Taxing the ‘make in India’ project

Article By : Sufia Tippu

You’d think the solar industry’s woes would end with SunEdison’s bankruptcy and difficulties raising capital. What else could go wrong?

« Previously: Where's the money?
 

You’d think the solar industry’s woes would end with SunEdison’s bankruptcy and difficulties raising capital. What else could go wrong?

*__Naveen Kumar:__ Fresh infrastructure needs to be laid down and this would require further investment, which is really not forthcoming.*
 

India’s infrastructure and regulatory issues and manufacturing challenges remain. “For instance,” said Naveen Kumar, Associate VP at Greenko Group, a clean energy independent power producer (IPP), “substations with adequate capacity are required to inject generated power from solar plants into the grid. Ideally, the solar plants need to come up within 4km – 5km from where the substations are located. If the substation doesn’t have adequate capacity, the government needs to augment the capacity or promise to get a substation ready by the time the construction of the solar plant gets completed, but that doesn’t happen. In the case of new solar parks of GW capacity, fresh infrastructure needs to be laid down and this would require further investment, which is really not forthcoming.”

Moreover, developers have to deal with too many government agencies–state nodal agencies, off-takers and implementing agencies to name a few–which makes on-time execution challenging. Today, some companies are bidding aggressively because they are trying to build their pipelines quickly to reach a critical mass and look for an exit.

But after the SunEdison debacle banks are wary of lending. They are very careful when lending to projects that have bid below ₹5/kW, Y.M. Deosthalee, MD, L&T Finance Holdings told the *The Economic Times*. In that report, Deosthalee defended the caution by pointing out that projects that have bid below the ₹5/kW mark have not reached financial closure.

Taxing time for manufacturing

There is a 1.2GW capacity of cell manufacturing and 4GW of module manufacturing in India. The Adani and Bharti groups are planning another 2GW of solar cell manufacturing. But that’s just about 10% of the country’s demand being met by Indian manufacturers. About 30% of the solar cell and panel requirement comes from the U.S. and the rest from China.

*__Narender Surana:__ Skewed financial structuring gives us a major disadvantage.*
 

Government policy encourages imports at zero duty whereas there is customs duty to be paid on several raw materials used for making panels and sales tax on local sale, according to Narender Surana, Managing Director, Surana Ventures, a Hyderabad-based solar cells and module manufacturer. Another disadvantage is that international rates of interest are at 2-3% against the 11-12% available domestically to Indian companies.

“Because of the long-term offering of import payment we import at 2% interest and the Indian government allows us to pay these companies even after three years at 2%. So you see, we are definitely at a big disadvantage vis-a-vis foreign manufacturers,” explained Surana.

Many Chinese companies are importing the finished product, storing it in Special Economic Zones (SEZs) and offering it in India without any tax, according to another module manufacturer. When you offer from the SEZ there is no tax to be paid.

In that regulatory context and with local manufacturers meeting just 10% of demand, the recent WTO case lodged by the U.S. comes as a surprise, according to at least one module manufacturer who talked to EE Times India.

Interestingly, Chinese companies like Trina Solar and Rene Solar, are planning to set up manufacturing facilities here with Indian joint venture partners. They believe that the Indian government would implement a policy more favourable to the Indian manufacturer.

Contrary to popular belief, the quality of the Chinese solar products is quite good. “They have advanced manufacturing plants and the output is directly supervised by the OEMs who give the specifications,” said a solar panel manufacturer. “In fact, their output is far superior and the quantum is much more — more than 50x compared to Indian products. Chinese products can be bought at 40-42 cents per Watt whereas for Indian manufactured products come with a higher price tag of 60-65 cents per Watt,” he said.

Although Trina and Yingly are the two leading Chinese companies who are supplying cells and modules to a large market here, there are several other smaller Chinese companies who are in the play for smaller projects.

Last word

The current aggressive bids backed by un-hedged foreign currency loans and private equity players wary of this sector (because they see no exit in the short term) could turn out to be the final straw that breaks the financial backbone of solar projects.

On hearing SunEdison’s bankruptcy, the company’s founder and former CEO Jigar Shah tweeted, "Founded by visionaries, built by revolutionaries, destroyed by mercenaries." Unless developers present the business logic upfront and work out the financial engineering in a transparent and feasible manner, solar power generation plans in India may come to nought.

 
« Previously: Where's the money?