WTO decision on local content requirements will not affect India solar ambitions, officials say

4 March 2016

A WTO panel ruled on first instance last Thursday on the US dispute (DS456) against India concerning the use of domestic content requirements in the context of the Jawaharlal Nehru National Solar Mission (JNNSM) energy scheme.

In the initial phases of the JNNSM, solar power developers were required to use certain types of solar cells and modules manufactured in India for power generation projects in order to ultimately sell that electricity to government agencies under a long-term agreement at a guaranteed rate.

The US complained that these domestic content requirements violate India’s national treatment obligations under the General Agreement on Tariffs and Trade (GATT) 1994 and the Agreement on Trade-Related Investment Measures (TRIMs Agreement). A panel was established in May 2014 to hear the case. (See Bridges Weekly, 28 May 2014)

Washington made clear in its submissions as well as in public statements that it does not take issue with either India’s environmental or developmental goals, nor with New Delhi’s attempts to improve its domestic capacities in solar energy.

“The United States strongly supports the rapid deployment of solar energy around the world – including in India,” said US Trade Representative Michael Froman in response to the ruling. “But discriminatory policies in the clean energy space in fact undermine our efforts to promote clean energy by requiring the use of more expensive and less efficient equipment, raising the cost of generating clean energy and making it more difficult for clean energy sources to be competitive.”

While the report had been scheduled for release earlier, this was delayed repeatedly while the two parties attempted to clinch a settlement.

National solar mission

India launched the JNNSM in 2010 with the goal of promoting “ecologically sustainable growth while addressing India’s energy security challenge,” along with serving as part of the country’s efforts to tackle climate change.  

The mission aims to ultimately generate 100,000 mega-watts (MW) of grid-connected solar power capacity by 2022. Under the JNNSM, the Indian government enters into power purchase agreements (PPAs) with solar power developers, providing a guaranteed rate for a 25-year term. India resells the electricity to downstream distribution utilities, which in turn resell it to consumers.

The JNNSM is being implemented in several successive “Phases,” which are further divided into “Batches.” Mandatory domestic content requirements were imposed on solar power developers participating in the initial Batches between 2010 and 2014.

Depending on the conditions under each Batch, solar power developers could use foreign cells and or modules and still comply with the applicable domestic content requirement, provided they used the types of foreign cells and/or modules that fell outside of the scope and coverage of the applicable domestic content requirement; or by bidding only for specific projects.

For the current dispute, the panel emphasised that its analysis was of the WTO-legality of the domestic content requirements, and that the legitimacy of the policy objectives pursued through the National Solar Mission is not under dispute. The panel indicated that it will take India's policy objectives and the wider factual context into account in the course of its analysis so long as these are legally relevant.

National treatment derogation

The panel found that the domestic content requirements are trade-related investment measures violating the national treatment obligations under the TRIMs Agreement and the GATT 1994. Promoting the use of more efficient, best price available intermediate goods in global markets for a country’s manufacturing needs, is the economic assumption underlying this WTO obligation. 

The panel also found that the discrimination relating to solar cells and modules under the domestic content requirements cannot be exempted by the GATT Article III:8(a) derogation for government procurement, as the solar cells and modules discriminated against were not in a “competitive relationship” with the electricity bought by the Indian government from power developers.

Article XX defences

The GATT Article XX exceptions outline a set of justifications under which WTO members may, under certain conditions, use measures that would otherwise be inconsistent with agreements under its purview, including measures “necessary to secure compliance with laws or regulations” under GATT Article XX (d); and measures “essential to the acquisition or distribution of products in general or local short supply” under Article XX (j).

India argued that the domestic content requirements are justified under the latter, citing supply risks both due to its limited domestic manufacturing capacity in such goods, along with the potential for a disruption in imports of foreign-made versions. 

The panel disagreed, arguing that the Article XX (j) justification refers to the situation where the quantities of such good from all available supply sources, both foreign and domestic, fail to meet demand in the relevant geographical area or market in question, which can range from being a region within one country to a shortage of global scale.

The panel also considered that this does include the risk of “becoming in short supply,” which New Delhi had also not proven existed.

India also argued that the domestic content requirements are justified under Article XX(d), on the grounds that they secure New Delhi’s compliance with “laws or regulations” which require the government to take steps to promote sustainable development.

