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Too clever by half? How Adani’s lobbying may cost Adani Green over US $100 million
Apr 05, 2024
Has Adani's solar-panels arm cost Adani Green $100 million?

An import-duty on solar equipment that the Indian government imposed following lobbying led by the Adani Group has been a public-policy disaster. The policy was designed to protect India’s domestic manufacturing of solar panels. But it has failed in that objective and slowed down India’s transition to renewable energy. A duty-evasion scheme has allegedly defrauded the government of at least $228 million. The price of solar power in India has increased. More coal is being burned. And associated court rulings may cost Adani Green over US $100 million.

In recent weeks, the Adani Group’s renewable-energy generation business, Adani Green Energy Limited, has been on a PR blitz.

Group chairman Gautam Adani was in London on 26 March 2024, launching the ‘Adani Green Energy Gallery’ at the city’s historic Science Museum. On 28 March, Israeli social media personality Nuseir Yassin, who is one of the world’s most recognizable influencers with his ‘Nas Daily’ channel boasting a combined global audience of over 65 million across various social media platforms, published a video collaboration with Adani Green, excitedly extolling the contributions of the Adani Group to India’s ‘Green Energy Revolution’, with footage shot at the Science Museum gallery and at an Adani-run solar-power project in India that Yassin claims can be seen from outer space.

Protest against Adani's 'green energy gallery' at the London Science Museum.This comes shortly on the heels of a successful bond issue by the company, in which it raised US $409 million to pay off a previous set of bonds. This was the first time the Adani Group had approached the bond market since its value crashed following the January 2023 release of the explosive Hindenburg report, which alleged widespread financial malpractice in the Group.

Away from the headlines, however, the Adani Group’s renewable energy businesses may be facing a considerable revenue risk arising out of a 2023 verdict by an electricity regulator in the Southern Indian state of Andhra Pradesh that denied it a hike in the power tariffs it charges for electricity it generates at one of its solar plants. The Andhra Pradesh verdict constitutes a precedent for a series of similar cases involving several other Adani solar projects demanding higher tariffs that are pending before electricity regulators and India’s Supreme Court. Hearings at the Appellate Tribunal for Electricity (APTEL) of Adani’s appeal of the Andhra Pradesh ruling were concluded on 11 March, the judgment has been “reserved”, and is imminent. The cumulative revenue impact of all the cases together, if they go against Adani Green, could amount to over US $100 million.

Has the duty on imported solar panels won by Adani Solar cost Adani Green $100 million? Image Wikimedia CommonsIronically, the possible losses are a fallout of a policy change brought about by the Adani Group’s own prior lobbying. An industry body of India’s top solar equipment manufacturers, led by Adani Solar, a subsidiary of Adani Enterprises, lobbied the Indian government in 2017 to protect the domestic industry from lower-priced imports. This led to the government instituting an import duty on solar modules manufactured in China and Malaysia in order to promote manufacturing of the modules in India. The import duties were imposed for two years in 2018, and were renewed, at a reduced level, in 2020 for a further year, and reintroduced under a different name in 2022. These duties increased costs for Indian solar-power generators, including Adani Green, which sought to offset the increased costs by increasing electricity tariffs. The tariff increases have to be approved by electricity regulators, and the Andhra Pradesh regulator’s verdict and reasoning denying such a tariff increase may form the grounds for all such tariff increases to be rejected, including some that have already been approved but are now being reconsidered in appeals.

Beyond its potential adverse revenue impact on Adani Green’s bottom-line, however, the policy that the Adani Group had lobbied for was a misstep that slowed down India’s energy transition, as experts had warned at the time. This measure has had a series of deleterious consequences.

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The import duty, known as a ‘safeguard duty’ slowed down India’s ambitious renewable-energy expansion plans leading to missed targets. India also failed to achieve its aims of increased Indian manufacture of solar panels and other equipment. Indian importers of solar panels have allegedly defrauded the government of at least Rs 1900 crore (about US $228 million) in a duty-evasion scam. The imposition of the duty has also led to higher power tariffs for solar energy, and can be argued to have led to more coal being burned than would have otherwise.

Adani Solar led lobbying for solar safeguard duties

In December 2017, the Indian Solar Manufacturers Association (ISMA), an industry body, made an application to the erstwhile Directorate General of Safeguards in the Ministry of Finance on behalf of five companies: the Adani Group’s Mundra Solar PV Limited (now named Adani Solar), Indosolar Limited, Jupiter Solar Power Limited, Websol Energy Systems Limited and Helios Photo Voltaic Limited.

