Can do­mes­tic man­u­fac­tur­ers cap­ture a larger piece of the grow­ing In­dian so­lar mar­ket, asks Raj Prabhu, CEO and Co-Founder, Mer­com Cap­i­tal.

Power Watch India - - CONTENTS - By Raj Prabhu

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So­lar in­stal­la­tions in In­dia reached 4 GW in 2016, and are ex­pected to sur­pass 9 GW in 2017, an in­cred­i­ble pace of growth con­sid­er­ing In­dia in­stalled just 883 MW in 2014. With ex­po­nen­tial growth in the sec­tor, the gov­ern­ment wants to ramp up do­mes­tic man­u­fac­tur­ing to de­crease the vol­ume of so­lar mod­ule im­ports which, along with in­stal­la­tions, has also in­creased dra­mat­i­cally. The chal­lenge, like in most mar­kets, has been cost com­pe­ti­tion from Chi­nese man­u­fac­tur­ers. In­dia also lost the World Trade Or­gan­i­sa­tion (WTO) rul­ing last year which de­cided that its Do­mes­tic Con­tent Re­quire­ments (DCR) dis­crim­i­nated against US man­u­fac­tur­ers. With this back­drop, pol­icy mak­ers are look­ing at var­i­ous op­tions to sup­port do­mes­tic man­u­fac­tur­ers with­out vi­o­lat­ing trade agree­ments.

The In­dian so­lar man­u­fac­tur­ing sec­tor was ac­tive long be­fore any pol­icy or sig­nif­i­cant mar­ket de­mand ex­isted in In­dia. The sec­tor mainly fo­cused on orig­i­nal equip­ment man­u­fac­tur­ing and ex­port­ing to Euro­pean coun­tries. In­dia had ex­ported al­most a bil­lion dol­lars in mod­ules be­fore the Na­tional So­lar Mis­sion was es­tab­lished. Ex­ports boomed in 2008 with mas­sive growth in global de­mand, but the slump in 2009 (due to the global re­ces­sion) slowed the sec­tor. As man­u­fac­tur­ing took off in China, prices dropped to record low lev­els. From the be­gin­ning of 2011 through the end of 2012 mod­ule prices fell from $1.80/W to $0.65/W, a 65 per cent drop. State funded and sub­sidised Chi­nese man­u­fac­tur­ers cap­tured most of the global mar­ket at the cost of man­u­fac­tur­ers else­where, in­clud­ing In­dian man­u­fac­tur­ers.

In­stalled ca­pac­ity of do­mes­tic so­lar cells and mod­ules in the coun­try is es­ti­mated to be 2,815 MW and 8,008 MW re­spec­tively, while op­er­a­tional ca­pac­ity of so­lar cells and mod­ules is 1,448 MW and 5,246 MW re­spec­tively as of De­cem­ber 2016, ac­cord­ing to Mer­com’s Man­u­fac­tur­ing Tracker.

How­ever, man­u­fac­tur­ers paint a dif­fer­ent pic­ture. Most of them are of the opin­ion that true work­ing mod­ule man­u­fac­tur­ing ca­pac­ity was ap­prox­i­mately 3 GW as of the end of 2016. This huge dis­par­ity in fig­ures is due to old and ob­so­lete man­u­fac­tur­ing lines that are still be­ing counted by man­u­fac­tur­ers as “op­er­at­ing ca­pac­ity”.

As of De­cem­ber 2016, an es­ti­mated 9.6 GW of so­lar has been in­stalled in In­dia. In the seven months from April to Oc­to­ber in fi­nan­cial year (FY) 2016-17, ex­port and im­port ac­tiv­ity to­talling $1.22 bil­lion (~Rs.83.22 bil­lion) was reg­is­tered in the sec­tor. Out of this, In­dia im­ported so­lar ma­te­ri­als worth

more than a bil­lion dol­lars. This is not just be­cause In­dia lacks man­u­fac­tur­ing ca­pac­ity, but it’s mostly be­cause In­dian mod­ules are much more ex­pen­sive as com­pared to Chi­nese mod­ules.

Chal­lenges

Com­pet­ing with low-cost im­ports, low profit mar­gins and lack of scale are all hurt­ing In­dia’s so­lar man­u­fac­tur­ing sec­tor.

“The ma­jor prob­lems plagu­ing the sec­tor are a lack of scale, in­suf­fi­cient gov­ern­ment sup­port and an un­der­de­vel­oped sup­ply chain,” stated an of­fi­cial at Waa­ree En­er­gies.

Ac­cess to fi­nanc­ing is also a chal­lenge. Man­u­fac­tur­ers are cit­ing lack of fund­ing avail­able to build man­u­fac­tur­ing units. “Even if pri­vate banks are will­ing to lend, it is at ex­or­bi­tant rates rang­ing from 16 to 17 per cent,” said Thakur of Shukra So­lar, a so­lar man­u­fac­turer.

Fi­nanc­ing chal­lenges struck a chord with an­other so­lar man­u­fac­turer: “You won’t find banks fi­nanc­ing man­u­fac­tur­ing units be­cause it is con­sid­ered risky.” Any fi­nanc­ing that has hap­pened so far is be­cause of for­eign direct in­vest­ment, voiced an­other man­u­fac­turer.

