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Apr 23, 2016

India Solar Dispute: Right Intent, Wrong Means

Should countries focus on clean energy and worry less about making components feeding into clean energy industries?
Source: YouTube

Should countries focus on clean energy and worry less about making components feeding into clean energy industries?

A thermal power plant in India. Credit: Wikimedia Commons

A thermal power plant in India. Credit: Wikimedia Commons

Geneva: India’s solar dispute at the World Trade Organization (WTO) is being viewed as an important case given the implications it has for the rapid deployment and scale up of renewable energy globally. It is also drawing attention to whether international trade rules should be used to adjudicate on matters having wider implications beyond trade including for the environment, energy security and socio-economic objectives of developing countries. And worryingly, the practice of discriminating in favour of domestic producers could potentially leave countries like India open to being challenged by investors.

The case, brought by the US to the Dispute Settlement Body at the WTO in 2013, has also thrown up fundamental questions about countries’ investment in making solar components and the economics of manufacturing. Should countries focus on clean energy and worry less about making components feeding into clean energy industries?

India has appealed against the decision of the WTO Panel which found Domestic Content Requirements (DCRs) in conflict with trade rules. But experts are of the view that it is very unlikely that the Appellate Body at the WTO will reverse the findings of the Panel.

Earlier this week, the WTO said on its website that parties to a dispute can appeal a panel’s ruling. “Appeals have to be based on points of law, such as legal interpretation — they cannot re-open factual findings made by the panel.” As per process, each appeal is heard by three members of a permanent seven-member Appellate Body (AB). It also said that the Appellate Body membership represents the geographic range of WTO membership, with each member appointed for a fixed term and are unaffiliated with any government. The AB has up to three months to conclude its report.

Experts are looking to a similar and recent case of Canada — Certain Measures Affecting the Renewable Energy Generation Sector, as precedent. The Canadian case was also triggered by the use of DCRs for both wind power and solar power producers. Observers feel that in its ruling in the Canada case, the AB made an attempt to make it more difficult to challenge clean energy programs. (The AB applied a complex “benefit” standard to establish whether the governmental long-term power purchase agreements resulted in giving power producers better terms than they would otherwise get. But subsidy per se was not challenged in the India-solar case.)

It is widely agreed that the issue at question, of imposing of DCRs for a part of the production of solar powered electricity, is inconsistent with international trade rules, notwithstanding similar practices within the US

Despite the litigious threat by India’s minister for power on filing a stack of disputes at the WTO, experts believe that the government might be well-advised to review its assumptions about manufacturing for solar. (Subsequently, the Ministry of New and Renewable Energy has indicated that it will file one comprehensive case against the US at the WTO.)

The Indian Solar Mission 

The Jawaharlal Nehru National Solar Mission, first launched by the Indian government in 2010, aiming to generate 20,000 megawatts (MW) of grid-connected solar power capacity by 2022. Later this target was increased to 100,000 MW. The stakes are therefore high in supporting and meeting such big targets of solar power generation. (About 8000 MW is expected to be met from locally made cells and generation equipment.)

In order to achieve this, the government has entered into long-term power purchase agreements (PPAs) with solar power developers (SPDs). Each PPA provides a guaranteed rate for a 25-year period during which the electricity generated by the developers is bought by the government. In turn, the government resells the electricity that it purchases to downstream distribution companies, which ultimately resell it to the consumers including government-owned entities. The guaranteed rates are determined by the Central Electricity Regulatory Commission and the State Electricity Regulatory Commission.

The solar mission is spread over several phases and batches. In some of the initial phases, mandatory DCRs were imposed on solar power developers to use solar cells and modules produced in India.

Some conclusions of the panel

  1. On National Treatment and Trade Related Investment Measures

The panel found that India’s use of DCRs under the National Solar Mission, violate the national treatment obligations under the General Agreement on Tariffs and Trade (GATT) [Article III(4)] and the Agreement on Trade Related Investment Measures (TRIMs) [Article 2.1]. WTO law prohibits discrimination in favour of domestic goods over imported goods.

