Exorcism of Unemployment- Switching to Solar

Current progress in India indicates incredible growth in business and industry development, testified by the country’s acquirement of 77th position On World Bank’s Ease Of Doing Business Report from 126th rank in 2016. However, factoring in 6.1% (NSSO data) current unemployment rate it is important to note that unemployment in the country is surging faster than development and job creation. Improving functionalities and inner mechanisms through policy reformations have done a great job in India, but as a scenario indicates, the country needs a saviour to significantly increase job development.

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Need of the hour: Solar Adoption, not Project Cancellation

Indian Solar industry has shown incredible growth, with an inspiring trajectory of increasing capacities from 5 GW in 2015 to 10 GW in 2016 to ~24 GW growth in 2018. Although there is growth, India still has to install more than 18 GW of solar capacity each year for the next 4 years to achieve its announced 100 GW target. Considering this scenario, we should expect an aggressive solar adoption rate. However, India’s current solar growth would not be able to realize the 2022 targets.

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Current Scenario

A myriad of projects have been cancelled in the calendar year 2018, which begs the question of whether India would be able to reach current targets. Data shows that between Jan-September 2018, ~35 GW of solar projects were tendered. However, only 13 GW of projects were auctioned. There was a 65% decline in tender activity in Q3 2018, in comparison with Q2 2018.

The results are clearly seen in project installation trajectory. Although, solar installations in Q1 2018 was higher than Q1 2017 and stood at 3.3 GW, however, in Q2 2018 Indian solar installation rate started declining and stood at 1.6 GW in and fell even lower to 1.5 GW in Q3. Although we would want the solar installation rate to rise each quarter of a year, it is normal to see a decline in a few quarters. For example, solar installation rate had fallen in 2017 as well, however, the decline in 2018 is much higher than ever before (30% Y-o-Y), which paints a threatening picture for Indian solar industry.

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Reasons behind the Decline

25% safeguard duty on SEZ based solar panel manufacturers, demands of setting up a manufacturing facility to bid in projects, differential GST rates have increased solar project cost by 12-18% and produced hesitant solar developers bringing forth the decline in projects.

SECI cancelled 2.4 GW out of a 3 GW Interstate Transmission System (ISTS) connected solar auction held in July 2018.

  • The Gujarat Urja Vikas Nigam Limited (GUVNL) also cancelled the auction for the development of 500 MW of grid-connected solar photovoltaic (PV) projects in March 2018.
  • The Uttar Pradesh New and Renewable Energy Development Agency (UPNEDA) also cancelled 1 GW auction for grid-connected solar projects across the state held in July 2018.

The primary reason behind these cancellations is Government of India’s insistence to bring down solar tariff event further. Also, recent demands like asking developers to set up a manufacturing plant to win solar projects (e.g- SECI’s 10 GW solar project) have negative effects and produced hesitant developers.

India spent $3.8 bn on solar module import in FY 17-18, and in FY 18-19 (Apr-Oct), the country has already spent $1.1 bn, while India’s export of solar for the same years stood at a meagre $141 mn in FY 17-18 and $80 mn in FY 18-19 (Apr-Oct).

Additionally, 25% safeguard duty imposition on imported solar equipment and SEZ based solar manufacturing units have raised the equipment cost, making projects expensive while introducing low quality (imported) module usage issue and little to no demand for domestically manufactured solar equipment.

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Way Forward

Indian solar industry still has incredible opportunity to turn around and lead the global solar revolution, while speeding up solarisation of the country. However, for that to happen, India needs to realize that maintaining investor interest in building solar projects is a must.

And although imported modules offer a cheaper option for countrywide solarisation- It is producing hesitant developers by allowing tariff fall, shrinking India’s opportunity of building solar manufacturing industry, which would have created jobs, improved industrial infrastructure, brought revenue through exports.

Additionally, India’s dependence on solar import is leading to huge forex outflows, introducing quality issues, and making projects unviable.

Therefore, focusing on manufacturing, stabilizing tariff, exempting domestic manufacturers from safeguard duty and differential taxes (GST), would be the right move to increase solar installation rate. Forecasts show that continued import, falling tariff and other policy deviations (safeguard duty, differential GST) will result in lower solar demand in Q1 2019 (approx. 3.5 GW). Therefore, it is the best time for India to make changes and solve core issues to speed up solar project installation.

