Why Indian solar makers are unfazed by adverse WTO verdict

Domestic solar equipment manufacturers are not worried about the World Trade Organisation’s ruling against India’s buy-local policy because petitioner United States has become an insignificant player in the local market

India’s fledgling solar cell and module manufacturers are responding to the World Trade Organisation’s rejection of India’s appeal last week to retain the country’s buy-local provisions by, in VS Naipaul’s memorable expression in another context, “taking it on the chin and moving on”.

“Nothing is lost; it isn’t a cause of concern. The decision will not have much impact on the domestic solar industry,” Sunil Jain, CEO of Hero Future Energies in Delhi, which executes solar power projects, told indiaclimatedialogue.net. “The government and government organisations like NTPC (National Thermal Power Corporation, India’s largest power utility) will have to redesign programmes in compliance with the WTO guidelines. When there is open bidding for private and public players, such sourcing won’t be allowed.”

“The US isn’t significant in our solar product imports. Of a total of $3 billion a year, the US contributes an insignificant $20 million,” Jain said. “India’s true domestic content in its total manufacturing capacity of solar products hardly amounts to 2,000 MW.”

As a consequence of the WTO ruling, India is increasing its domestic sourcing under the Jawaharlal Nehru National Solar Mission by incentivising local manufacturers through subsidies and upping procurement of solar panels by government agencies, instead of making domestic sourcing mandatory as it had planned to do earlier.

“I understand that the Indian government is planning to provide direct subsidies to solar producers, and to increase its own procurement,” Vanderbilt University Law School Professor Timothy Meyer, who has studied renewable energy support programmes in 50 US states, told indiaclimatedialogue.net. “With respect to government procurement, WTO rules contain a narrow exemption for products purchased by the government that the government intends to use for governmental, not commercial, purposes. In theory, this exemption could shield government procurement of solar cells, but it can be tough to design a government procurement programme that fits within the exemption.”

“In both the India-Solar Cells and (an earlier) Canada-Renewable Energy cases, WTO panels ruled that this exemption did not apply because the government was purchasing electricity, not solar cells,” Meyer said. “The domestic content requirements required the electricity producer, not the government, to purchase domestic solar cells.”

“Moreover, the exemption for government procurement does not apply if the government intends to resell either the product purchased (the solar cells) or to use that product in producing another product (electricity) it intends to sell commercially,” Meyer told indiaclimatedialogue.net. “Hence, a lot would depend on the structure of the government procurement. For example, the exemption would not apply if the government purchased the solar cells and then transferred them to commercial electricity generators, or if the government used the cells to generate electricity which the government then resold to consumers.”

“In the first phase of the National Solar Mission, it was the United States that supplied the bulk of the solar cells and modules,” Biswajit Dhar, an international trade expert who teaches at Delhi’s Jawaharlal Nehru University, told indiaclimatedialogue.net

Still, some Indian solar power market players are concerned about the WTO decision. Sunil Rathi of Waaree Energies in Mumbai, which is the market leader in installing more than 500 MW of solar modules, told indiaclimatedialogue.net, “The WTO ruling against India’s sourcing of local solar products will be demoralising for the solar industry which has recently started gaining impetus.”

“Chinese manufacturers are dumping panels in India at unsustainable prices, already snatching our share of the pie. Production-based subsidies or manufacturing incentives will help the existing manufacturers and also boost the solar manufacturing sector in India.”

Free trade desirable

Jagdish Agarwal, till recently with Welspun Energy and the Solar Power Developers Association, said, “We need to protect domestic producers, without which a robust manufacturing base can’t be developed. As project developers, we want free trade in the solar market, with no restrictions on imports. Our priority is to have installed capacity in the country.”

By some accounts, India dragged its feet on appealing against the original US complaint to the WTO in 2013 regarding its domestic content requirement, under which half the amount of solar cells and modules procured by the central government had to be manufactured in India. After the complaint, India reduced the proportion to one-tenth.

The JNNSM, which was started in 2010 to establish India as a global leader in solar energy, by creating the policy conditions for its diffusion across the country as quickly as possible, laid down the localisation clause.

