India: Domestic Content Requirement Under JNNSM Policy For Phase II, Batch I

Introduction

With an objective to establish India as a global leader in solar energy the Ministry of New and Renewable Energy (hereinafter referred as "MNRE") has launched The Jawaharlal Nehru National Solar Mission (hereinafter referred as "JNNSM") in the year 2010 to achieve the set target of grid connected solar power capacity of 20,000 MW by 2022, in three (3) phases (first phase upto 2012-13, second phase from 2013 to 2017 and the third phase from 2017 to 2022).

Analysis of Guidelines for JNNSM Policy for Phase II, Batch I vis-à-vis WTO

MNRE has launched Phase II, Batch I for implementation of 750 MW aggregate capacity of Grid Connected Solar Power Project after Phase I1. The Government of India has approved the implementation of scheme for setting up of 750MW aggregate capacity of Grid Connected Solar PV Power Project under Phase II, Batch I of JNNSM with Viability Gap Funding support from National Clean Energy Fund through Solar Energy Corporation of India (SECI). The detailed guidelines for implementation of Phase II, Batch I of the Jawaharlal Nehru National Solar Mission were issued separately. The salient provisions of the Guidelines are as under:

a) The scheme to be implemented by SECI in close association with the NTPC Vidyut Vyapar Nigam Limited (NVVN).

b) Viability Gap Funding (VGF) support will be provided for setting up of Grid Connected Solar PV Power Projects of 750 MW aggregate capacity of Solar Power Developers on Build Own Operate basis.

c) The Power generated from the projects shall be purchased by SECI at a fixed levelised tariff of Rs. 5.45 per kWh (Rs. 4.75 per kWh in case of projects availing benefit of Accelerated Depreciation) for 25 years and shall be sold by SECI to willing State Utilities/Discoms/ Other Bulk Consumers, at a fixed tariff of Rs. 5.50 per kWh for 25 years.

d) The Projects would be selected through a process of open competitive reverse bidding on Viability Gap Funding (VGF) required by the Bidders to enable them supply the solar power to SECI at the above mentioned levelized tariff for 25 years.

e) The Bids will be invited in two separate categories:- (i) 375 MW with stipulation of Domestic Content Requirement (DCR) in respect of Solar PV Cells and Modules to be used in the projects and (ii) 375 MW without any DCR restrictions.

f ) The Solar PV Projects shall be installed and commissioned within 13 months from the date of signing of their Power Purchase Agreements (PPAs) subject to provisions of the PPAs and Guidelines of the scheme.

The policy of Domestic Content Requirement is with intent to promote the local manufacturing of the components of solar generation equipment which includes the cells and modules.2 Under the said Guidelines, the total capacity of 750 MW under Batch-I Phase-II, is equally divided into two categories (i.e. "DCR" or "Open") wherein out of the total capacity of 750 MW, a capacity of 375 MW was kept for bidding with Domestic Content Requirement (DCR) and the rest capacity was kept open to bid with no specification as to compulsory DCR (i.e. bidder is open to procure either from domestically or from outside the domestic territory). The Bidder at the time of bidding may opt for either "DCR" or "Open" or both the categories. Under DCR, the solar cells and modules used in the power plant must both be made in India. The Bidder has to submit separate Bids to bid under both categories.

It is pertinent to note that India is the member of WTO and shall be bound by its agreements i.e. the General Agreement on Tariffs and Trade (GATT), Agreement on Trade Related Investment Measures (TRIMS) and Agreement on Subsidies and Countervailing Measures (ASCM).

As stated above the Guidelines provides for viability gap funding (VGF) support to project developers to enable them to supply the solar power to SECI at the above mentioned levelized tariff for 25 years. VGF is in nature of financial support and comprises of 30% of the project cost which shall be given in instalments after successful commissioning of the project. It is pertinent to note that the Guidelines do not state that the VGF will be conditional upon domestic content or local procurement by project developers from domestic manufactures. In light of the same and since VGF will be available to all eligible projects it is not on its own, likely to be challenged, even though VGF has the attributes of a "grant" under the ASCM.

It is generally accepted that strong domestic content requirements enable the setting up of local capacity. But any fiscal benefit provided to encourage local manufacturing is likely to attract challenge under the GATT, TRIMS and ASCM as a prohibited subsidy and violation of the national treatment principle. There has been significant concern raised on the compatibility of the domestic content requirement with the GATT, TRIMS and ASCM.

It is pertinent to note the cardinal principle of WTO relating to National Treatment wherein imported and locally produced goods should be treated equally at least after the foreign goods have entered the market. This principle of National Treatment (giving others the same treatment as ones own national) is also found in the main WTO agreements (Article III of GATT, Article 2 of TRIMS), which shall only apply once a product has entered the market. However Article III (4) of GATT provides that:

The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.

Please note that there is no escape from the cardinal principle of WTO above discussed other than Article III (8) which could have been the only argument to escape from Article III (4). It provides that Article III (4) will not be applicable if the requirement under challenge is governing government procurement, but not with a view to commercial resale.

However, Article 2 of TRIMS further provides that no Member shall apply any TRIM that is inconsistent with the provisions of Article III of GATT 1994. It further provides an illustrative list of TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994. The illustrative list provide measure relating to the purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production.

