By Sarthak Takyar
To promote domestic manufacturing and reduce the dependence on solar imports from various countries, especially China, the Indian government has taken a number of policy initiatives. These include the production-linked incentive (PLI) scheme, basic customs duty (BCD), Approved List of Models and Manufacturers (ALMM) and the domestic content requirement (DCR) scheme. However, these policies are facing some legacy issues as well as new challenges.
This article highlights the gaps in the policies relating to domestic manufacturing…
Gaps in the PLI scheme and domestic manufacturing
In order to promote domestic manufacturing and exports under the Atmanirbhar Bharat initiative, the government introduced the PLI scheme for key sectors including high efficiency solar PV modules. It is a positive scheme that has provisions for incentives. The scheme also supports the ambitious climate goals set by India at the COP26. Of the targeted 500 GW non-fossil fuel energy capacity by 2030, the majority has been set aside for the solar sector. In this scenario, it is viable to source solar modules domestically to meet the demand rather than depend on imports, primarily from China, which has been a cause of major supply chain disruptions post the Covid-19 pandemic.
The initial capital outlay of the PLI scheme was Rs 45 billion, which was later increased to Rs 240 billion. The initial capital outlay was too low to manufacture the quantum of capacity needed to meet the demand. This would have also led to lower profit margins for manufacturers and lower R&D investments.
The first tender under this scheme received an impressive response and around 54.8 GW of capacity was bid. However, only about 8.7 GW was sanctioned. When the outlay of the scheme increased, the stakeholders debated whether a second tender should be floated or the wait-listed bidders under the first tender should be only accommodated. Now, fresh bids are being planned with new eligibility requirements.
In a response to an unstarred question in the Lok Sabha, dated November 28, 2019, regarding the reasons for the dependence on China for solar hardware, the then minister of state (I/C) for new and renewable energy, R.K. Singh, had responded that domestic solar cell and module manufacturers had the following disadvantages:
- The country does not have a manufacturing base for polysilicon, ingots and wafers, the upstream stages of the solar PV manufacturing chain, which are energy and capital intensive.
- Lack of an integrated set-up, economies of scale and modern technology, resulting in higher cost of production.
- High cost of land and electricity, low capacity utilisation, high cost of financing, and lack of a skilled workforce.
The above factors lead to the high cost of domestic solar products as compared to those imported from China, according to the minister. While the PLI scheme does try to resolve some of these problems, other issues persist. Even if the new PLI tender is floated soon and a successful auction takes place, it is still doubtful that the domestic manufacturing will be able to match Chinese products in terms of costs. China’s manufacturing base grew with the help of huge government incentives directly and efficient logistics indirectly. Manufacturers in China were able to manufacture products using cheap and reliable electricity. This is not the case in India where manufacturers complain of high grid tariffs and unfirm power supply, which adversely impact their operations.
At a webinar organised by Renewable Watch, a senior executive from a leading renewable energy firm made an interesting policy suggestion. The executive noted that while they produce solar energy at a very cheap rate, they will have to purchase electricity from the grid at exorbitant prices (industrial tariffs) to manufacture the solar modules. Thus, solar energy developers diversifying into manufacturing should be incentivised by being given electricity at the same rate at which they produce it. The executive’s suggestion is a testament to the key issue of high power tariffs which deters manufacturing in India.
Overall, given that different risks are posing a threat to the success of the PLI scheme, it should be debated whether the Rs 240 billion outlay is justified for the solar manufacturing space.
Concerns with BCDs
With effect from April 1, 2022, 40 per cent and 25 per cent BCD was applied on solar modules and solar cells respectively. While domestic manufacturers applauded this move, import duties in the form of BCD (and earlier safeguard duties) have become a major pain point for developers, who find imported modules not only cheaper but also of better quality.
Further, the effectiveness of BCD is still being debated as, according to some developers, imported modules tend to be cheaper than domestically produced modules, despite import duties. In addition, developers with huge warehouses may have already stockpiled imported modules by capitalising on the loophole in the policy. “The increase in the BCD on solar cells and modules (effective April 1) is ill-timed as the existing capacity is inadequate to fulfil the demand. Further, the hike in BCD may push up the cost of solar manufacturing,” says Saon Ray, professor, ICRIER.
The other issue with import duty hikes is that it harms economic prospects. This is because economic theory suggests that low duties boost the economy, and this was also witnessed post India’s 1991 economic reforms.
Contradictory policies on ALMM
While BCD is a tariff barrier, ALMM acts as a non-tariff barrier. According to the scheme, only the models and manufacturers included in this list are eligible for use in government-assisted projects and those set up for supply of electricity to the government.
At a recent CII event, “India @2030: A Roadmap for Atmanirbhar Bharat in RE”, Indu Shekhar Chaturvedi, secretary, Ministry of New and Renewable Energy (MNRE), mentioned that in some sectors that are strategic for India, self-reliance is needed, especially against the backdrop of current geopolitical constraints as well as excessive reliance on one country for imports. He added that capacity development could be given less importance in the short term if it means greater holistic growth in the long term.
However, recent media reports state that some central public sector enterprises (CPSEs) such as NTPC will be allowed to import components from China for their solar projects to give them a level playing field with private players. Meanwhile, private industry continues to face such restrictions. Does this indicate the end of the ALMM policy or will it be a temporary waiver and will this be extended to private players as well?
It is also difficult to appreciate the ALMM compliance mandate for open access or rooftop solar projects to be applicable from October 2022. A petition has been filed contesting this mandate in the Delhi High Court. The main contention is that C&I projects do not get any government subsidy, and hence should not come under the mandate of the ALMM. The industry has strongly criticised this move and sees it as a major dampener to the uptake of solar projects in India. Overall, allowing imports to CPSE on the one hand while applying ALMM on the other, even to verticals that do not get any subsidy, contradicts the initial policy directive.
Slow progress of DCR schemes
The government has also mandated DCR of more than 36 GW of solar cells and modules through the CPSU Scheme Phase II, PM-KUSUM and Grid-Connected Rooftop Solar Programme Phase II. A key concern of this policy has been the slow progress vis-à-vis the target and limited participation of CPSUs. The latter issue has even been flagged by the Standing Committee on Energy (2021-22) report titled “Action Taken by the Government on Observations/Recommendations Contained in Seventeenth Report (17th Lok Sabha)” on the subject “Action Plan for Achievement of 175 GW Renewable Energy Target”. Therefore, the report recommends that the MNRE take proactive steps and encourage more CPSUs/government organisations to participate in the CPSU scheme and increase the target for setting up grid-connected solar PV power projects.
According to the report by the Standing Committee on Energy (2021-22), the annual manufacturing capacity in India is around 3 GW for solar PV cells; 10-15 GW for solar PV modules; 5 GW for solar inverters; and nil for polysilicon, wafers and ingots. To meet the ambitious solar energy targets set by the government for 2030, the demand expected per annum (approximately 30 GW) is significantly higher than the current manufacturing base.
Data provided by the union power and new and renewable energy minister, R.K. Singh, to a Lok Sabha question dated March 31, 2022 shows that India’s total value of solar imports in 2018-19, 2019-20, 2020-21 and 2021-22 (April to January) was $2,160 million, $1,684 million, $572 million and $3,447 million respectively. For the same time periods, the value of solar imports from China was $1,694.04 million, $1,307.03 million, $494.87 million and $3,117.78 million respectively. A trend of a gradual fall followed by a surge in imports is visible.
These trends, coupled with policy uncertainty and slow progress in promoting domestic manufacturing and reducing import dependence show that India has a long way to go before achieving self-reliance in the solar energy space.