New dawn for solar manufacturing

04 February 2022 |

The government has approved basic customs duty (BCD) for cells and modules as well as an enhanced budget of INR 240 billion (USD 3.2 billion) for production-linked incentive (PLI) for domestic manufacturers. As per the budget announcement made this week, 25% and 40% BCD would be levied on cells and modules respectively from 1 April 2022 onwards. Both measures were widely expected and finally clear way for a dramatic transformation of the solar sector in India.

  • We expect total module manufacturing capacity to touch 55,000 MW by 2025;
  • BCD would add to overall cost pressures in the sector and reduce cost advantage of solar power;
  • The challenge for the government would be to wean manufacturers away from trade barriers and subsidies over time;

Enhanced PLI budget means that all 15 remaining bidders in the scheme with total bid capacity of 48,600 MW can now be accommodated in the scheme. The move is being hailed across the industry but we question the need for financial incentives when manufacturers have significant protection from imports through BCD and ALMM. The incentive is a waste of taxpayer money. Moreover, it risks distorting the market by creating massive capacity glut. We estimate total installed capacity of polysilicon, cells and modules to touch 30,000 MW, 40,000 MW and 55,000 MW respectively by 2025, far in excess of domestic demand. Some smaller bidders may, however, struggle to raise required funds within the tight deadlines – only 1.5 years for cells-modules. Based on an analysis of the investment requirement vs PLI bids, Adani, First Solar, ReNew, Waaree, Tata Power and Vikram would be the biggest beneficiaries.

Figure: PLI bid capacities and amounts

Source: IREDA’s list of qualified bidders

India’s renewable sector, having so far focused on adding more generation capacity with ever lower tariffs, is set for a drastic change with pivot towards manufacturing. Total manufacturing investment over next three years is expected to touch INR 600 billion (USD 8 billion). Despite oversupply and financial incentives, prices for domestically produced modules are expected to remain higher than for Chinese module prices by up to 10%. It also seems fair to assume that fall in Indian module prices and tariffs would be much more gradual going forward. The challenge for the government would be to wean manufacturers away from trade barriers/ subsidies and ensure that they remain competitive with leading international manufacturers on technology and cost.

Impact on project developers and consumers
The government has refrained from providing any BCD exemption for under construction projects, which will now see capital costs going up by a further 16%. Change in law compensation would ultimately cover utility scale project developers for the additional cost. But there is no clear compensation formula specified in most state tenders resulting in a significant hit because of: i) additional working capital requirement arising from delay of up to 2 years in claim approval from regulators; and ii) inadequate carrying cost allowed in determination of incremental tariff. We estimate total project pipeline impacted by BCD at 38,575 MW with Adani and Azure accounting for the biggest share because of their combined 12,000 MW win in the manufacturing-linked tender.

Figure: Estimated project pipeline affected by BCD imposition, MW

Source: BRIDGE TO INDIA research

BCD would have far more negative impact on the corporate renewable market, where effective cost for consumers would increase by about INR 0.50/ kWh eating into shrinking cost advantage of open access solar.

Other budget announcements
The government has also extended operations commencement deadline for new manufacturing companies to avail concessional corporate tax of 15% by a year to March 2024. Beyond the pro-manufacturing announcements, there was little of note in the budget for the sector. Storage has been included within definition of ‘infrastructure’ sector, which may mean marginally better access to financing. The government also announced a plan to issue sovereign green bonds and extended BCD exemption on electrolysers to FY 2024.

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