By Jyoti Gulia and Vibhuti Garg for IEEFA
India is one of the leading module manufacturers with a growing capacity and promising potential. However, the country still lags behind China. In its report titled “Viability assessment of new domestic solar module manufacturing units”, Institute for Energy Economics and Financial Analysis (IEEFA) evaluates the question of whether India can compete against China in PV production. REGlobal presents the key highlights from the report:
India is one of the top 10 solar module producers in the world with an installed domestic photovoltaic (PV) module manufacturing capacity of about 15 gigawatts (GW). However, India is lagging behind its biggest competitor China, in not just module manufacturing capacity but also in production of other raw materials such as wafers, cells and poly silicon. In addition, the capacity utilisation of domestic production facilities is only 40- 45% and estimated operational capacity is only about 7GW. Current production capacity is only able to meet 35% of the total annual domestic demand. Even though domestic suppliers contribute only 30-35% share of all utility-scale solar installations, the situation is reversed in the commercial and industrial (C&I) and distributed segment of the market where domestic suppliers cater to nearly 60% of the market.
On the export-import front in India, Chinese suppliers account for 80% of the imported modules market with the rest of the imports coming from Thailand, Malaysia, Vietnam. Since 2015, India has on average imported solar cells and modules worth Rs 176bn (US$2.6bn) annually. Simultaneously, 80% of India’s market share of exports is to the U.S. The exports of each of the top 4 players – Vikram Solar, Waaree, Adani Solar and Tata – constitute 25-30% of their total trade volume. On the other hand, Chinese manufacturers, trade 66% of their production volume on average in the overseas market.
This report covers two distinct sets of policy framework and different industry incentive programmes prevailing in India and China. In India, in order to boost domestic manufacturing, several avenues were created under the Domestic Content Requirement (DCR) category, manufacturing linked tenders, incentives though Modified Special Incentive Package Scheme (M-SIPS), imposition of safeguard duties etc. to name a few. Whereas, the Chinese government offers cheap credit, free land, cheap loans, research funds, tax rebates, and sometimes even cash to support its manufacturing sector.
The report also analyses various components of PV module manufacturing cost, in which the Bill of Materials (BOM) has the highest share with more than 4/5ths of the total expenditure. BOM of solar modules include the cell, glass, ribbon, silicon, aluminium frame, etc, with the cell contributing the highest share in terms of component cost. For Indian manufacturers, the BOM is about 9% higher than the BOM for their Chinese counterparts for non-DCR modules (modules where imported cells are used) and about 20% higher for DCR modules. If India’s capacity utilisation could be increased to 100%, then the per watt-peak (Wp) cost can be reduced by 7- 8%. In terms of profit margins, the Chinese module suppliers are able to absorb larger shares of profit (average 4.3%) of the operational revenues compared to that of Indian suppliers (excluding Adani), who earn an average profit income of less than 3%. This is because the Chinese module manufacturers have larger-scale production facilities, low dependence on imports, completely integrated facilities of modules, cells and wafers. This is also complemented by robust research & development (R&D) and favourable government support.
In terms of technology adoption trends, the more advanced mono-Si PV modules had almost a two-thirds share of the entire global PV production by 2019 in terms of GW volume. Whereas in India, considering the top 7 domestic module manufacturers in 2019, mono-Si PV modules constituted only 13% of PV production, while 87% comprised of multi-crystalline (or multi-Si) PV modules. According to JMK Research, in 2020, in India, the share of mono PERC modules is expected to increase to 25-30% of all utility-scale solar installations.
From having a virtually monopolistic presence in Chinese module exports prior to 2018, demand for M2 cell-based modules has been declining at a fast pace every quarter since 2019. Conversely, in the Indian market, the domestic manufacturers have only been catering to the M2 cell-based module market.
