Larger GST from as we speak more likely to have an effect on solar energy charges

The GST Council, at its meeting on 17 September, recommended an increase in GST on specified RE devices from 5% to 12%. Bloomberg

NEW DELHI : India’s solar power tariffs are expected to rise by around 10 Paise per unit as a higher Goods and Services Tax (GST) is levied on cells, modules and inverters from Oct. 1, several developers and analysts said.

The GST Council, at its 45th meeting on September 17th, recommended increasing the GST on “specified renewable energy equipment and parts” from 5% to 12% effective October 1st.

This increase in GST is expected to increase the cost of capital by 4.5% and comes as solar tariffs are firming up in recent auctions after hitting a record low of 1.99 per unit in December 2020. India’s solar tariffs are on the upswing from April next year due to factors such as higher commodity prices and a rise in the cost of imported solar systems.

“The cost of capital and tariffs for solar energy (energy) are expected to increase by approximately 4.5% and 10 Paise, respectively. The timing couldn’t be worse, as developers have scheduled large shipments to take advantage of the duty-free window before the basic tariff (BCD) begins next year. Unfortunately, there is too much movement in tariffs and taxes, which is raising investor concerns over other issues such as rising equipment prices and environmental issues with transmission lines,” said Vinay Rustagi, managing director of consulting firm Bridge to India.

Indian green energy projects face several problems. A case in point is concern about the impact of power transmission lines being built for green energy projects that happen to pass over the habitat of the endangered Indian Bustard.

“I think that’s the reality we have to live with. Whatever impact it has on the tariff, it has. It also means that the renewable (energy) market is maturing and doesn’t need support mechanisms to make it attractive. The only problem is that there are so many changes in taxes and levies and in a business model where the tariff is fixed for the duration of the Power Purchase Agreement (PPA), the returns are devastating,” said Sanjay Aggarwal, President of Fortum India Pvt. Ltd, owned by Finland’s state-controlled energy company Fortum Oyj.

India’s solar electricity tariffs have recovered from record lows in December. Also, increasing raw material costs and 40% BCD for solar modules and 25% for solar cells, which will be mandatory from April 2022, are affecting the auction rounds and the bids of the developers.

“While it is true that changes in legislation are covered, the entire industry struggles to operationalize this. So as long as legislative change issues are resolved quickly, without knocking on so many doors and without spending an unusual amount of time and resources to get something that’s legally the developer’s anyway, we’ll have to adjust to the new reality,” Aggarwal said.

India operates the world’s largest clean energy program and aims to reach 175 GW of renewable capacity by 2022, including 100 GW of solar power.

“Increasing VAT on solar products may have an upward impact on costs. The need for such a tax increase needs to be carefully weighed against the eventual impact on project costs and tariffs,” said Somesh Kumar, Power and Utilities Leader at EY India.

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