Solar panels being cleaned and assembled in India. Image: Flickr_CCAFS/2014/PrashanMundra Solar PV, which began production in May 2017, ran India’s largest solar equipment manufacturing facility at the time, in the Adani-run Mundra Special Economic Zone (SEZ) in the western state of Gujarat. Two more of the five – Helios and Websol – also operated out of the Mundra SEZ.

The application by ISMA sought protection for the domestic industry from imports of inexpensive solar cells and modules, mainly from China but also from countries such as Taiwan, Singapore and Malaysia, in the form of a safeguard duty. It further argued for an exemption from the duty for imports into SEZs. This request was tailored to benefit Mundra Solar, Helios and Websol, whose facilities in the Mundra SEZ used imported equipment to assemble solar panels that were subsequently sold to power producers.

Adani's 'special economic zone' at the Mundra port - site of various solar-panel manufacturing businesses in India. Image GoogleIn January 2018, the DGS released a set of recommendations agreeing to the ISMA’s requests, recommending the imposition of a safeguard duty of 70%, and exempting the units located in SEZs from the duty. This was fiercely opposed by Indian solar power producers, which relied on the imported solar equipment. One power producer, a company in the Shapoorji Pallonji group, filed a lawsuit and prevailed – the Madras High Court stayed the DGS’s recommendations.

Soon after, however, the DGS was subsumed into the Directorate General of Trade Remedies (DGTR), which comes under the Ministry of Commerce and Industry – and this led to the issue being reconsidered. In June 2018, the DGTR held a public hearing on the issue. Then, on 16 July 2018, the final recommendation of the DGTR was published. This time the duty recommended was lower – 25% for the first year, and 20% and 15% for the subsequent six months respectively – and did not allow the exemption from the duty for manufacturing units in SEZs. The Ministry of Finance notified this duty on 30 July 2018. A court challenge kept the duty off for a couple of months, but it was finally cleared for implementation in September 2018, with effect from its originally notified date, of 30 July 2018.

Though the Adani-led lobby had failed to secure the exemption for manufacturers in SEZs, its initial application paved the way for a duty regime that has stayed in place, in one way or another, ever since. In 2020, as the safeguard duty was set to expire, the DGTR extended the duty for another year, at 14.9% for the first six months, and 14.5% for the following six months – this time for imports from China, Thailand and Vietnam.

This duty was allowed to lapse in July 2021 – WTO rules forbid a safeguard duty for more than four years and India was risking reaching that limit. The regime, however, continued in effect – with a basic customs duty that was notified in 2021, and that came into force in April 2022, set at 40% for solar modules and 25% for solar cells, that is still in place.

Safeguard duties a ‘change in law?’

For solar-power-generation companies, the safeguard duties represented an increase in input costs that they have sought to pass on to power consumers. Having been awarded contracts to supply electricity in competitive auctions in which they competed to bid the lowest tariff, the generators have sought to frame the safeguard duty imposition as a ‘change in law’ which allows for a tariff revision under their contracts. They have knocked on the doors of regulators with this argument, and numerous such cases are being heard by Electricity Regulatory Commissions (ERCs) across Indian states and the Central Electricity Regulatory Commission (CERC).

A second wave of cases arose from the 2020 extension of the safeguard duty, with generation companies arguing that they anticipated the safeguard duty would lapse according to its original schedule, and bid for power generation contracts accordingly, and thus the extension of the duty constituted another change in law.

While each case is different, depending on the date the bid was placed, the date of the award of the contract, and the specific terms of the contract signed by the generation company, the central principle involved is the same across the board – can the generation companies prove that they did not know of, and did not take into account, the safeguard duties, when they bid for the contracts?

One significant verdict, involving four Adani Green subsidiaries is the so called Parampujya verdict (as it is referred to in subsequent citations) of September 2022, where the Appellate Tribunal for Electricity (APTEL) declared that the 2018 safeguard duty imposition constituted a change in law for which the four companies deserve to be awarded compensatory payment of electricity tariffs. This verdict is currently being appealed before the Supreme Court of India, which has ordered that the compensatory tariffs should be calculated by the Central Electricity Regulatory Authority (CERC) as per the APTEL’s verdict but the compensatory tariffs won’t come into effect until the Supreme Court rules on the appeal.

Of the four Adani Green subsidiaries involved, three – Parampujya Solar Energy Private Limited, Prayatna Developers Private Limited, and Wardha Solar (Maharashtra) Private Limited – had signed their contracts to supply power in July, August and September 2016, well before the ISMA application for solar safeguard duties had been made to the DGS.

