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Trade protection for domestic manufacturers is misguided

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While the solar industry anxiously awaits the safeguard duty decision, we have examined the rationale of policies favouring domestic manufacturing in a recent study. We have assessed the complete solar value chain – from manufacturing to project construction and operations – and evaluated each activity for employment and value creation to understand their overall impact on the economy.

Solar value chain can be broadly divided into upstream and downstream activities. The upstream activities comprise manufacturing of solar cells, modules, inverters and balance of system and downstream activities comprise project development, engineering, construction and operations. Our findings suggest that module manufacturing contributes a relatively minuscule amount of total economic benefit from solar sector:

80% of total job creation in solar sector comes from downstream activities;

87% of total value creation in solar sector comes from downstream activities;

Even within upstream activities, majority of job and value creation comes from manufacturing of balance of system components;

As part of the study, we have collected employment and cost data directly from various domestic and international manufacturers, EPC companies and project developers. We found that a 1,000 MW cell and module manufacturing line creates only 1,220 jobs. In contrast, manufacturing of inverters and various balance of system components for the same capacity creates almost 3x as many jobs. But bulk of job creation comes from project construction and operations.

Extrapolating these numbers, 10 GW of new solar capacity addition in a year – split 80% utility scale and 20% rooftop solar – creates 66,300 full time jobs in year 1, rising to 316,860 by year 25. The proportion of total jobs created in module manufacturing, inverter and BOS manufacturing, project development and construction and operation is 4%, 10%, 5% and 81% respectively over complete life-cycle of the projects. 

Figure: Job and value creation for 10 GW solar capacity addition

Source: BRIDGE TO INDIA research

We have similarly estimated economic value creation, value of final finished goods less direct cost of key inputs, from each upstream and downstream activity. 10 GW of solar project capacity creates INR 5,42 billion (USD 8.4 billion) of total economic value, split between module manufacturing, inverter and BOS manufacturing, power generation as 10%, 3% and 87% respectively.

The analysis is conclusive – majority of job and value creation in solar sector comes from project development and power generation. Given the critical contribution of solar power to the Indian economy, the government needs to ensure that sector growth prospects are not harmed. Instead of trade barriers, manufacturing should be supported a range of genuine policy reforms including investment in R&D, creation of supply chain and associated infrastructure. Please read our full report here.

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Wind makes an emphatic case

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In the latest wind auction for SECI 2,000 MW tender held on February 13, 2018, winning tariffs came out at INR 2.44 – 2.45/kWh. Winners include ReNew (400 MW), Sembcorp (300 MW), Inox (200 MW), Torrent Power (500 MW), Adani (250 MW), Alfanar (300 MW) and Engie (50 MW). There were five other participants including Sprng, Enel, Orange, Hero and Mytrah. The tender was oversubscribed by 1.85x.

The auction has conclusively demonstrated that wind is price competitive with solar power;

Most developers are indifferent to RE technology;

Wind offers compelling advantages over solar including less land requirement and significantly better domestic manufacturing capability;

There are many interesting takeaways here. First, the immense market depth is a revelation. The large number of credible bidders, over-subscription of 1.85x in such a large tender and fine bidding margin all show that the Indian RE market is now very mature.

Figure: Wind and solar auction tariffs over last year, INR/ kWh

Source: BRIDGE TO INDIA research

The fall in wind tariffs has also been, frankly, a major surprise. In the old preferential allocation regime, when states were offering attractive feed-in-tariffs ranging between INR 3.70–4.90, viability was still regarded as challenging and developers were lobbying for additional incentives like GBI (generation-based incentive). Improvement in turbine technology has played its part in making wind competitive. But more importantly, the government has reduced investor risk by making project allocation more transparent and addressing transmission connectivity challenge. More developers have entered the market creating more competition. EPC contractors have also been forced to become more efficient and the consumer has been the big beneficiary. This is a great lesson for policy makers in policy design.

