India: Solar Power In India: Solar Panels, Domestic Content Requirement And The WTO

1. INTRODUCTION

The National Solar Mission or the Jawaharlal Nehru National Solar Mission (the "JNNSM") adopted by India in 2010 targets generation of 100,000 MW of grid connected solar power capacity by 2022.

It's an ambitious target in view of India's current generation capacity of approximately 5,000 MW,1 but the intent of the Central Government is reflected in various policies and subsidy schemes floated to encourage growth of the solar industry.

The JNNSM aims 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"2.

In furtherance of that aim, we have recently seen favorable state level policies, a feed-in-tariff regime, viability gap funding mechanisms, capital subsidies, progressive net-metering arrangements and solar specific renewable purchase obligations that have created a supportive environment to develop solar power in the country.

2. THE METHODOLOGY SO FAR

The Ministry of New and Renewable Energy (the "MNRE") has selected NTPC Vidyut Vyapar Nigam Limited ("NVVN") and the Solar Energy Corporation of India (the "SECI") as the agencies responsible for implementing the solar power project selection process.

The procedure adopted typically involves the government entering into long-term power purchase agreements ("PPAs") with solar power developers ("SPDs") wherein the government undertakes to purchase solar power generated by a particular SPD.

Generally, each PPA provides a guaranteed rate for a 25-year term at which the electricity generated by the SPD is bought by the government. The guaranteed rates are fixed by the Central Electricity Regulatory Commission at the national level, and the State Electricity Regulatory Commission at each state level.

The JNNSM is being implemented in several successive phases, with each phase initiated thus far being further divided into batches.

A mandatory domestic content requirement (known as a "DCR") was imposed on SPDs participating in phase I (batches 1 and 2) and phase II (batch 1) under the Guidelines for Selection of New Grid Connected Solar Power Projects3 and the model PPAs.

The applicable DCR is reaffirmed through a specific plan that the SPDs have to submit to NVVN or the SECI (as applicable) after entering into the PPA, specifying how they are going to meet the requirements of the applicable DCR.

As a corollary, the SPD has to be in compliance with the applicable DCR in order to avail the guaranteed rates fixed by the government under the relevant PPA.

The following table4 summarizes the DCR requirements at play since 2010:

Phase & Batch Agency Project selection period Foreign c-Si modules permitted Foreign c-Si cells permitted Foreign Thin-film modules or concentrator PV cells permitted Total # PPAs Using foreign cells and/or modules Using Indian cells and/or modules
Phase I (Batch 1) MNRE & NVVN 2010- 2011 No Yes Yes 28 14 PPAs (70MW) 14 PPAs (70MW)
Phase I (Batch 2) MNRE & NVVN 2011- 2012 No Yes 27 19 PPAs (260MW) 8 PPAs (70MW)
Phase II (Batch 1-A) MNRE & SECI5 2013- 2014 No 22 0 22 PPAs (375MW)

As is evident from the table above, the DCR has consistently increased across all phases since 2010. The rationale behind the DCR regime was based on the core principle of increasing economic opportunities, green technology and jobs in India while taking critically important steps in the global fight against climate change. However, international trade obligations have had some impact on the realization of this object.

3. THE DISPUTE

3.1. The United States of America

In 2013, the United States brought a claim before the WTO challenging India's DCRs on the ground that they violated Article III, para 4 of the GATT 19946 and Article 2.1 of the TRIMs Agreement.

It was argued that the DCR measures modify the conditions of competition in favor of solar cells and modules of Indian origin and in fact accord less favourable treatment towards imported solar cells and modules.

Elaborating further, it was argued that India's DCR measures were inconsistent with Article 2.1 of the TRIMs Agreement because they are trade-related investment measures that make the purchase of domestic products a requirement to obtain an advantage, thus falling under paragraph 1(a) of the Illustrative List in the Annex to the TRIMs Agreement.

3.2. India

The substance of India's defense was premised on two main arguments:

  1. Article XX (j)7

    DCR measures are justified on the ground that India's lack of domestic manufacturing capacity in solar cells and modules, and/or the risk of a disruption in imports, makes these "products in general or local short supply" within the meaning of that provision; and
  2. Article XX (d)8

    DCR measures are also justified under the general exceptions, on the ground that they secure India's compliance with "laws or regulations" requiring it to take steps to promote sustainable development.

4. THE WTO DECISION

At the outset the panel found that the DCR measures were trade-related investment measures covered by paragraph 1(a) of the Illustrative List in the Annex to the TRIMs Agreement.

This sufficiently establishes that the DCRs are inconsistent with both Article III, para 4 of the GATT 1994 and Article 2.1 of the TRIMs Agreement.

