US launches new WTO challenge against India solar incentives

13 February 2014

The US lodged its second WTO challenge against India's domestic content requirements for solar cells and solar modules on Monday, in a move expected to worsen the two sides' already-strained trade relationship. The decision, announced by US Trade Representative Michael Froman, also brings back to the fore a long-standing debate over how countries should best foster the development of renewable energy.

Washington had first challenged New Delhi on its renewable energy incentives a year ago; however, that initial case has not yet advanced past the consultation phase, which is the first level of WTO dispute settlement proceedings. (DS456)

The focus of both the original February 2013 complaint and the new one filed this week is the Jawaharlal Nehru National Solar Mission (NSM), an Indian programme launched in 2010 with the goal of deploying 20,000 MW of solar panels that would be connected to the grid by 2022.

Indian officials have said that the NSM's goal is to lower the cost of generating solar power in the country, along with making New Delhi a "global leader in solar energy."

The NSM is divided into three phases, with Phase I being the subject of the February 2013 challenge. At the time, Washington had complained that New Delhi was requiring developers of photovoltaic projects using crystalline silicon technology to source their solar cells and modules domestically (See Bridges Weekly, 13 February 2013)

The implementation of Phase II - the subject of the new WTO challenge - was approved by India's cabinet this past October. According to Washington, this second stage maintains the original domestic content requirements, requiring new Indian solar projects to obtain at least half of their content from local producers.

The US also claims that Indian solar power developers are provided with certain benefits - such as long-term tariffs on electricity - that are contingent on the use of domestically-produced solar cells and modules.

Furthermore, these local requirements have now been expanded to cover thin film technology, which were not included in Phase I.

Thin film makes up the bulk of US solar exports to India, and over half of the projects under NSM have relied on imports of the product.

These terms, Washington says, puts New Delhi in violation of WTO rules on national treatment, both under the organisation's General Agreement on Tariffs and Trade, and under the Agreement on Trade-Related Investment Measures.

Sources familiar with the new US claim say that Washington is aiming to supplement the existing one, and not replace it. US officials have also said that the consultations it conducted with India in the first complaint were unable to resolve its concerns.

The two sides will now be required to hold consultations for a minimum of 60 days in an attempt to resolve their differences. Should these consultations fail to yield a result, the US may then ask that a WTO panel be established to hear the case. Sources say that the WTO will be treating the new complaint as an addendum to last year's consultations request.

Renewable energy deployment

In 2011, the US exported US$119 million worth of solar industry products to India, making the Asian country the US' second largest export market in this area. Since then, the level of exports has fallen, Washington says, with the NSM being partly to blame.

"These unfair requirements [imposed by India] are against WTO rules, and we are standing up today for the rights of American workers and businesses," Froman said on Monday in announcing the decision, adding that Washington's move is also aimed at increasing the deployment of renewable energy at a global level.

"These types of ‘localisation' measures not only are an unfair barrier to US exports, but also raise the cost of solar energy, hindering deployment of solar energy around the world, including in India," he added.

However, analysts note that while the NSM has a local content requirement, much of the capacity increase seen in India over recent years has come as a result of state schemes, such as the one in Gujarat, which do not have local content requirements.

In addition, of the total 9000 mega-watts being commissioned under Phase II between now and 2017, only half - in the first batch of projects, 375 megawatts out of 750 - will be subject to the domestic sourcing requirements.

Since the news of the US complaint broke, Indian officials have publicly insisted that their programme is in line with WTO rules, and have raised their own concerns about some of the US' solar schemes.

"We have evidence of, I think, 13-odd [US] states which follow equally restrictive policies," Indian Commerce Secretary Rajeev Kher told the Press Trust of India. "So we are examining their policies."

The issue of how governments should best support their renewable energy sectors without running afoul of international trade rules has become increasingly prominent in current debate, sparking high-profile rows both at the WTO and elsewhere.

For instance, the Canadian province of Ontario's feed-in tariff (FIT) programme for renewable energy was the subject of a dispute filed by the EU and Japan, also due to a local content requirement (LCRs) in the scheme. The WTO's highest court ruled last year that the design of the scheme violated Canada's commitments at the global trade body, confirming an earlier panel finding. (See Bridges Weekly, 8 May 2013 and 19 December 2012, respectively)

Local content requirements, such as the one cited in India's NSM programme or the Ontario FIT scheme, have been particularly controversial in the renewable energy debate. While advocates say that these requirements are key to advancing the sector's development, creating "green jobs" and increasing opportunities for investment, some critics have warned that LCRs can actually increase energy costs and stifle competition.

Many US solar producers and developers have welcomed Washington's decision to challenge the Indian programme, with Rhone Resch, president of the Solar Energy Industries Association, calling the move "justified and necessary."

"Localisation barriers are a growing threat to US solar exports and clearly violate WTO rules," Resch said, adding that the US has repeatedly urged India over the past three years to change its policies.

US-India ties at risk?

The new dispute comes during a period of increasingly strained trade ties between Washington and New Delhi, with the two sides sparring repeatedly in recent years on subjects as varied as patent protection policies, poultry import bans, and steel duties. (See Bridges Weekly, 30 May 2012 and 18 April 2012)

However, USTR Froman was quick to downplay any suggestions that the two sides' relationship has soured, stressing that Washington has "strong and growing" ties with New Delhi.

"An important part of any maturing trade relationship is effectively addressing the range of issues on our trade and investment agenda, including in areas where we might disagree," he told reporters on Monday.

ICTSD reporting; "U.S. Files Second Case Against India on Solar-Energy Policy," BLOOMBERG BUSINESSWEEK, 10 February 2014; "India lashes out at US in solar trade spat," AGENCE FRANCE PRESSE, 11 February 2014; "RPT-UPDATE 1-India warns U.S. about dumping investigation in solar trade spat," REUTERS, 11 February 2014; "India's National Solar Mission, Phase II" PV Magazine, October 2013.

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