The Ministry of New and Renewable Energy’s move to consider basic customs duty (BCD) on import of solar cells/modules as a ‘change in law’¹ event and allow for its passthrough could raise tariff by 50-70 paise per unit of electricity² for eligible projects. The increased tariff will remain well below the average power purchase cost for discoms in India. However, more importantly, this announcement brings partial relief for upto 6 GW of solar projects already seeing elevated project costs as they are set to achieve COD/ import modules from this fiscal.

The solar power industry is already hit by a sharp rise in module prices in the last two years. This has been further aggravated by the imposition of 40% BCD on import of modules and 25% on import of cells effective from April 1, 2022. Though the move is to encourage indigenous manufacturing of solar modules/cells and reduce dependence on imports³, it increased the project cost by ~25%⁴, depressing the already slim returns⁵ of developers.

The BCD imposition was likely to impact ~17 GW of projects bid between October 1, 2019, and March 9, 2021⁶. These projects were likely to procure modules post April 1, 2022 and could not have factored the customs duty in their bid tariffs.

Says Manish Gupta, Senior Director, CRISIL Ratings, “Based on our discussions with industry players, we estimate that for 50-60% of the 17GW capacity, modules may be procured domestically, keeping it out of the ambit of duty. For another 10-15% of such capacity, modules were imported before the BCD imposition. Hence treating BCD as a ‘change in law’ event will benefit the remaining capacity of upto 6 GW, making the projects economically viable.”

These projects were bid at tariffs ranging from Rs 1.99/unit to Rs 2.92/unit, with only ~20% of the projects being at a tariff of more than Rs 2.55/unit, thus the increased tariff post passthrough is expected to be in the range of Rs 3-3.2/unit, keeping them cost-competitive compared to average power procurement cost for discoms in India.

Says Ankit Hakhu, Director, CRISIL Ratings, “Tariff pass through remains only a partial relief as returns for these projects will remain weaker than envisaged at the time of bidding, as module prices have risen by ~50% since then. This is in contrast to the industry expectation of softening prices, in line with past trends, and was not budgeted in tariffs while bidding.”

Timely approval by regulatory authorities, pertaining to the tariff passthrough, is essential to protect further erosion of returns.

¹ Announcement made by Ministry of New and Renewable Energy on September 27, 2022
² Based on the prevailing rupee-dollar exchange rate (USD 1= INR 83) and imported module prices
³ Imports form 80-85% of module supply in India
⁴ solar modules comprise nearly 60% of the project cost
⁵ Mostly low double digit/ single digit IRRs (at P75 PLF levels) due to aggressive tariffs quoted in the bids and increasing module prices
⁶ the date of announcement for imposition of BCD w.e.f. April 1, 2022