How Import Duty on Solar Panels Affects Their Prices and Quality in India

The solar energy industry in India has been experiencing tremendous growth, driven by the nation’s commitment to renewable energy. However, the introduction of import duties on solar panels has generated debate regarding its impact on prices and quality. As India pushes towards achieving its ambitious renewable energy targets, understanding how import duties affect the solar industry is crucial for stakeholders. This blog will explore the impact of import duty on solar panels prices and quality in India and how this policy can shape the future of the country’s solar energy landscape.

Introduction to Solar Import Duties in India

Solar energy has a long history in India, dating back thousands of years. The sun has always been revered in Indian culture and mythology as a powerful life-giving force. Ancient Indian architecture incorporated passive solar design, orienting buildings and streets to make optimal use of sunlight and shade. But how does import duty affect solar energy in India today? This is the question that we will explore in this article. We will look at the current and proposed import duty on solar panels, the solar price in India, and the solar industry in India. We will also examine the impact of import duty on the growth and competitiveness of solar energy in India.

In more recent times, experiments with solar technology began in the late 19th century under British rule. In 1895, the Tata Power Company set up India’s first experimental photovoltaic plant. Through the 20th century, solar research advanced in fits and starts. The 1970s oil crisis prompted greater interest in renewable energy sources like solar.

In the 1980s, India established a solar energy programme under the Ministry of Non-Conventional Energy Sources. This spurred the creation of the National Solar Energy Federation in 1980. During the 1990s and 2000s, India stepped up efforts to adopt solar technology, from solar water heating systems for homes to grid-connected solar farms.

The real solar revolution in India took off after 2010. Plummeting prices for solar panels globally made solar power cost competitive. Supportive government policies incentivized the rapid scaling of solar energy. Major investments flowed into India’s solar industry from both domestic and foreign companies. This set the stage for impressive growth in installed solar capacity over the past decade.

Overview of the Import Duty Structure

The import duty on solar panels in India currently consists of the following elements:

• Basic Customs Duty (BCD): A significant part of the total import duty imposed on solar modules. The BCD on solar cells is set at 25%, while for solar modules, it is set at 40%.
• Goods and Services Tax (GST): In addition to BCD, solar panels and related components are subject to a GST rate of 5%. This further contributes to the total cost of importing solar panels.

This combination of import duty on solar panels and taxes has led to increased prices, directly impacting the overall cost of solar projects.

Solar Growth Mission of India

The Indian government launched the National Solar Mission in 2010 with the goal of establishing India as a global leader in solar energy. The mission aims to install 100 gigawatts (GW) of grid-connected solar power capacity in India by 2022.

The target of 100 GW by 2022 is in line with India’s commitment in its Intended Nationally Determined Contributions (INDCs) to the Paris Agreement, where India pledged that 40% of its installed electricity capacity would be from non-fossil fuel sources by 2030. The Solar Mission is a major part of achieving this clean energy target.

The 100 GW solar target consists of 40 GW rooftop solar and 60 GW large and medium-scale grid-connected solar power projects. The ambitious capacity addition is aimed at reducing dependence on fossil fuels like coal and petroleum to meet the country’s rapidly increasing electricity demand. It will also support India’s aim to reduce the emissions intensity of its GDP by 33-35 percent from 2005 levels by 2030.

Overall, the Solar Mission signifies India’s commitment to meeting its rising energy needs through renewable sources and transitioning to a low-carbon economy. The success of the mission will be key for India to meet its climate goals and establish its position as a global solar power leader.

• In the Union Budget 2024-25, The Centrally Sponsored Scheme for Solar Power (Grid) has been allocated INR 10,000 Cr, an increase of 110% from INR 4,757 Cr allocated in the Union Budget 2023-25. 
• PM-Surya Ghar Muft Bijli Yojana, launched in February 2024 with an outlay of INR 75,000 Cr, has been allocated INR 6,250 Cr.