The fourth company – Mahoba Solar (UP) Private Limited – won its bid on 19 July 2018, after the release of the DGTR’s recommendations on 16 July 2018, and signed the contract on 27 July 2018, just three days before the safeguard duty was announced on 30 July 2018, and well after the ISMA application of December 2017 and the DGS recommendations of January 2018.

The case that the Andhra Pradesh ERC (APERC) ruled on in 2023 is similar to that of Mahoba, but led to a different outcome. Here, one of the three companies concerned is Adani Green subsidiary Adani Solar AP Seven Private Limited. It placed its winning bid in April 2018, and signed the contract on 5 July 2018. Contrary to the Parampuyja verdict, however, in this case the APERC ruled that though the imposition of safeguard duty did technically constitute a change in law, to justify receiving compensatory tariffs, the solar power generators must show that they did not factor in the safeguard duty in their calculations while making their bids. The APERC notes that the impending notification of safeguard duty was ‘staring power generators in the face’ since early 2018, when the DGS first issued its recommendations, and demanded documentation from the power generators of how they calculated the cost of imported parts as a part of their bids. The generation companies, including Adani Solar AP Seven, failed to provide this documentation, and failed to prove that they had not taken the impending safeguard duty into account. As a result, the Commission denied the compensation it was demanding. Crucially, in this case, the Adani company sought to use the Parampujya verdict as a precedent to support its position, but did not succeed.

This ruling has been appealed in the APTEL, which concluded its hearings on 11 March 2024, and has reserved its verdict, which is imminent. The APERC’s reasoning is relevant in the Supreme Court’s decision on appeals that are pending before it of the Parampujya verdict. Not only was Mahoba, in that instance, aware of the impending safeguard duty, the same way that Adani Solar AP Seven was, Mahoba in fact placed its bid after the DGTR issued its recommendations on 16 July 2018. Another argument that may come up before the Supreme Court is that a different arm of the Adani Group had lobbied (through the ISMA) for the imposition from late 2017 itself. The argument goes that if one arm of the Adani Group (that manufactures solar panels) was lobbying for a duty to be imposed on solar-panel parts that another arm was planning to import, then surely the importing arm of the Adani Group (the solar-power generators) would have known of the possibility of an imposition of a safeguard duty and accounted for it in their bids.

Revenue impact of over $100 million if the appeals go against Adani

In Adani Green Energy Limited’s earnings conference call of the second quarter of financial year 2020-21, its management expressed confidence that the safeguard duty imposed by the Indian government in July 2020 could be ‘passed through’ to consumers of electricity. Here is the exchange of Adani Green executive Raj Kumar Jain with an analyst:

Adani Green had been saying the same thing since the duties were first imposed. Here is a November 2018 corporate presentation, just months after the duties were first imposed, prior to any judicial or regulatory precedents. See the highlighted explanatory sentence at the bottom of the table.

Source: Adani Green Energy Investor Presentation November 2018

Source: Adani Green Energy Investor Presentation November 2018

There are numerous instances across all of Adani Green’s subsidiaries of its solar projects expecting a pass-through of safeguard duties. A 2021 US $750 million bond issue’s Offering Circular notes as follows:

Source: 2021 bond issue offering circularThe same circular lists two more projects, both acquired from SB Energy in 2021, as potentially impacted by safeguard duties not being considered a pass-through. At the APTEL, another Adani Green subsidiary – Adani Solar Energy Chitrakoot One Limited – is facing an appeal from the power procurer regarding an Uttar Pradesh Electricity Regulatory Commission verdict that awarded a compensatory tariff on the grounds of safeguard duty constituting a change in law.

In another case, this time at the CERC, an Adani Green subsidiary is in litigation against power procurers in the state of Haryana. The relevant Adani company is called Adani Hybrid Energy Jaisalmer One Limited. The Haryana govt company is seeking to recover about Rs 48 crore (US $5.8 million), arguing that the reduction in safeguard duty in 2020 should constitute a change in law in its favour.

In the Andhra Pradesh case, which is at appeal at APTEL, CareEdge Ratings has termed the outcome of appeal a ‘key monitorable from a credit standpoint’. In this case the Adani company is seeking compensation of Rs 137 crore (about US $16.5 million).

In 2022-23, Adani Green reported a consolidated loss after tax of Rs 328 crore (US $39.5 million). If only these two cases – Haryana and Andhra Pradesh – are to go against its subsidiaries, it is looking at a revenue risk of Rs 185 crore (US $22.3 million) – a 56% increase in its losses.

