India's solar power prospects compromised by steep import duty, commodity hikes

Import duties on solar components enforced April 1 have combined with rising commodity costs to challenge India's ambitious renewable development goals, sector participants have told S&P Global Commodity Insights.

The fear is that rising costs will put a brake on India's solar capacity additions just as development needs to accelerate to meet climate targets.

"Solar panel prices have increased to around 28-30 US cents per watt from around 20 cents in late 2020 due to increased inputs costs for polysilicon, photovoltaic glass and freight costs," said Abhishek Dangra, senior director, infrastructure sector lead at S&P Global Ratings.

"We expect solar panel prices to remain firm in 2022 in India reflecting international trends," Dangra said.

A 40% import duty on photovoltaic modules and 25% duty on photovoltaic cells came into force April 1 in line with the government's announcement in mid-2021.

The move is designed to protect domestic manufacturers from competing imports mainly from China, with 80%-85% of India's solar panels imported from overseas.

Meanwhile, Russia's invasion of Ukraine has further tightened markets for raw materials that were already facing supply chain issues.

And an added upward pressure is coming from rising funding costs and squeezed returns on aggressive renewable project bids.

Tariffs rise

Tariffs in the government's latest reverse auction for renewable projects in February reflected the upward trend before the duty kicked in.

In the auction SolarOne Energy won 300 MW of a 1.2 GW solar project in Karnataka state at Indian Rupees 2.37/kWh ($0.03/kWh), data from Solar Energy Corporation of India (SECI) showed.

At a similar auction held in late December last year, NTPC Renewable Energy won 500 MW of a 1.79 GW solar power project in Rajasthan state at Rupees 2.17/kWh.

Both outturns were significantly higher than the country's lowest recorded solar price of Rupees 1.99/kWh in 2020, according to the Ministry of New and Renewable Energy.

It was unlikely that upcoming auctions would see a decline in price in the immediate future, "but once input cost pressures subside, India's domestic manufacturing capacities increase and future technological developments lead to a fall in panel prices, the medium to long term pricing trend will still likely register decline," Dangra said.

Impact

Market conditions had made one large project developer, Norway's Scatec, revise its development plans for a solar project jointly undertaken with an India partner in Rajasthan.

"Scatec and Acme have decided to put the 900 MW project in India on hold due to lack of supply of domestic solar panels and a 40% import duty on solar panels to be imposed from 1 April 2022," it said in its fourth quarter 2021 report.

Most of India's 50 GW solar capacity is in the commercial and industrial segment, but of late the residential segment has been growing at a fast clip. This is where the rise in solar panel prices could be felt most, another developer said.

"Solar in the commercial and industrial segment will still be viable despite the impact of the duty," said Ritu Lal, senior VP and head of institutional relations at Amplus Solar, a subsidiary of Petronas. Amplus has over 915 MW of operational and under construction solar in India.

"We will have to wait and see if the increased prices will deter some of the homeowners looking at solarizing as their pay back period will increase," Lal said.

India has committed to reach 500 GW of renewable capacity by 2030. It aims for 175 GW by the end of this year, up from 151 GW at end-2021 (including large hydro).