The panel found that the DCRs meet the standards of being classified as trade related investment measures. The panel said that these DCR measures “require” the “use” by “an enterprise” of “products of domestic origin”, and “are specified in terms of particular products” such as solar cells and modules. The panel concluded that compliance with the DCR measures “is necessary to obtain an advantage” [TRIMS Illustrative List Para 1(a)].

A trade lawyer in Geneva, told The Wire, “It is close to impossible to justify an explicit (de jure) national treatment violation or a domestic content requirement.  It goes against everything the WTO stands for.”

  1. On Government Procurement:

While international trade law does now allow for discriminatory practices in favour of domestic goods, over imported goods, there are exceptions if the objective is government procurement or consumption. [This is protected under Article III:8(a)]

India had argued that its DCRs rule in favour of domestic generation equipment could be exempt under the government procurement carve-out. The panel did not deem India’s support for it solar program as government procurement.

As mentioned earlier, the Indian government buys power from solar power producers and resells it to distribution companies. The discoms ultimately resell it to the consumers. This could not be classified as government procurement according to the panel, considering the commercial resale of the electricity.

Further, the panel was of the view that the product procured – electricity and the product discriminated for – solar cells and modules, must be same or a substitute/competing product. It somewhat narrowly ruled that the generation equipment and the electricity were not “in a competitive relationship”.

However, a trade lawyer in Geneva, who did not wish to be named cited the AB ruling in the Canada case, where exceptions to “inputs” were hinted. “In a footnote the AB said the standard might be different if the product discriminated against is an “input” for the product procured. The AB might be telling us that we should relax the “substitutability/competing” standard, because it is in a way a lesser evil – the government is not discriminating against entire industry but only against one imported component”.  (To be sure, the AB in the Canada case ruled that the product procured and the product discriminated against must be the same or substitutes.

India, of course, had argued that the solar cells and panels were an input for the electricity. But the panel disagreed and said that generation equipment is not an input for/component of electricity.

This specific conclusion however raises questions on the limits for sustainable procurement, experts say. While there is broad agreement that procuring electricity from solar power developers and selling it to distribution companies did not amount to government procurement, but the panel takes a strict view on government procurement itself.

Aaron Cosbey, environmental economist, at the International Institute for Sustainable Development (IISD), says, “I agree with the panel that what India was doing was not government procurement. Where I differ with the Panel is on their judgment that even if it were government procurement, it could not be sheltered by the provisions of GATT III:8(a). The Panel’s interpretation is that it would be illegal under TRIMS – because the good being discriminated against (solar panels) is not the same as the good being procured (electricity).   Ultimately, there is no certainty that India can use government procurement to specify any requirements related to the way the procured good was produced, and that’s a problem for sustainable public procurement.”

  1. To tide over short supply [Article XX (j)]

India also framed its arguments in terms of energy security, addressing climate change and goals for sustainable development by linking the continuous supply of clean energy to adequate reserve capacity for manufacturing of solar components domestically. It cited Article XX(j) which makes exceptions on certain measures to meet supply constraints.

The panel disagreed and said that “short supply” did not mean “lack of domestic manufacturing capacity”.  As long as there was enough supply – whether from domestic or foreign sources – no “short supply” existed within the meaning of XX(j).  The panel also found that XX(j) did not cover “risks” of products being in short supply; and even if it did, such risks would have to be “imminent”, which India was unable to prove.

Some experts believe that developing countries might be better off importing instead of manufacturing since solar is a knowledge and capital-intensive industry. Cosbey said, “Only the really big players can try to win this game.  If you do it unsuccessfully, all you have done is to raise the price of imported solar panels, which is bad from an environmental and an economic perspective.  And to do it right you need so many pre-requisites, including a big domestic market for the products, domestic suppliers with levels of global competitiveness, resources to protect and support the infant industries through to maturity, a robust public service, free of corruption and that understands how to do industrial policy and infrastructure and services at the national level to make manufacturing viable: transport, communications, finance.”

