Demand, policy, efficiency and competitiveness to drive growth
India’s solar module manufacturing capacity is set to gallop by almost 400% higher by fiscal 2025, compared with fiscal 2021, with 30-35 GW of fresh module capacity set to be commissioned following strong demand, favourable policies, likely improvement in energy efficiency, and price competitiveness.
A CRISIL Ratings study of the capex plans of the top 11 domestic module manufacturers, which account for ~80% of the current effective solar module installed capacity of 8 GW, and some new entrants, indicates as much.
The solar module manufacturing value chain starts with polysilicon and/or ingots, which are converted into wafers. These wafers are used to produce solar cells, which are then assembled to manufacture solar modules.
As on March 31, 2021, India had 3 GW of solar cell capacity (mostly used for captive production of solar modules) and 8 GW of effective solar module capacity. However, there is no manufacturing capacity for polysilicon and wafers yet.
Even this 8 GW capacity remains underutilized, at ~20%, because of higher cost of domestic modules compared with Chinese ones, which are 15-25% (4-61 cents/watt) cheaper because of subsidies and scale efficiencies. As a result, nearly 80% of India’s current annual solar module demand is catered to by Chinese module manufactures.
This low demand has till now disincentivised major investments in better-technology products and backward integration into polysilicon and wafer manufacturing, which also has high capital cost.
Says Ankit Hakhu, Director, CRISIL Ratings, “However, now, with the government supporting domestic manufacturers through policy measures, their competitiveness relative to the Chinese is expected to improve. The imposition of 40% custom duty on imported modules and the Production-Linked Incentive (PLI) scheme2 benefits will not only eliminate the existing price gap, but may even make domestic module competitive by 2-3 cents/watt at current prices.”
These supply-side interventions are complemented by growing demand due to continuing government thrust on renewables, and sharper focus of the private sector on the environmental, social and governance, or ESG, norms.
India’s solar capacity implementation is expected to rise to 14 GW per annum between fiscals 2022 and 2024, and further beyond that given aggressive renewable energy plans. This will drive demand for cells and modules. In addition to price competitiveness, developers may prefer domestic modules because they get better control of the supply chain and timely supplies compared with imports. It will also help developers offset risks from surging freight cost seen in the recent past.
Says Aditya Jhaver, Director, CRISIL Ratings, “We estimate ~Rs 50,000 crore of investments across the value chain for capacity building in India through fiscal 2025. Module and cell manufacturing capacity is estimated to increase by 30-35 GW each, while under the PLI scheme, we may also see backward-integration into polysilicon and wafer capacities.”3
A portion of the capex is also moving towards newer technologies such as mono perc/bifacial modules, where efficiencies are higher and comparable with imports. That, along with healthy demand — which is supporting order books — and favourable government policies, is expected to drive operating margins for integrated solar module manufacturers (manufacturing both cells and modules) to 12-13%. It will also result in a payback period of 4.5-5 years, assuming ~50% utilisation levels.
However, the capex will increase leverage, given 70% of outlay is likely to be funded by debt. But with low complexity in implementation, a faster payback period, and robust investor appetite, the credit profiles for domestic solar module manufacturers are expected to be stable.
That said, while the domestic manufacturers have reasonable experience in operating module assembly lines, they may have relatively lower experience in operating a cell line. Consequently, it will be imperative for them to get the required technical assistance to ramp up cell lines once commissioned. Also, dependence on Chinese companies for supply of wafers will continue for a relatively longer period considering India will not have sufficient wafer capacity even after the imminent round of capex.
1 For monocrystalline modules
2 MNRE has launched PLI scheme to enhance domestic manufacturing capacity of high-efficiency solar PV modules with allocation of Rs. 4,500 crore to be spent over a period of five years. PLI benefits for module manufacturers are based on sales volumes, base PLI rate as per performance matrix, a tapering factor, and local value addition for module manufacturing.
3 While a 1 GW module line costs ~ Rs. 250 crore, a 1 GW cell line that requires high technological knowhow and higher value addition costs ~ Rs. 600 crore. Further, backward integration to polysilicon and wafer may cost ~ Rs. 2,500 crore per GW.