Across all of Adani Green’s projects, an estimate of the overall revenue impact, if the safeguard duties payable are not ruled to be pass-throughs, when all the matters reach the Supreme Court, is around Rs 133 crore annually (US $16 million). This is taking into account the Adani Group’s approximate solar-capacity addition of 3800 MW between January 2018 and July 2021 (from when the duties were first recommended by the government through the time the duties were in place), an average plant-load factor of 20% (solar plant-load factor in India averages 20-25% according to the Central Electricity Authority), and a tariff adjustment of 0.20 Rs per unit (in its 2021 bond offering, for one subsidiary, AGEL disclosed the tariff impact per unit of safeguard duty to be Rs 0.25 per unit).

This is a one-time impact of around Rs. 930 crore (around US $111 million) if an adverse ruling were to arrive today. This represents an impact of over 10% of Adani Green’s EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) in 2023, and just under a 200% increase in its losses.

Conversely, if the verdicts go in Adani’s favour, power tariffs will be revised upwards, and this amount, meant to safeguard domestic manufacture of solar equipment, will be paid by India’s power consumers.

Safeguard duties slowed down India’s renewable transition

India has been running behind its targets for addition of renewable energy to its grid. It failed to meet a previous target of 175 giga-watts of installed generation capacity from renewable sources by 2022. By the end of December 2022, installed capacity was about 30% short of this target at around 120 gigawatts, and in December 2022, with the missed target looming, the government replaced it with a target of 500 giga-watts by 2030. While it has repeatedly stated its optimism for achieving this target well before the deadline, in February 2024 the government informed Parliament that it had postponed the target to the 2031-32 financial year.

This is along the lines of what experts predicted may happen in the early years of the safeguard-duty regime. A 2019 report by the Council on Energy, Environment and Water (CEEW), a Delhi-based think tank, described how safeguard duties had led to a drop in investor confidence, leading to capacity addition at a lower pace than had previously prevailed. That same report said that the cause of improving India’s solar manufacturing capacity would not be helped by the safeguard duty. The report titled ‘What is Safeguard Duty Safeguarding?’ pointed to underlying structural barriers for the solar-equipment manufacturing sector that the safeguard duty would not address.

Sure enough, five years later, India’s solar manufacturing industry is still far from meeting India’s demand for solar panels. Imported solar equipment still dominates. In December 2023, Bloomberg calculated that India imported 57-100% percent of solar products, including modules, cells, wafers and solar glass since the start of 2021.

This is despite several additional measures the Indian government had taken to help grow domestic manufacturing – including a “Production Linked Incentive” (PLI) scheme initiated in April 2021, where the government provided incentive payments to domestic manufacturers to set up additional manufacturing capacity, and imposing a requirement in March 2021 that solar-power generators acquire equipment only from an ‘approved list of models and manufacturers’ – all domestic – if they are government funded, or selling their power to the government. Note that both these schemes were put in place close to the end of the safeguard-duty regime, which had evidently failed to boost domestic manufacturing to that point.

In fact, domestic manufacturing had failed to such an extent to meet the requirement of power generators that the government suspended the requirement to use domestically-manufactured equipment for the 2023-24 financial year. It has now reimposed the requirement, after the PLI scheme had some success. Research published by the Institute for Energy Economics and Financial Analysis (IEEFA) in 2023, anticipated that Indian solar-manufacturing capacity will catch up to demand by 2026, at least to the extent of being able to domestically assemble all the required equipment after importing component parts, attributing growth in domestic manufacturing capacity to the PLI scheme. The scheme, put in place in March 2021, effectively subsidised the burden of the safeguard duty and later the basic customs duty by paying domestic manufacturers to add additional capacity. Manufacturers qualified for the PLI scheme through a competitive auction, and Adani was among the successful bidders.

It is worth remembering that this incentive was seen as necessary because domestic manufacturing capacity wasn’t keeping pace with the government’s targets. The 2019 CEEW report had suggested the safeguard duty wasn’t effectively safeguarding domestic manufacturing, but had set up a tariff barrier that needed to be bridged by providing the incentive. With Adani being one of its beneficiaries, it was receiving a taxpayer-provided incentive to offset a cost imposed due to its own prior lobbying.

A $228-million duty evasion scam

Another impact of the safeguard-duty regime, followed by the basic customs duty that replaced it, was that domestic solar-power generators sought to find creative ways to avoid it. One such route was the Project Import Regulations of 1986 – an old customs-duty concession system provided for imports of equipment for projects sponsored by the government. These regulations, written long before solar power existed in India, were turned into a loophole by solar-power generators seeking a route to avoid the steep payments of duty for imported solar panels.