Current Import Duty on Solar Panels

India currently imposes a 15% safeguard import duty on solar panels and modules imported from China and Malaysia. This safeguard duty was imposed in July 2018 to protect the domestic solar manufacturing industry from a surge in imports.

The safeguard duty was initially imposed for 1 year and has been extended multiple times since then. The current 15% duty is effective until July 2022.

The safeguard duty only applies to imports from China and Malaysia, which account for the bulk of module imports to India. Other countries exporting modules to India do not face this duty currently.

The 15% safeguard duty is levied on the total import value of cells and modules. It increases the cost of imported solar equipment and was intended to create a more level playing field for Indian manufacturers.

However, even with the safeguard duty in place, solar developers in India continue to largely source their modules from China due to lower costs. Domestic manufacturing has not yet been able to match the scale and pricing prevalent in China.Impact of Import Duty on Solar Panel Prices

The introduction of import duty on solar panels on solar panels has led to an increase in the cost of solar energy projects. Since a significant portion of solar panels in India were previously imported from countries like China, which offer competitive prices, the imposition of BCD has made these imports more expensive.

a. Rising Costs for Developers

Solar developers in India are now faced with higher upfront costs due to the increased prices of imported panels. These higher costs are often passed on to consumers, affecting the affordability of solar energy solutions. The cost of solar installations has risen by approximately 20-30% since the imposition of the import duty on solar panels, which has slowed down the growth rate of new solar projects.

b. Effects on Solar Power Purchase Agreements (PPAs)

The increased cost of solar projects has impacted Power Purchase Agreements (PPAs) between developers and power distribution companies. Developers are now demanding higher tariffs to account for the increased cost of solar panels, which has led to renegotiations of existing PPAs and delays in the signing of new agreements.

c. Affordability for Consumers

As solar developers face increased costs, consumers also experience a surge in prices for solar installations. This makes adopting solar energy less affordable for individual consumers, businesses, and industries, thereby potentially slowing the transition to renewable energy.

Impact on Solar Panel Quality

While the imposition of import duty on solar panels aims to boost domestic solar manufacturing, it raises questions about the quality of domestically produced solar panels compared to imported ones. Many developers and consumers have relied on imported panels due to their proven quality, efficiency, and reliability.

a. Quality Concerns with Domestic Manufacturing

The domestic solar manufacturing industry in India is still in its nascent stages, and concerns have been raised about whether domestic manufacturers can produce panels that meet international quality standards. Imported panels, particularly from countries like China, are known for their high efficiency and durability, which are essential for long-term solar energy projects.

b. Technological Advancements and R&D

Imported solar panels often come with the latest technological advancements, making them more efficient in converting sunlight into electricity. Domestic manufacturers may take time to match these advancements, leading to concerns that solar energy projects using domestically manufactured panels might not be as efficient or long-lasting as those using imported panels.

c. Testing and Certification Standards

While the government is encouraging domestic production, it is crucial to establish robust testing and certification standards to ensure the quality of domestically produced solar panels. Without stringent quality checks, there is a risk that lower-quality panels might enter the market, which could affect the long-term performance and reliability of solar energy systems.

Boosting Domestic Solar Manufacturing

The government’s introduction of import duty on solar panels is part of a broader strategy to promote domestic solar manufacturing under the ‘Atmanirbhar Bharat’ (self-reliant India) initiative. Several incentives have been put in place to support domestic manufacturers, including:

• Production-Linked Incentives (PLI): The PLI scheme offers financial incentives to solar manufacturers to scale up production and improve efficiency.
• Special Economic Zones (SEZs): Solar manufacturers are encouraged to set up production units in SEZs, which offer tax benefits and other incentives.
• Research and Development (R&D) Support: The government is providing support for R&D initiatives aimed at improving the quality and efficiency of domestically produced solar panels.

Despite these incentives, challenges remain for domestic manufacturers, particularly in terms of achieving economies of scale and competing with global solar giants.