The other interesting aspect of falling wind tariffs is implications for future RE mix. India needs to add another 80 and 27 GW of solar and wind power respectively in the next four years to meet the March 2022 targets. These numbers seem unfairly balanced against wind. The rationale for higher solar target has never been outlined. Presumably the reasons are geographical wider distribution of solar radiation (in comparison to wind) and an expectation that solar costs would fall more sharply than wind power. Solar may have also benefitted from its image of a newer, more progressive technology in comparison to wind, which has been around for much longer.

But rapid improvement in wind competitiveness should lead to a reconsideration of the RE mix. Many complex factors including land and transmission requirement, geographical dispersion, power generation variability, seasonal profile, operational risk and role of domestic manufacturing go into the mix. Solar offers the advantages of slightly quicker deployment and a more reliable generation profile, which is also more closely aligned to demand pattern. But wind has some crucial advantages – it requires much less land in comparison to solar power. And India has a strong eco-system of manufacturing and construction of wind power plants – in sharp contrast to solar, where the country remains heavily reliant on imports

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Duty announcement seems imminent

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Since announcement of preliminary findings by Director General of Safeguards (DGS) last month, a decision on provisional safeguard duty has been anxiously awaited by the Indian solar industry. We understand that the government is leaning towards a 20-25% duty and the decision process is fairly advanced. In fact, a DGS Board meeting had been convened last week. But a delayed High Court hearing in response to an appeal by Shapoorji Pallonji Infrastructure Capital, a project developer, has deferred the duty announcement.

The government believes that solar power can afford a nominal level of duties as costs/tariffs have fallen to record lows;

But the duties risk upsetting progress in downstream project development activity, which creates over 80% of jobs and value in the sector;

We need a long-term policy reform for creating genuine competitive advantage in manufacturing;

It seems increasingly inevitable that India is set to levy a safeguard and/or anti-dumping duty on imports of PV cells and modules. The government rationale appears to be that with solar falling to all-time cost lows to become the most competitive source of power (alongside wind), the sector can afford a nominal level of duties without any undue damage.

It is still a fair question to ask: why promote manufacturing and more importantly, how to do it? As per our latest report, Trade protection for domestic manufacturers is misguided, module manufacturing accounts for only 4% and 10% of total job and economic value creation respectively in the sector. The downstream power generation activity, on the other hand, accounts for a disproportionate number of jobs and value creation (86% and 87% respectively), and also produces other vital benefits including greater energy access and carbon abatement. High module imports are sometimes cited as a threat to India’s energy security, but making modules is not really going to address this issue if the country remains reliant on 100% imports for polysilicon and/or wafers.

The main problem with manufacturing is simply that India is not very good at it. Manufacturing’s share of the country’s GDP has been stuck at close to 16% over the years, a remarkably low level for a developing economy such as India. Despite demand growing nearly 10x in the last 4 years and the government offering multiple incentives (capital and operational cost subsidies, assured demand in the form of domestic content requirement), manufacturing has failed to take off – India produces less than 1 GW of cells (0.7% global market share) and about 2 GW of modules (2.0%). Many leading Indian and international players (Sterling & Wilson, Welspun, JK Group, Dalmia Bharat, Trina, LG, JA Solar and Hareon) have closely examined this business, yet decided to stay away.

As we noted earlier, 1-2 Chinese players may set up local capacity to opportunistically take advantage of duties. But a serious manufacturing revival appears unlikely unless the Indian government can come up with radical, multi-dimensional reform to improve domestic competitive advantage

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US safeguard duty to have nuanced implications for India

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On 22nd January this year, the US government imposed 30% safeguard duty on imported solar cells and modules. The duty has been imposed for four years but will reduce by 5% every year. First 2.5 GW of imports every year shall be exempted from duties.

As per WTO laws, imports from specified developing countries shall also be exempt from duties up to 3% of ‘total imports’ for individual countries and up to 9% of ‘total imports’ cumulatively for all such developing countries. This provision is a silver lining for Indian manufacturers as India is one of the exempted countries. Assuming that the US imports 10 GW cells and/or modules every year, Indian manufacturers can export up to 300 MW of modules per year with a healthy pricing advantage. This is an attractive opportunity but the small scale is not credible enough to support manufacturing in India.