The WTO first ruled against India in February this year on the ground that the domestic requirement infringed provisions of its General Agreement on Tariffs and Trade as well as its Trade-Related Investment Measures in discriminating in favour of Indian solar products manufacturers.

The US had also pointed out that Indian solar power producers obtain long-term tariffs for their sale of clean electricity, provided they buy local cells and modules. The guaranteed rate for their power for 25 years gave them an unfavourable advantage, the US alleged.

After last week’s verdict, the powerful US Trade Representative Michael Froman said: “This is a clear victory for American solar manufacturers and workers, and another step forward in the fight against climate change.”

Froman is US President Barack Obama’s principal negotiator on international trade and investment issues and leads this office “to open global markets for US goods and services, enforce America’s rights in the global trading system, and foster development through trade”.

Solar subsidies in the US

The Penang-based Third World Network, which follows global trade and development negotiations closely, reported from Geneva that in its appeal against the February ruling, India cited how content requirements and subsidies provided by eight American states – Washington, California, Montana, Massachusetts, Connecticut, Michigan, Delaware and Minnesota – for renewable energy companies was a case of positive discrimination.

An October 2015 paper by Meyer cited how there were 44 such support programmes in 23 US states, and “China and India have already identified several of these programmes as incompatible with WTO law”. But this argument didn’t cut any ice.

The US may well have won a Pyrrhic victory. India, which plans to have an installed capacity of 100 GW or 100,000 MW of solar power by 2022, now has 8,000 MW. Only 680 MW of projects have currently been awarded under the buy-local rule.

At present, Indian manufacturers have the capacity to produce 1,386 MW of solar cells and 2,500 MW of modules. They are only functioning at a third of this capacity. As much as 70% of all solar equipment in the country is Chinese, while the US and India contribute 15% each.

MetalMiner in the US, which gathers intelligence on global metals markets, commented in March: “Is a local requirement really discrimination? The pro-U.S. solar ruling in India runs afoul of non-government-administered green building certification programmes here in America, such as the US Green Building Council’s Leadership in Energy and Environmental Design standard which reward credits for regionally produced building materials…”

“Maybe our trade representatives need to consider the further implications of winning this case. Sure, the Jawaharlal Nehru Solar Mission is a lucrative project. Goldman Sachs has invested $250 million in it and it will, eventually, add 2,250 MW of solar power to India’s grid. It’s understandable that US solar manufacturers want a piece of such a massive project, but they should, perhaps, rethink using this WTO ruling to force their way in.”

“India has indicated it intends to challenge at least some of these US state measures. Such a case could ultimately lead US manufacturers to lose some of the subsidies they enjoy in the US. It could also provide a basis for the US and India to reach a negotiated settlement on the general issue of domestic content requirements for renewable energy,” Meyer told indiaclimatedialogue.net.

“Direct subsidies for solar producers are a safer bet. They can still be challenged before the WTO, but as long as they do not contain domestic content requirements or require the recipients to export solar cells, winning a case against India would be difficult. If the US were to challenge direct subsidies, it would have to prove both that India was providing solar producers a benefit that those producers could not obtain on the market, and that the subsidies caused ‘adverse effects’ on US interests. Both of these showings can be very challenging to make.”

Climate dimension ignored

The climate dimension has been completely ignored in the current trade controversy. The record has been set straight by a December 2015 paper titled Reach for the Sun: How India’s Audacious Solar Ambitions Could Make or Break its Climate Commitments by three authors from Stanford University, including Varun Sivaram and Gireesh Shrimali.

They refer to Prime Minister Narendra Modi’s goal of reaching 100 GW of solar power by 2022 as equalling more than half the installed capacity worldwide in 2014. They also cite his announcement at the UNFCCC meet in Paris to set up the International Solar Alliance, towards which he committed $400 million and land near Delhi for the institution.

Meanwhile, market forces are compensating for whatever setbacks India’s solar power industry may have suffered due to the adverse WTO decision. The price of solar power from projects being bid for has dropped to Rs 4.34 a unit, which makes it cheaper than coal.

This article first appeared on India Climate Dialogue.