Climate Action

Solar Manufacturing under the Clouds- Need for Policy Overhaul

May 29, 2019 6:59 PM

Less than 90 days after becoming the Prime Minister in 2014, Shri Narendra Modi, in his address from the Red Fort on India’s 68^th Independence Day, gave a clarion call for “Make in India” for the first time. From satellites to submarines, he said, “sell anywhere, but make in India”. We have got skill, talent, discipline, and determination to do something. We want to give the world a favourable opportunity…to come, Make in India.

Today, 5 years later, as far as manufacturing is concerned, the “Make in India" programme has thus far been ineffective in fueling economic growth. The manufacturing sector is not growing rapidly and export growth has been lukewarm for five years. Private sector investment, especially in new manufacturing projects, has been unenthusiastic. Corporate earnings have been weak, despite the booming stock markets.

Evidently, “Make in India" has been limited in ambition and scope. Its vision follows from an outsize focus on only erecting tariff barriers to protect domestic industry, instead of creating an overall conducive environment for manufacturing, what is really needed is to incentivize manufacturing competitiveness through tax breaks, cheaper loans, infrastructural support and other structural interventions. The approach failed to catalyse the domestic manufacturers of solar cells, the technologies of which have evolved rapidly. Keeping up with the technology curve requires serious investments in R&D.

One must point out that on one hand, the Indian solar industry witnessed incredible progress in terms of solar power installations in last five years, on the other, we are still far from achieving economic and social goals and self-reliant solar energy future that the initiative promised to offer. Case in point, India has market potential worth of at least INR 46,500 crores per annum for solar modules. However, foreign suppliers have captured ~85% of this demand, thus taking away India’s opportunity to build manufacturing scale, facilitate industrial growth, create jobs and power socio-economic growth.

The core reasons behind lagging manufacturing in solar is lack of a strong dedicated manufacturing policy. Solar manufacturing policy has been on the anvil for a long time. But, its future remains in the dark. At least so far.

Why Do We Need A Manufacturing Policy?

Focusing on the manufacturing sector promises to create significant jobs, improve the industrial structure, improve R&D, and ultimately support domestic manufacturing, allowing to reduce forex outflow, increase GDP, ensures sustainable development and price volatility due to exposure to currency fluctuation risks. This will help government achieve its target of 100GW solar installations by year 2020 and beyond.

However, the country has failed to boost its solar manufacturing sector due to the lack of guidelines and framework to nurture and engage domestic manufacturing capacity. We can see how a dominant manufacturing giant like- China has aggressively expanded its domestic manufacturing capacity, thus creating jobs, claiming the export markets, facilitating growth. Closer inspection will help us see that manufacturing policy implementation is the primary reason behind China’s phenomenal economic growth.

In 1990 India’s GDP per capita ($385) was higher than China ($318). Post the implementation of industrial manufacturing policies, China’s GDP grew 5 times that of India. Solar manufacturing policy was a major part of China’s industrial policies and it extended subsidies, low interest loans to purchase equipment, land transfer price refunds, full VAT refund, depreciation benefit according to capacity utilization, reduction of taxes, reduction of utility fees, that attracted huge investments ($127 bn in RE in 2017 and $360 bn by 2020). In a nutshell, China took aggressive steps to build its manufacturing sector and lucrative sectors like solar helped China to stay on a straight path to consistent development.

Other countries like Vietnam and South Korea are becoming emerging markets by implementing solar manufacturing policies that favour and protect domestic manufacturing industry, creating demand, technological growth and leading to wins in the export market.  Vietnam established its first comprehensive policy designed to promote solar PV in 2017. The policy outlined both regulatory and financial measures like- bringing FIT and Net Metering. It also brought tax exemptions, establishing technical requirements, providing government allocated land for solar manufacturing and projects, while setting guidelines to use domestically manufactured solar equipment for development of national and provincial plans for solar power. Although, solar stands 0.4% of electricity generation in the country now, the Solar manufacturing policy in Vietnam has helped the country to set targets for installing 850 MW by 2020; 4 GW by 2025; 12 GW by 2030. Finally reaching to 3.3% of total electricity generation by 2030.

Similarly, solar manufacturing policy in South Korea has helped the country to reach 7.86 GW of cumulative installed PV capacity, of which more than 2 GW were installed last year alone. South Korea’s Renewable Portfolio Standards subsidies policy have drastically increased the competitiveness of solar panel manufacturing by reducing costs. Although, South Korea’s solar PV industry has been adversely affected by the U.S. safeguard, powered by the manufacturing policy, the country has set a target to generate 20% of the total electricity from solar by 2030.

In fact, some Asian countries are expanding their solar manufacturing base aggressively and manufacturing has picked tremendously in these countries leaving installation behind and emerged as net exporters of solar products. India in spite of having huge potential domestic market for solar power equipment in short, medium and long term could not strengthen its manufacturing is last few years and is lagging behind. The time has come for India to achieve sustainability through domestic manufacturing of solar equipment and tap potential to create jobs besides encashing other benefits of promoting manufacturing.

Current Challenges

Delays in the arrival of the long-awaited solar manufacturing policy have increased India’s dependency on solar equipment import. Although some may agree with the appeal of importing cheap solar equipment to quickly reach country’s solarisation milestones and lower tariffs, the initiative has been eating away at India’s chance towards gaining energy reliance and transforming the country into a manufacturing hub.

Those were the primary ideas behind energy transition initiative in India. However, lack of flexible financing, delays in getting approvals and subsidies, delays in getting land for setting up manufacturing sector, lack of demand for domestic product, and limited R&D growth in the country are standing in the way of  making India into a solar manufacturing hub.

Lack of focus on manufacturing and continued importing has bred equipment quality & performance issues, lack of technology upgrade, lack of job creation, consistently falling solar project bids, and produced hesitant investors and developers.

India’s renewable energy sector saw investment of ~$42 bn since 2014 and the country has recorded US$ 7.48 bn FDI inflows in RE energy between April 2000 and December 2018. However, we also need to note that country needs $100 bn investment to reach 100 GW goal. Therefore, more focus on bringing in foreign investment is needed and that can only happen when India starts to nurture its domestic solar manufacturing sector.

Conclusion

Indian solar manufacturing policy must focus on providing incentives for capacity addition, new facilities and investments by way of backward and forward integration of existing facilities in the form of capital subsidies that can be disbursed in a time bound manner, cheaper priority lending, tax holidays, export incentives and R&D growth for increasing FDI inflow and job creation. It has to remove bureaucratic hurdles for faster decision making and initiate skill development campaigns.

I would like to point out here that the Indian export margin has consistently fallen since 2013 and policy support can help in penetrating worldwide markets, generating revenue with ease. With manufacturing policy modification, implementation and enforcement, India can expect its manufacturing sector to have a 25% share in its GDP by 2025, against the current 16%. India’s green energy industry has shown the best growth statistics among all industries. Given that the need for sustainable energy solutions is on the rise globally, this industry needs to be prioritized and supported further with a favourable manufacturing policy.