The short-term costs of local content requirements in the Indian solar auctions

Abstract

Developing and emerging economies are implementing local content requirements (LCRs) to spur domestic manufacturing though their costs and benefits are not well understood and difficult to quantify. Here, we provide an empirical assessment of the short-term costs of LCRs using a credible counterfactual. We analyse data on government-run solar PV auctions held in India between 2014-2017 and exploit the fact that not all of the auctioned contracts entailed LCRs. We find that LCR policies resulted in a ~6% per kWh increase in the cost of solar PV power generated from those projects when compared to similar projects not subjected to the same LCR policy. During this three-year time period, Indian solar panels remained around 14% more expensive than international panels. We found some evidence of short-term increases in domestic manufacturing capacity, yet, during this short period Indian firms did not increase market share or break into export markets.