“In this case, India argues that the DCR measures are justified under Article XX(d) because they are ‘integral to its compliance with both domestic and international law obligations to ensure ecologically sustainable growth while addressing India's energy security challenge, and ensuring compliance with its obligations relating to climate change’," the panel report noted.

“According to India, these obligations are reflected in four international instruments, and four domestic instruments,” the report continued.

India identified four international instruments, including the United Nations Framework Convention on Climate Change (UNFCCC), and four domestic legal instruments, including the Electricity Act, as well as the National Plan, National Policy documents on electricity or climate change.

Regarding international agreements, the panel said that these may constitute “laws or regulations” within the meaning of Article XX(d) only in being rules that have “direct effect” in, or otherwise form part of, the domestic legal system of the member concerned – which India failed to prove.

The panel also found that among the domestic legal instruments identified by India, only Section 3 of Electricity Act falls in the scope of “laws or regulations,” as this term refers to legally enforceable rules of conduct under a country’s domestic legal system, and not the general objectives of those laws.

Nonetheless, the panel failed to see how the domestic content requirements could secure compliance with the obligations in Section 3 of Electricity Act, which are to prepare periodically the National Electricity Policy and National Electricity Plan. The panel therefore ruled against India’s claim on Article XX(d).

Energy security?

Aiming to facilitate a potential Appellate Body review in the future, the panel made additional factual findings on whether the domestic content requirements are “essential” or “necessary” within the meaning of Article XX (j) and XX (d), as India claimed.

To do so, the panel said that it would need to review the importance of the objective that India is seeking to achieve; the trade-restrictiveness of the domestic content requirements; and the contribution such requirements make toward that objective.

The panel said that ensuring that Indian solar power developers have access to a continuous and affordable supply of the solar cells and modules for power generation is an important objective.

It also recalled that the domestic content requirements are trade-restrictive, because they restrict the use of foreign solar cells and modules by solar power developers that are participating, or would have participated, in the National Solar Mission.

The panel also found that, in the short term, by reducing available supply sources for solar power developers, the domestic content requirements are unlikely to help ensure access to a continuous and affordable supply of the necessary solar cells and modules, and arguably undermine that objective.

With regard to the contribution such measures make to India's objective in the long run, the panel said that the information given regarding the domestic content requirements’ effect on boosting manufacturing capacity seems to call into question whether this effect is positive.

The panel also said that India has not identified any related measures that it is taking to ensure the supply of the raw materials and consumables necessary to domestically produce and use solar cells and modules, and that it is not clear that domestic manufacturers would sell these products to Indian developers, as opposed to their foreign competitors, in the event of a shortage or import disruption.

The panel concluded that the effect of the domestic content requirements is uncertain and unpredictable regarding the realisation of India’s stated objective.

The panel also found there was not sufficient information to reach a conclusion on the extent to which the six alternative measures identified by the United States, such as removing trade barriers or stockpiling such goods, would contribute to meeting India’s objective, and desired level of protection, relative to any contribution being made by the domestic content requirements. 

Stakeholders, trade watchers mull implications

The panel ruling has been highly anticipated for many months, given the relationship to renewable energy and the major players involved, among various other factors. The result has already drawn significant scrutiny from many trade watchers, particularly in light of a possible appeal, as well as what this might mean for each country’s solar energy sectors – along with the efforts to scale-up the deployment of renewable energy globally.

According to a senior Indian commerce ministry official, who spoke on condition of anonymity, the case is an important one as it brings in several dimensions, such as climate change, trade, energy access, domestic manufacturing, and local employment.

The domestic content requirements under scrutiny also fed into India’s “Make in India” programme and sought to address the real concern of supply disruption and energy security, the official said, adding that the ruling should be viewed both for its long-term implications, and not just from a short-term market access perspective.

Other Indian officials, such as Tarun Kapoor, Joint Secretary of India’s Ministry of New and Renewable Energy, have commented that the ruling will not inhibit New Delhi’s future plans.

“It does not affect the future course of action which India is considering, as India is committed to protecting its industry while following WTO regulations,” Kapoor told PV-Tech. “This will not, therefore, cause any dent in [the] ‘Make in India’ programme because we still have several options to support the domestic industry while remaining within the WTO regulations.”

