India’s installed solar power generation capacity is around 35 gigawatts today, compared to just 0.2 GW in 2010. This commendable growth over the past decade has been largely achieved through imports of solar panels from China, Singapore, Vietnam and Taiwan. A robust domestic supply chain for manufacturing solar panels in India will promote self-reliance, energy security and the preservation of valuable foreign currency reserves. However, the challenges of developing a manufacturing ecosystem need to be addressed.
Current Indian solar PV supply landscape
India has added around 34 GW of solar power capacity in the past 5 years. While our domestic production capacity of 10 GW modules is sufficient to meet this demand, we imported over 80 percent of local demand for modules in 2015-19. The total value of imports of solar cells and modules in the 2015/19 fiscal year was around 12.4 billion US dollars.
There would be sustained demand for solar systems over the next decade, with India’s goal of reaching 100 GW of solar capacity by 2022 and over 300 GW of solar capacity by 2030 over the next 10 years.
Developing domestic solar production would help reduce this deficit, promote self-reliance and improve energy security, while at the same time creating investment and employment opportunities. Although there is a growing consensus in the RE industry about promoting domestic solar PV production, our domestic manufacturers are facing multi-dimensional challenges that must be actively addressed.
Challenges in current domestic manufacturing
Solar manufacturing in India is currently largely active in the downstream activities of the value chain and mainly relies on imports of bars and wafers as raw materials.
The heavy reliance on imports of upstream components results in foreign suppliers having significant control over prices, which limits the ability of domestic manufacturers to cut costs and be price competitive in the world market. Over the years, Chinese solar PV devices have been offered at more competitive prices and these market pressures have deterred new investors from entering the domestic manufacturing industry.
Module manufacturing has low technological barriers and investment requirements. Solar cells and other raw materials account for up to 94 percent of the total costs for module assembly. If we move up the value chain, the process becomes technology and capital intensive.
The expansion of the upstream capacities was hardly brought into focus, which has a negative effect on the price competitiveness of the domestic modules. High capital expenditures and fixed-term loan rates discourage investors from engaging upstream. In addition, low production capacities and utilization limit economies of scale. Therefore, targeted efforts to promote upstream activities and the scale of operations are vital.
Building a domestic ecosystem for solar production
A low capacity utilization could increase the costs for modules by up to 5 to 15 percent. By creating a local demand, existing actors could increase utilization and reduce costs to some extent. However, having a domestic value chain system is crucial in order to further reduce our costs and make new investments. The main priorities in building a domestic manufacturing ecosystem in India are:
1. Investments and project finance: Lending rates are high (10-12 percent versus 3-5 percent in China) and banks prefer short-term loans.
2. Technology: This industry has a high rate of technological obsolescence (out of date in 2-3 years). With limited research and development in India, manufacturing solutions are mainly imported, with updates depending on OEMs all the time.
3. Work: India offers lower wage structures and access to a huge labor market. However, less than 5 percent of our workforce has formal qualifications.
4. Energy: Due to the cross-subsidy requirements, the energy suppliers deliver an unreliable electricity supply at high costs.
Government intervention in the past
Even with a vertically integrated ecosystem, domestic manufacturers would need protection in order to compete with Chinese manufacturers. While India has taken steps to boost domestic industries in the past, these have had a limited impact and have failed to instil investor confidence.
The government has also taken measures such as the introduction of an approved list of module manufacturers (effective October 2020) to ensure the reliability of home appliances and to reduce corporate tax rates for new manufacturing companies from 29 to 17 percent. MNRE has also announced a basic tariff of up to 25 percent for modules and 15 percent for cells from August 2020, which is to be increased to up to 40 percent and 20 to 30 percent respectively next year. While this can benefit our domestic manufacturing, it requires more clarity on implementation and timelines. Now let’s take a closer look at the steps some of our Asian colleagues have taken.
India has so far focused on promoting downstream solar production. While some of our colleagues have done the same, the need of the hour in the Indian context is to take concrete action for the holistic development of our manufacturing ecosystem.
The identified measures would enable domestic manufacturers to gradually reduce their costs by increasing utilization, using a local supply chain and increasing competitiveness in imports.
– Trade barriers: BCD should be applicable for 4-5 years to attract new investors, protect them over at least one technology cycle, and facilitate the modernization of technology. Since around 63 percent of our cell and 43 percent of our module production capacity are in special economic zones, BCD should only be applicable to the value of imported goods and not to the value added in special economic zones. In addition, the export subsidies for domestic manufacturers should be increased from 2 to 10 percent in order to increase competitiveness in world markets.
– Financial support: Subsidies for manufacturers should be granted in advance against a bank guarantee in order to avoid delays in payment. For RE developers using domestic equipment, an interest subsidy should be offered for a period of 25 years to incentivize domestic procurement.
– Creation of demand: Existing DCR systems such as CPSU, KUSUM and solar systems on the roof need to be accelerated and supported with greater financing of the profitability gap. The schemes should show a division of the capacity for modules as well as for cells and modules.
– Tax incentives to attract foreign direct investment: The government must offer tax breaks with a higher degree of relaxation for production facilities for bars or wafers.
– R&D support: the government has to set up R&D centers supported by capital grants, subsidies and tax exemptions.
– Development of the additional infrastructure: we need to encourage the domestic production of a balanced system (inverters, glass, EVAs, etc.) through capital grants and other incentives.
[This piece was authored by Saurabh Singhal, Director, Auctus Advisors]
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