The panel observed that the terms "products in general or local short supply" refer to a situation wherein the available supply of a product, from all sources, does not meet demand in a relevant geographical area or market.

In light of this, the terms "products in general or local short supply" do not cover products at risk of becoming in short supply.

The panel determined that India had not demonstrated the existence of any imminent risk of a short supply and ruled that the DCRs were not justified under Article XX (j).

Addressing the defense of Article XX (d), the panel concluded that international agreements may constitute "laws or regulations" within the meaning of Article XX(d) only insofar as they are rules that have a direct effect in, or otherwise form part of, the domestic legal system of the member concerned.

Most of the instruments identified by India did not constitute "laws or regulations" within the meaning of Article XX(d), or were not international laws or regulations in respect of which the DCR measures secured compliance.

Therefore, the panel found that India failed to demonstrate that the DCRs were justified under Article XX (d).

5. IMPLICATIONS OF THE DECISION

The decision is bound to cause ripples in the international relations between the two countries. The Indian Power Minister has alleged similar practices by the US government, citing 16 cases where support has been given to domestic manufacturers in the US.

The Indian Power Ministry's response essentially alleges targeted prosecution against the developing world and the Minister was of the view that the US government should have been more magnanimous in its approach to the issue.

The MNRE's response to the ruling appears to maintain that the future course of action will involve protecting the domestic industry. While a notice of appeal has been filed with the appellate body at the WTO, the present government seems confident that the ruling will not affect the roll out of India's ambitious solar power capacity installation.

However, there are also some very important realities in play here. It is estimated that India needs investment of over US $ 100 billion9 to achieve its green energy targets of 100 GW of solar power and 60,000 MW of wind power by 2022. What should then be the focus of governmental initiative and to what extent should the domestic solar panel manufacturing market be the sole beneficiary of that investment?

Industry reaction to the DCR regime in general has not been particularly positive. India's solar manufacturers still largely assemble products with core materials, (such as poly-silicon chips) purchased mostly from China.

As a result, Indian solar cells and modules end up becoming up to 10 per cent more expensive than those imported from China, Malaysia or Taiwan, countries from where most solar developers in India source their modules. Moreover, Indian solar cells are generally thought to be technologically inferior to those manufactured in other countries.10

DCRs therefore, perpetuate a cost for SPDs and although guaranteed PPAs may to a certain extent off-set that cost, it impacts dynamics for the cost of electricity in the consumer market. This could in the long run lead to generation of solar power being economically unfeasible.

Certain industry experts11 take the view that the DCRs actually have little long-term benefits for domestic manufacturers. What is needed is a broader structural approach that would genuinely address domestic manufacturers' constraints and enable them to become cost-competitive in the international market.

Ultimately, producers of solar energy should have the freedom to import technology and materials, such as solar cells and modules, if importing is cost-efficient. Removing barriers to trade might attract more foreign and domestic investment in the solar sector leading to increased investment in the manufacturing of solar cells and modules.12

Following more investment in this sector, market forces will likely lead to a situation where solar power developers choose to buy domestically-manufactured solar cells and modules as a prudent business decision, without external pressure.

Footnotes

1. Press Information Bureau Press release dated January 15, 2016; http://pib.nic.in/newsite/printrelease.aspx?relid=134497

2. Resolution, Jawaharlal Nehru National Solar Mission, Ministry of New and Renewable Energy, January 11, 2010

3. Guidelines for Selection of New Grid Connected Solar Power Projects, Ministry of New and Renewable Energy (July 2010) ("Phase I (Batch 1) Guidelines").

4. WTO, India- Certain Measures Relating To Solar Cells And Solar Modules, Report Of The Panel dated February 24, 2016; https://www.wto.org/english/tratop_e/dispu_e/456r_e.pdf

5. Solar Energy Corporation of India. The government agency responsible for facilitating the implementation of JNNSM and achievement of targets set therein.

6. Article III of the GATT 1994 is titled "National Treatment on Internal Taxation and Regulation". Paragraph 4 of Article III provides in relevant part:

The products of the territory of any Member imported into the territory of any other Member 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.

7. Article XX (j) establishes a general exception for measures essential to the acquisition or distribution of products in general or local short supply.

8. Article XX (d) establishes a general exception for measures necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of GATT, 1994.

9. http://www.livemint.com/Politics/11yE8Bz6bgZZ6LhXXlB8eL/WTO-panel-rules-against-India-in-solar-dispute.html

10. http://economictimes.indiatimes.com/articleshow/51147890.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

11. http://www.ictsd.org/bridges-news/biores/news/wto-decision-on-local-content-requirements-will-not-affect-india-solar

12. http://www.financialexpress.com/article/fe-columnist/what-the-wto-panel-did-not-decide-on-solar-panels/226070/

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