Local with solar: As China goes cheap, India loses the beat

When China sneezes, as the (modified) adage goes, the world catches a cold. And India, at least when we’re talking about solar power, is today the first to start sniffling.

The year 2018-19 was a special one for India’s solar industry. For the first time since 2014, new installations of solar power declined, by about 10%. To put that in context, installations had roughly doubled in each of the two previous years.

The obvious reason was a set of safeguard duties imposed on imports of solar equipment starting July 2018. Intended to insulate domestic manufacturers from cheaper Chinese solar modules, the move drove developers to halt plans for new solar plants.

A seemingly straightforward tale of a protectionist policy that backfired. But behind it lies a complex interplay that results in Chinese policy effectively dictating the dynamics of the Indian solar industry.

And with Indian policymakers unable to put together anything more than a piecemeal response, the country’s vaunted National Solar Mission—with an ambitious goal of 100 GW of solar power generating capacity by 2022—is lumbering along, far short of its targets.

The China shadow

The Chinese government, over the past two decades, has progressively increased support to expand both renewable energy generation and equipment manufacturing.

By 2012, China-based solar module makers had enough capacity to supply the entire world’s solar panel needs. The resulting glut in the early 2010s led to the collapse of several Chinese—as well as American and European—manufacturers. Both the US and the European Union had slapped anti-dumping and anti-subsidy tariffs on Chinese solar cells and modules by the end of 2014. Undeterred, Chinese companies set their sights on a new, rapidly growing market—India.

The Narendra Modi government in 2015 raised the country’s solar capacity target to the current 100 GW from the earlier 20 GW. (As part of a bigger renewable energy target of 175 GW from solar, wind and small hydropower projects by 2022.) India rose to become China’s biggest solar export market in 2017, accounting for about 30% of shipments by Chinese manufacturers.

Full house

Nine of the top 10 manufacturers in the world are based in China; the sole exception is South Korean company Hanwha Q-Cells

Much as in the US and Europe before, cheap Chinese equipment drove down costs for developers, giving India some of the lowest prices for solar-based electricity tariffs in the world. Tariffs fell to less than Rs 3 ($0.04) per kilowatt-hour as companies bid furiously for projects in 2016 and 2017, as imports accounted for about 90% of module sales.

But last year, something happened. China sneezed.

In May 2018, the Chinese government abruptly announced that it was ending all subsidies for solar power. Any new solar plants would have to make do without aid from the state. Chinese solar equipment makers, which accounted for 70% of global solar module shipments in 2018, rushed to the international markets.

Prices plummeted, and this could have been a godsend for Indian power producers and a nightmare for local panel makers already unable to match Chinese prices. But, at the same time, Indian trade authorities, which had been investigating the effect of Chinese solar imports since 2017, announced a 25% safeguard duty to protect local manufacturers.

We already know what happened next. Power producers, already struggling with the record low tariffs as a result of bidding wars in previous years, decided to wait out the safeguard duty. Imports more than halved in 2018-19 to $1.7 billion from $3.42 billion the previous fiscal year.

But that figure doesn’t tell us everything. Lower prices meant that even though imports, in terms of value, declined steeply, volumes fell only by a modest 9.6%. And therein lies the rub for India’s dreams of local manufacturing.

Weak sauce

While prices of locally-made solar modules have steadily dropped over the past four years, Indian manufacturers are still far short of Chinese economies of scale. While Indian modules cost an average of about $0.26-0.27 (Rs 18-19) per watt, imported modules average $0.20-0.22 (Rs 13-15) per watt. Even with a 25% safeguard duty, Indian companies are barely able to match prices.

One reason is that most modules made in India are simply assembled from solar cells imported from, well, China.

The solar power supply chain goes something like this: First come wafers or ingots of silicon, which are used to make cells, which are put together to make a module or panel. Few Indian manufacturers produce solar cells (the basic unit of a panel), and even those that do ultimately use wafers (the raw material) from China.

