Race for Solar Power hits GST bump

-Solar power generation 5.8% pricier post-GST, questioning its long-term sustainability

Solar power announced its revolutionary run in Rajasthan’s arid Bhadla region in May 2018 when prices at auctions plunged to INR 2.44 per unit. This beat even the most competitive price of coal-fired generation by NTPC, engendering a new price disruption in energy markets. A new dawn had set in or perhaps a new sun had dawned on the country’s energy horizon, blazing promise of a long-term, sustainable energy security. Bhadla’s startling success fuelled by the installation of plants by Acme Solar, NTPC Ltd, Fortum and others triggered a spree of solar tenders across states. The bids got more intense as major energy players stormed the race for building solar power.

But the euphoria seems to have subsided as the solar power industry weighs on the impact of the Goods & Services tax (GST). The sweeping indirect tax has lent a massive blow to the competitiveness of solar power and its sustainability over the years. The GST blow along with the Government’s import duty on solar models is doubtless a double whammy for the sector. With the two headwinds buffeting the solar space, the players are in tenterhooks on the viability of their businesses on which they have pledged substantial funds.

Escalating cost of solar power generation is a niggling worry. A study released by the Council on Energy, Environment & Water (CEEW) and the International Institute for Sustainable Development (IISD) establishes a six per cent hike in solar photovoltaic generation costs since the introduction of GST. Paradoxically, GST has resulted in pulling down cost of thermal power generation by 1.6 per cent, thus affecting India’s clean energy transition.

Abhinav Soman, Programme Associate, CEEW, and lead author of the study, said, “The uncertainty surrounding GST rates for various solar PV contracting structures and the imposition of safeguard duty may constrain India’s progress toward its ambitious target of 100 GW of installed solar capacity through delayed investments. It is important for policymakers to evaluate such impacts and their influence on our choices of energy sources.”

The study found that the GST has overhauled a large share of India’s taxes and the tax-related subsidies. The absolute size of the subsidy to coal-based power generation remains INR 7,685 crore (USD 1.1 billion) higher than for solar PV in FY 2018. India has reformed a number of subsidies for petroleum products since 2014. Over the same time period, government support for renewable energy has increased significantly but the scale of subsidies for coal has remained largely unchanged.

By removing exemptions and altering tax rates, the extent of preferential treatment for various energy sources has changed under the GST. Total tax subsidies to both solar PV and coal thermal power have been reduced but the absolute size of the subsidy to coal-based power remains much higher than for solar PV. Moreover, altering the net tax burden, the GST has also affected the cost of energy production. Our calculations show that, assuming all other factors are held constant; the GST is likely to lead to a significant increase in the cost of generation for new solar PV plants. In contrast, existing coal-fired thermal power plants are likely to experience reduced variable costs under the GST. A lack of data on the fixed costs of new coal plants makes it impossible to calculate the impact of the GST on the overall cost of new coal plants. Thus, the introduction of the GST therefore appears to provide a relative bias in favour of coal-based power.

Race for Solar Power hits GST bump- Representational Image
Representational Image

How thermal & solar power stack up post GST implementation?

Post GST implementation, there has been a 15.6 per cent and 16 per cent decrease in the total tax subsidy for solar PV and coal thermal power, respectively, as a result of the implementation of GST. While the degree of support appears to have declined by nearly the same percentage for the two energy sources, there is still a significant difference in the total amount of government support offered, with support to coal more than double that provided to solar PV. In comparing these figures, it should be noted that a much larger volume of electricity is generated by coal each year than by solar PV—and also that coal is a fully developed conventional energy technology, with significant social and environmental impacts, while solar PV is a new, clean and emerging energy technology.