The Chinese Solar Story: Some Learnings

India’s decision to adopt green energy through solar has opened up new opportunities for energy and economic growth through industrial development. And although, India’s initiatives to support and ramp up solar should be commended, the country is nowhere close to giants like China who have become the global supplier and have dwarfed other countries in solar installations (~145 GW). China announced a new energy policy in June 2018, which terminated approvals for new, subsidized utility-scale PV power stations, halting in-country solar growth within China. The country’s new announcement of revising renewable energy consumption targets to 35% by 2030 puts China back in its mantle of industry leader.

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The Re-Alignment

China’s previous decision to shrink its renewable energy target would have dealt a terrible blow to aspiring solar manufacturing industries in developing countries like- India with influx of cheaper solar modules. However, this new policy revision re-iterates how China continues to re-align its industries and priorities to support solar growth. The new policy shows China proposing higher green power consumption targets while mandating penal action against those who fail to meet goals to help fund government subsidies to producers. China became the leading force in global solar industry (in 2017, China accounted for 54% of global PV installations) by focusing on expanding manufacturing capacities and offered subsidies to projects development. Growing subsidy cost ($15.6 billion in 2016) which are suspected to reach $39 billion by 2020 pushed China to stop its renewable energy expansion.

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However, what is exceptional is how rapidly China has solved its internal issues and are back with solar energy growth. The reason behind China’s prompt action is its obvious understanding of the solar opportunity and the promise it holds. By focusing on solar manufacturing capacity growth, China has been able to support industrial growth. Leading to job creation and economic progress. As testimony, we can take example of India and China’s influence over its solar market. ~80% of Indian solar market has been claimed by China and in In FY 17-18 the India’s solar module import expenditure stood at $3.8 billion (mostly from China). This proves that China’s decision on gaining manufacturing prowess has served the country well. And to protect what the country had built, to create and maintain demand of its domestically manufactured solar products, and to keep encouraging solar entrepreneurs; in a nutshell we can say that China sprung to action to press on its advantage in the growing global solar industry.

India Must Re-Prioritize Solar

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India has taken initiatives and created policy environment to support solar manufacturing. However, recent policy developments such as imposing 25% safeguard duties that target SEZ based solar manufacturers, differential GST rates (5% for modules and 12-18% for other inputs), and continued solar importing (FY 17-18 spent $3.8 bn) have come forward as a great challenge for domestic solar manufacturing in India.

Like China and other dominating solar countries, India must understand that strengthening domestic manufacturing eco-system is not just the best but the only choice for India to gain energy security and self reliance. And as statistics show, India can become the third largest economy in the world by focusing on domestic manufacturing, which promises to improve social, industrial, and economic infrastructure. Domestic solar manufacturing can create jobs, reduce import expenses, build industrial infrastructure within a country. This is clearly in alignment of ‘Make in India’ initiative, which also need to be re-prioritized for India’s growth.

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India has an exceptional opportunity to become energy super power and facilitate industrial and economic growth through choosing solar. But, manufacturing has to be focused to see this transition into reality. India has the perfect example in front of it, and it is China. China’s growth and tenacity towards supporting solar growth should inspire India to go all in solar.

Re-Prioritizing ‘Make in India’: Need of the Hour

India saw the opportunity for growth in economic development through industrial capacity expansion and domestic manufacturing. Hon’ble Prime Minister, Shri Narendra Modi focused on manufacturing and brought forward a multi-pronged operation titled ‘Make in India’ to bring in new investments and encouragement for manufacturing growth, creating jobs, and socio-economic revolution within the country. And as expected, Make in India did attract investment, reducing knowledge curve and initiating technological growth within industrial setups. In such an environment, new and lucrative sectors like Solar, saw a bright future and possibilities for country wide improvements. But, the picture is not turning out to be that rosy.

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Support & Expectations

Make in India was supposed to work on the same lines of tried and tested strategies that have helped many countries to transform into global suppliers by focusing on their manufacturing capacity expansion. The initiative was expected to create jobs, help develop long-term policies for R&D growth, faster deployments, and build capacity in manufacturing raw materials in a value chain, to satisfy domestic demand and ultimately capture the export market of progressive sectors like Solar.

