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Solar Panel Dispute: India and WTO

Solar Panel Dispute: India and WTO

Brief Background: India has come up with regulations that prefer domestic manufacturers of solar modules over foreign manufacturers. USA, a major manufacturer of solar panels says that it violates WTO norms of “National Treatment”

Encouraging Renewable Energy

This issue has its origin in India’s National Solar Mission – one of the eight missions under National Action Plan on Climate Change ( NAPCC ). Under the National Solar Mission, the government had set up an ambitious target of generating 22000 MW of electricity from Solar Power.

Update : The target was revised by Prime Minister Modi in June 2015 – five times – to 100,000 – 1 Lakh Megawatts or 100 GW. Out of this 40 GW would be rooftop ( largely off grid ) and 60 GB would be through Grid connected Solar Plants.

But, solar Power is still expensive to produce because of several reasons

  • Technology is expensive
  • Manufacturing is expensive
  • Initial investment required for any power plant by a private player.

The per unit cost of solar power is higher than the power per unit from coal plants. If government wants to encourage use of solar energy (because its clean, renewable, and helps fight climate change!)

Three questions arise here:

  • Will consumers pay more for electricity if it produced from renewable sources?
  • Will the electricity distribution companies (called Discoms) buy electricity produced from solar power when cheaper electricity is available from coal power plants?
  • Will private companies set up solar power plants if the electricity they produce is expensive compared to electricity from thermal power plants?

Clearly, the consumer will not be willing to pay more for electricity just because it is clean. In a developing country like India, any industry will not be willing to pay more for clean electricity because it raises the input cost.

DisComs (Distribution companies that buy power and distribute it to retail consumers, hence the name) will not buy solar power when cheaper thermal power is available.

This will mean that solar power produced may have no buyers. Which means no one will invest in setting up Solar power plants.

Government incentive:

The Govt of India says that to promote solar power, we will buy solar power from solar plants at rates that will help sustain producing solar power . Secondly, We will have a long term contract of buying clean electricity from solar power plants. This should incentivize private companies to set up solar power plants.

Then government will sell this power to discoms. To force discoms to buy at least some of the power from renewable energy sources, govt will do few things

  1. Sell the solar power to these discoms at as cheap price (matching the price at which they are already buying from thermal power plants ) as possible so that they do not feel the pinch (why?)
  2. Make a regulation to force the discoms to have certain component of the power that they buy to be from renewable sources of energy.

What may be the outcome of this?

Government is successful in creating incentive for solar industry. Private players will set up power plants. Manufacturers will set up solar panels manufacturing units. Some companies may set up R & D units to make solar power cheaper.

If the government does not encourage domestic solar equipment manufacturing then this is what may happen.

Solar power industry may simply start importing cheap solar panels from China and USA and start producing solar power. No innovation, no domestic manufacturing, and loss of forex to the country!

What government has decided to do?

Government said, that solar companies that provide equipment to must have certain percentage of components of the solar panels made in India. This is called “Domestic content requirement.”

This will force solar companies and allied industries to set up local manufacturing in India. Such “Make in India” will help create more employment, push domestic investment and also help prevent loss of forex!

Only those solar companies that have some Indian component in their equipments, will be eligible to benefit from the government’s long term guarantee of purchasing solar power from them.

For solar companies, this long term guarantee by government is important , because it may happen that if there is no such guarantee, then they may have invested in equipment, plant and everything and may be producing power, but there is no buyer for that power because it is expensive than thermal power.

Why USA is having a problem?

USA and China are major suppliers of solar equipments. USA feels that if domestic content requirement is made mandatory by the government , their solar panels will not be bought in India by solar energy companies. USA says, that government is violating National Treatment to goods imported from USA. This is against WTO norms.

What is National Treatment? 

Members of WTO pledge that goods whether imported or exported will be treated equally by the government. India is a member of WTO.

By being a member, India agrees to not promote domestic goods and discourage imported goods. For example, of government cannot promote Baba Ramdev’s products above say Johnson & Johnson. If for midday meal scheme there is a tender for buying biscuits, government cannot make rule that domestic companies will be preferred for supplying biscuits.

Exception for National Treatment in WTO norms

In WTO there is an exception to the National Treatment clause, if the product for which domestic companies are being preferred is a “government procurement”. Government procurement means two things

(a) The procurement by governmental agencies of products purchased for governmental purposes only

(b) Product should NOT be commercially resold or used in production of goods for commercial sale

WTO Panel Verdict

USA says – India is violating National Treatment to its solar equipment manufacturers

India Says – This is “government procurement”! (Remember that electricity is well regulated by the government – in both procurement and price at which it is sold to you. So government could have directly asked Discoms likes BSES, Tata Power to buy electricity from solar power companies. But government is buying itself, so that it falls under Government procurement. )

WTO Panel that is investigating in the case says – This is not “government procurement”. Product that is being bought by government is – Electricity. This is government procurement.

But product which is being discriminated is – solar cells and modules. But solar cells and modules are NOT procured by government. Hence they are not GP and government cannot discriminate against them.

Who is right?

Arguments against India

  1. What the government has been doing is indeed discrimination against foreign suppliers.
  2. This is violative of National Treatment and WTO obligations. Imagine, if USA says all USA companies should have some minimum percentage of software to be developed by American companies to get tax benefit .What will Indian Software Engineers do?

Points in Favour of India

  1. India wants to promote clean energy.
  2. 100GW = 1,00,000 MW of electricity of solar power is a BIG target. And if some/all equipment using for producing solar power are made in India, it will boost manufacturing in India.
  3. If this is not done, then simply all the equipment will be imported – no benefit to manufacturing + loss of forex.
  4. Government is not interfering in the market buying and selling of solar panels. India says that in the market, people can buy any solar panel – Indian or Chinese. We are not creating any barrier for imported solar panels in the market. We are merely saying that power that we are buying should have been sourced from companies that have some indigenous components.

Update on March 3: WTO Panel has said that India is wrong and violating its WTO obligation of providing “National Treatment” to solar modules and panels made by other WTO members. Likely to appeal against this.

What next?

This page will be updated as and when the issue develops.

 

Reference Article

  • http://pib.nic.in/newsite/PrintRelease.aspx?relid=122566
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  • NeverSayDie

    The target for solar power is 170000MW instead of 22000MW.

  • Great job sir.

  • vikram rk

    Very nicely explained

  • Ramesh

    Wow, This is fully and completely illustrative. I will now be able to understand quicker on further issues If raised on this subject . Thanks a lot to ForumIAS.

  • jay

    is any one taking optional paper as electrical for UPSC 2017??

  • jay

    Product should NOT be commercially resold or used in production of goods for commercial sale.

  • Fighter

    Thank you sir, nice article .fully understood … thanks a lot !!!

  • rural india

    any one cant elaborate this just as u

  • Bisoyee Koushik

    I think “(b) Product should be commercially resold or used in production of goods for commercial sale”….I will be “Should not Be”

  • Atul Das

    Incisively written article team forum ias.. Great initiative..

  • dark matter

    Thanku very much forumias

  • Hi forum IAS..it is really really great article and cleared everything regarding solar panel dispute..Thanks a lot..I request u to continue making these kind of articles like why private investment is lacking and govt needs to divert from fiscal consolidation.why G20 is giving emphasis on fiscal stimulus and moreover please provide analysis of budget speech and economic survey..And articles in Indian Year book

  • Paritosh Munot

    Hello Forum IAS its nice article
    Are you going to cover all the important topics like this……….
    Thank You so much Team forumIAS