The domestic solar equipment manufacturing market has failed to take off despite the sizeable increase in installed capacity over the past three years. Today, India imports over 80 per cent of its solar equipment, a large part of it from China. But this scenario could now be changing. The Covid-19 outbreak has thrown up a major supply challenge for the solar equipment industry. But also a big opportunity. To put the size of this opportunity in perspective, Indian solar power companies imported equipment worth $1,179 million from China during April-December 2020. The Covid crisis could help Indian companies snap out of their complacency and tap this opportunity, underlining the need to be self-reliant. The government too has been laying emphasis on cutting imports from China following border tensions with the neighbouring country.
Its recent decision to extend safeguard duties on imported solar cells and modules is a step to incentivise developers to go for local production. In yet another development, the Ministry of New and Renewable Energy (MNRE) has suggested levying basic customs duty of 15-20 per cent on solar modules, cells and inverters. The Atmanirbhar Bharat Abhiyaan and Make in India initiatives too offer multiple benefits to manufacture goods domestically. The MNRE, in consultation with the shipping ministry, has zeroed in on six to seven land parcels across major ports to set up production units for local manufacturing of solar equipment. All these initiatives are creating the right environment for the solar industry to build a robust supply chain and domestic manufacturing facilities for solar cells and modules, and reduce the heavy dependence on imports.
Case for domestic manufacturing
The high-growth years of solar capacity addition in the country were the result of steeply falling module prices, which helped solar tariffs achieve grid parity with conventional forms of generation. The economies of scale provided by large tenders enabled the entry of advanced solar technology into India, but also made the industry dependent on China for its solar panel requirements. Domestic manufacturers could not match the price points of the Chinese imports and they struggled to stay afloat with the modest demand available to them through the domestic content requirement tenders alone. In the absence of adequate demand, the manufacturing segment lacked the opportunity to develop systematically alongside the development of solar capacity.
India’s current cell manufacturing capacity stands at around 3.1 GW and module manufacturing capacity at about 9 GW. Some traction can be seen in the manufacturing segment, which has remained largely passive. The government has drawn up a mega plan to triple domestic solar cell manufacturing capacity with the addition of 7 GW of capacity through accelerated manufacturing plans and manufacturing-linked tenders. The focus on domestic solar manufacturing is prompted by the realisation that this is no longer a need, but a necessity. The Covid-19 pandemic, that hit the Chinese market initially, led to a disruption in supply chains that originated in China. India’s solar panel imports from the country have been as high as 80 per cent of the domestic requirement.
As a result, India’s solar market became highly nervous during the period January-March 2020 when China was under lockdown. And even once it unlocked the situation remained stressed, with stringent Covid-19 checks and measures on the entry of Chinese goods via air and sea leading to long customs delays. The Indian solar industry, therefore, understood the need for a robust domestic supply chain that would eliminate the risks associated with import dependence and that too, on one country primarily.
Calls for diversification of imports and expansion of domestic manufacturing became louder as border tensions with China escalated. In the aftermath of the Galwan Valley build-up, the government decided to curb Chinese expansion into the Indian infrastructure space. It has since restricted Chinese companies from participating in tenders of various public procurement projects, including solar projects. This has further strengthened the case for domestic manufacturing of solar equipment. In fact, earlier, in July 2018, the government had imposed a safeguard duty of 25 per cent for a period of two years (progressively reducing this to 15 per cent by July 2020) in order to counter the dumping of solar panels into India by countries such as China. Dumping is a measure used by manufacturers from an outside country to sell their goods in the importing country at prices lower than the normal value of the goods in the destination country. The government has now decided to extend the provisions of the safeguard duty till July 2021, much to the satisfaction of domestic manufacturers. During the period July 30, 2020 to January 29, 2021, a duty of 14.9 per cent will be levied, which will reduce to 14.5 per cent from January 30, 2021 until the end of its tenure on July 31, 2021.
