Prices Plummet

Impact of new Chinese policy on the Indian solar market

On May 31 this year, a mere two days after the end of the 12th SNEC International Photovoltaic Power Generation Conference, the world’s largest solar conference and a central gathering of all Chinese photovoltaic (PV) manufacturers, the National Development and Reform Commission, Ministry of Finance and National Energy Administration of China announced a nationwide solar subsidy cut that resulted in Chinese solar stocks crashing. Specifically, the government issued the 2018 Solar PV Generation Notice, imposing a 10 GW cap on capacity for distributed generation projects, and suspending arrangements for utility-scale projects that were to be set up during 2018. This is a steep drop from last year’s installation of 19 GW of distributed generation projects (out of 53 GW of all PV projects set up in China in 2017). The notice encourages the local governments to come up with more solar-supportive policies to reduce non-technological costs and as a result, to reduce the need for solar subsidies from central and local governments.

The notice further states that feed-in tariffs (FiTs) for renewable energy projects as well as the subsidy for off-grid distribution generation projects would be reduced by CNY 0.05 per kWh with effect from May 31, 2018. The energy subsidy for off-grid distribution generation systems would be CNY 0.32 per kWh after the reduction. Finally, the notice emphasises that the marketisation of China’s solar industry is crucial. This includes further implementation of bidding processes for power purchase (of newly built utility-scale solar projects), project acquisition and project development (for utility-scale and distributed generation projects). It urges the local governments to enforce regulations  that encourage fair competition in the local solar markets.

This sudden, stringent move by the world’s largest solar PV market, both in terms of project development and manufacturing, is difficult to ignore. Before delving into its impact on the global PV market and, more specifically, on the Indian solar segment, it is important to highlight the reasons that pushed the Chinese government to make this decision. As indicated by officials at a press meeting organised by the issuing agencies, there were four key reasons for the notice.

One, the central government was concerned about the present insufficiency of transmission infrastructure. Two, the central government is facing budget shortfalls resulting from the large pre-existing solar subsidies. Three, the central government intends to shift more responsibility for further development of the solar industry to local governments. Four, the government hopes to transition China’s solar industry from quantity-oriented to quality-oriented. If observed closely, India is also facing similar issues. The country’s flagship renewable energy programme is headed for rough weather on account of procedural wrangles amongst government agencies, including transmission utility Power Grid Corporation of India Limited (Powergrid) and planning body Central Electricity Authority (CEA). Work on transmission corridors for future green energy projects has not taken off and is pushing the Solar Energy Corporation of India (SECI) as well as state nodal agencies to slow down future bidding for wind and solar projects. The impact is already visible. SECI’s latest tender for 2,000 MW of wind energy capacity has been undersubscribed by 800 MW, and there is a chance that the tender may be scrapped altogether, as a lack of transmission infrastructure continues to plague clean energy players. Several other SECI and state-level tenders have been postponed, as developers are hesitant to invest in projects without visibility on the transmission side.

Much like in China, the renewable push in India has largely been led by the central government. A significant majority of the renewable capacity has been set up via central government tenders, as most of the state-level tenders face issues pertaining to the creditworthiness of offtakers. However, this trend is gradually changing with a number of state governments launching their individual solar programmes. The tariffs quoted under state-level tenders are sometimes much higher compared to those quoted under SECI-issued tenders. Take, for instance, the results of two recent tenders – a 3 GW tender issued by SECI and a 1 GW tender issued by Uttar Pradesh New and Renewable Energy Development Agency (UPNEDA). The lowest tariff quoted under the SECI tender was Rs 2.44 per kWh, while in the case of UPNEDA, it was Rs 3.48 per kWh. Some may argue that the key reason for the higher tariff under the UPNEDA tender is higher land prices, compared to greater economies of scale achieved by setting up a project under a solar park model, which was adopted by SECI. But it is important to give considerable weightage to the poor financials of the state discoms for developers to arrive at the quoted tariff.