To support Make in India to turn these expectations into reality, Government of India established Special Economic Zones (SEZs) and extended special benefits like- cheap water, electricity etc. The Government also offered special benefits to lucrative sectors like Solar, namely- exemption from excise duties, 10-year income tax holiday, exemption of sales tax in certain states, payment security mechanisms to cover the risk of default by state utilities/DISCOMs etc.

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Additionally, Government also permitted 100% Foreign Direct Investment (FDI) under the automatic route for renewable energy generation.

As a result, India was able to excel in building a strong manufacturing set up in one of the fastest growing sectors like Solar. And with initiatives like Make in India running at full throttle, India stood a chance to surpass dominating solar countries like US and eventually China. However, the biggest challenges to make that happen is lack of support from Make in India.

The Current Reality

Making India a manufacturing hub can be the solution to all of the country’s woes. In fact, solar has already presented itself as a viable sector to invest in. The sector’s continuous leaps from 5 GW in 2015 to 10 GW in 2016 to ~25 GW in 2018 acts as a proof of its promising nature. And there are numerous examples where countries have become global suppliers in solar sector by focusing on manufacturing- like China. Although, Make in India could have helped India achieve a similar goal, India’s continuously growing dependency towards importing solar has removed that opportunity from equation. India spent $3.8 bn in FY 17-18 on solar module import, which has limited the progress in manufacturing capacity expansion, leading to a market scenario where foreign suppliers have claimed more than 80% share. In the same breath we need to highlight that China’s recent energy policy will lead to further fall in imported module prices, capturing demand of domestic manufacturing even more (currently Indian suppliers have less than 10% share in Indian solar market).

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Additionally, continuous drop in solar tariff, cancelation of projects, and lack of green energy distribution to the grid is scaring away the investors, making it more challenging for Make in India to succeed.

On top of that, imposition of 25% safeguard duty on SEZ based solar manufacturing units in India stands to deal a damaging blow to country’s solar manufacturing industry, as India’s 40% of Solar panel Manufacturing Units and 60% of Solar Cells Manufacturing Units are currently located in SEZs. SEZs were built to support Indian manufacturing sector, and as the growth statistics, it has. And for continued growth, more support is needed not taxes, or duties.

It is, as it seems. But there is still time to turn things around. Make in India can still serve the purpose it was built for: economic and social growth through industrial development. However, intervention is needed in different strategic and operational layers.

  • New policies are needed to address manufacturing issues regarding infrastructure, transport, taxation, power outages, labor laws, and taxation
  • Low cost finances and longer tenure loans are needed to help solar project developers
  • Investment in establishing R&D institutions is needed to support quality control and to reduce the knowledge curve
  • Reducing import dependency
  • Re-prioritizing solar and exempting it from duties, added taxes are also necessary
  • Campaigns like National Skill Development Mission are already available, Government needs to invest in them and broaden their reach to create skilled workforce
  • Extending the viability of industrial license, creating random inspection scheme, and reducing corporate tax rate by 25%-30% can aid in bringing foreign investment

Moving Ahead

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As solar continues to gain global acceptance, this is the best time for India to focus on solar manufacturing, thus making power for all a reality while becoming a global supplier of solar components. Make in India is the perfect platform to launch this growth trajectory. However, much more focus on domestic manufacturing rather than importing is needed.

It is estimated that with focus on domestic manufacturing, India can overtake EU’s renewable expansion by 2022. And that would be just the beginning for India to become an energy reliant, economically strong, manufacturing hub of the world.

 

 

Safeguard Duty on Solar to cause 30% Decline in Demand

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As one of the fastest growing economies, India decisively opted for solar development, understanding its potential to lift the country out of financial, social, and industrial darkness. The announcement of targeting 100 GW solar energy by 2022 evidently created an environment of urgency and brought forth a plethora of opportunities for industrial development. As a result, our country quickly became the second most attractive renewable energy market in the world. However, Government of India’s decision to impose Safeguard Duty on solar imports stands to undo the growth India accomplished through enhancing domestic solar manufacturing capacities. Many in the industry argue that the new policy is completely opposite of what our Solar mission and Make in India initially stood for.

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