Furthermore, about 1-3% of the gross revenue has been utilised for R&D by the Chinese players every year. In India on other hand, there is not much investment in R&D, even by the leading players. Even the government has not promoted schemes or given grants to set up facilities to promote technological innovation, a key aspect of the solar sector. However, in a recent development, the Indian government gave the nod for the introduction of a Production-Linked Incentive (PLI) scheme in 10 key sectors, including the solar PV manufacturing sector, for which Rs45bn (US$603m) is allocated for investment by the Ministry of New and Renewable Energy (MNRE) in high efficiency solar PV modules.
With reformed national priorities following the COVID-19 pandemic and India-China border issues, the solar PV industry presents an opportunity for the nation to boost its self-reliance, albeit at a cost to downstream electricity users in the form of higher resulting tariffs. Henceforth, to assess the viability of new module PV manufacturing facilities in India, this report analysis and compares in detail various critical parameters, that are imperative to aid this segment.
Until 2011, India was one of the largest exporters of best-in-class modules. Domestic manufacturers including Tata Solar, Moser Baer, BHEL, Indosolar and Lanco were industry pioneers. However, factors including lack of financing support, inconsistent government policy, lack of scale and competition from low priced Chinese imports led to undercutting of India’s domestic module manufacturing growth.
In India, domestic module manufacturing started picking up pace in 2010 with the announcement of the National Solar Mission. The mission required the bidders to use solar Photovoltaic (PV) modules manufactured domestically in the first ever solar tender of 150 megawatts (MW). The second tender of 350MW further strengthened the stipulation requiring bidders to use only solar cells and modules produced domestically instead of modules produced using imported solar cells. In 2012, the Modified Special Incentive Package Scheme (MSIPS) was launched to provide financial aid via subsidy grants for the local players. In the following years, to lend further assistance to the stressed sector, the Indian government introduced certain measures such as the Domestic Content Requirement (DCR) and the safeguard duty (SGD) to dampen the influx of cheap foreign imports. Later on, schemes were launched to reserve 50% of the tender capacity for solar cells and modules manufactured domestically while allowing the remaining 50% capacity to be set up using imported modules. But this was unhelpfully challenged in the World Trade Organization (WTO) by the U.S., which viewed it not as a government procurement but a commercial transaction. Due to this, the process of reserving capacities in the tenders for solar cells and modules manufactured domestically was stopped in January 2018.
Most of these central government initiatives did not catalyse a nation-wide move towards the indigenisation of the PV value chain in the desired manner. Apart from the policy and regulations concerning the industry, there are considerable technoeconomic risks involved in the setting up and operation of module manufacturing facilities in India. But the challenges associated with these risks along with the rising annual demand for solar installation in the country signify the existence of enormous underlying potential for development of domestic module production. With reformed national priorities following the COVID-induced lockdown, the solar PV industry presents a critical opportunity for the nation to boost its self-reliance.
Domestic cell production capacity
India has just over 3GW capacity of domestic cell manufacturing. With module production capacity in the country at around 5 times of that of solar cells, the huge dearth as well as the opportunity in the logistical support for Indian module manufacturing is quite evident. The demand for indigenously made solar cells is generally low because module suppliers demand cells of higher grade (in terms of wattage, efficiency, etc.). In addition to this, due to the narrow cell production scale for the majority of cell manufacturers, domestic cells are more expensive. Given these factors, domestic module suppliers prefer the superior imported cells.
Module manufacturing capacity
According to MNRE, the current installed manufacturing capacity of domestic modules in India is about 15GW. Only a couple of GW-scale companies exist in India. The majority of the plants are of 50-200MW capacity and experience very high operating costs. The capacity utilisation of domestic production facilities is only 40- 45% and estimated operational capacity is about 7GW. This low capacity utilisation has been attributed as the reason for the sub-scale production capacity with the average plant size 0.5-1GW in India vs. 3-5GW in China.
China accounts for ~71% of the total solar module manufacturing capacity globally. It has witnessed growth in solar manufacturing capacity from 10GW in 2010 to 106GW in 2019. In addition to modules, China is also a leading producer of silicon wafer with a 97.4% share of the global market, PV cells with a 79% share and poly silicon with a 67% share. 3 India is lagging behind its biggest competitor not only in module manufacturing capacity but in other raw material production such as wafers, cells, poly silicon as well. With rapid solar technology innovation, Indian firms also struggle to keep pace with China’s constant manufacturing capacity upgrades.
