Solar tariffs in India may increase by more than one-fifth over the next year due to surging commodity prices and the introduction of a new duty on imported solar modules, finds a recent report by JMK Research and the Institute for Energy Economics and Financial Analysis (IEEFA).

“The price and performance of modules are critical factors in project cost and, accordingly, in developers’ bids in solar auctions,” says report co-author and JMK Research Founder Jyoti Gulia.

Rising module prices due to an increase in key raw material prices and freight charges have led to higher tariffs discovered at solar auctions from early 2021. The lowest winning solar bids between January 2021 and March 2022 have increased by an average of 22%, relative to India’s record-low solar tariff of INR 1.99 ($0.03)/kWh in December 2020.

The report projects that solar tariffs will climb even further following the recent imposition of a 40% basic customs duty (BCD) on imported solar modules and 25% on cells, and the implementation of the Approved List of Models and Manufacturers (ALMM). 

The report urges central and state government regulators to make a joint effort to address these policy hurdles by clarifying how long BCD will be applicable on imported modules and whether the duty will increase or decrease on a year-on-year basis.

Domestic module supply

The authors considered three scenarios to arrive at future tariffs when using domestically manufactured and imported modules. In the base case scenario, which assumes duty-free imported modules, the tariff is estimated to be INR 2.43 ($0.0323)/kWh.

With module imports subject to BCD, the tariff would be INR 2.95 ($0.039)/kWh – about 21% higher than the base case tariff. If a developer was able to procure domestic modules, the tariff would be INR 2.26 ($0.030) – about 7% lower than the base case tariff, as per the report.

However, the authors say a substantial chunk of projects that are likely to be commissioned by 2024 will not be able to secure a supply of domestic modules due to the huge demand across segments, including rooftop solar, open access, utility scale as well as the off-grid market.

“In this case, developers will have to import modules that will attract 40% BCD,” says co-author JMK Senior Research Associate Akhil Thayillam.

New technology will partly compensate for higher tariffs, playing a significant role in maximizing plant output, states the report. “For example, a developer opting for imported bifacial modules and a single-axis tracker could achieve a 4% to 5% capacity utilization factor (CUF) gain.”

But Thayillam says a lack of availability of domestically manufactured high-wattage modules and bifacial modules will be a critical challenge for developers.

“Prices of domestic modules are also volatile and may surge significantly in the near-term, chiefly due to demand-supply mismatch, an increase in global polysilicon prices, and 25% BCD on solar cells,” he adds.

To reduce dependency on imported equipment and raw materials, the Indian government, as part of its production-linked incentive (PLI) scheme, has allotted an INR 24,000 crore ($3.2 billion) capital subsidy to set up vertically integrated domestic solar manufacturing facilities.

“These facilities are likely to start production by mid-2023 at the earliest. Even for domestic modules, prices until then are likely to see an upward trend,” says co-author JMK Senior Research Associate Prabhakar Sharma.

“To achieve our ambitious renewable energy targets for 2030, we must avoid delays in project commissioning caused by the short-term surge in module prices,” says co-author Vibhuti Garg, IEEFA Energy Economist and Lead India.

“Renewable energy is deflationary, and future solar projects will still have significantly lower tariffs than thermal projects. Accelerating the deployment of renewable energy systems to meet India’s increasing power demand will strengthen the country’s energy security and avoid future power shortage crises.”