The Indian solar industry has been dependent on imported solar cells and modules since the inception of the National Solar Mission. The focus so far has been on project development to meet the government set goal of installing 100 GW of solar by 2022.
By imposing the safeguard duty in 2018, the goal shifted to focus on helping domestic manufacturing. However, since the COVID-19 outbreak and the subsequent shutdown in many parts of the world, more impetus has been put on localizing the supply chain. With the new government policy shift towards “Atmanirbhar” or “self-reliant” India, domestic manufacturing has become the primary objective.
To support domestic manufacturing, the government recently extended the safeguard duty by another year starting July 30, 2020. A duty of 14.90% announced from July 30, 2020, to January 29, 2021, and 14.50% from January 30, 2021, to July 29, 2021, for all solar cells and modules imported from China, Thailand, and Vietnam.
To make imported cells and modules even more expensive, the government has proposed a 20% basic customs duty on the import of solar cells and modules. There are speculations that this duty might be in the range of 10-20% on top of the safeguard duty to ensure that the total duty is enough to curb imports and encourage domestic manufacturing and possibly increased next year.
However, if the imports are curbed to quickly, there is fear that India does not have enough domestic capacity to fulfill demand. According to Mercom India Research, India currently has only about 16 domestic solar cell manufacturers with a cumulative operating production capacity of approximately 2 GW. And the country has about 8 GW of operating module manufacturing capacity, and this number varies and can go much higher based on whom you ask as the are no government verified numbers out there.
Indian solar manufacturing capacity pales when compared to a manufacturing giant like China that currently has a manufacturing capacity that exceeds global demand, and where one manufacturer can have more than all of India’s manufacturing capacity.
Chinese cells and modules are imported at extremely competitive prices into India. China has been able to achieve such low prices because of its massive scale, and this feat has been achieved through full support by the Chinese government and lending institutions. To be able to compete with the world’s biggest solar manufacturer, India, will have to do something similar.
Mercom spoke to domestic manufacturers to understand the kind of hurdles they face in terms of expanding manufacturing capacity, and some pressing concerns were revealed.
Developing an Ecosystem
To reduce imports, cell manufacturing needs to take center stage. Strengthening just module manufacturing would not remove the domestic industry’s dependence on imports as individual components would still need to be sourced from third parties.
To promote the growth of the manufacturing value chain as a whole and create an all-encompassing ecosystem, it is crucial to focus on bolstering domestic solar cell manufacturing capacity. This way, there is scope for backward integration into secondary component manufacturing avenues in the future as well.
“Cell production is the pivot around which the solar manufacturing system revolves. A presence of large and growing cell manufacturing capacity in India will automatically lead to investments finding its way upstream into wafer and ingot manufacturing in the country,” explained Dhruv Sharma, Chief Executive Officer at Jupiter Solar Power Limited, a Kolkata-based solar cell manufacturing company.
“Simultaneously abundant availability of local cells will be balanced out by investments in module manufacturing capacities. This, in turn, will drive local capacities for manufacturing balance of materials for modules in the country,” Sharma said.
Emphasizing this, Manjunatha D.V., Founder and Managing Director at EMMVEE Photovoltaic Power Private Limited, a Bengaluru-based solar module maker, explained that a fully integrated ecosystem would also help keep costs low.
“To promote domestic manufacturing, it is more important to create the right ecosystem. The Indian government must focus on creating manufacturing clusters throughout the country similar to solar parks, with the availability of the entire supply chain, research and development (R&D) centers, equipment manufacturing, universities, and laboratories,” Manjunatha said.
“This will not only bring down costs drastically, but also the R&D centers and universities can be used to focus on innovating new-age solar technology in terms of product and manufacturing practices, among other things,” he added.
The lack of clarity in terms of demand has been a major hindrance to the growth of domestic production capacity. The government of India has only recently started to enforce programs with domestic content requirement (DCR) like the KUSUM solar program, rooftop programs, and central public sector units (CPSU) programs. However, these programs might take some time to translate into actual demand.
“The DCR program is another great example of a policy with long-term potential. A steady pipeline and forecast will be crucial over the next decade to ensure that domestic module manufacturers can truly scale up and compete globally,” said Avinash Hiranandani, Global CEO & Managing Director at Mumbai-based solar cell and module maker RenewSys India.
