects completed in FY

5 As per MNRE, India s total installed solar cell and module manufacturing capacity was 3.2 GW and 8.5 GW respectively as of May 31, 2017, but the operational capacity was only 1.7 GW and 5.5 GW for cells and modules respectively. As against this, actual production in was only 0.7 GW and 1.7 GW respectively. Figure 5 Capacity and production for modules in Installed capacity, MW 8,398 8,398 Operational capacity, MW 5,507 Actual production, MW 1,764 Figure 6 Capacity and production for cells in Installed capacity, MW 3,164 Operational capacity, MW Actual production, MW 1, The key issue for the sector is whether Indian or other manufacturers would be able to use the opportunity afforded by duties to make investments and create a thriving, competitive module manufacturing sector in India The domestic manufacturers have been struggling because of their inability to compete on price with Chinese manufacturers. Most of them have sub-scale capacities, high cost base and are completely reliant on imported technology and raw materials. Imposition of ADD or provisional duty exceeding 10% shall enable them to price at profitable levels and increase production. But the key issue for the sector is whether Indian or other manufacturers would be able to use the opportunity afforded by duties to make investments and create a thriving, competitive module manufacturing sector in India. There is a huge gulf between the scale and technological or operational capability of Indian and Chinese manufacturers. Moreover, the Chinese manufacturers have been expanding internationally to counter threat from trade barriers. Canadian Solar, Jinko, Trina, JA Solar and Talesun are some of the notable names to set up manufacturing facilities in Indonesia, South Korea, South Africa and Thailand precisely for such purposes. They should be able to circumvent duties, at least partly, by routing exports from these manufacturing bases, in turn mitigating the negative and positive impact on developers and manufacturers respectively. We believe that trade barriers alone will fail to achieve their target to promote domestic manufacturing unless they are backed up by other policy reforms to improve competitiveness of Indian manufacturing. 5

6 Conclusion The anti-dumping duty petition has created huge uncertainty for the entire solar sector. It comes at a very inopportune time with the sector already reeling from slowdown in new project procurement, extra costs due to GST, import duties and increase in module prices. It affects all stakeholders and projects in pipeline as well as those awaiting auction. The Indian government has a tough decision to make as it needs to strike balance between demands of manufacturing and project development activities. If developers are not compensated for extra cost, many of the underconstruction projects face risk of abandonment as they have little financial cushion. On the other hand, announcement of duties alone is unlikely to have any enduring benefits for domestic manufacturing beyond throwing a financial lifeline to the existing manufacturers. Disclaimer For further enquiries, please contact contact@bridgetoindia.com BRIDGE TO INDIA Energy Pvt. Ltd. C - 8/5, DLF Phase I, Gurgaon India Subscribe to our mailers contact@bridgetoindia.com Read our blog for up-to-date market insights and opinions Track the Indian solar market with our reports Follow us on Twitter BRIDGE TO INDIA Energy Private Limited Authors Arti Mishra Saran, BRIDGE TO INDIA Vinay Rustagi, BRIDGE TO INDIA This report is owned exclusively by BRIDGE TO INDIA and is protected by Indian copyright and international copyright and intellectual property laws. BRIDGE TO INDIA hereby grants the user a personal, non-exclusive, nontransferable license to use the report pursuant to the terms and conditions of this agreement. The user agrees not to export full or any part of the report to a country that does not have copyright and intellectual property laws that will protect BRIDGE TO INDIA's rights therein. The user cannot engage in any unauthorized use, reproduction, distribution, publication or electronic transmission of this report or the information/forecasts therein without the express written permission of BRIDGE TO INDIA. The information contained in this report is of a general nature and is not intended to address the requirements of any particular individual or entity. BRIDGE TO INDIA aims to provide accurate and up-to-date information, but is not legally liable for accuracy or completeness of such information. Follow us on 6

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