Flickering benefits for solar power

A production-linked incentive scheme and possible basic customs duty will have a limited impact in encouraging domestic solar equipment manufacture

In 2015, the prime minister set an ambitious goal of generating 100Gw of solar power by 2022. India had installed 36Gw of solar capacity until last year; according to Mercom Research data, it has only been able to add 3.2Gw in 2020. One can blame the pandemic for the halving of power generation, but capacity addition was dipping even before this (see chart).

Mercom estimates that India will only add 10Gw of solar power this year, implying that it would take another six years to reach the 100Gw target. If power generation addition stays at 2020 levels, it would take two decades; and, at 7Gw per year (the

2019 addition), the country will need nine years to fulfil its ambitious target.

Discoms’ frequent renegotiation of power purchase agreements and reluctance to clear bills has marred the sector. Another major reason, though, is the government’s failure to balance its targets with its goal to spur local manufacturing for solar equipment.

The government wanted to promote domestic manufacture of cells and wafers. Instead, the industry has veered towards module assembly, which requires imported inputs. The domestic industry’s dependence on imports is so high that when the government imposed a safeguard duty on imports from China, Malaysia and others to spur local manufacturing in July 2018, it hampered Indian module manufacturers’ ability to export. A 43 per cent fall in imports was accompanied by a 14 per cent fall in exports in FY19. Though exports have since risen, analysts say it may be a one-time trend given the US duty on Chinese products.

“Close to 80 per cent of India’s module exports are to the US, so because of these duty impositions, exports might have gone up. That was short-lived, because the US subsequently imposed duties on Indian imports. That is why imports to the US have declined in the last fiscal,” said Manish Gupta, senior director, Crisil Ratings.

The safeguard duty has also failed to steer India away from Chinese products (see chart) even as Vietnam, Thailand and Singapore have emerged as alternative suppliers.

In a last-ditch effort to become atmanirbhar (self-reliant), the government announced a production-linked incentive (PLI) scheme for solar manufacturing (details of which are awaited) and may also impose a 40 per cent basic customs duty (BCD) on solar imports from April 2022. Both will help but they cannot be the determining factor.

For instance, Vinay Rustagi, managing director, Bridge To India, expects module capacity to increase by 8-10 Gw given the government’s initiatives. But it may not add much to India’s atmanirbhar goal. “Module assembly is a low-tech and low-valueadded activity requiring low capex and technical expertise. It has gone up by about 3 GW in the last three years. In the same time, cell manufacturing capacity, entailing higher technology, complexity, expertise and capital investment, has barely increased,” he said.

But the government would need to be clear on how it plans to structure its PLI scheme. If it is focused on module manufacturing, then a 25 per cent BCD, which the government plans to impose on cells, may not be significant for players to add capacity.

Investment will also be a concern. A 1,000-Mw module production can be set up for ~40–50 crore, whereas a cell manufacturing plant of similar capacity would require a capex of ~500 crore.

Another issue with the BCD is that it violates Information Technology Agreements signed by India under the World Trade Organization framework. China and the US will surely challenge the decision, but all will depend on how long it takes for dispute resolution. One of the weaknesses of the predecessor safeguard duty was that it only provided a benefit for two years. It is not clear how long the BCD incentive will last.

Even in the module sector, where capacity addition has been substantial, India’s manufacturing has not been competitive. An analysis by the Centre for Energy Finance from August 2020 shows that Indian solar modules were 33 per cent more expensive than the Chinese module. Labour, electricity, utilities, land and project finance accounted for 14 per cent of total cost in India against 8 per cent in China.

Moreover, Indian manufacturers are still far from achieving the scale of Chinese companies and that gap is growing (see chart).

“The top four or five Chinese companies ship 15-25 Gw of modules every year and are growing at 30-40 per cent annually. The gap between Indian companies and their Chinese competitors in terms of scale, technology and expertise is increasing all the time. And, that is why we are now dependent on such a steep duty barrier,” Rustagi said.

Should the government look for new alternatives? There is, for instance, demand for research into storage technologies that can bring down the cost of renewable power and ensure certainty of supply. Here too, India has been losing ground to China.

“The Chinese companies have already taken a huge head start and become global leaders. They are expanding capacity furiously, investing heavily in R&D and securing access to key raw materials. I think the government believes that it doesn't need to choose between solar and storage when it comes to setting up domestic manufacturing capacity. But promoting storage manufacturing is going to be as challenging, if not more, as promoting solar manufacturing,” Rustagi said.

The govt wanted to promote domestic manufacture of cells and wafers. Instead, the industry has veered towards module assembly, which requires imported inputs