View: Manufacturing-linked tenders not the silver bullet for domestic solar manufacturing
- To be truly self-reliant, our policies must be evidence-based, integrated, and strategically designed for effective implementation.
- This is an ineffective measure as the underlying causes of the competitive disadvantage of domestic PV manufacturers remain unaddressed.
- Moreover, the tariff discovered at the tender could burden cash-strapped discoms.
Less than a month after Prime Minister Narendra Modi affirmed the nation’s commitment to domestic manufacturing under the Aatma Nirbhar Bharat Abhiyan, Adani Green Energy has expanded its commitment under Solar Energy Corporation of India’s (SECI) January 2020 manufacturing-linked solar tender. The company has now exercised an option to increase its allocation to 8 GW of solar energy projects and 2 GW of photovoltaics ( PV) manufacturing (cells and modules) capacity. Azure Power has also exercised its option to expand its capacity allocation under the tender to 4 GW of solar projects and 1 GW of manufacturing, but unlike the Adani Group company, it had not received a letter of award from SECI at the time of writing.
The manufacturing-linked tender is one of a suite of measures implemented by the Ministry of New and Renewable Energy (MNRE) to boost India’s solar PV manufacturing sector. However, this is an ineffective measure as the underlying causes of the competitive disadvantage of domestic PV manufacturers remain unaddressed. Moreover, the tariff discovered at the tender could burden cash-strapped discoms.
Cost implications of the winning tariff
The winning tariff of Rs 2.92/kWh was marginally below the ceiling tariff of Rs 2.93/kWh. Considering that there are no restrictions on project location or a requirement to use domestically-produced modules, the tariff discovered in the auction is quite lucrative. To put this into perspective, a tariff of Rs 2.50/kWh was discovered when 1.2 GW inter-state transmission system (ISTS)-connected capacity was awarded by SECI in February 2020—barely a month after this manufacturing-linked capacity was awarded. Further, given the relaxed commissioning timelines—staggered deployment of capacity in annual increments till 2025—the developer would benefit from further declines in equipment costs. Thus, tariffs even lower than Rs 2.50/kWh could have been viable.
According to our analysis, the increment over the Rs 2.50/kWh tariff translates into an additional payment burden of around Rs 22,000 crore over 25 years or nearly Rs 900 crore annually for 8 GW capacity (assuming a capacity utilisation factor of 30 percent at 50 percent DC overloading). Given the financial implications, it has become challenging for SECI to find discoms to sign the power sale agreement for the electricity generated.
The higher tariff could be a reflection of limited interest from developers in participating in the tender and to compensate for the additional risks involved in setting up manufacturing capacity.
PV manufacturing versus RE project development
PV manufacturing and renewable energy (RE) project development are businesses characterised by different underlying risks. The predictable annuity-like returns for RE developers are a stark contrast to the lack of predictability in returns for manufacturing. Unlike the long-term offtake contracts for RE projects, orders from customers (developers) in manufacturing are typically project-specific. New orders may be affected by cost-competitiveness relative to other manufacturers (including imports), technology obsolescence, etc. The greater risks inherent in manufacturing are reflected in the terms of finance relative to those applicable for RE projects— capital structures for manufacturing plants are less debt-heavy, debt is costlier with shorter tenures, and returns required by equity investors are higher.
Combining lower-risk RE project development and higher-risk manufacturing in the same tender could translate into the discovery of higher tariffs, as developers factor in higher returns in the RE tariff to compensate for the riskier nature of the overall tender. At the same time, manufacturers do not clearly benefit either—as the existing challenges to scaling up domestic manufacturing remain unaddressed.
Bolstering domestic manufacturing
The first step towards policy design to scale up domestic PV manufacturing should be understanding the underlying reasons for its competitive disadvantage relative to imports. For example, in the case of domestic module manufacturing, lower capacity utilisation levels and higher costs of raw materials are the primary reasons. A recent CEEW Centre for Energy Finance study found that domestically-produced modules are 33 percent more expensive than their Chinese counterparts (assuming viable returns on equity factored into prices in both markets).
A third of this gap may be attributed to lower capacity utilisation levels of Indian module manufacturers, due to low demand for domestic modules. At the same utilisation levels, the price difference is 22 percent. Around 56 percent of the price difference at the same utilisation levels may be attributed to differences in the cost of raw materials such as solar PV cells, EVA backsheets, etc. Indian module manufacturers rely on imports for sourcing most raw materials as domestically produced components are costlier.
The identification of the underlying reasons for the lack of competitiveness forms the basis of targeted policy measures to address these deficiencies. While the manufacturing-linked tender will result in additions to domestic manufacturing capacity, it does little to address the demand-side challenges stemming from a lack of competitiveness. From our analysis, it is clear that incentives such as capital expenditure subsidies or interest subventions would not significantly improve the competitiveness of domestic modules either.
Instead, operationalising domestic procurement under the existing Central Public Sector Undertaking (CPSU), residential rooftop, and KUSUM schemes could generate a guaranteed domestic demand for nearly 30 GW of domestic modules. This would address the challenge of low capacity utilisation as well as allow domestically sourced raw material costs to decline through economies of scale by supporting 10 GW annual domestic production, in both modules as well as raw materials, over a three-year period.
To be truly self-reliant, our policies must be evidence-based, integrated, and strategically designed for effective implementation.
—Arjun Dutt is an Associate at the Centre for Energy Finance at the Council on Energy Environment and Water. The views expressed are personal