How Import Duties Affect India’s Solar Energy Targets

India has set ambitious targets for solar energy, aiming to achieve 280 GW of installed solar capacity by 2030 as part of its National Solar Mission. However, the imposition of import duty on solar panels poses challenges to achieving these targets on time.

a. Slower Solar Capacity Expansion

The increased cost of solar projects due to import duty on solar panels has led to delays in new project installations. This slowdown in capacity expansion could make it difficult for India to meet its renewable energy targets, especially as demand for solar energy continues to grow.

b. Impact on Solar Power Prices

The rising cost of solar projects could lead to higher solar power prices for consumers, potentially making solar energy less attractive compared to conventional energy sources. This could affect the overall adoption rate of solar energy in the country.

c. Need for Long-Term Policy Clarity

To mitigate the challenges posed by import duty on solar panels, there is a need for clear long-term policy direction. Stakeholders in the solar industry require clarity on government policies related to import duties, incentives for domestic manufacturing, and support for R&D to make informed decisions and investments.

Impact on Prices

The increase in import duty on solar panels will directly impact the prices of imported solar panels and cells. Developers who rely on importing solar components will face higher costs.

Some key impacts on pricing include:

• The 40% basic customs duty on modules and 25% on cells will make the landed cost of imports significantly more expensive. Analysts estimate this could increase costs by 18-20%.
• For developers and EPC contractors who have to import components, their project costs will rise proportionately. This may impact bid tariffs and the ultimate price at which solar power is sold.
• The price increase applies uniformly to all projects under development, regardless of when they were bid out or planned. There is no grandfathering based on past timelines.
• Domestic manufacturers may not immediately have the capacity or cost efficiency to match cheaper imports. So sourcing locally may also lead to higher prices, at least in the short term.
• Higher import costs will impact the entire supply chain, increasing the working capital requirements for developers. This too may raise financing costs indirectly.
• While the government aims to spur domestic manufacturing eventually, the short-term impact is definitively a cost increase for solar projects reliant on imports.

Overall, the import duty changes will clearly raise the costs for developers and EPC contractors who have to import solar components. This may impact bid tariffs and tariffs for end consumers unless domestic manufacturing is simultaneously incentivized. The government hopes growing local solar manufacturing will offset the price impact over time.

Impact on Manufacturing

The increase in import duty on solar panels is expected to provide a strong incentive for domestic manufacturing of solar cells and modules in India. Here are some of the key impacts on manufacturing:

• The higher cost of imported cells and modules will make locally produced ones more price-competitive. This should encourage domestic producers to scale up their production capacities.
• The government aims to have an installed solar equipment manufacturing capacity of 10,000 MW per annum within the next two years under the PLI scheme. The import duty hike makes this target more viable.
• Companies like Adani, Reliance, Tata Power, and state-owned BHEL are expected to benefit and establish new solar equipment factories. Production-linked incentives under the PLI scheme will also assist them.
• Foreign companies may look to set up local manufacturing plants in India to serve the domestic market and maintain their market share.
• The import duty differential of 20% between cells and modules may encourage production of cells in India to be integrated into module making.
• More employment opportunities will arise in solar manufacturing as capacity scales up over the next few years.
• With large-scale manufacturing, Indian companies can build expertise in the latest solar technologies and improve productivity over time.
• In the longer run, India can become an exporter of solar cells and modules if sufficient economies of scale are achieved.

Impact on Quality

The higher import duty on solar panels on solar cells and modules could potentially lead to lower-quality solar products in India. With imported products becoming more expensive, some developers may use cheaper, low-quality components from unknown manufacturers to cut costs.

While established foreign brands are held to certain quality standards, new local producers entering the market may not have the same rigorous quality control and testing measures in place. There is a risk that the focus on rapidly scaling up local manufacturing could come at the expense of quality.

Cheap, poor quality solar modules degrade faster, have lower conversion efficiencies, and are more prone to defects. This not only impacts the performance of individual solar projects but could also damage public perception and trust in solar technology.