One big unknown is the impact of this decision on US module demand and ultimately, the international prices. The level of duty imposed is less than the US International Trade Commission (US ITC) recommendation and final solar system prices are expected to go up by only between 6-10%. That makes us believe that final impact on US demand and module prices elsewhere would be minimal.

The US decision could still have one important implication for India. India is in the midst of its own trade investigations to consider safeguard and/or anti-dumping duty on cells and modules. We feel that the Indian government has a much tougher call as the downstream market is extremely price sensitive and any price shock would detract from the vastly ambitious target of 100 GW by 2022. Nonetheless, the US decision would ring loudly in the ears of Indian policy makers, who may take a cue from the US in imposing duties of about 20-30%.

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It’s raining RE tenders in India

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Gujarat Urja Vikas Nigam Limited (GUVNL), Gujarat government holding company for power distribution and transmission businesses in the state, announced a new 500 MW solar tender last week. The tender has an innovative provision in the form of a 500 MW green-shoe option. If GUVNL deems the lowest auction tariff attractive, it can exercise an option to increase the tender capacity up to 1,000 MW provided bidders are willing to match the tariff. With this tender, total new RE capacity tendered in India from December 2017 onwards has gone up to 12,755 MW.

High RE demand would be difficult to sustain as total power demand growth remains stuck in low single digits;

Connectivity to national grid is allowing greater RE access for land and resource constrained states but likely to build up grid stability challenges;

Procurement agencies may be set for tariff surprises as growing viability concerns and reducing competitive pressure may finally lead to tariffs going up;

The new tender rush is in stark contrast to the only 7,200 MW of new capacity tendered in the 11 months from January – November 2017. MNRE’s pressure on states to accelerate RE procurement seems to be working although we believe that the actual numbers would still be way short of the MNRE plan to auction 21 GW by end March 2018. Power demand growth in the country remains steady at about 4% as per the latest numbers available. The good news is that RE growth is beginning to make aconsiderable dent in thermal power demand and capacity addition.

SECI has issued seven of the fifteen new tenders totalling 7,295 MW (57% of total tendered capacity) since beginning of December 2017. Three of these tenders are for 2,000 MW each, where bidders can elect to build projects anywhere in the country and connect to the national grid. Most such projects are likely to be located in Gujarat, Tamil Nadu (for wind) or Rajasthan and Madhya Pradesh (for solar). Details of ultimate offtakers are not available at this stage but we expect most of this power to be bought by hinterland states including Punjab, Haryana, Uttar Pradesh, Bihar, Jharkhand and Chhattisgarh. It is an appealing route for these land and resource constrained states to buy RE power at low cost. But concentrating more capacity in select states may pose problems from a grid stability perspective in the future and the policy makers need to be watchful on this front.

Most of the other new location-specific tenders have been issued by Karnataka (2,260 MW), Maharashtra (1,800), Uttar Pradesh (1,275) and Andhra Pradesh (750)

All figures in MW

There are two other interesting developments in recent new tenders. With the threat of safeguard and/or anti-dumping duty looming, Gujarat and Karnataka have chosen to offer change-in-law protection to developers insulating them from this risk. We expect other states and even SECI to follow suit. The other one relates to benchmark ceiling tariff, set at INR 2.93/kWh in Andhra Pradesh and Karnataka, 3.00 in Maharashtra and 3.43 in Uttar Pradesh and Assam. Expectations have been set low after the recent auction results. But what if tariffs start rising in response to growing viability concerns and reducing competitive pressure? Procurement agencies may be set for some surprises on this front.

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Energy goes missing from the Union Budget

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The Indian Finance Minister announced budget for the financial year 2018-19 last week. Being this government’s last budget before general elections due in early 2019, the focus was unsurprisingly on populist measures related to agriculture, rural development and health. But we still found it remarkable how little attention was paid to the entire energy sector.

Focus is on rural electrification, but funding provision seems inadequate for various ongoing and proposed schemes;

Increase in customs duties on lithium-ion batteries is expected to hamper storage prospects;

Slippage down the government’s priority list is not a good sign for the sector;

RE received precious few mentions in the budget. Those were limited to rural electrification and solar irrigation pump schemes. But here again, the funding allocations seem too small and less than expected – INR 8,485 million for off-grid solar for FY 2018-19 is 14% lower than the revised estimate for FY 2017-18. Moreover, initiatives to devise a mechanism for DISCOMs to buy surplus power from farmers seem insincere.