Going by current targets which require an estimated new investment of $100 billion, the government wants India to be a global leader. (The ability of Indian banks to participate in this, is another matter.)

Also, this may be different for countries in Africa. Mamadou Toure, Chairman and CEO of Ubuntu Capital, an Investment and Advisory firm and Founder of Africa 2.0 Foundation, said, “Job creation is important. Besides, many countries have raw materials, so it makes sense to invest in an integrated supply chain”. It is not about solar only, but the energy revolution in Africa. Countries should be able to boost local manufacturing efforts without worrying about trade rules, he added.

  1. To honor international commitments – [Article XX(d)]

Citing the flexibility under Article XX (d), India argued that DCRs were measures “to secure compliance with laws or regulations” and were important to honor its international law obligations including instruments such as those for climate change, The Rio Declaration among others. It also argued for the need to comply with its domestic law on electricity and other regulations.

The panel however ruled that DCRs are not measures “necessary to secure compliance with laws or regulations”.  The panel has said that India could not demonstrate that international instruments had a “direct effect”. Most of the instruments and laws India identified, did not pass muster within the meaning of Article XX(d) of GATT. 

 This interpretation has drawn the ire of environmentalists.  While international instruments in environmental law are non-binding, they nevertheless, have a direct effect in the domestic system, experts said. Some are even questioning if international environmental law can transcend trade and investment objectives.

Jorge E Vinuales, Harold Samuel Chair of Law and Environmental Policy at the University of Cambridge, told The Wire, “I have long argued on the need to flesh out broad climate change (and environmental) obligations. The India – Solar Cells case epitomizes the unresolved tension between different goals pursued by the international community. From a legal standpoint, local content requirements, even if included in a renewable energy policy, are discriminatory. The problem, however, is that it is politically very difficult to make a bold move in favour of renewable energy, particularly of the scale called for by climate change instruments, if the local constituencies do not see a tangible advantage. While it may be theoretically possible to massively promote renewable energy while avoiding some buy-local requirements, it does not seem realistic in practice. Emerging economies need to tackle socio-economic development as well as environmental protection. Unfortunately, the trade community, including trade lawyers and litigators, remain fairly unfamiliar with environmental and climate change law, which does not help in either litigation or, earlier, in designing policies that are difficult to challenge. At that level, it is truly a matter of values.”

A different view prevails in the trade community in Geneva. “If we want to protect the environment, prevent climate change, do we really have to do it via building a domestic industry and shutting out or limiting imports?  Where is the connection?  This is essentially how trade lawyers think about that,” a trade lawyer cited earlier said.

Risk of investor-led litigation

Most experts are of the view that India must take steps to be WTO-consistent as soon as possible. There could be a bigger threat in the future, they caution, pointing to potential claims by injured investors.

Freya Baetens, Associate Professor of Law, Leiden University, at The Hague, in The Netherlands, said, “The same measure that gave rise to the WTO dispute, might also give rise to investment claims from individuals or individual companies who allegedly have been discriminated against. They have to prove a violation of international investment law has taken place but if they can support their argument by saying ‘the WTO DSB has already agreed that this is discrimination’, they will of course do so. Additionally, most investment agreements (India has more than 80 such agreements) do not contain a justification clause such as Article XX GATT, which means that India could not invoke, in an investment case, the exceptions it has invoked in the WTO case. For India, in my view, the best course would now be to make its legislation WTO and investment law consistent as soon as possible; and be very transparent about it, in order avoid triggering a claim.”

At stake is if countries such as India should have the policy space to determine energy security while ensuring jobs and servicing clean energy goals. Many believe that countries cannot club complex and different goals such as energy security and jobs.

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