India’s Solar Panel Wars Heat up

By Sarah Watson —

Solar power plant in India. Source: Brahmakumaris Photo Gallery’s flickr photostream, used under a creative commons license.

Prime Minister Narendra Modi has made solar power a key plank of his energy independence and climate change agenda. India has set a target of reaching 100 gigawatts (GW) of solar generation capacity by 2022; it still has 86.5 GW to go. Cheap solar modules will be key to reaching that target, but India’s abysmal balance of trade in solar equipment has spurred calls for protective measures. With domestic content requirements nixed by the World Trade Organization (WTO), the Modi government may seek other means of protecting domestic capacity. But experience shows that simply offering special opportunities to domestic manufacturers has failed to boost the industry in the past.

A crucial facilitator of India’s unprecedented adoption of solar power has been the rapidly dropping price of the electricity it produces. Recent reverse auctions have discovered prices of well below 3 rupees, or around 4.5 cents, per kilowatt hour. The fall in the price of solar power has been driven by the even faster drop in solar module prices; these declined 36 percent in 2016 alone, and between December 2016 and May 2017 they dropped a further 11 percent.

The vast majority of solar modules powering this boom are of Chinese origin. Indian imports of photosensitive semiconductor devices from China reached $2.8 billion in fiscal year 2016-17, up from $1.96 billion the previous year. The next largest exporter was Malaysia, with $210 million in sales. In contrast, India exported only $4.6 million worth of solar cells to China in 2016-17. This dependence on imports for a resource that is key to its energy strategy has created unease within India. It does not help that Sino-Indian relations are fraught with tension and that executives in the Indian solar industry accuse China of exporting a substandard product.

India’s response to this imbalance has taken two primary forms. First announced in 2013, the Jawaharlal Nehru National Solar Mission laid out a schedule for government procurement of solar power and specified that an increasing portion of solar modules for government-sponsored production must be made in India. In late 2016, however, India lost a World Trade Organization dispute over these domestic content requirements (DCR). The complainants, led by the United States, convinced an arbitration panel that the requirements violated India’s WTO obligations, and India agreed to phase them out by December 2017. Indian solar manufacturers have also sought more explicit protection: a petition by the Indian Solar Manufacturers Association (ISMA) requested an anti-dumping investigation against China, Malaysia, and Taiwan. The Directorate General of Anti-Dumping and Allied Duties (DGAD), the Indian agency responsible for the investigation, found that ISMA has made a prima facie case, and initiated a full investigation.

But India has been here before — and not that long ago. In 2012, a predecessor group to ISMA petitioned DGAD for an investigation into dumping by the same three countries, plus the United States. In May 2014 DGAD recommended stiff anti-dumping penalties ranging from 11 to 81 cents per watt depending on the country of origin and export (Chinese companies received the highest recommended penalties). The decision was met with an intense lobbying campaign by solar producers and heads of powerful ministries, who argued that anti-dumping tariffs would cripple India’s solar power production. The Ministry of Finance, which makes the final decision on anti-dumping tariffs, eventually allowed the investigation to lapse.

Most analysts agree that DCR failed to boost India’s solar manufacturing industry. Total domestic manufacturing capacity is about 5 GW (the largest Chinese supplier exported 3 GW to India in the first half of 2017 alone). Furthermore, according to Bridge to India much of this capacity is “obsolete, sub-scale, and uncompetitive.” Chinese cells are being sold in India at 19-20 cents a watt, 35 percent below what Indian manufacturers claim is their cost of production. Tariff duties on Chinese panels such as those proposed in 2014 could quintuple the current per-watt cost, threatening the viability of many existing power purchase agreements and dissuading public utilities from buying more solar power. Given the industry’s razor-thin margins, even a 12 percent rise in solar modules in the third quarter of 2017 was enough to scare solar power producers.

Solar power stakeholders in the United States and the European Union are engaging in a similar debate: should their trade policy prioritize the growth of solar power (and jobs in the installation and maintenance industry) or should they act to protect domestic solar producers? Although both the U.S. and E.U. have experimented with protective tariffs in the past, these measures have not led to robust domestic solar manufacturing industries. This time around, India may decide that its solar manufacturing industry cannot survive the flood of cheap Chinese solar panels and must be protected. If so, India’s government officials should remember that simply offering opportunities to domestic industry, as it attempted to do with DCR, does not necessarily cause that industry to flourish. In order to ensure that Indian solar manufacturing becomes not just viable but competitive, India should focus less on protectionism and more on ‘ease of doing business’ reforms that encourage manufacturing over all.

Ms. Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS. Follow her on twitter @SWatson_CSIS.

Sarah Watson

Sarah Watson

Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.

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