PLI scheme, basic customs duty: Only flickering benefits for solar power

A production-linked incentive scheme and possible basic customs duty will have a limited impact in encouraging domestic solar equipment manufacture

In 2015, the Prime Minister set an ambitious goal of generating 100Gw of power from solar by 2022. At that time, the country had less than 3Ge of solar power generation capacity. India had installed 36Gw of solar capacity until last year; as per Mercom Research data, it has only been able to add 3.2Gw in 2020.

One can blame the pandemic, for the halving of power generation, but capacity addition was dipping even before the pandemic hit the country. In 2019, India had added only 7.3Gw of solar power, as compared to 8.3Gw in 2018 and 9.8Gw in 2017.

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While the government still has a year to go to fulfill its target, Mercom estimates that India will only be able to add 10Gw of solar power this year. The country has added 39Gw till now, and a 10Gw addition would mean that it would take another six years to reach 100Gw target. If for some reason, power generation addition stays at 2020 levels, it would take two long decades; and, at 7Gw per year (2019 addition), the country would need nine years to fulfil its ambitious target.

Poor offtake by discoms is partly to blame for this debacle. Renegotiation of power purchase agreements and reluctance by discoms to clear bills has marred the sector. Another major reason, though, is the failure of the government to balance its power generation targets with its goal to spur local manufacturing for solar equipment.

The government had intended that the fast-paced power generation, with a boost from government schemes, would spur the domestic manufacturing industry of solar equipment like module, panels, wafers, ingot, glass, etc.

Domestic manufacturing has moved at a snail’s pace and the industry remains dependent on Chinese products. The government wanted to get high-tech manufacturing of cells, wafers in the country, but instead the industry has veered towards module assembly, which requires imported inputs.

The dependence of the industry on imports is so high that when the government imposed a safeguard duty (an anti-dumping measure) on China, Malaysia and other developed economies to spur local manufacturing in July 2018, it hampered the ability to Indian module manufacturers to export. A 43-per cent fall in imports was accompanied by a 14-per cent fall in exports in FY19. Exports have since risen, but analysts say that it may just be a one-time phenomenon given the US duty on Chinese products.

“One of the reason was that there was duty imposition on Chinese products by the US. Close to 80 per cent of India’s module exports are to the US, so because of these duty impositions exports might have gone up. That was short-lived, because the US subsequently imposed duty on Indian imports. That is the reason imports to the US have declined in the last fiscal (April-January),” said Manish Gupta, senior director, Crisil Ratings.

The safeguard duty has also failed to steer India away from Chinese products. Even after duty barriers, China still accounts for 83 per cent of India's total solar imports. Meanwhile, other countries like Vietnam, Thailand and Singapore have become preferred destinations. Between FY18 and FY20, Chinese imports declined by 62 per cent, imports from Malaysia dipped 98 per cent. In contrast, solar imports from Vietnam grew 944 per cent, and Thailand had a staggering 1,485 per cent growth.

However, the government seems to be making a last-ditch effort to become atmanirbhar. Given the disruption of supply chains due to Covid-19 and the position of the domestic industry, the government announced a production-linked incentive (PLI) scheme for solar manufacturing. Details are yet to emerge, but the government is looking at the holistic development of the sector. 

Besides, the government may also impose a basic customs duty (BCD) on solar imports to the tune of 40 per cent from April 2022 to buoy Indian solar manufacturing. 

But can solar manufacturing be salvaged?

Too little, too late

Both the PLI scheme and the basic customs duty will help the sector, but they cannot be the determining factor. Analysts say that the schemes are well intentioned, but there is need for more.

Vinay Rustagi, managing director, Bridge To India, expects module capacity to increase by 8-10 Gw given the government’s initiatives. But it may not add much to India’s atmanirbhar goal.

“Module assembly, the last piece in the manufacturing puzzle, is a low-tech and low-value added activity requiring low capex and technical expertise. It has gone up by about three gigawatts in the last three years. But in the same time, cell manufacturing capacity, entailing higher technology complexity expertise and capital investment, has increased barely,” he said.

He expects the cell capacity to go up from 3GW to 8GW under the new duty structure.

But the government would need to be clear on how it plans to structure its production linked incentive scheme. If the scheme is focused on module manufacturing, then a 25 per cent BCD, which the government plans to impose on cells, may not be significant for players to add capacity. 

Investment will also be a concern. At present, a 1,000-Mw module production can be set up for Rs 40–50 crore, whereas a cell manufacturing plant with a similar capacity would require a capex of Rs 500 crore.

Another issue with the BCD is that it violates Information Technology Agreements signed by India under the WTO framework. China and the US will surely challenge the decision, but all will depend on how long it takes for the dispute resolution. One of the reasons for failure of safeguard duty was that it only provided a benefit for two years. It is not clear how long the BCD incentive will last.

Rustagi and Gupta concur that just a BCD or PLI imposition cannot work in India's favour. Gupta highlights that there needs to be vertical integration. 

“Based on our assessment, unless and until the players begin to backward integrate into manufacturing of cells, wafers, etc, the benefits may not fully accrue. Currently, most players import cells and convert into module, which is essentially an assembling process. If they continue to do this, then the differential may not be too much.”, Gupta told Business Standard.

Can India even compete with China?

Even in the module sector, where capacity addition has been substantial, India's manufacturing has not been competitive. An analysis by the Centre for Energy Finance from August 2020 shows that Indian solar modules were 33% more expensive than the Chinese module. While labour, electricity, utilities, land and project finance cost made up 14% of the total cost in India, they just had an 8 per cent share in China. 

Moreover, Indian manufacturers are still far off from achieving the scale that Chinese companies have in recent times, and that gap has been growing. 

“The big Chinese companies are expanding at breakneck speeds. The top four or five are already shipping 15-25 Gw of modules every year and growing at 30-40 per cent annually. The gap between Indian companies and their leading Chinese competitors in terms of scale, technology and expertise is increasing all the time. And, that is why we are now dependent on such a steep duty barrier,” Rustagi said.

However, Gupta highlights that India does not have to be export-oriented “The industry needs to be able to compete with Chinese imports. There is significant opportunity in India in terms of gigawatt of solar capacity that can come up in the next three to four years. The scale is smaller, cost of funding and raw material costs are high, leading to lower competitiveness. What is needed is a more comprehensive redressal of all these aspects. BCD, PLI are steps in right direction, there has to be more incentivisation.”

Should the government look for new alternatives then. Storage is a new field that requires attention. Given that the share of renewable energies has been increasing, there is demand for research into storage technologies, which can bring down the cost of renewable power and ensure certainty of power supply; sadly, here too, India has been losing ground to China. 

“The story on storage is unfortunately playing out very similarly to solar manufacturing. The Chinese companies have already taken a huge head start and become global leaders. They are expanding capacity furiously, investing heavily in R&D and securing access to key raw materials. In India, storage manufacturing is yet to take off. I think the government believes that they don't need to choose between solar and storage when it comes to setting up domestic manufacturing capacity. But promoting storage manufacturing is going to be as challenging, if not more, as promoting solar manufacturing,” Rustagi said.