The India – USA solar dispute with the WTO

The new Indian government has aggressive plans for the country’s renewable energy sector. India plans to add nearly 100,000 MW of solar power and 60,000 MW of wind power. An important vehicle for facilitating the growth of India’s solar sector is the National Solar mission (NSM). Under the NSM, wherein solar projects are allocated by the government, projects have been continuously being set up across India since 2010. As of today ~4,500 MW has been installed across India (including installations under the NSM), with ambitious plans to meet the 100,000 MW target in a phased manner. Undoubtedly there is an enormous business opportunity for Indian as well as Global companies.

What is Domestic Content requirement?

Now one of the key objectives of the NSM was to promote and establish domestic manufacturing in the solar space. NSM has a ‘domestic/local content requirement’ included, under which a certain specific capacity of projects allocated are required to employ solar cells and modules that are manufactured locally in India. In fact under NSM’s Phase 1 back in 2010, projects using crystalline technology had to source modules from domestic manufacturers, while thin-film technology could be imported or sourced locally. The Indian government has even offered financing of up to ~$ 150,000 (INR 10 Million) per MW to those who employ local products to set up solar projects.

USA raised a dispute with the WTO on India’s local content requirement

USA took India to the World Trade Organization claiming that the requirement of having ‘domestic/local content’ was against international competition norms. As per the norms, WTO members are required to treat imports equally as domestic products, and cannot have national limits/requirements that would make foreign products disadvantageous as compared to local ones. According to the US, these provisions require a specific fixed capacity of solar projects to deploy locally manufactured equipment and even enable solar projects that employ domestically manufactured equipment to gain subsidies. As a result they provide an unfair advantage to Indian solar equipment manufacturers and discriminate against US based equipment manufacturers who find it much more difficult to compete, subsequently harming American solar exports. However, India highlighted that even USA had used similar measures to promote its solar industry by having subsidy schemes and programs such as the Solar Energy Credits program which relies on compliance with domestic content requirements.

Recently, the dispute settlement panel (set up in May 2014) concluded that India’s requirement of domestic content under its NSM and the incentives provided to domestic solar companies for manufacturing solar cells and modules, are in violation of trade rules.

Looking at simple facts would suggest that the Indian industry would not be very adversely impacted – the share of local requirement under the NSM is very small. For example, out of 2,000 MW to be installed under Batch 3 of NSM’s Phase 2, only 250 MW had the local requirement, leaving ample capacity for rest of the market. Further out of the 100,000 MW planned capacity, only 8,000 MW would be from locally manufactured solar cells. In fact the solar capacity addition by government owned entities are allowed through local sourcing requirements as per WTO’s rules, which represents an enormous capacity for local equipment, given latest installation plans of the government – 1000 MW by Indian Army, 1000 MW by the National Railways, ~4,000 MW by a consortium of government owned companies, 1000 MW by coal mining state-owned entity, and 4000 MW by state-owned lignite mining company, among others. Interestingly, China and South Africa also have ‘local manufactured equipment’ requirement, and the EU and US both have levied anti-dumping duty on Chinese solar panels.

The final ruling is still awaited, and as per media reports, India is going to appeal against the ruling, which could even give it a two year breather. But the modalities of the final ruling might even have a larger impact, given India’s recent push to attract foreign investors and promote manufacturing in India, and cooperate with USA on clean energy and climate change.

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References from, Live Mint, Economic Times, Reuters, Indian Express, Times of India, PVTech, Business Standard, Cleantechnica, NXG, Huffington Post