WTO rules in favour of USA in solar power case

Recently WTO released its ruling against India's National Solar Mission, deciding that India's efforts to boost local production of solar cells violated WTO rules.

What is the issue all about?

• India in 2010 launched its National solar programme the program aimed at reducing the cost of solar energy and achieve 100000 MW of solar power capacity by 2022. . This solar programme was launched because coal was unable to meet India's power sector demands and also focusing on solar power would meet India's commitment towards climatic change.

• To incentivize the production of solar energy within the country, the government under the programme agrees to enter into long-term power purchase agreements with solar power producers, effectively “guaranteeing” the sale of the energy produced and the price that such a solar power producer could obtain.

• Thereafter, it would sell such energy through distribution utilities to the ultimate consumer. However, a solar power producer, to be eligible to participate under the programme, is required compulsorily to use certain domestically sourced inputs, namely solar cells and modules for certain types of solar projects. In other words, unless a solar power producer satisfies this domestic content requirement, the government will not 'guarantee' the purchase of the energy produced.

US stand in this case?

In 2013, the U.S. brought a complaint before the WTO arguing that, the domestic content requirement imposed under India's national solar programme is in violation of the global trading rules specifically, it said, India has violated its national treatment obligation by unfavorably discriminating against imported solar cells and modules. In other words, India was discriminating between solar cells and modules which were otherwise identical on the basis of the national 'origin' of the cells and modules, a clear violation of its trade commitment.

What is India's stand in this case?

• India argued that the program helps the country to meet its climate commitments under the United Nations Framework Convention on Climate Change (UNFCCC), the WTO rejected that argument. 

• India principally relied on the 'government procurement' justification, which permits countries to deviate from their national treatment obligation provided that the measure was related to “the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or use in production of goods for commercial sale”.

• India also argued that nearly half of US States have renewable energy programs that, like India's solar program, include “buy-local” rules that create local, green jobs and bring new solar entrepreneurs to the economy.

WTO panel stands in this case

• WTO panel decided that India has violated In its ruling, the WTO agreed that India's buy-local rules “accord less favorable treatment” to imported solar components, even while acknowledging that imported cells and modules currently have a dominant share of the market for solar cells and modules in India.

• In so far as the government procurement derogation was concerned, the panel found that the product being subject to the domestic content requirement was solar cells and modules, but the product that was ultimately procured or purchased by the government was electricity. The domestic content requirement was therefore not an instance of government procurement

• Besides, the panel also found that since India failed to point out any specific obligation having direct effect in India or forming part of its domestic legal system, which obligated India to impose the particular domestic content requirement, the general exception was not available to the Indian government in the instant case.

Is there basis for domestic content requirement?

• There appears to be no rational basis for how mandatory local content requirements contribute towards promoting the use of clean energy. If the objective is to produce more clean energy, then solar power producers should be free to choose energy-generation equipment on the basis of price and quality, irrespective of whether they are manufactured locally or not.

• In fact, by mandatorily requiring solar power producers to buy locally, the government is imposing an additional cost, usually passed on to the ultimate consumer, for the production of clean energy.

Impact of this decision

• solar power producers in India would get freedom to choose energy-generation equipment on the basis price and quality, irrespective of whether they are manufactured locally or not, Since most of the producers in USA and China produce these equipments cheaply it would reduce the price of solar electricity in India which benefit the consumers of solar power in India.

• However, this may affect the profitability and future of nascent solar equipment making industry in India since power producers in India would hardly buy from them after this decision as there equipments are of inferior quality and also they are costly.

• It would also give a boost to investment in solar power industry as with reduction in cost the profitability of solar power producers would increase.

Options for India

• India has a option to appeal to the appellate body. Simultaneously, India may be exploring the option of filing a counter complaint against the U.S., with several states in the U.S. such as Michigan, Texas and California having also reportedly been accused of employing mandatory local content requirements in the renewable energies sector.

Way foreword

• India must resist the temptation of adopting protectionist measures such as domestic content requirements which are inconsistent with its international obligations. Domestic content measures, despite their immediate political gains, have a tendency to skew competition. Manufacturers must remain free to select inputs based solely on quality and price, irrespective of the origin.

• It is entirely possible to give preferential treatment to clean energies (in the form of tax rebates for solar power producers and so on) without requiring mandatory local content.