Domestic policy environment and global inflation favour viability of made-in-India modules
‘Atmanirbharta’ (self-reliance) has been identified as a key strategic policy element by the Indian government to recover from the economic downturn of the COVID-19 pandemic.
Given this, clean energy, with an investment potential of more than US$500 billion over this decade, is a key focus area for the economy. India’s ambitious target of 450 gigawatts (GW) of renewable energy (RE) capacity by 2030 requires an annual RE build rate of ~35GW.
The government recognises this valuable opportunity to strengthen the country’s energy security, create jobs and export capacity, and contribute to global action on climate. However, the solar industry – a very promising segment of India’s energy economy – is heavily dependent on imports for solar equipment.
According to All India Solar Industries Association (AISIA), an industry body representing domestic solar module manufacturers, more than 80% of Indian solar equipment currently used in power projects is imported from Asian countries such as China, Vietnam and Malaysia.
At present, the cumulative solar cell and module manufacturing capacities in India are about 4GW and 16GW respectively. And manufacturing capacity for ingots and wafers, the upstream stages of polysilicon, is absent, primarily due to high production costs. Further, a lack of scale and integration of the PV manufacturing industry has been a critical barrier to the nation’s solarisation program.
The ambition is bigger than ever
Over the years the government has tried to protect domestic module manufacturing by introducing measures such as the Domestic Content Requirement (DCR) in 2014 and the Safeguard Duty (SGD) in 2018 to dampen the influx of cheaper imports.
In our view, these policies have failed to incentivise capacity building in domestic module manufacturing. More recently, the government has turned to tenders for module manufacturing capacity.
In 2019, Solar Energy Corporation of India (SECI) issued a landmark project development tender for 12GW of solar generation capacity and within that a tied contract for 3GW of domestic module manufacturing capacity, to provide a boost to domestic production by linking it with a big solar tender.
In April 2021, the government approved the production-linked incentive (PLI) scheme for the solar PV manufacturing sector, with Rs4,500 crore (US$603 million) allocated by the Ministry of New and Renewable Energy (MNRE) for investment in high-efficiency solar PV modules. In a further move to make domestic solar manufacturing competitive, the Ministry of Finance has provided long-term policy certainty by issuing an order to impose 40% and 25% Basic Customs Duty (BCD) on imported solar modules and solar cells, respectively, from 1 April, 2022.
In October 2021, the Indian Renewable Energy Agency (IREDA) conducted an auction for a fully integrated polysilicon to PV modules manufacturing capacity of 10GW per annum, with priority given to interested manufacturers with the lowest requirement of corresponding incentives.
The tender received a tremendous response with the tendered manufacturing capacity oversubscribed by 44.8GW. The interested manufacturers included India’s biggest industrial groups such as Jindal, Adani, Reliance, Tata and Larson & Toubro (L&T). Other notable participants included top domestic RE developers such as ReNew Power, ACME Power, Avaada Energy and existing domestic module manufacturers such as Waaree Energies and Vikram Solar and international module manufacturer First Solar. Indian government-owned coal mining giant, Coal India, also bid to build 4GW of wafers to module capacity with PLI support of Rs1,340 crore (US$180m). This is illustrative of the Government of India’s serious ambition for a large domestic module manufacturing capacity and to be self-reliant for long-term decarbonisation goals.
When commissioned, this fully integrated PV manufacturing capacity will boost India’s solar industry.
Domestically manufactured modules have been falling behind in cost and quality parameters compared to the imported modules. Given the fiercely competitive nature of the reverse-bidding solar capacity auctions, developers have preferred to import modules. This has led to underutilisation of the domestic module manufacturing capacity. Many industry analysts now ponder whether the new manufacturing capacity will face the similar danger of underutilisation.
Recently, the cost parameters for the Chinese-made modules have changed and in the past 12 months, module prices have risen 46%.
Figure 1: Module Prices September 2020 vs October 2021
Source: Sterling & Wilson
Supply chain constraints in the raw material for module manufacturing have halted the longest-running deflation in module prices. Polysilicon, the most important raw material for modules, has gone up by 237% – from US$11/kg January 2021 to US$37/kg in December 2021, according to data from Bernreuter Research. The ongoing COVID-19 pandemic has been the key reason for polysilicon production constraints and price inflation.
Figure 2: Trend of polysilicon spot prices in 2021
Source: Bernreuter Research
Similar constraints in supply have inflated the prices of solar glass, another key ingredient of the modules, which forms roughly 20% of the module cost. Borosil Renewables, the leading solar glass manufacturer in India, suggests that average prices of tempered solar glass has increased by 20% year-on-year to the end of September 2021. (Borosil’s solar glass prices are pegged to the Chinese-made glass prices.)
More recently, the impact of the global energy crisis has spread to China’s solar industry. Curtailed power supply to cities that are hubs for module manufacturing has disrupted operations, pushing module prices up. This has resulted in a 15-20% increase in solar project costs for India.
Overdependence on cheaper but superior imported equipment exposes the Indian industry to variability of prices, currency fluctuations and trade account imbalance. Most importantly, India loses out on a huge opportunity to create skilled jobs for its growing labour force.
India’s annual solar build rate has been poor for the past two financial years but has now bounced back with 7.5GW of capacity commissioned in the first seven months of FY2021/22. At this rate, India’s solar annual installs could hit a high of 13GW in FY2021/22.
India’s target of 300GW of solar by FY2029/30 means that the annual solar build rate needs to accelerate to an average of 28GW of additions starting next year. This gives manufacturers ample visibility of potential off-take of their product.
Figure 3: Solar Annual Build Rate to Reach 300GW by FY2029/30
Source: IEEFA estimates
Now is the time
Module manufacturing in India has never been more viable. The Indian government’s strong policy support for an industry that is facing a supply-chain crunch globally gives domestic manufacturers an opportunity they never had previously, especially when module prices manufactured outside India have jumped more than 40%.
For sustainable long-term growth of domestic module manufacturing, the focus should be on building infrastructure to produce modern module technology such as Mono PERC and Heterojunction (HJT).
India’s domestic manufacturing ambition has received a massive boost with Reliance Industries’ entry. The group has acquired stakes in leading entities across the solar value chain. Reliance’s acquisition of Norway’s REC group – which already produces HJT, one of the most promising cell technologies – will set Reliance apart from its peers, more importantly benefit India’s solar industry and potentially force competitors to bring similar scale, efficiency and technology to stay relevant in the market.