A solar manufacturing unit in India is a GDP and employment enhancer, foreign exchange saver and a means to China-proof India. But the big question is, will these two supports engender strong solar manufacture?
To wean India from dependence on China for solar cells and modules and develop a robust domestic solar manufacturing base, the government of India has done two things: One, it raised a wall of protection. A 40 per cent basic customs duty on imported modules and 25 per cent duty on imported cells. (Cells are woven into modules.) Two, it has offered solar manufacturers incentives under the Production-Linked Incentive (PLI) scheme. Manufacture of solar modules involves several steps. Polysilicon (made from silicon) is melted and cast into ingots; ingots are sliced into wafers; silver circuits are etched on wafers to make cells; when cells are connected and encased, they become modules.
The quantum of incentive under the PLI depends upon the level of value addition and the efficiency of the modules and tapers to a half after five years after commissioning the plant. A sum of Rs 4500 crore has been allotted for PLI for solar manufacture, but the power minister has said that the government would provide an additional Rs 19,000 crore, to accommodate more players.
The lead players…
So, there are two supports for domestic manufacture—duty protection and incentives.
These seem to have enthused the industry. Several players have announced manufacturing plans. These include incumbent solar companies such as Adani, Waaree and Vikram and several others—Reliance Industries, First Solar, ReNew Power, Coal India, L&T… When the government, through the government-owned IREDA, opened bids for the PLI, it received bidders for a total capacity of 54.8 GW of modules.
That is the story so far. The government’s moves are, of course, well-intentioned. A solar manufacturing industry in India is a GDP and employment enhancer, foreign exchange saver and a means to China-proof India. But the big question is, will these two supports engender a strong solar manufacture in India, as is hoped for? The answer, in one word, is: doubtful.
The disadvantages…
India starts with many disadvantages and the given support may not outweigh them. At best, there could be some domestic manufacturing as long as the props are in place. Remove the crutches, the man doesn’t walk. This appears to be the likely scenario.
There are many reasons to come to this view. First, the players themselves have said that the level of duty protection is not enough. Waaree’s Chairman, Hitesh Doshi, has been quoted as saying that the country needs at least 50 per cent protection for many years. A couple of years ago, when the government was working out the level of safeguard duty, the industry demanded 70 per cent. At 40 per cent duty, the Chinese could still be competitive.
Earlier, the Chinese modules were available at 18 cents and there were expectations that the prices would go further down to 12 cents. Today, a Chinese module sells at 30-32 US cents a watt; but this high because of supply side constraints and power-related issues in China, which may go away in a year. When the supply and power issues go away there is likelihood of module prices sliding to below 20 cents a watt, in a year or two. This means that the price of imported modules in China, with the duty, would be 28 cents.
Now, let us look at the incentives. The highest incentive available to a manufacturer is Rs 3.75 (5.03 cents) a watt, available for modules of 23 per cent efficiency. But a 23 per cent efficiency is a dream; the best you get today is 21 per cent, at which level the incentive is Rs 2.75 a watt, or 3.65 cents.
Furthermore, solar cell manufacture is a fast-changing technology. Those who spend big on R&D are most likely to emerge winners. The evolution of technology is in terms of higher efficiency modules. It is a well-known that Indian companies do not invest much in R&D. Indian manufacturers need a much higher level of cushioning to be able to withstand competition from higher efficiency cells. In the solar energy business, a 1 per cent or even 0.5 per cent improvement in efficiency matters a lot.
The cost disadvantage…
This means that the Indian manufacturer must be able to sell at not more than 32 cents to be able to compete against imports. Remember, the 40 per cent duty is also on imported components, which the domestic manufacturer must pay. Today, the incumbent manufacturers like Waaree and Vikram are able to sell at these prices because they import cells or wafers. An integrated manufacturing plant in India has a sclerotic cost structure—cost of capital, land, electricity, etc. Even if the Indian manufacturers are able to sell at 32 cents, there are two dangers—Chinese prices falling further down and cost factors after the protection and incentives go away.
On the flipside, the high costs of modules will impact solar tariffs, which will make India’s dream of green hydrogen even more distant.
Build even with cheap Chinese…
The crying need of the hour is climate action, in which low cost, clean electricity plays a big role. Therefore, it makes sense to build a large solar electricity installed capacity, even with cheap Chinese products. A country does not have to make everything by itself. After all, India has committed at the recent COP 26 climate conference that it would build 500GW of renewable energy capacity. Higher solar energy prices are going to put this tough target beyond reach, particularly given the moribund finance of the utilities (discoms), who are the primary buyers of electricity.
A telling point is the absence of Chinese companies among the bidders. If the protection is good and incentives are compelling, they would have shown interest. Their absence shows that they believe that they are still better off manufacturing in China and selling to India.
In sum, it appears that the government is punting against heavy odds. The Rs 4500 crore (which could rise to Rs 24,000 crore) PLI money might be better spent if used to support where India has a better chance of success, such as electronics or electrolysers for hydrogen generation, where no country has a significant head start over others. -Thungabhadran