The safeguard duty increases the price of imported solar panels, thereby providing a level playing field to domestic manufacturers, who struggle with higher production costs in the absence of economies of scale. Evidence suggests that the safeguard duty has been successful in diversifying India’s solar equipment supply sources from China to Vietnam and Thailand. Imports from these countries in the first nine months of 2019-20 were 842 per cent and 1,352 per cent higher, respectively, as compared to 2018-19 when there was no safeguard duty. Meanwhile, solar equipment imports from China fell by about 65.5 per cent in April-December 2019 as compared to imports in 2017-18. However, the imposition of safeguard duty has not been successful in bringing business back to India. Also, it is more of a temporary measure and may not provide long-term relief to domestic manufacturers. This is because, over time, the cost of goods manufactured in China may come down enough to absorb the safeguard duty and still be lower than the value of solar equipment manufactured in India. As such, enhancing domestic manufacturing is the only solution to counter the country’s dependence on China for solar equipment.
In January 2020, Adani Green Energy (AGE) and Azure Power won a manufacturing-linked solar power tender floated by the Solar Energy Corporation of India. Both companies qualified to develop 2,000 MW of solar capacity along with 500 MW of manufacturing each, at a tariff of Rs 2.92 per kWh. The tender had a greenshoe option as well, wherein both winners could opt for setting up additional capacity. Availing of the option, AGE has decided to add 1,500 MW of manufacturing capacity along with 6 GW of solar power capacity, bringing the total to 2 GW of manufacturing capacity and 8 GW of project capacity, at an investment of around $6 billion. Similarly, Azure Power is going to set up a total of 1 GW the manufacturing capacity and 4 GW of generation capacity at an estimated $4 billion of investment.
In July 2020, ReNew Power announced its plans to start manufacturing solar cells and modules in India. The company will be setting up 2 GW of manufacturing capacity at a cost of Rs 15 billion-Rs 20 billion. With this, the company, which has over 4.5 GW of projects at various stages of development, will achieve backward integration and gain better control over the supply chain of critical solar power components. Also, in July 2020, Vikram Solar signed an MoU with the Tamil Nadu government to set up a 3 GW wafer, cell and module manufacturing facility in the state. The facility will be set up over a period of five years. Vikram Solar has an existing annual production capacity of over 1.2 GW. These efforts are in line with the Atmanirbhar Bharat Abhiyaan vision, which encourages Indian companies to increase their investment in the Indian manufacturing sector.
The way forward
At a recent conference organised by the Confederation of Indian Industry, to R.K. Singh, minister of new and renewable energy, stressed on the need to develop domestic manufacturing capabilities in the solar segment under the Atmanirbhar Bharat Abhiyaan and stated that the country is looking to develop 3 GW each of solar cell and module capacity. This underscores the government’s intent to enhance domestic manufacturing capacity. With traditional manufacturers increasing their capacity and project developers integrating backwards into manufacturing, it seems that the Atmanirbhar Bharat initiative is finding several takers.
The only blip in this, however, is that India has no capacity to manufacture ingots and wafers – the raw material required for producing solar cells and modules. Setting up manufacturing capacity for these is significantly more expensive than that for cells and modules. As a result, manufacturers will still be dependent on imports to procure the raw material. The environment and technology for domestic production of ingots and wafers need to be simultaneously improved in order to reduce the dependence on imports. To this end, the government is contemplating ways to provide incentives to develop wafer and ingot manufacturing capacity, either through subsidies or capital support.
Domestic manufacturing of solar equipment needs a focused approach along with substantial incentives from the government to make prices competitive with imports from China until enough demand is available to scale manufacturing and bring down costs. The government is mulling the imposition of a basic customs duty of 20-25 per cent on solar module imports.
Until such incentives come into play, demand will remain subdued as project developers continue to opt for the least-cost product in order to improve their margins, which have been hit by the low tariffs discovered in solar tenders.
By Ashay Abbhi