The Government should come out with conducive policy measures to reduce the cost of solar power, while simultaneously promoting local solar panel producers.

Reductions in solar power tariff were possible till recently because of the availability of cheap, imported solar panels. However, with the Jawaharlal Nehru National Solar Mission (JNNSM) increasingly restricting the use of imported panels, in a bid to strengthen local production, any reduction in tariff from now on may, at best, be moderate.

This is because local players lack the required capacity and economies of scale to compete with their global counterparts on pricing. Since the prices of solar panels play a major role in the cost of power generated, it is imperative for local players to become more competitive on costs.

Therefore, policy support, such as capital subsidies directed towards panel producers, will facilitate scale-up in capacities.

Hurdles to expansion

The JNNSM, the principal solar programme in the country, targeting addition of 20 gigawatts (GW) of solar generation capacity by 2022, has twin objectives — to bring down the cost of solar power, and to establish India as a “low-cost, high-quality solar equipment manufacturing hub”. It seeks to reduce the cost of generating solar power, which is currently high, to levels that are comparable with those of the conventional sources of energy. In line with the second objective, JNNSM seeks to increase the local content in its solar projects.

However, it will be difficult to reduce the cost of generating solar power if localisation is pursued in the current scheme of things. Domestic panel producers, with their sub-optimal scales of operation, are not as cost-competitive as their international peers, especially the Chinese. For instance, India’s single largest solar cell manufacturing capacity is about a tenth of the average capacity (about 1.5 GW) of the typical large global manufacturer.

The local manufacturers, therefore, face challenges in offering panels at competitive prices. Notably, a decline in India’s solar power tariff was possible in 2010 and 2011 largely on account of reduced prices of international solar panels. In contrast, the increasing restrictions on the use of imported solar panels will slacken the pace of future decline in solar power tariffs.

Therefore, the objectives of reducing the cost of solar power and strengthening local panel production will gain a fillip if the domestic players scale up their operations. Interactions with domestic manufacturers indicate that the main hurdles to capacity expansions are the substantial investments required, and the absence of commensurate demand, post-expansion.

Subsidy support

Typically, a 1 GW facility with module and cell manufacturing capability requires an investment of about Rs 4,000 crore. Schemes providing subsidy for investments in capacity will help domestic panel producers scale up operations and improve their cost competitiveness, and aid in the mission’s localisation objectives.

Moreover, once the local manufacturers achieve efficiencies of scale, they can take advantage of export opportunities that are currently not possible, given their cost disadvantage. This will, in turn, ensure that utilisation levels for the expanded capacities are adequate.

It is believed that the funds for such capital subsidies can be raised well within JNNSM’s existing subsidy budget. Currently, the government incentivises solar power producers by offering higher tariff to compensate for their higher costs of generating power, compared with those of thermal or wind power producers.

Accordingly, a subsidy of Rs 8,400 crore was budgeted under the JNNSM to implement solar power generation capacities of 4,000 MW by 2017. However, based on the actual solar power tariff bid for the first two rounds of the programme in 2010 and 2011, one would believe that the overall subsidy outgo till 2017 may well be 30 to 35 per cent (Rs 2,500 crore to Rs 3,000 crore) lower.

Moreover, there is a strong rationale for the government to utilise these potential savings to strengthen local panel production, since these savings can materialise only if the cost of solar panels produced continues to decline.

(The author is Senior Director, CRISIL Ratings)

(This article was published on July 19, 2012)
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