It’s been a trying time for the Indian solar power sector due to recent policy and financial headwinds, and unless they change in the favour of project developers, the going could be tough
The past few months have seen numerous challenges for the solar sector in India. Apart from changes at the policy level, grappling with uncertainty on the economic front appears to have taken a toll on the solar industry, experts say.
Even though the government’s policy remains favourable for the sector, a series of operational missteps on safeguard duty, ceiling tariffs, tender design and tender cancellations have weakened market confidence over the last year, says Vinay Rustagi, managing director of clean tech consultancy Bridge to India.
Concurring, Neha Agrawal, head of corporate strategy and rooftop business, Vikram Solar, said that some of the recent implementations have dealt a damaging blow to the industry. “One such instance is that of GST (Goods and Services Tax). Even after a year, ambiguity still persists on whether the EPC (engineering, procure and construction) contract for solar power projects would be categorised under the 5% or 18% tax bracket. This has led to an unpredictable environment and made investors reluctant when it comes to bidding for projects.”
Also, in a move to accord protection to the domestic industry against a sudden surge in imports of solar cells whether or not assembled in modules or panels, the Ministry of Finance imposed a safeguard duty on imports. This has been counterproductive to the units set up in Special Economic Zones (SEZ), as these units were also made liable to pay safeguard duty. Around 60% to 70% of the domestic solar manufacturing capacity is situated in SEZs.
Since solar PV modules contribute approximately 60% to the overall cost of a project, the imposition of the duty has increased the overall cost of solar projects by approximately 12% to 15%, said Agrawal.
Allaying fears, a source in the Ministry of New and Renewable Energy (MNRE) explains that the solar sector in the country is primarily import driven and 80% of the modules and cells come from China and Malaysia. The kind of ecosystem or framework that developed over a period of time in the solar sector gave the feeling that though prices have fallen and reached a level of Rs 2.24 per unit, falling prices of the module or solar cells that are being imported, coupled with finances coming in from large companies which are investing in the Indian solar sector, over a period, there was an inquiry and safeguard duty was imposed, he said.
This created some kind of a ripple, the source said. If a developer applies for a tender, he will not buy his panels immediately and may buy them after six months. By that time, the prices will move and there will be uncertainty in the market. That is the reason why the industry is becoming a bit cautious, as to what kind of cost implications will be there.
Agrawal says some of the other issues the sector has had to confront are the fact that the Indian rupee depreciated against the US dollar and this squeezed the margin of the solar industry, as it is highly vulnerable to currency volatility owing to heavy dependence on import of equipment for solar power installations.
“The expectation of lower tariffs and unwillingness of the distribution companies to procure power beyond INR 2.70 (4 US cents) per unit is also putting severe pressure on the industry,” she said. “Many tenders were floated and put off several times before getting scrapped, due to a lukewarm response from the industry. Domestic manufacturers are also struggling for their survival without any visibility of a market for indigenous products.”
The Indian solar imports spiked considerably in the third quarter of 2018. According to the Department of Commerce, solar modules and cells worth USD 602 million were imported by India in that third quarter. This figure is approximately 38% more than the USD 436.63 million of solar cells and modules imported by India in the second quarter.
China continues to be the single-largest supplier of solar modules and cells to India. Chinese companies accounted for nearly 84.5% of solar imports to India in the third quarter, a slight rise from over 75.9% in the previous three months, clean energy consultancy Mercom reported. Singapore accounted for 6.9% of India’s imported solar cells and modules in the quarter, totalling USD 41.33 million, making it the second largest supplier of solar equipment to India.
Some policies and demands made by the government have limited the Indian solar sector from achieving its full potential, a few experts say. Moreover, there has been no significant policy moves to promote the domestic solar manufacturing industry, they said.
It is important that the Central Public Sector Undertaking (CPSU) and solar-manufacturing policy be announced so as to incentivise domestic manufacturing and provide a reason for manufacturers to undertake backward integration and expand the existing capacity, said Agrawal.
Recent issues such as the imposition of 25% safeguard duties on SEZ-based solar manufacturers, continuous solar imports, lack of demand creation, cancellation of tenders, renegotiation of power purchase agreements by state distribution companies, lack of R&D incentives for manufacturers, differential GST rates, states failing to reach renewable purchase obligations and lack of access to cheap finance have led to a slowdown in India’s solar sector, she explained.
Tenders of Solar Energy Corporation of India (SECI) for 1,200 megawatt (MW) of wind-solar hybrid scheme and 10,000 MW solar tender linked to manufacturing units failed to attract developers, as it entails that they set up manufacturing plans for bidding projects.
A continuous drop in solar tariff created another issue. Gujarat Urja Vikas Nigam Ltd and Uttar Pradesh Non-conventional Energy Development Agency and SECI cancelled 3.9 GW of cumulative capacity solar projects to drive down the tariff even lower. In the absence of any visibility for off-takers, it is tough for anyone to commit such a huge investment in a new facility.
Moreover, continuous import of solar (India spent USD 3.8 billion on solar module import in 2017-18), 25% safeguard duty on SEZ-based solar manufacturing units, and lack of focus on domestic solar manufacturing have led to a scenario that predicts a reduction of solar demand in the first quarter of 2019.
Rustagi is of the opinion that the industry is subject to a lot of volatility because of irregularity in the way tenders are issued and auctions are completed. “We expect volumes to be down very significantly in 2018-19, but there should be a pick up next year followed by another year of slowdown,” he said. “This up-down movement is detrimental to the market as it doesn’t allow private players to plan ahead and also leads to irrational bidding behaviour.”
Agrawal said policies must be modified to create a favourable environment for solar manufacturing. Reducing solar import, exempting safeguard duties, keeping inputs for solar development under the 5% GST bracket, investing in energy evacuation and distribution infrastructure, discouraging cancellation of tenders and focusing on domestic solar manufacturing are needed to better the situation. “The deviations in policy that do not focus on solar need to be realigned so that the industry can grow,” she said.
According to the MNRE official, as far as the government is concerned, tariffs have touched a level of INR 2.44 or so. Looking at the condition of the distribution companies or the states, nobody is ready to go in for INR 3 or INR 4 and nobody will buy electricity at those rates. “So, the challenge is whether India can afford to increase the prices of solar, including the safeguard duties or not and can the impact of the safeguard duty be minimised if prices of the modules are falling,” he said.
Apart from the central public sector units, tenders that are happening through SECI or state-owned NTPC Ltd, why can’t states develop their own ecosystems for competitive bidding from their own tenders, he questioned. Unless the states become more proactive, the risk will not be distributed across the board and one cannot blame the government for it, the official said.
With the MNRE announcing plans to award 77 GW of solar power projects within 2020 and new floating solar projects being introduced in India, there are indications of healthy growth of solar in the country. Additionally, being part of the International Solar Alliance, new untapped solar markets will be accessible to India, said Agrawal.
According to the MNRE official, the government has been doing everything it can to handle the situation and the results are quite apparent. “Since solar in India is dependent on imports, many of the factors are not in our control —prices, cost of finance, dollar versus rupee volatility. It is the general economic condition that has impacted the globe and India is not insulated from it,” he said. “Many a times, our efforts to create a domestic manufacturing have been jeopardised due to WTO regimes. Despite all this, in the years to come, growth will be more robust in India.”