In July 2022, a solar-power generator obtained a ruling from a customs regulator permitting it to import equipment under this route, at a concessional rate. This led to a series of other generators seeking permission to use the same route. The government took some time to respond, but through two notifications in October 2022 and February 2023, it amended the Project Import Regulations to specifically exclude solar projects.

Another loophole that solar generators tried to use was the customs warehouse scheme. In this scheme, imports can be brought into the country without paying customs duty, as long as they are stored in ‘customs warehouses’, with the duties becoming payable when they are taken out of the warehouse and brought to their final destination. Solar-power generators tried to take advantage of this scheme by seeking permission to declare their entire project premises as customs warehouses – and thereby never having to pay duty on imported equipment. Some succeeded in getting local customs authorities to allow them this declaration. The government’s Central Board of Excise and Customs wrote to its field offices in July 2022 warning them to not grant any further such permissions and to cancel those already awarded.

Despite the government apparently shutting the door, in February 2024 it was revealed that the Directorate of Revenue Intelligence (DRI), a law enforcement agency in the Ministry of Finance tasked with enforcing customs law, is set to charge six companies with evading customs duties by using the project import and customs warehouse routes. Collectively, the six allegedly defrauded the government of at least Rs. 1900 crore (about US $228 million), and this is a conservative estimate that the DRI expects to increase as the scope of its investigation widens, the Economic Times reported. Power generators had imported equipment in excess of the amount needed for the specific projects notified under the project import regulations, and into solar-power projects declared as customs warehouses to pull off the duty-evasion scheme, a DRI official told the newspaper.

This duty-evasion scam was a fallout of power generation companies trying to evade the safeguard duty and basic customs duty regime.

Safeguard duties led to higher solar-power tariffs

The same CEEW report mentioned earlier also predicted the higher cost of solar power that would result from the safeguard duties. ‘In the current form, the safeguard duty hinders the reduction in solar tariffs. Tariffs could be six to ten per cent lower in the absence of duties,’ it said. The Adani Group itself, as we saw earlier in this article, calculated a tariff impact of around Rs 0.25 per kWh (kilowatt hour) – which is of the same order predicted by the CEEW.  

This higher tariff has appeared in two forms – in increased tariff levels at the stage of award of contracts, and in compensatory tariff orders for previously awarded contracts. We have already seen the compensatory tariff orders where they concern the Adani Group. It is now for the Supreme Court to decide whether the orders will stand.

The higher tariff at the stage of awarded contracts meanwhile has materialised, (just as the CEEW had predicted). A 2020 report by IEEFA found that Indian solar tariffs were higher than those in the Arabian gulf, partly due to import duties. The tariff levels IEEFA calculated for Indian projects at the time, of the order of Rs 2.6 per kWh, have barely moved since. In 2023, the lowest solar tariff discovered through auction in India was Rs 2.51 per kWh.

Safeguard duties exacerbate coal expansion

Finally, the slower than targeted growth of solar-power generation has contributed to an expansion in coal-power generation. In February 2024, Reuters reported that India is set for its highest annual increase in coal-fired power capacity in six years, planning to add a combined 13.9 gigawatts of coal-power capacity.

Adani's 'safeguard' tariff on imported solar panels has contributed to an expansion of exploitation of coal in India.In March, it reported further that Adani Power, JSW Group, and Essar Group are among private Indian firms that have expressed an interest in building at least 10 gigawatts capacity in coal-power by expanding old plants and reviving stalled projects facing financial stress. A forthcoming report for AdaniWatch will cover Adani’s plans for one such stalled project – the Adani Group’s Pench power station in the central Indian state of Madhya Pradesh.

Bloomberg analyst David Fickling attributed this coal expansion partly to the safeguard duties, which he described as ‘tariffs on imported solar panels (that) have failed to incubate a viable domestic manufacturing sector, but have succeeded in raising costs for developers’ in a column published after the Reuters news break.

So, to recap, the safeguard duties for which Adani led the charge in 2017, will either hurt Adani’s own bottom line, if it fails to secure the compensatory tariffs it is seeking, or will raise the cost of power for Indian customers, if the compensatory tariffs are awarded. In addition, they have slowed India’s renewable-energy transition, failed to adequately raise domestic solar-manufacturing capacity, led to the government seeking to provide additional incentives that have still not ensured complete self-sufficiency, provoked a duty-evasion scam by solar-power generators, raised Indian solar power tariffs, and led to an expansion of coal.

Will India’s ‘green energy revolution’ recover from this Adani-induced derailment? We will know the answer in time. Why did this derailment have to take place? That answer may be speculated at, but we may never know for sure.

The author is an independent journalist based in New Delhi