Electricity production from different sources—such as coal-fired thermal, nuclear, wind and solar PV—has different characteristics that affect the cost of generation. Upfront capital investment, operational expenses and capacity factors can influence generation cost. The Levelized Cost of Electricity (LCOE) is a metric that permits comparison of the costs of electricity generation across various generation sources. It represents costs on a per-kWh basis accounting for the total lifetime of a project. The costs of any project consist of two components—fixed costs and variable costs. There is no fuel cost for solar PV, and other variable costs, such as operations and maintenance, are small. As a result, the LCOE for solar PV generation is driven almost entirely by the estimated capital cost. On the other hand, the LCOE for coal thermal power is sensitive to both the variable cost of fuel and the capital investment required.


Until December 2018, when the GST Council came out with a clarification, there was uncertainty about the exact post-GST rates that would be applicable on Solar Power Generating Systems (SPGS). The GST Council has now stated that 70 per cent of the gross value of a contract shall be considered as supply of goods and attract five per cent GST, while the remaining 30 per cent of the aggregate value will be treated as supply of services with 18 per cent GST as the applicable rate (PIB, 2018). This is an arbitrary method of applying taxes since a variety of contracting structures exist for solar PV projects and the share of services is not necessarily 30 per cent of gross value across all contract types. For project developers, there is still uncertainty regarding how taxes will be applied across all contract types for SPGS.

The LCOE calculations for coal thermal power plants were carried out assuming a typical 500 MW capacity. A significant share of plants commissioned between 2003 and 2016 were 500 MW in size. For India’s existing coal thermal power plants, whose fixed costs have already been incurred, the change in variable costs indicates the full impact of the GST on their costs of generation. Overall, the variable LCOE of a coal thermal power plant—assuming that it uses only domestic coal decreased by almost 1.6 per cent post-GST reform. Plants using a mix of domestic and imported coal would see a smaller decrease, 1 per cent, largely due to the influence of higher taxes on imported coal.


Outlook subdued as capacity addition slows

Between FY2019 and FY2023, solar power capacity addition is projected between 48-50 Gw. The forecast for solar power growth in the near future remains sombre as investor sentiment has been negatively impacted due to policy issues emanating from GST and arbitrary cancellation of bids- a trend contrarian to the supportive practices of the government. “There were frequent bid cancellations, lack of clarity on GST procedures, and cost pressure from the imposition of the safeguard duty on imported cells/modules.

Total tax subsidy for coal and solar- pre GST (FY17) and post GST (FY18)

Year Subsidy for Coal (in INR) Subsidy for Solar power

(in INR)

FY17 5324 14504
FY18 4491 12176

Source: IISD, CEEW study.

While, GST clarity was lacking for over a year with a final decision taken in December by the GST council, it ended with an increase in taxation compared to what was expected by the industry. Similarly, the safeguard duty has turned out to be a double whammy of sorts, impacting costs of solar power projects and not resulting in any significant offtake for the domestic manufacturing sector. This was coupled by cancellation of bids post auctions as state utilities/SECI found tariffs to be higher than expectations. Close to 4.7 GW was cancelled in such a manner over March – December 2018. Over and above the GST, the safeguard duty imposition has affected project costs by 10-15 per cent and consequently led to a rise in bid tariffs. Though exemption via change in law is available as an option for projects already bid out prior to the duty, the regulatory process developers have to follow has also turned out to be long and arduous.

Year Capacity addition (in Mw)
2017-18 9010
2018-19 6500-7000
2019-20 8500-9000
2020-21 10000-11000
2021-22 11000-12000
2022-23 11000-12000

Solar capacity additions. Source: MNRE, CRISIL Ratings

““The imposition of safeguard duty has failed to achieve the desired objectives of according protection to the domestic manufacturers from the sudden surge of imports. The safeguard duty has been imposed for two years and the implementation period of utility scale solar projects is 18 to 24 months. In such circumstances, the solar projects which were auctioned before the imposition will mostly be procuring panels during the period safeguard duty is to remain in force, and are eligible to pass the burden of the safeguard duty to the end consumer by invoking the change in law clause of the Power Purchase Agreement,” feels Amit Gupta, Director of Legal & Corporate Affairs, Mercom Solar.