Another parallel between Chinese and Indian solar segments pertains to the transition from quantity-oriented to quality-oriented development. In its bid to achieve the 175 GW target by 2022, the Indian government needs to ensure that there are stringent checks on quality control. The only exception pertains to decentralised generation, and that too partially. The Indian rooftop segment, which was earlier being driven by a subsidy-led model, is beginning to witness sizeable growth, led by industrial and commercial consumers that receive no government subsidy. The residential segment, however, is yet to witness significant growth. These are all signs that the government needs to review its renewable goals and strategies, including its target to develop capacity for indigenous solar manufacturing.

At present, the installed capacity for solar cell production – which is the basic and most essential building block for solar power generation – is 3.1 GW. The installed capacity for the production of solar panels (or modules), which are produced by assembling solar cells, is 9 GW. An interesting point to note is that the 21 GW capacity of solar power deployed so far has been largely attained using imported solar cells and solar panels, defeating the entire purpose of achieving energy security. Further, the country must upgrade the existing transmission and distribution infrastructure to accommodate both utility-scale and rooftop solar power plants efficiently. Problems notwithstanding, the country’s renewable energy sector appears ready to grow considerably, with a large number of domestic and international developers and investors placing their bets on this market. For these developers and investors, the “China effect” will definitely be beneficial. For domestic manufacturers, on the contrary, the impact is likely to be detrimental.

Impact on equipment prices and tariffs

An immediate consequence of the Chinese policy will be a steep reduction in demand in their domestic solar market, which will result in a decline in the global average selling price of solar modules, given that China is the world’s biggest solar market. According to Bloomberg New Energy Finance, manufacturing overcapacity in China is estimated to result in a 35 per cent global module price decline in 2018. However, the expected decline in the global average selling price for modules in the second half of 2018 could stimulate growth in demand in 2019 and 2020, which could then slow down a further decline in module prices. Moreover, it is important to understand that China is not just a module manufacturing country; it also has a significant amount of investment capital, solar PV accompanying equipment such as racking and inverters, and a number of solar experts. As a result, the impact of the government’s decision on the global solar industry could be much more than just a decline in module prices.

With the project development freeze in China’s domestic market, billions of dollars of capital and several thousands of development personnel deployed for domestic Chinese solar projects will now be seeking new markets outside the country. This could, in turn, affect the global prices of professional services and project investments. The accompanying racking systems, inverters and other equipment produced for the domestic solar projects will also now be looking for demand in markets outside China, which could lead to a change in global prices of this equipment as well.

In India, the impact is already visible in the tariffs quoted by developers in the latest auction conducted by SECI. After a brief lull, caused by concerns surrounding a rise in imported module costs due to a proposed safeguard duty, solar developers have regained their competitive aggression. The auction for 3 GW of interstate transmission system (ISTS)-connected solar PV projects witnessed the lowest tariff of Rs 2.44 per kWh.

Solar tariffs hit an all-time low for the first time in May 2017, with a tariff of Rs 2.44 per unit recorded at a SECI-conducted auction for 500 MW of capacity at the Bhadla Solar Park (Phase III), Rajasthan. Thereafter, tariffs had been climbing steadily due to the rising cost of solar panels – 80 per cent of which are imported from China – as well as fears of a hefty 70 per cent safeguard duty proposed to be imposed by the Indian government to protect local solar manufacturers. The tariff rose to a high of Rs 2.94-Rs 3.54 per kWh at an 860 MW auction conducted by the Karnataka Renewable Energy Development Limited in February 2018. However, the possibility of China’s export prices for PV modules plunging in the wake of its recent policy move to slow down the pace of solar capacity addition, coupled with a recent regulatory decision by the MNRE to allow pass-through of extra costs due to any duty hikes, seem to have enthused players in the solar sector to quote lower tariffs. ICRA has estimated that every 8-cent-per-watt decrease in module prices (due to cheaper Chinese imports) would lower the capital costs of Indian developers by about 13 per cent.