Domestic production of modules is yet to attain critical mass in India. Current production capacity is only able to meet 35% of the total annual domestic demand. The share of Indian PV module sales compared to overall global sales so far is insignificant. But major expansion plans by some of the biggest domestic players such as Waaree and Adani are expected to spur the growth of domestic module sales in the next few years.
However, in the near term, the prospect of manufacturing capacity addition/ expansion looks to be uncertain. Though the import of solar modules has reduced since the beginning of COVID-induced lockdown, it has also affected the domestic manufacturing industry. The Indian manufacturers have been dealing with raw material import restrictions and a surge in the prices of these inputs.
Due to insufficient domestic module manufacturing capacity and quality, over the years India has relied mainly on imported modules. The domestic module manufacturing industry has a long way to go to fulfil the 10GW annual domestic demand for solar installations. As shown by the chart below, the share of domestic modules installed in total in India has increased from 15% to 35% in the last three years. Despite this, the industry is heavily reliant on imported modules from China only.
Even though domestic suppliers contribute only about a 30-35% share of all utilityscale solar installations, the situation is reversed in the commercial and industrial (C&I) and distributed segment of the market where domestic suppliers cater for nearly 60% of the market.
Key challenges for Indian manufacturers in relation to Chinese suppliers
In order to understand the overall viability of operating domestic module manufacturing plants, it is necessary to assess the various challenges, technological capabilities and economic costs of the sector in detail. The market competitiveness of various aspects of domestic modules in relation to aggressively priced imported modules is an indicator of the potential prospects for setting up new production facilities in India. However, limited scale manufacturing capacity, capacity underutilisation (due to fluctuating demand for domestic modules) and sluggish technological development are some of the major reasons for India lagging behind China in the PV manufacturing industry.
Higher Costs: Among the various components of PV module manufacturing cost, the Bill of Materials (BOM) has the highest share with more than 4/5ths of the total expenditure. The BOM of solar modules includes cell, glass, ribbon, silicon, aluminium frame, etc, with cell contributing the highest share in terms of component cost. Indian manufacturers’ BOM is about 9% higher than that of their Chinese counterparts for Non DCR modules (modules that use imported cells) and about 20% higher for DCR modules. This is because Indian manufacturers have to import many of the raw material inputs, unlike Chinese players who can rely on their end-to-end domestic PV value chain. Raw material costs are huge in India as the majority are imported.
Smaller profit margins: With a monopolistic presence in the solar PV manufacturing market and strategic priority awarded by the government to this industry, China enjoys the lion’s share of revenue and profit generated by the industry worldwide. China’s massive-scale manufacturing capacity and advanced technological capabilities put it ahead of other nations. Even though operational revenue earned by the Indian players has generally been on an upward trend in recent years, it is still far behind that of their Chinese counterparts. Except in 2018, when revenue of Chinese players trended downward and in FY2019 where Indian players have observed a minor dip.
Lesser volume of exports: India used to export significantly more (in value terms) in the previous decade. The quality of solar cells and modules produced in India is on a par with those produced in other major solar PV manufacturing countries. Around 2010, with the supply of cheaper Chinese modules in the global market, the share of Indian exports began to dwindle.
Slow rate of technology adoption in India: As the world shifts towards mono-crystalline (mono-Si) based PV technology, there is a greater focus on enhancing technological prowess in this segment by the major players across the world. From a global perspective, the more advanced mono-Si PV modules have almost a 2/3rd share of the entire PV production by 2019 in terms of GW volume. Whereas PV production in India, considering the top 7 domestic module manufacturers in 2019, constituted only 13% of mono-Si PV modules and 87% of the multi-crystalline (or multi-Si) PV modules. The current technology split of production of leading Indian domestic manufacturers is shown in the chart below.
