The pandemic has taught some important lessons to the Indian renewable energy sector especially in terms of ensuring sustainable supply chains and promoting local manufacturing, as supply constraints of essential equipment led to significant delays in project timelines during the first wave of Covid. The government on its part has taken various measures to strengthen domestic manufacturing capabilities of renewable energy equipment. However, many manufacturers feel that a lot more needs to be done to create a strong manufacturing base to not only cater to India’s ambitious 500 GW non-fossil fuel energy target but also pave the way for the development of an export hub. Renewable Watch spoke to leading solar and wind manufacturers on these issues and discussed the way forward.
What are the most pressing issues confronting the renewable energy manufacturing industry in India?
At the recently concluded COP26, India increased its target of installed renewable energy capacity to 500 GW by 2030; of this 280 GW (over 60 per cent) would come from solar. For the next 10 years, around 25-30 GW of solar energy capacity needs to be installed every year. However, currently the majority of our solar energy capacity has been built on imports, leading to substantial forex outflow year on year. For example, during 2019-20, India imported solar wafers, cells, modules and inverters worth $2.5 billion.
– One of the world’s largest glassmakers is in India, but we import glass from China, Indonesia or Malaysia. Similarly, even though India is one of the largest aluminium producers in the world, we import aluminium frames.
– Input cost on components, such as glass, backsheets and aluminium frames, for modules has risen significantly. Solar glass price has gone up by 100-130 per cent since June 2020. Additionally, the prices of polysilicon and silver have witnessed a sharp increase.
– The sharp rise in raw material cost has caused overall module cost to increase. Solar panel manufacturers are unable to fully absorb the steep rise in upstream cost.
– Freight rates have also increased substantially due to a shortage of shipping capacity under Covid regulations, thus increasing module prices further.
There is an immediate need to develop a robust ecosystem for indigenous solar manufacturing. This will have a multiplier effect on the economy in terms of creating jobs, increasing exports, saving approximately $50 billion worth of imports, achieving India’s energy security and ensuring overall socio-economic development.
Cost is certainly an important consideration, be it increased logistics costs (inbound or outbound), cost overruns due to supply chain disruptions, and material cost inflation. These cost overruns have reduced India’s cost competitiveness. Utilising our manufacturing capacity to the optimum levels is a challenge when demand (domestic and overseas) is dropping.
Another challenge facing us today is the supplier capacity of critical raw materials, for example, carbon pultrusion, especially in the post-pandemic scenario. Besides these factors, another challenge in the past has been the lack of long-term policy visibility with respect to the wind energy sector and slowing down of the Solar Energy Corporation of India auction process in the Gujarat market. These have slowed down project execution which, in turn, has softened the demand throughout the supply chain.
Wind energy technology has advanced in India in the past three decades. The sector has witnessed the presence of most of the global OEMs, component manufacturers, global utilities, IPPs and developers. It has already created 2 million jobs in the entire value chain, including 4,000 MSMEs. India has been aspiring to become a global manufacturing hub for wind energy equipment through Make in India, Aatmanirbhar Bharat, skill development initiatives and the ambitious 2030 renewable energy deployment target. In fact, all leading national and multinational companies have chalked out their India plans to expand footprint in the country. However, there are pressing issues around duties and taxes, confronting the renewable energy manufacturing industry in India. These are:
Rationalisation of import duty benefits: The government has been trying to rationalise the Concessional Customs Duty Exemption Certificate (CCDC) benefit while importing components. This will grossly discourage OEMs from bringing the latest wind turbine technology early to India. The reason being, the supply chain will have its own gestation time to reach maturity for the new technology as investments will be required for tooling, capacity and capability expansion. The direct impact of withdrawal of CCDC on wind turbine cost will be 0.8-1 per cent.
Less attractive export duty benefits: Most of the OEMs and component manufacturers have expanded their manufacturing capacity by two to three times in the past couple of years in view of a huge export demand. Meanwhile, the government has replaced the Merchandise Export from India Scheme (MEIS) with the Remission of Duties and Taxes on Export Products (RoDTEP) scheme from January 1, 2021. The rate of the RoDTEP is much lower than that of MEIS. Also, export under advance authorisation licence has been withdrawn. In the absence of strong domestic market demand, most of the leading OEMs were forced to export a substantial portion of produced capacity. However, the new rate structure of the RoDTEP is not lucrative enough to make export from India competitive compared to other countries.
GST rate: As per the 45th GST Council, the GST rate has been increased from 5 per cent to 12 per cent for windmills, wind-operated electricity generators and other renewable energy devices from October 1, 2021. This came as a surprise for the industry. This massive increase in taxes will adversely impact the sector and all the stakeholders including OEMs and component manufacturers. It will make a lot of projects commercially unviable. Bringing electricity under GST should be one of the focus areas of the government to change the current scenario.
No PLI scheme for wind sector: On February 1, 2021, Finance Minister Nirmala Sitharaman announced the PLI schemes for 13 key sectors. Unfortunately, the wind sector has not been considered for the PLI scheme. In fact, 31 per cent of the 450 GW ambitious renewable energy target will be contributed by wind in various forms – onshore, nearshore, offshore, etc. If India wants to commission 110 GW more wind power (including 30 GW of offshore wind) by 2030, the sector must transition from the 2 MW platform to higher capacity wind turbines. This requires substantial investment at the OEM as well as component manufacturer levels. Hence, there is a strong need for the sector to be incentivised by way of the PLI scheme. In fact, the entire renewable energy sector should be given priority under the PLI scheme considering the prime minister’s “Panchamrita” announcement at the COP26 summit in Glasgow.
What have been the key takeaways from the pandemic in terms of sustainability of supply chains?
