Clean Tech

Getting solar manufacturing right

Ramesh Matham | Updated on February 12, 2019

Does the Government’s new viability gap funding scheme pack enough to give Chinese module manufacturers a bloody nose?

One of the objectives of the National Solar Mission is “to create favourable conditions for solar manufacturing capacity, particularly solar thermal, for indigenous production and market leadership”. In the nine years since the Mission began — it was launched on January 11, 2010 — this is the only objective that has not been met.

Charmed by the prospect of a large domestic market, many investors put down big sums of money into module manufacturing, only to see their investments washed away by the flood of cheap imports. They watched haplessly as hundreds of solar power plants came up in their backyards with Chinese modules while their own manufacturing units continued to gather dust. One remembers the case of Suryaprakash Singapur, a successful IT professional in the US who called it quits to set up a ₹80 crore module plant in the Sri City industrial estate near Chennai. Today, his Shan Solar Pvt Ltd is, for all practical purposes, non-existent. There have been many like Singapur with their fingers burnt to a cinder.

No matter what it did, the government could never “create favourable conditions for solar manufacturing capacity” as the Chinese were always significantly cheaper. (‘Solar thermal’, as elsewhere in the world, died at the hands of ever-more-competitive solar photovoltaic; the objective of ‘market leadership’ turned out to be, well, a good joke.)

Fresh hope

But a development that took place last week could be a turning point. The Cabinet Committee on Economic Affairs (CCEA) approved a viability gap funding (VGF) scheme worth ₹8,580 crore, which would enable government-owned companies to set up 12 GW of solar power plants over the next four years using the costlier, made-in-India modules.

This governmental support comes after India lost a case at the WTO over its reservation of a slice of the market for locally produced modules, under the ‘domestic content requirement’ (DCR) rule. The WTO ruled, in a case filed by the US, that the DCR rule violated global trade rules and gave India time till December 14, 2017 to clean its slate. In that month, the Central Government brought out a ‘concept note’ on solar, which spoke of getting central public sector units to set up 12 GW using local cells and modules, with viability gap funding support from the government. The proposal has now been formally approved.

Whether even this support is WTO-compliant or not is a moot question, but the reaction from the industry has been positive. “It is fantastic,” says HR Gupta, Managing Director, Indo Solar, a listed company that makes solar cells with imported wafers. (Cells are made into modules.) “Give us one year and we will show you what we can do,” Gupta told BusinessLine.

Bowing to cheaper exports

The VGF scheme comes after the failure of the 25 per cent safeguard duty to protect the domestic manufacturing industry from export onslaught. In January last year, the Directorate General of Trade Remedies recommended a 70 per cent safeguard duty (levied when there is a sudden surge in imports of a product.) However, under pressure from energy companies, the government slashed it to 25 per cent. Even that little protection soon evaporated when China, in May last year, announced paring of its own solar programme, resulting in a price-dampening module glut. Prices of Chinese modules fell to about 22 cents a watt, from stability levels of around 30 cents earlier.

Nor have the auctions of capacity linked to manufacturing yielded results, as energy companies baulked from entering manufacturing, a business that has different risks.

There is no doubt that cheap imports have greatly helped rapid installations of solar power projects in India. To illustrate, when the now-defunct Sun Edison won 500 MW through capacity auctions in November 2015, its (then) record low tariff quote of ₹4.63 a kWhr, was based on module prices of 43 cents a watt offered to it by the Chinese company, Canadian Solar. Solar tariffs have since fallen to an all-time low of ₹2.44, but have since firmed up to around ₹2.89. The heart-warming tariff dip happened solely due to cheap imported modules.

However, while the solar energy companies have been all-smiles, the solar cells and module manufacturers sank into the red. India has about 3 GW of cell and 9 GW of module manufacturing capacity, though only 1.5 GW and 3 GW of them, respectively, are actively in use. There was an urgent need to revive these plants, whose state of affairs was discordant with the ‘Make in India’ idea. Further, the Government has been speaking of taking the 100 GW of installed capacity by 2022, to 350 GW by 2030. This would mean enormous outflow of foreign exchange. (In 2017-18, when India set up 10 GW of solar plants, its module import bill was $3.83 billion, of which $3.4 billion was China’s).

Against this background, the CCEA has come up with the VGF scheme for central PSUs. The idea is that, with the assured market for four years, Indian manufacturers would mature enough to face competition after four years.

Not so easy

They are unlikely to, because for companies to be competitive, they need to be integrated, i.e., present in the entire value chain. Indian companies are not. Producing solar modules begins with making polysilicon or monosilicon out of sand, casting it into ingots, cutting the ingots into ultra-thin wafers, making cells with the wafers basically by etching current-conducting silver wires on them, and making modules with the cells. Today, there is no Indian company that produces even wafers (which can be imported duty-free).

Thus, it is hard to believe that after four years, Indian cell or module manufacturers would be able to give the Chinese a bloody nose in the market. Setting up integrated plants is a capital, power and water-intensive business and would require special incentives. The incentives under ‘Modified Special Incentives Package Scheme’, or M-SIPS, which offers a 25 per cent capital subsidy to electronics, semi-conductor and solar manufacturing units, has not shovelled investments from solar manufacturers – other than the ₹4,837 crore of Adanis in Gujarat. But even the Adani project will go only as back as wafers, and not to polysilicon. China’s Trina Solar, which expressed interest in setting up a plant in Andhra Pradesh, is still “evaluating” the prospects, the company’s India sales manager, Gaurav Mathur told BusinessLine.

Further, the technology employed by Indian manufacturers — as eloquently noted in the Ministry’s ‘concept paper’ — is obsolete, which could mean sub-optimal use of the viability gap funds.

In sum, while the 12 GW VGF scheme is sure to mitigate the dysphoria among the solar cells and modules producers, the question whether it will lead on to a robust manufacturing eco-system in the country is wide open.

Published on February 12, 2019

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