Over the last six months, the rising price trends in commodities, including steel, aluminum, and copper, have started to take a toll, increasing the burden on solar developers. In addition, the spike in steel prices has exacerbated the situation for engineering, procurement, and construction players and module manufacturers in the solar space.
The trend that started about six months ago shows no sign of slowing, and many believe it will continue for another six months. Steel prices have continued to rise and are currently hovering around the ₹36,000 (~$490)/ton mark, a 25% increase over the price two months back.
The increase in metal prices has made the situation harder for developers and manufacturers who are also reeling under the effect of the second wave of the Covid-19 pandemic.
Increase in commodity prices a concern
Speaking on the increase in copper and aluminum prices, Harsh Jain, Director of Citizen Solar, said, “Last August, the price of copper was around ₹600 (~$8)/kg, and now it is around ₹1,110 (~$15)/kg. This is an increase of nearly ₹400 (~$5.5)/kg. A 72-cell solar panel requires 240 gm of copper. The cost per module has increased by ₹100 (~$1.4)/panel, which comes to ₹0.35 (~$0.005)/W because of rising copper prices. Such a small change can still have a huge impact on the module prices. Furthermore, the price of aluminum has also spiked in the last six months, and now it is around ₹250 (~$3.4)/kg. Normally, 2kg-3kg of aluminum is used for a single module, and the increase in prices has been in the range of ₹150 (~$2)-₹160 (~$2.2)/panel, which translates to ₹0.45 (~$0.006)/W. So, when we combine both copper and aluminum, the module prices increase by nearly ₹0.75 (~$0.011)/W, which is not a small number.”
The main reason for the increase in copper prices is the growing use of copper in various sectors and the global increase in demand.
“Most of the copper used in the solar sector is imported from South American countries. While the demand has been growing, there is a need for the supply to cater to the demands, and this has led to an increase in copper prices. The increase in copper and aluminum prices will increase the cost of projects to some extent, as modules account for over 40% of the project cost. It has already impacted the module prices. Compared to last July, module prices are up almost 30%. I don’t think it is going to come down soon,” Jain added.
Trend will continue
The increase in steel prices and other raw materials will cut down on the margins of the project developers and increase the payback period for a solar project. While the increase in steel prices has come at an inopportune time when the country is grappling with the second wave of the Covid-9 pandemic, it seems that the demand-supply gap for steel will continue in the second and third quarter of the calendar year 2021.
Sharing his thoughts on the increase in steel prices and the increase on the overall cost of projects, Vinay Pabba, Founder of VARP Power, said, “For a grid-scale utility project, for a capacity of 250 MW to 300 MW, a large part of the balance of system (BoS) goes into civil structure works, the foundation works, cabling, and ducting, among others. The BoS costs have increased from ₹7 million (~$95,419)/MW to over ₹10 million (~$136,314)/MW in the past six months, which is nearly a 50% rise. This is primarily due to the increase in steel and iron prices.”
Such a sharp difference is likely to change the whole dynamics, increasing the overall project cost. This will force bidders for new projects to consider these aspects before committing to a venture.
“The increase in copper prices will also impact the ongoing projects, as it is used in several components. This can be a commodity cycle, but it is rather unusual to have all the commodities peaking simultaneously. Many factors have contributed to the spike in prices. While it is difficult to put the finger on one particular issue, I think this upward trend will continue for some time,” noted Pabba.
Impact on the manufacturing sector
The manufacturing sector is dependent on the imports of raw materials, and most of the raw materials that go into solar projects are imported from other countries. The price volatility of raw materials creates uncertainty in the market, leading to a supply-demand gap. This cost instability is not favorable for the Indian solar manufacturing sector, which is still nascent.
Commenting on the impact of the spike in raw material prices on the manufacturing sector, Gyanesh Chaudhary, Managing Director of Vikram Solar, said, “The input cost, such as copper, backsheets, and aluminum frames for modules, has risen significantly. Also, the price of solar glass has gone up by around 100-130% since June 2020. Additionally, the prices for copper and silver have also witnessed a sharp increase. Currently, the majority of the solar energy capacity in India has been built on imports. Though India is one of the largest aluminum producers in the world, we import aluminum frames.”
A Solution Needed
Many, however, believe that the price rise should not be a cause of concern, and the industry will find a way around it. But if the trend persists, things will become difficult for the developers, who remain skeptical about the future.
According to another executive at a project developer, “Steel prices have spiked, and we need government efforts to bring it down. The price of steel and supply both have turned into a challenge. Right now, steel is exported. If the prices and supply continue to be a challenge, the government has to think about curtailing the export of steel.”
“The rise in raw material cost has caused an overall module cost increase by about 35%. Solar module manufacturers have been unable to fully absorb the steep rise in upstream costs. Additionally, the freight rates have also increased substantially due to a shortage of shipping capacity under Covid-19 regulations, thus increasing module prices further. In such a scenario, the industry urges government support – tax and duty exemption, long-term financial support, and direct incentives to make the domestic solar industry cost-competitive,” added Chaudhary.
A top executive from one of the leading solar developers said, “Steel is an important component for any solar project. On average, 24 tons of steel is required for one MW capacity, and the total quantity of steel required depends on the size of the project. With steel prices hovering around the ₹36,000 (~$490)/ton mark, it has affected the overall cost of the projects. There has been an increase of nearly 40% in steel prices, and the price of galvanized steel, which is used in module mounting structures, has also gone up by nearly 50-60% in the last three to four months. So, developers bidding for new projects will have to consider this. It is highly unlikely that the prices will drop anytime soon.”
Manoj Singh from SB Energy opined, “The commodity prices have moved up sharply in the last four to six months, and that has affected the module prices also. The tariffs are decided based on commodity prices and module prices. And if there’s variation in the prices, it is bound to affect the cost modeling for the whole project. The cost of structures accounts for nearly 12-15% of the overall cost of the solar projects, and modules account for 50% of the overall project’s cost. With the increase in steel, copper, and aluminum prices, things are bound to get tricky for the developers, which will reflect in the upcoming bids. This is a cycle that happens every seven to eight years, and it was bound to happen. Curtailing the export of steel is not an option, and it’s not something that can happen overnight. Considering that prices will remain steep for some more time, we will have to find a way around it.”
While the inflation in commodity prices is set to continue, the solar sector is looking for ways to continue the manufacturing process cost-efficiently and devise innovative methods to execute the ongoing and upcoming projects. Although the industry seems to be handling the effects of price rise, for now, it might have a detrimental effect on the solar industry if the trend persists for a longer duration.
“The price behavior of a lot of commodities, products, and services globally have been irrational in the COVID-19 economy. The Indian solar industry has to change the way it does business accordingly. Business strategies need to be based on data and research. If companies bid low just to win a project without taking into consideration how the market will play out over the next 12-18 months or invest in a new business without a thorough analysis of the market, then they have no one to blame but themselves,” commented Raj Prabhu, CEO of Mercom Capital Group.
Rakesh is a staff reporter at Mercom India. Prior to joining Mercom, he worked in many roles as a business correspondent, assistant editor, senior content writer, and sub-editor with bcfocus.com, CIOReview/Silicon India, Verbinden Communication, and Bangalore Bias. Rakesh holds a Bachelor’s degree in English from Indira Gandhi National Open University (IGNOU). More articles from Rakesh Ranjan.