The grant in the form of VGF can be considered as Subsidy as defined under Article 1 of ASCM only if the benefit is conferred to the corresponding party receiving such subsidy. The moot question is to determine the benefit, as the same requires lots of comparable data to conclude that the said subsidy conferred benefit. The subsidies given for use of domestic over imported goods are regarded as Prohibited Subsidies under Article 3 of ASCM. A Member shall neither grant nor maintain subsidies which give preference of use of domestic over imported goods. Any subsidy falling under the provisions of Article 3 shall be deemed to be specific. The Subsidy of such nature as discussed above can lead to the adverse effects to the interests of other Members if it serious prejudice to the interests of another Member.3 The said serious prejudice may arise in case the effect of the subsidy is to displace or impede the imports of a like product of another Member into the market of the subsidizing Member.4

A similar case of such nature, wherein the local procurement requirement was challenged in light of subsidy is decided by WTO, in the recent Canada - Feed- In Tariff Program case. The dispute was initiated by Japan and the EU against the local content requirement in the FIT and the MicroFIT contracts ("FIT contracts") pursuant to the feed in tariff program ("FIT program") of the Canadian province of Ontario for wind and solar electricity generation projects. The claims raised by complainants were mainly twofold. Firstly the complainants claimed that the FIT contracts were inconsistent with Article 2.1 of the TRIMs agreement on account of being inconsistent with the national treatment obligation under GATT Article III 4. In this respect, the complainants also refuted Canada's claim that the electricity generated pursuant to the FIT program was "government procurement" within the meaning of Article III 8 (a). Secondly, the complaints claimed that the price paid by the Ontario Power Authority ("OPA") to the electricity generators pursuant to the FIT contracts was in the nature of a financial contribution or income/price support within the context of the Agreement on Subsidies and Countervailing Measures ("ASCM") which conferred a benefit to renewable energy generators. Moreover the measure was a prohibited subsidy within the meaning of Article 3.1(b) of ASCM as it mandated the use of local solar and wind power equipment.

The Appellate Body over ruled the Panel report wherein it was observed that requirement relating to domestic content for the electricity producers using solar powers can be considered as a requirement governing government procurement. This is because the electricity produced using such equipments was ultimately purchased by the government for further distribution. The Appellate Body said that the requirement relating to domestic content is not a requirement governing government procurement. It has no connection with government procurement of electricity which takes place ultimately therefore the said exception is not attracted. It thus found that the challenged measures are not covered by Article III:8(a) of the GATT 1994 and that, consequently, the Panel's conclusion that the Minimum Required Domestic Content Levels prescribed under the FIT Programme and related FIT and microFIT Contracts are inconsistent with Article 2.1 of the TRIMS Agreement and Article III:4 of the GATT 1994, stands. The Appellate Body was unable to complete the analysis as to whether the challenged measures confer a benefit within the meaning of Article 1.1(b) of the SCM Agreement and whether Canada acted inconsistently with Articles 3.1(b) and 3.2 of the SCM Agreement. The Appellate Body recommended that the DSB request Canada to bring its measures found in the Appellate Body Report, and in Panel Report as modified by the Appellate Body Report, to be inconsistent with the TRIMs Agreement and the GATT 1994 into conformity with its obligations under those Agreements.

Further, United States also on 6 February 2013, requested consultations with India concerning certain measures of India relating to domestic content requirements under the Jawaharlal Nehru National Solar Mission ("NSM") for solar cells and solar modules. The United States claims that the measures appear to be inconsistent with Article III (4) of the GATT 1994; Article 2.1 of the TRIMs Agreement; and Articles 3.1(b), 3.2, 5(c), 6.3(a) and (c), and 25 of the SCM Agreement. The United States also claims that the measures appear to nullify or impair the benefits accruing to the United States directly or indirectly under the cited agreements.

An examination of the JNNSM in light of Canada's FIT program shows that there are some similarities between the two programmes. Like the Ontario state entity, SECI/NVVN in the case of JNNSM purchases electricity from solar power generators, which is then sold to DISCOMS who further distribute it to the final consumer. The determination of benefit conferred against the subsidy will be again the moot question in determination of subsidy. If challenged it is undoubted that a Panel will likely hold the program to constitute a "government purchase of goods", like the Panel Report held in case of Canada. Despite the uncertainty of a Appellate Body ruling on the subsidy and benefit issue, it is likely that a Panel will not give the JNNSM the benefit of GATT Article III 8 and will not hold it to be government procurement, due to the "resale" aspect of the programme.

Conclusion

A domestic content requirement will always be found to be foul of the national treatment obligation and as the Canada renewable energy case shows, exempting such requirements from scrutiny under GATT Article III (8) is difficult, unless the generated solar energy is purchased by the government, for government use. But as the same case also shows, a challenge under ASCM may be more difficult to establish due to the challenge of using an appropriate benchmark for purposes of benefit determination.

Therefore in light of the above discussion we conclude that a policy relating to Domestic Content Requirement or local content requirement under JNNSM Policy, Phase II, Batch I will almost certainly infringe the national treatment obligation under the WTO rules. If challenged, a country enforcing such requirement is unlikely to be able to defend the challenge unless there is an element of government procurement involved. At the same time, there are several instances wherein domestic content requirements have not been challenged because their challenge has been rendered moot due to the willing participation of global manufacturers in such programmes. In the context of the Indian solar energy sector a domestic content requirement will be successful if it is backed by incentives strong enough to encourage even global manufacturers to set up manufacturing capacity in India. As discussed above, legally these requirements are hard to defend.

Footnotes

1. The first phase (up to 2013) focused on promoting scale-up in grid-connected solar power capacity addition of 1000 MW through scheme of bundling with thermal power operated through NTPC Vidyut Vyapar Nigam Limited (hereinafter referred as "NVVN") for minimizing the financial burden on Government, and a small component of 100MW with Generation Based Incentive (GBI) support through Indian Renewable Energy Development Agency (hereinafter referred as "IREDA").

2. As provided in the Scope and objective of the Guidelines

3. Article 5 of ASCM

4. Article 6.3 (a) of ASCM

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