The solar industry in India has received considerable support from the government during the pandemic. Policy initiatives such as supporting force majeure, reducing repo rate, extending the approved list of models and manufacturers (ALMM) deadline, making solar plant O&M an essential service, removing tariff caps for solar tenders, issuing the PLI scheme, and notifying basic customs duty. indicate the government’s intent towards supporting solar energy growth.
We firmly believe the pandemic is a huge opportunity for India to shape an inclusive and sustainable economy. Globally, countries are reviewing their supply chains and the world is looking at India to diversify its trade markets. India has the resources, technology, leadership and skills to become the global manufacturing hub for renewable energy. We need a comprehensive policy framework encompassing both tariff and non-tariff barriers to improve domestic solar manufacturing. The need of the hour is a crystal-clear manufacturing policy. With policy certainty and focus on the manufacturing sector, India can become the global manufacturing hub for clean technologies.
The pandemic has been an eye-opener, throwing new challenges and forcing us to rethink how we approach business, be it production, supply chain network, volatile market situations, or logistics. Making urgent changes, such as pushing for increased localisation and diversification of supply chains, has helped turn the tide and address some of the supply-side disruptions, but these measures need time to be operationalised. A flexible supply chain is key to responding quickly to variations in customer demands or developing an alternative source. This flexibility also calls for a nimble organisational structure and internal business processes.
The pandemic created a very dynamic situation, which was not only evolving fast but also presenting new challenges. The ability to assess the situation and mitigate new supply chain risks was a new strength that kept several businesses afloat. A few businesses have found benefits in collaborating with external partners (such as logistics partners) to drive costs down (such as logistic costs).
The pandemic has also shown that there is a need for increased clarity on how to proactively respond to crises and balance the need for addressing health emergencies against operational needs – especially manufacturing operations that have to be run physically with operators present on the shop floor. One pleasant surprise here has been the close working and sharing of best practices between the government machinery and other businesses.
The pandemic has created unprecedented circumstances for everyone, everywhere. While some countries are beginning to see some respite from the impact of the pandemic, infection rates and disruptions due to lockdowns and travel restrictions continue to remain at crippling levels in others. The wind industry too has faced supply chain disruptions that have created an impact across the globe. Navigating through these challenges has not been easy specially when cost inflation in record percentages within raw materials, components and transport has increased costs for the energy industry and hampered the entire value chain. The biggest takeaway is that the industry must collaborate more inclusively to mitigate the impact from the increasing transport and raw material costs to the largest possible extent. Since power generation and distribution is an essential commodity, the manufacturing of wind turbines and their components should be exempted from lockdown restrictions through government orders with strict adherence to the standard operating procedures. This will ensure the continuity of manufacturing activity for domestic and export demands.
What have been the key policy measures to promote local manufacturing in the country? What more needs to be done?
The government has always been supportive of strengthening the domestic solar manufacturing sector in alignment with the Aatmanirbhar Bharat vision. This is evident in various policy interventions such as the PLI scheme, basic customs duty on modules and cells, and the ALMM list, amongst others. India’s annual renewable energy capacity addition has been exceeding that of coal-based thermal power since 2017. The country has embarked on the world’s largest renewable energy expansion plan of 500 GW by 2030.
The GST roll-out, drafting the National Policy on Electronics, increasing export incentives, launching a phased manufacturing programme and a modified special incentive package scheme, and planning a new industrial policy under the current regime has increased the foreign direct investment inflow in the country and has created an environment to enhance the manufacturing sector.
We recommend the following steps to further improve domestic solar manufacturing:
- Price variation clause should be imposed in solar tenders as the project commissioning period is generally 18-24 months for large projects. Solar being a very volatile industry, there is huge fluctuation of prices of raw material and other components.
- Solar manufacturing units based in special economic zones should be exempted from basic customs duty and should be treated at par with domestic tariff.
- Clarity on the applicability of GST rate on solar projects before January 1, 2019 .
- RoDTEP incentive should be at least 6-8 per cent to increase solar export.
- Deemed pass-through for domestic content requirement modules when BCD is implemented.
- 5 per cent interest subvention on term loan and working capital, and upfront central financial assistance of 30 per cent on capex.
- Longer tenor and low-cost finances.
- RPO enforcement by states.
- A payment security mechanism to cover the risk of default by state utilities.
- Super deduction of 200 per cent for R&D expenses for new and clean solar technology development.
- Technology upgradation fund for existing investments in cells and modules.
LM Wind Power is one of the highest exporters of fibre-reinforced plastic products in India, thus helping to increase foreign reserves. And, as a major player, we would expect incentives such as continuation of advance licence benefit, MEIS, cap on import content, duty benefits, state-specific incentives for investments, and export promotion capital goods scheme. We would urge an introduction of PLI for wind turbine components, such as blades. This would help promote raw material localisation, thus reducing cost of energy. We also encourage the allocation of renewable energy share by state governments or other government initiatives promoting the use of renewable energy. Further, incentivising timely execution of renewable power projects would be very beneficial to the industry in general.
The key policy measures required to promote local manufacturing in the country are:
- Ease of doing business: Duties and taxation, land permits and other clearances
- Ensuring PLI to promote local manufacturing, green job creation and skill development.
- Tapping commercial and industrial market to increase demand in the domestic space.
- Auction design: i) Current reverse auction for renewable power to be revamped with a clause of stronger PPAs. This will bring more seriousness to the bidding process. ii) Unlock the potential of state auctions.
- Implementation of separate renewable purchase obligations for wind energy
- Policy for wind parks, repowering old wind farms, nearshore/offshore wind and P2X.
- Policy for R&D, technology innovation and skill development.