CPSU scheme won’t do the trick for domestic solar firms
The Cabinet Committee on Economic Affairs (CCEA) recently approved an extension to the existing 1,000 megawatts (MW) central public sector undertaking (CPSU) scheme under the National Solar Mission (NSM), taking the cumulative capacity approved under it to 12 gigawatts (GW).
The CCEA also approved ₹8,580 crore as viability gap funding to subsidize projects to be set up under the scheme between fiscals 2020 and 2023, which is about ₹70 lakh per MW. The approval, however, mandates the use of both domestic cells and modules.
However, this comes at a time when domestic manufacturers are finding it difficult to sustain themselves because of a flood of cheap imports. Around ₹24,700 crore of photovoltaic cells and modules were imported in fiscal 2018, which marked a 15% year-on-year growth.
Imports have fallen 40% in the first nine months of this fiscal, but this has been more because of lower capacity additions than higher sales of locally-made modules or the levy of safeguard duty. Put another way, imported modules continue to find favour.
While domestic module makers are weathering the headwinds by catering to niche segments (off-grid, rooftop) and forward-integrating into developing rooftop projects, cell makers are facing weak profitability and even operating losses.
Additionally, the dearth of upstream manufacturing capabilities (ingots, wafers, cells) has been a big drag. These are some of the reasons the government is introducing short-term measures to brighten the landscape.
There are three hurdles to changing the game for domestic manufacturers of cells and modules. One, the industry needs to expand rapidly to cater to the approximately 3GW annual average capacity addition envisaged under the CPSU scheme. This necessitates fresh investments in a stressed sector. Domestic capacity for cells would be around 3GW by this fiscal-end, while module capacity will be about 8GW. Given that solar developers continue to prefer imported modules despite the safeguard duty and with alternative import destinations, such as Vietnam and Thailand, emerging, large-scale investments may be seen as risky with only the CPSU scheme as the guaranteed demand source.
Then there’s the issue of cell technology. Globally, the solar industry is moving towards mono-crystalline and passivated emitter and rear cell (Perc), technology to improve plant load factors, but a significant chunk of the 3GW cell lines installed in India still uses older technology. Any upgrade would again require incremental investments and technical expertise. Additionally, where global manufacturers in the solar cell/module space spend significant amounts on research and development to improve cell efficiencies or develop new technology, Indian counterparts remain followers rather than becoming leaders.
Lastly, implementation of the 1GW capacities allocated under the CPSU scheme has been painfully slow with the National Thermal Power Corporation Ltd (NTPC) accounting for about 700MW out of a total of 800MW commissioned. Other CPSUs haven’t been as enthusiastic, and enforcement remains weak. Further, NTPC is driven more by its own goals than the NSM guidelines, where it has a target of setting up roughly 10GW of solar capacities by fiscal 2022 to diversify its generation portfolio.
In such a scenario, implementing steep capacity targets to sustain the industry will be tough.
The good part is that global average spot prices of multi-crystalline wafers have fallen 45% from $0.50 per watt-peak to $0.27 in April-December 2018 as the Chinese market slowed. Global cell and module prices also fell, by 41% and 36%, respectively.
While the 25% safeguard duty has negated the fall in prices abroad for imported cells and modules to some extent, imported wafers are exempt from the safeguard duty levy. Hence, a decline in wafer prices can work to the advantage of domestic cell makers by increasing their price competitiveness versus imported cells as they can leverage a price differential of about 10-15%.
While Crisil Research expects close to 48-50GW of solar capacity additions between fiscals 2019 and 2023, the demand for domestic modules would be limited as utility-scale developers are expected to continue to bet on cheaper imported modules in the current scenario.
Domestic demand would be driven by the CPSU scheme (if implemented according to the stipulated timelines), the rooftop sector (government orders sometimes mandate domestic modules), and exports.
However, given that structural factors such as the probability of fresh capital investments, technologically obsolete production lines, and the CPSU scheme being the sole source of demand, this does not change the landscape.
Structural support as outlined in the ministry of renewable energy’s December 2017 concept note is imperative. It called for interest-cost subvention, provision for low-cost land and power, central financial assistance for setting up and upgrading domestic capacities, backward integration enablers, and a fund to upgrade technology, among others.
Facilitating these would help improve the competitiveness of domestic manufacturers compared with global giants, which have large installed manufacturing bases, a presence across the value chain and are more cost-efficient.