“Within DCR projects, if domestic manufacturers are given due visibility of upcoming tenders with higher efficiencies, it will both strengthen domestic technology output and give manufacturers an incentive to be globally competitive,” Hiranandani added.
Manufacturers believe that a combination of demand creation and protectionist policies would be the best way forward. They explained that protectionist policies in the absence of actual demand for locally-manufactured components would only impair the industry overall as project costs would rise for developers, and production would remain stagnant.
They also said that tariff protection would go a long way in encouraging production capacity additions. If utilized in tandem with DCR programs where imported cells and modules cannot be used, demand visibility would be created for manufacturers who can then work on enhancing production capacity.
“Tariff protection for the domestic industry is very effective since it creates demand visibility for a longer period of time, and therefore the industry has been seeking imposition of Basic Customs Duty (BCD) for a while. However, it is important to have a substantial tariff limit and not tokenism, which will defeat the very purpose for which the tariff protection is needed,” said Jupiter’s Sharma.
Adding to this, Manjunatha said, “Constant and steady demand for the products is a grave necessity when it comes to solar, as we are not producing appreciating goods like gold. As we maintain inventory, we are losing money with fast decreasing prices of modules and cells.”
Role of MSMEs
Considering the large costs involved in setting up or expanding a manufacturing facility, the job of creating a self-sustaining manufacturing base in the country is best left to the larger players in the industry, according to industry stakeholders. They can afford to invest in research & development and newer technology. Separately, they can also handle contingent liabilities in the form of product warranties.
Cell and module manufacturers are expected to provide warranties for their products for around 20-25 years. This means they have to set aside reserves equivalent to the value of the components supplied for the entire duration of the warranty. Small and Medium Enterprises (MSMEs) may not have the financial backing to do so according to larger suppliers.
“MSMEs do not have the financial depth to provide warranties for 20-50 MW (likely their entire production capacity) of cells for so long. Contingent liability will be a problem. They will have to keep large reserves for the entire capacity supplied in case anything goes wrong. The nature of the business is that it requires deep pockets, larger investments, frequent tech up-gradation, and large working capital. So, this job is not very aligned with MSMEs,” said an industry executive.
The executive explained that a better way to involve this segment of manufacturers would be for the government to mandate large manufacturers to use MSME modules for a certain percentage of their capacity and use them as downstream or subcontract manufacturers. It would then be the large manufacturer’s responsibility to provide them with adequate technology and supervise their production.
“Additionally, the average size of a solar project in India is now large, and they demand a single manufacturer to be able to meet their entire requirements in a few months. This can only be met by GW level module manufacturers,” the executive added.
There are several other areas the government can act on to incentivize companies to boost or set up new solar component manufacturing capacity. Manufacturing has to deal with significant costs related to setting up assembly lines, land acquisition, labor needs, taxes, power costs, and other working capital requirements.
“Reduction in power costs is another significant area to consider. Opening up the market to solar industries for open access power purchase and allowing them to make arrangements for their own reasonably-priced sustainable power sources like a captive power plant will certainly help the industry grow,” said RenewSys’ Hiranandani.
“Access to reasonably priced power is a significant hurdle as component manufacturing, especially wafers and cells, are extremely power-intensive processes,” he added.
The Indian government has to take cues from China. The Chinese government has not just consistently supported the industry with extremely low-cost debt but also pushed technological enhancement through its “Solar Top Runner Program.” The primary focus of the program has been to manufacture high-efficiency solar modules through research and innovation while eliminating outdated technology.
China, in a way, has been subsidizing solar installations worldwide, including India. Now, if India wants to shift the base of solar component supply, the government has to do much more than merely imposing duties. This alone will not attract investments into the sector, but will only make solar power more expensive. The Indian government has to provide incentives for manufacturing and push for efficient technologies constantly.
“Solar component manufacturing is capital intensive, and the technology is constantly changing. The scale needs to continually increase to keep the price of components down. All of this will require an enormous commitment from the government to invest going forward,” said Raj Prabhu, CEO of Mercom Capital Group.
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Nithin Thomas is a staff reporter at Mercom India. Previously with Reuters News, he has covered oil, metals and agricultural commodity markets across global markets. He has also covered refinery and pipeline explosions, oil and gas leaks, Atlantic region hurricane developments, and other natural disasters. Nithin holds a Masters Degree in Applied Economics from Christ University, Bangalore and a Bachelor’s Degree in Commerce from Loyola College, Chennai. More articles from Nithin.