Larger cells: Globally, there is a rising demand for larger cell-based modules due to their higher efficiency and wattage output range. In the past two years, with the ground-breaking developments by Chinese module manufacturers in the PV technology space, there have been numerous novel cell types that have been introduced including the larger sized cells. From having a virtually monopolistic presence in the Chinese module exports prior till 2018, the demand for M2 cell-based modules has declined at a fast pace during every quarter since 2019. Conversely, in the Indian market the domestic manufacturers have only been catering for the M2 cell-based module market. India has been a laggard in transitioning towards development of the latest cell technology, primarily due to the lack of R&D support and enormous financial drain associated with the continuous technology upgradation.
Lack of focus on R&D expenditure in India: It is crucial to incentivise the Indian solar manufacturing industry to continually invest along the PV value chain in light of the ongoing rapid technology improvements. This must be encouraged along with financial and technological reinforcement of solar PV tech R&D facilities in India.
Higher selling prices: Prior to imposition of SGD, Chinese modules were cheaper than domestic modules by at least 15%. Post the SGD imposition in July 2018, the landed cost, i.e. module cost + SGD, of the Chinese modules was higher than that of the Indian modules, giving the latter the competitive edge over the imported modules. But, with the progressive decline of SGD in every six months since its imposition along with the ongoing reductions of Chinese module cost, the price difference between the Chinese and Indian modules has narrowed.
Over the past few years the Indian government has introduced various initiatives and schemes to support the domestic PV manufacturing industry, given the trade balance, employment and localisation of supply chain benefits. However, most of them have been unable to provide the necessary support to the sector. With a renewed emphasis on the “Make In India” initiative, the government is now focussing on building a complete ecosystem to boost the domestic PV manufacturing industry. As part of this, the Indian government is planning to provide capital subsidy, tax breaks, custom duty exemption on imported capital goods and the machinery needed for manufacturing, along with cheaper land parcels near port areas to be developed as manufacturing hubs.
In the wake of all these factors, many Indian players including Adani, Renew, Azure, Vikram Solar have announced plans to expand their existing facilities or set up completely new integrated facilities. Even government entities like CIL are looking to setup integrated wafer manufacturing facility.
However, these players will face stiff competition from the leading global players. Chinese firms’ aggressive ongoing capacity expansion and growing thrust towards technology advancement are yielding development of superior efficiency yet cost-effective PV cells and modules.
The government now needs to provide a balanced framework and should focus on a long term strategy. Imposition of safeguard duties and basic custom duties can help the domestic players remain competitive with imported modules. However, this is only a partial solution that will only create demand in the local market. The planned initiatives should not be limited to boosting the domestic market. The focus should also be on helping players expand their horizons to be globally competitive.
Government should formulate plans to support backward integration now and plan initiatives to set up cell, wafer and ingot manufacturing facilities as well as module manufacturing. State governments can intervene at these junctures by providing land, utilities, etc. at concessional rates and various regulatory approvals and permissions in a more timely and efficient manner if competition vs China is to be successful over the long term.
Further, sustained innovation should be the core of all the government’s new plans. Government should focus on setting up new R&D facilities and institutes to support this high growth sector. The market is experiencing a huge shift to higher efficiency products and with global technological advancements in the PV manufacturing sector, India should also focus on spending more on R&D to build a long term, sustainable segment.
Government has set a target to achieve 450GW of renewable capacity by 2030. To achieve this, about $18bn worth of products annually will be imported. Instead, if a small proportion of this amount, about US$3-3.5bn, were to be spent on building the domestic segment it would give long term results and make India’s solar sector completely ‘AtmaNirbhar’. A self-reliant solar sector would not only cater to domestic demand but could also open new avenues of exports, especially after the COVID-19 supply chain shock that forced nations to start looking at alternatives to China. Clear political intent along with a long-term vision is what is now needed for this sector to take off.
The article has been sourced from IEEFA and can be accessed by clicking here