Solar: India – USA Domestic Content Requirement Issue

On January 11, 2010, India launched its national solar policy, the Jawaharlal Nehru National Solar Mission (JNNSM). Phase I of that national policy is composed of two parts: Batch 1 and Batch 2. Under Batch 1, India required developers ofsolar photovoltaic (“PV”) projects employing crystalline silicon technology to use solar modules manufactured in India.

Subsequently, under Batch 2, India expanded this domestic sourcing requirement to crystalline silicon solar cells as well.

Moreover, the Phase II domestic content requirements have been expanded to cover thin film technology, which was exempt from such requirements under Phase I.

India also offers solar energy developers participating in the JNNSM a guarantee that the government will purchase a certain amount of solar power at a highly subsidized tariff rate, provided that they use domestically manufactured solar equipment instead of imports.

These elements of India’s national solar policy appear to be inconsistent with India’s obligations under the WTO agreements. These obligations include Article III of the General Agreement on Tariffs and Trade 1994 (GATT 1994), which generally prohibits measures that discriminate in favor of domestically produced goods versus imports;

Article 2 of the WTO Agreement on Trade-Related Investment Measures, which prohibits trade-related investment measures that are inconsistent with GATT Article III;

Article 3 of the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement), which prohibits conditioning a subsidy on the use of domestic over imported goods; and

Article 5 of the SCM Agreement, which prohibits causing adverse effects on other WTO Members through subsidies that discriminate against imported goods.

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Points in India’s Favor:

In India, the solar power industry is a 4-year-old baby. Indian manufacturers want protection against the much cheaper products from abroad, especially from the Chinese crystalline silicon manufacturers and the American ‘thin film’ manufacturers, both of whom often bring in cheap funding for their buyers.

India has an ambitious target of 22,000 MW of solar capacity by 2022, and where is the sense, ask the module manufacturers, in rolling out a $40 billion programme if the domestic producers have no share of it.

In trying to tread the fine line between these two positions, the government of India has triggered off what some people are calling ‘solar wars’.

The National Solar Mission (NSM) is being rolled out in phases, and for the first batch of the first phase, the government said that those project developers who opt for the crystalline silicon modules, shall buy only those made in India. For the second batch, it went a step down in the value chain and said that even the cells will have to be made in India. This is what has got the United States’ goat. This rule did not apply to thin film, simply because there is no thin film module manufacturer in India to buy from. As a consequence of this, most of the project developers went in for imported thin film modules.

This domestic content requirement was only for projects awarded under the NSM and not for those set up under the various states’ programmes. Notably, of the 1,200 MW of capacity in India today, about 850 MW has come under Gujarat’s programme. Most of those putting up projects under the states’ programmes are therefore importing their modules.

Thus, the NSM projects are importing thin films (mainly from the U.S.), those under states’ programmes are importing crystalline silicon modules (mainly from China) and nobody is buying from Indian manufacturers.

Against this backdrop, India initiated anti-dumping investigations in November last year against manufacturers in China, USA, Taiwan and Malaysia, deferring to the pleas of the domestic manufacturing industry.

Other Perspective:

The project developers stress that it is only smart to let them buy their equipment from the cheapest sources in the world, so that a culture of setting up solar plants develops first. Force them to buy locally, the costs will stunt the growth of the fledgling industry and neither the power producers nor the module makers will be in business.

The solar power generators were promptly up in arms, pleading that the duty would make their upcoming projects unviable, given that most of them were won under thin-margin tariffs determined through competitive bidding processes.

Current Status:

Now, the U.S. has taken India to WTO over the ‘domestic content requirement’ (DCR) under the NSM. India is likely to argue that the NSM is in the nature of government procurement — because the power is bought by a government-owned company.India is not a signatory to the Agreement on Government Procurement, hence, no violation.

Secondly, India will argue that the DCR rules have truly caused no damage to any overseas manufacturers, because it is applied on a very small portion of the country’s goals, the rules do not cover states’ programmes.

Solution:

One way out could be to encourage Indian companies to acquire technologies abroad — for technology alone could be the answer to the advantage of scale that the American and Chinese companies have. Such technologies are available and are being acquired. For instance, a South Korean company, Hanwha, which took over the German major, Q-Cells, last year, also bought Crystal Solar of the US for just $23 million. Crystal Solar is developing cutting edge solar manufacturing technologies. Hanergy, a Chinese company, took over the American company, Miasole, recently, but it also acquired another division of Q-Cells, called Solibro. The Chinese and the Koreans have an eye on emerging technologies. Why not Indian companies?

References:

http://www.thehindu.com/business/Industry/the-solar-war-heats-up/article4397578.ece

http://www.ustr.gov/about-us/press-office/press-releases/2013/february/us-challenges-india-restrictions-solar

http://www.india.com/business/us-challenges-indias-local-requirements-for-solar-products-in-jnnsm-phase-ii-in-wto-12189/

http://www.pv-magazine.com/news/details/beitrag/us–india-fail-to-reach-agreement_100014741/

http://www.business-standard.com/article/economy-policy/india-us-to-thrash-out-solar-procurement-issue-113031300284_1.html

http://www.thehindubusinessline.com/economy/policy/solar-mission-us-wants-india-to-do-away-with-local-sourcing-norms-in-new-projects/article5859589.ece

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Yellow Haze Energy is a Solar Energy based startup focussed on improving consumer choices for electricity by use of Solar Power.