Santanu Mukherjee, Partner at Luthra and Luthra Law Offices, New Delhi heading its International Trade/WTO Law and Policy Advisory Practice said that "it is a fact that not only clean energy alternatives are essential for a fast-industrialising country like India, local capacity development in this sector is also necessary, the decision can have a long-term repercussion.”

“Among others, the panel found that India's measures couldn't pass the necessity test needed to qualify for the exception under Article XX (d), one reason being, India does not follow direct effect of international commitments,” added Mukherjee. “Given the importance of the sector in India some questions arise, if India allowed direct effect or could establish implied direct effect based on existing Indian jurisprudence, would the panel decision be different? It is crucial to watch the developments as India moves ahead with its “Make in India” initiative.” 

The ruling has also been watched closely by solar product manufacturers in both the US and India.

“The opportunity for solar development in India has been coined by many as the second gold rush, and rightly so,” said Sourabh Sen, CEO of New York-headquartered Sentral Energy, an independent power producer, which aims to bring energy to India and other emerging markets in Asia, Africa, and Latin America.

Noting Indian Prime Minister Narendra Modi’s goals to significantly scale up the country’s solar sector in the coming years, with set goals and timeframes, Sen noted that fulfilling such an endeavour would involve over US$100 billion in new investment, requiring both domestic and foreign efforts.

“In this light, local content requirements are naturally obsolete, as India has already created an environment where the country will be able to grow the domestic industry as well as welcome increasing foreign investment, which in turn will firmly place India not only as a major contributor, but as a leader in the global solar development landscape,” said Sen.

Meanwhile, Dhurv Sharma, coordinator of the Indian Solar Manufacturers Association, noted in remarks tothe Economic Times that the ruling has been long expected, and that producers have therefore adapted their plans accordingly. “We know that the government will keep resolutely backing solar manufacturers,” Sharma said.

Dr. Arunabha Ghosh, the CEO of the Council on Energy, Environment, and Water (CEEW), an independent, not-for-profit research institution based in New Delhi, commented that India could have argued some of the points where it lost at the panel stage in a different way that might have ensured another outcome.

For example, on whether the UNFCCC’s Paris Agreement reached last December has a “direct effect” in India, he suggested that since the country is a parliamentary democracy and the executive a member of parliament, any international treaty obligations on climate change entered into by the executive would arguably have the force of law in India.

On that subject, he noted that it would be interesting to see how WTO adjudicators would interpret the Paris Agreement after it has been ratified by member states, including India, later in the year.

Ghosh added that the question could be asked whether including domestic content requirements – the issue at the centre of the dispute in the case – were indeed “essential” for India’s pursuit of global climate change objectives.

With regards to India’s unsuccessful efforts to claim an Article XX (j) exception, for example, he suggested that New Delhi could have argued that domestic manufacturing capacity takes time to create, and may not be invoked as required during a possible imminent crisis – drawing parallels to how essential medicines are treated with regards to the Doha Declaration on the TRIPS Agreement and Public Health. 

He also predicts that domestic content requirements would, as a result of the decision, increasingly shift to government procurement of solar panels for entities such as railways and defence, which would make it immune from future WTO challenge.

“Solar has to grow in India but at what cost?” asks Madhavan Namboothiri, founder and director of RESolve Energy Consultants and a regular solar industry watcher.

He adds that domestic content requirements were not making much of an impact on the ground for the domestic solar cell and module manufacturers and would merely have a temporary “prop-up” effect for domestic manufacturers. What was needed was a broader structural approach that would genuinely address domestic manufacturers’ constraints and enable them to become cost-competitive.

Whether it was for grid-connected power projects or procurement of solar PV modules by entities like railways, the government ultimately needs to do a long-term cost-benefit analysis, he added.

Next steps

Both sides have 60 days from when the report was circulated to appeal the panel's findings. Under WTO rules, the Appellate Body can review aspects of law – such as legal interpretation – but generally will not interfere with the factual findings of the original panel.

ICTSD reporting; “India can support its solar manufacturers despite WTO ruling, says government official,” PV-TECH, 25 February 2016.

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