Most man­u­fac­tur­ers agree that the DCR rul­ing by the WTO has hurt the in­dige­nous man­u­fac­tur­ing sec­tor. “The gov­ern­ment can still make DCR a pre-req­ui­site for gov­ern­ment ten­ders for projects in­stalled on gov­ern­ment land or build­ings,” stated an­other man­u­fac­turer.

Man­u­fac­tur­ers would also like to see more in­vest­ment in re­search and devel­op­ment to sup­port new in­no­va­tions that can bring down costs over the long run. “The in­vest­ment in re­search in the sec­tor is al­most neg­li­gent as com­pared to other coun­tries like China,” com­mented an­other man­u­fac­turer.

The Min­istry of New and Re­new­able En­ergy (MNRE) called a meet­ing with man­u­fac­tur­ers that have a ca­pac­ity of 500 MW or more to dis­cuss th­ese is­sues in June last year. The MNRE asked the man­u­fac­tur­ers to build polysil­i­con man­u­fac­tur­ing fa­cil­i­ties of about 500 MW each, ei­ther in part­ner­ship with a for­eign com­pany or join­ing forces with In­dian com­pa­nies like Waa­ree, Vikram and Goldi Green. In re­turn, th­ese com­pa­nies would get in­de­pen­dent power pro­ducer rights to de­velop a 1,500 MW so­lar project at a fixed tar­iff by MNRE. “While the of­fer was made, we have not heard back from MNRE on this topic,” said a source at Vikram So­lar.

Man­u­fac­tur­ers were hop­ing for some kind of sub­sidy or in­cen­tive from the gov­ern­ment to scale up pro­duc­tion but were dis­ap­pointed that the cur­rent bud­get did not pro­vide any.

Man­u­fac­tur­ers also want more clar­ity around state-spon­sored in­cen­tives so that they can de­ter­mine which states are bet­ter and more prof­itable for build­ing man­u­fac­tur­ing units.

Ac­cord­ing to Mer­com, In­dian non-DCR mod­ules typ­i­cally cost about 10 per cent more as com­pared to Chi­nese mod­ules. With highly com­pet­i­tive auc­tions like the one we saw in Mad­hya Pradesh at the REWA so­lar park auc­tion, tar­iffs have come down be­low Rs.4.0 (~$0.059)/kWh for the first time to Rs.3.30 (~$0.049)/kWh. Th­ese tar­iffs are only vi­able with cheaper Chi­nese pan­els, pos­ing an even big­ger chal­lenge to lo­cal man­u­fac­tur­ers.

What’s Be­ing Done

The “Make in In­dia” pro­gramme is the coun­try’s push to fo­cus on do­mes­tic man­u­fac­tur­ing to com­pete with Chi­nese man­u­fac­tur­ers. The gov­ern­ment is try­ing to pro­mote do­mes­tic man­u­fac­tur­ing with a 20-25 per cent cap­i­tal sub­sidy and in­cen­tives such

as in­ter­est free loans and tax breaks, com­mented a MNRE of­fi­cial. In ad­di­tion to fo­cus­ing on so­lar man­u­fac­tur­ing through this pro­gramme, the gov­ern­ment is also con­sid­er­ing sub­si­dis­ing so­lar man­u­fac­tur­ing through Vi­a­bil­ity Gap Fund­ing (VGF) as per an MNRE of­fi­cial.

The Goods and Ser­vices Tax (GST) is fur­ther ex­pected to help so­lar man­u­fac­tur­ers once it is rat­i­fied by all states. “Cur­rently, man­u­fac­tur­ers have to pay a coun­ter­vail­ing duty of 12 per cent and 5 per cent Value Added Tax. The GST will do away with th­ese and help in­dige­nous man­u­fac­tur­ers com­pete glob­ally,” stated an of­fi­cial at Min­istry of Com­merce.

While the gov­ern­ment is still ten­der­ing un­der its DCR cat­e­gory, it is do­ing so at a slower pace, and in­ter­est from de­vel­op­ers for projects in this cat­e­gory is muted due to higher costs.

What Lies Ahead

De­vel­op­ers mean­while are thrilled at de­clin­ing Chi­nese mod­ule prices, with­out which most of the re­cent ag­gres­sively bid projects would not be vi­able. The gov­ern­ment, on the other hand, is sav­ing hun­dreds of mil­lions due to low ag­gres­sive tar­iffs in auc­tions which re­duces its off­take bill, but this is only pos­si­ble be­cause of cheaper Chi­nese pan­els.

Raj Prabhu, CEO of Mer­com Cap­i­tal Group said, “Other than an­nounc­ing DCR auc­tions for gov­ern­ment in­stal­la­tions, there is no con­crete pol­icy pro­posal as yet. Ac­cess to fi­nanc­ing at com­pet­i­tive rates is some­thing many man­u­fac­tur­ers are look­ing for. Un­less there is scale it seems like an im­pos­si­ble task to com­pete with Chi­nese man­u­fac­tur­ers on price. Cheaper in­fra­struc­ture and R&D in­vest­ment are other ar­eas that the gov­ern­ment can fo­cus on. Amer­i­can and Euro­pean man­u­fac­tur­ers have tried and failed to up­end the dom­i­na­tion of Chi­nese man­u­fac­tur­ers, and it re­mains to be seen how far the In­dian gov­ern­ment is will­ing to go to sup­port lo­cal man­u­fac­tur­ers.”

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