For FY 2018-19, the budgeted allocation is INR 51.5 billion, 6% lower over last year. Around 39% of monies are earmarked for grid interactive solar projects. Bulk of this allocation is expected to go towards solar park capital expenditure and rooftop solar subsidies but the amount seems short of promised support under ongoing and proposed schemes.

Source: Union Budget 2018-19 documents, BRIDGE TO INDIA researchNote: Others include expenditure on human resource development and training, autonomous bodies under MNRE including National Institute of Solar Energy (NISE), National Institute of Wing Energy (NIWE), National Institute of Bio-Energy (NIBE) and SECI.

Despite a steep slowdown in wind energy installations during the last year, budgetary allocation for wind energy remains unchanged.

In line with other hikes in import duties, customs duty on lithium-ion batteries has been increased from 10% to 20%. That is not helpful for growth of storage business, which is already struggling with viability challenges.

Overall, it is disappointing for such a vital sector of the economy to receive such little attention. There is a dearth of new ideas and little attempt is being made to harness new technologies and business models – gasification, electric vehicles, storage, smart grids – to achieve India’s energy transition. The budget confirms our view that energy is slipping down the government’s priorities in the fog of elections and other ‘more important’ concerns.

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Karnataka takes the lead in addressing duty concerns

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Karnataka announced results of an 860 MW state solar tender last week. 11 developers have won 48 projects aggregating 760 MW at tariffs ranging between INR 2.94 – 3.54/ kWh. Big winners include Shapoorji Pallonji (185 MW), Acme (106 MW), ReNew (99 MW), Asian Fab Tech (85 MW) and Greenko (45 MW). Prominent losers include Aditya Birla, Avaada, Orange and EdF. 100 MW of the allocated capacity was reserved for domestic module manufacturers, but we expect this to be cancelled in view of the ongoing WTO dispute. We understand that no bids were received for the remaining 100 MW capacity

Karnataka is the first state to absorb complete risk of any change in duties and we expect other procurement agencies to follow suit;

Taluk-based bidding model remains unique to the state;

The state’s aggressive RE procurement is puzzling as its total RE capacity is set to exceed base load by 32% by 2019;

In a big relief to developers, Karnataka offered to assume complete risk of any change in taxes and duties arising after submission of bids. As we commented in our recent report on anti-dumping duties, duties pose a major risk to financial viability of solar projects. No other state or central agency including SECI has offered this concession so far but we expect Karnataka’s position to become an industry standard position over time. Lack of a solar park and direct DISCOM offtake meant that the tender was dominated almost entirely by local developers, who accounted for most of the 4x subscription. Moreover, winning bidders were selected on the basis of the lowest bids. Absence of e-auctions provided much-needed respite to developers as the winning tariffs are amongst the highest in more than 16 months.

Figure: Winning tariffs in recent solar auctions

Source: BRIDGE TO INDIA research

Karnataka is a pioneering state in the solar sector in many respects. It is the largest state in the country in terms of policy-based, utility scale installed and pipeline capacity totalling 3,754 MW as of December 31, 2017. The state also has a uniquely attractive open access policy. And it remains the only state in the country to adopt taluk-based bidding. The 860 MW tender is only the second tender of its kind, where up to 20 MW capacity is proposed to be developed in each of the 43 earmarked taluks across the state (a taluk is a sub-district level administrative area) in a bid to evenly spread solar capacity across the state and manage grid stability issues.

All this still begs the question – why is Karnataka installing so much solar capacity? Including this 860 MW tender and other ongoing SECI and state tenders, Karnataka will have procured a total of 5,810 MW of solar power by 2019. By that time, the state is expected to have a further 1,500 MW of open access solar, 200 MW of rooftop solar and almost 4,000 MW of wind capacity, raising total RE capacity in the state to 11.5 GW. By comparison, the state’s average power requirement is only 8.7 GW. The state is storing up big trouble for the years to come.

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