Other factors have also contributed to a decline in solar tariffs. A recent study conducted jointly by the Council on Energy, Environment and Water and the International Energy Agency states that solar projects are receiving a boost owing to the greater size of capacities being put up for auction.  This has helped developers to manage the risks related to land acquisition and the availability of evacuation infrastructure. The lowering of these risks, besides aiding the achievement of economies of scale through large project sizes in solar parks, has also contributed to the significant decline in tariffs.

On the flipside

While China’s decision to scale down its solar energy targets and subsidies seems to have a positive impact on solar capacity building, for manufacturers in India, it comes as yet another blow, as they are already facing an onslaught of cheap imports from China. Domestic manufacturers say they are concerned about the ripple effect of further dumping by Chinese manufacturers in India, once their internal demand is met. The Indian Solar Manufacturers’ Association had filed a safeguards petition in 2017 to look into solar imports from China and Malaysia. However, a decision is still pending.

Recently, the Directorate General of Trade Remedies (DGTR) – earlier known as the Directorate General of Safeguards – heard the proposals and suggestions of stakeholders on the issue; it is expected to take a call on the matter soon. While domestic solar manufacturers are in favour of these duties, developers, which rely heavily on imported products, are otherwise inclined. From what it seems, it is highly unlikely that these duties will be imposed. In a submission before the DGTR on June 22, the European Union (EU) has questioned the need for the loss-laden Indian solar cell manufacturing industry to further ramp up capacity while 22 per cent of the existing capacity is lying idle. Further, in a recent interaction with a news channel, Amitabh Kant, chief executive officer, NITI Aayog, stated, “I am not a great believer in protectionism. I am a believer in globalisation and a believer in India being an integral part of the global supply chain. If you are not competitive, do not try and manufacture something (in an area) where you are not going to be competitive. If you are not competitive in solar manufacturing, do not attempt that, and rather get into an area where you will be globally competitive. And if you want to be competitive, then make sure that you do it in size and scale.” In light of this, it is unlikely that the government will adopt a protectionist policy for domestic manufacturers.

The only ray of hope for the domestic manufacturing segment is the 5 GW solar manufacturing capacity request for service (RfS) floated by SECI in May 2018. The manufacturing capacity will be linked to ISTS-connected solar PV projects for an aggregate capacity of 10 GW. However, setting up manufacturing units as well as solar PV projects simultaneously will be a tough task for the majority of Indian players. As per the RfS, bidders selected by SECI will have to submit two separate performance bank guarantees (PBGs) per project, at the rate of Rs 2.2 billion per GW for solar manufacturing and Rs 4 billion per 2 GW of solar PV projects, within 30 days of issuance of the letter of intent (LoI). Successful bidders will have to pay Rs 10.6 million per project in addition to the 18 per cent goods and services tax to SECI towards administrative overheads, liaising with state authorities, discoms, state transmission utilities or the central transmission utility, pre-commissioning and commissioning expenses within 30 days of issuance of the LoI. Under these conditions, SECI is turning to cash-rich Chinese manufacturers for realisation of this tender. SECI and the Indian embassy in China recently organised a seminar, “Business Opportunities in Solar Sector in India” in Beijing, aimed at promoting the RfS amongst prospective Chinese investors. The Chinese manufacturers and investors may partner with existing domestic manufacturers for the tender.

The way forward

On the whole, the timing of China’s decision to cap and halt solar power development in their domestic market has been favourable for the Indian market, as the Indian government is looking to scale up capacity addition. More than 25,000 MW of tenders are currently awaiting auction and tariffs are expected to fall further. Industry experts believe that this is, in fact, a golden time to book modules and lock in margins. However, the government needs to be prudent on several fronts. First and foremost, attention must be given to the parallel development and upgradation of the country’s transmission infrastructure. Another area that needs to be looked at is quality-oriented growth. The quality control order for solar products introduced by the MNRE, which will be enforced from August 2018, is a necessary step to secure the quality and reliability of renewable power in the country. Finally, it is important to effectively devise and implement policies and regulations at both the central and state levels, to ensure the all-round development of the sector.

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