“Paradoxically, the duties on imported modules is much lower than those on glass, EVA and most of the other raw materials that go into manufacturing a module. Without enough of domestic production of EVA and other raw materials in the country to meet module manufacturers’ demand, this will only increase the cost and hurt businesses as well as customers,” says Hitesh Doshi, a founding member of All India Solar Industries Association.

With India’s safeguard duty falling to 20% next month, and 15% next year, Indian manufacturers may soon find themselves back at square one. “Many developers now are just postponing their purchases till the safeguard duty drops to 15%, or phases out entirely,” says Kanika Chawla, director of the centre for energy finance at the Council on Energy, Environment and Water (CEEW).

Which brings us back to China. Earlier this year, the Chinese government moved to reinstate some of its solar subsidies and phase them out over time. How this plays out will dictate, in large part, what happens to Indian industry.

“The biggest variable, or unpredictable element, is China. Even today, it’s not really clear what the Chinese programme is, over what period of time it will be spaced out, etc.,” says Vinay Rustagi, managing director of renewable energy consultancy Bridge to India. Chinese capacity addition is expected to rise this year, he says, with module prices remaining largely stable.

“But if Chinese demand undershoots, it will have a direct and immediate impact. Prices could easily drop by up to $0.02 (Rs 1.40),” Rustagi adds.

And in the first three months of 2019, Chinese capacity addition has been sluggish, at 5.2 GW, down 40% from about 9.6 GW in the same period last year.

Endgame

“Tariffs in India are currently not viable,” says CEEW’s Chawla. Price ceilings set by the government have resulted in tepid response at recent auctions and tenders. One auction for solar and wind projects last month saw only two bidders. And in total, while the central and state governments in 2018 had put up tenders to build over 50 GW of solar plants, only 13 GW of projects were actually awarded, according to a CEEW paper co-authored by Chawla.

Power producers will continue to wait out the safeguard duty, and manufacturers are unlikely to be able to pick up the slack in the meantime, Chawla adds. “China developed its manufacturing base first, then built demand.” The Chinese government provided support from low-cost loans to infrastructure to even electricity prices.

Chinese companies were able to develop both scale and capability. Indian manufacturers’ total manufacturing capacity is a little less than 9 GW of solar modules a year (far short of the 20 GW of annual targeted capacity addition), according to CEEW. Chinese manufacturers produced nearly 40 GW of modules in the first half of 2018 alone.

Nevertheless, solar installations will pick up again in 2019 and over the next few years, according to projections from Mercom India, a clean energy consulting firm. But tellingly, its estimates put India’s total solar power generating capacity at about 70 GW of the 100 GW target by 2022. (Utility-scale solar projects, though, aren’t going to get back to 2017’s peak for the next three years at least, according to Mercom’s forecasts.)

The government continues to trumpet its renewable energy programme, with power minister R K Singh saying on Tuesday that it’s on track to meet its 175 GW clean energy target (including the 100 GW from solar) by 2022.

To be fair, the state has also announced initiatives such as a viability gap funding scheme in February, which would allot Rs 8,580 crore ($1.23 billion).

Government-owned enterprises can use the funding to set up 12 GW of solar power using Indian-made panels, between 2019-20 and 2022-23. This is apart from existing incentives for electronics manufacturing and a plan to link solar power tenders to manufacturing.

Line of credit

Chinese manufacturers get cheap debt at 3-4%, a source of competitive advantage against Indian firms who pay rates as high as 11-12%

The solar industry and analysts, though, largely remain sceptical about these schemes. Setting up manufacturing, it goes without saying, is a capital-intensive process, and uncertainty over India’s solar policies make long-term investments tough to swallow.

The manufacture of photovoltaics—electricity-generating solar cells and panels—in India “suffers from a range of competitive disadvantages… These include inferior terms of debt capital, higher electricity prices, lower-scale operations, lack of vertical integration, outdated technology, and lack of demand visibility,” according to the CEEW paper cited earlier.

In the end, India’s solar march goes on. But unless local manufacturing policies get a radical overhaul, it will still be to China’s drumbeat.

With inputs from Pranav Balakrishnan and Pranav Shankar.

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