The government has announced quality control orders for solar modules and has emphasized the need for high quality indigenous manufacturing. However, oversight and enforcement remain a concern. Proper testing facilities, standards, and certifications need to be established to prevent subpar products from entering the market.

The PLI scheme offers incentives for highefficiency modules, which should encourage quality. But developers may still be tempted to use uncertified products to maximize profits in the absence of strict monitoring. While local manufacturing is important, quality considerations should not be overlooked in the push for self-reliance.

Alternatives for Developers

With the new tariffs making imported solar panels more expensive, developers in India have some alternatives they can consider:

Domestic Solar Panels

• One option is to source panels from domestic manufacturers in India. The government hopes the new import duties will spur growth in local production. This could create opportunities for developers to partner with Indian companies producing solar panels.
• There are some high quality solar panel producers already operating in India, like Waaree Energies and Adani Solar. Partnering with these companies could provide a steady supply of cost-effective solar panels.
• New manufacturing facilities are also expected to be built in India with the support of the PLI scheme announced by the government. Over time, this could significantly expand the availability of domestic panels.

Other Renewables

• Developers could explore supplementing solar power with other renewable sources, like wind energy. India has strong wind resources in certain states like Tamil Nadu, Gujarat, and Rajasthan.
• Wind power generation costs have also been falling steadily, making it an economical option. Combining solar and wind can provide a well-rounded renewable energy portfolio.
• Other technologies like biomass, small hydropower, etc. could also be considered where appropriate based on the location and application.
• Diversifying across renewables can mitigate risk from policy changes affecting one particular energy source.

Global Context

The solar industry is growing rapidly around the world. Major solar markets include:

• China – China is the world’s largest producer of solar panels and has heavily invested in solar manufacturing. However, China cut subsidies in 2018 which led to a slowdown in the domestic market. China still exports large numbers of solar panels globally.
• United States – The US has over 100GW of solar capacity installed, behind only China and Europe. Tax credits and incentives have helped spur adoption. However, import tariffs on foreign panels have also impacted prices.
• Japan – Japan has over 56GW of solar capacity and is the third largest global market. Generous feed-in tariffs helped drive early growth. The market has slowed recently due to policy shifts and saturation.
• Germany – Germany once dominated the global solar industry but domestic growth has slowed. Germany still has over 45GW in cumulative capacity. But rate cuts and rising prices have stalled the market.
• Australia – Australia has over 20GW of solar capacity. High electricity prices and abundant sunshine have made it an attractive market. Low module costs have enabled utility-scale and rooftop solar expansion.
• Emerging Markets – Nations like Brazil, Mexico, Chile, Vietnam and others are seeing rapid growth from low bases. Supportive policies, lower costs and abundant resources are driving adoption. Long-term potential is significant.

Future Outlook

The Indian solar industry is projected to see massive growth in the coming years, driven by strong government support, declining costs, and increased energy demand.

• India aims to have 100GW of solar power capacity by 2022 as part of its National Solar Mission. This target is expected to be achieved.
• Consultancy Bridge to India predicts India will reach 130GW of solar capacity by 2024. This would make India the third largest solar market globally behind China and the United States.
• India is expected to account for 8-10% of global solar panel demand over the next 5 years as new capacity is added.Panel manufacturers are looking to expand production to meet this demand.
• The government aims for non-fossil sources to make up 40% of installed power capacity by 2030. Solar is expected to contribute over 25% of this target.
• Declining solar tariffs, driven by cheaper panels and improved efficiency, will accelerate adoption across industrial, commercial and residential sectors.
• The rooftop solar segment is projected for faster growth compared to large-scale projects, as costs become more viable for households and businesses.
• Make in India incentives and import duty changes should boost domestic panel manufacturing and reduce reliance on imports over the long-term.
• To sustain growth, grid integration challenges, land availability, project delays and funding access need resolution through policy reforms.

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