Safeguard duty may delay 12,000 MW underway solar projects

Imposition of safeguard duty is likely to result in some delay in project implementation of nearly 12,000 MW of under-construction solar capacities, rating agency Crisil Research said.

As per Crisil's analysis, a 25 per cent safeguard duty entails a rise in capital costs by 15-20 per cent, which would have a 30-40 paise per unit impact on bid tariffs so as to maintain the same rates of return.

"We expect some delay in project implementation on account of the duty as the 'change in law' clause is expected to be sought for 12,000 MW of under-construction projects," it said in a statement issued here.

Following a petition filed by the Indian Solar Manufacturers Association (ISMA) in December 2017, seeking imposition of safeguard duty directorate general of trade remedies (DGTR) had recommended a 70 per cent safeguard duty in January 2018.

On July 16, DGTR reviewed the recommendations and imposed 25 per cent duty for the first year followed by 20 per cent in the first half of the second year and 15 per cent for the rest part of the year.

"The imposition of the duty could cause some procedural delays as developers would have to approach the appropriate authorities (electricity regulatory commissions) to approve the new tariffs with pass-through of costs," it said.

According to the agency, solar power capacity addition is likely to ramp up to 56,000-58,000 MW between fiscals 2019 and 2023, compared with 20,000 GW between fiscals 2014 and 2018, which will be driven by capacities allocated/tendered under the National Solar Mission, state solar policies, other schemes driven by SECI and PSUs.

"Logically, domestic module manufacturers would become the main suppliers to solar developers in India. However, their supply capacities are far short of the annual demand of the sector. Hence, we expect a rise in capital costs over the near-term due to the duty as even domestic module manufacturers are likely to charge a premium on their products in the event of a surge in demand," the report said.

The agency further said that as domestic capacities expand and integrated foreign players set up units in India, costs could drop again.

"A weakening rupee will cause additional cost pressure with increased foreign exchange volatility faced by importers unless they have hedged in advance. This could amp up the cost pressure slightly," it added.