By Fitch Solutions
- In the short term, we expect downside risks to India’s solar capacity growth to alleviate as the government of India postpones restrictions on imported solar equipment use by six months.
- We maintain our solar capacity forecasts as India implements basic custom duties on imported solar modules and cells, increasing the costs of solar projects and curbing stronger growth, given that domestic manufacturing is still unable to replace import quantities.
- Over the long-term, India’s domestic manufacturing of solar equipment will expand well with the increasing financing support from government and private sector, serving the market’s strong pipeline of solar projects.
In the short term, we expect downside risks to India’s solar capacity growth to alleviate, as the government of India postpones the restriction on imported solar equipment use by six months. The restriction, formally known as the ‘Approved Models and Manufacturers (ALMM) of Solar Photovoltaic Modules Order, 2019’, was tabled by the government as means to wane its dependence on solar equipment imports. These imports have been susceptible to supply chain disruptions, demonstrated during the Covid-19 pandemic through solar power project delays. The ALMM restriction was also initially set for governmental projects only, and was then expanded on January 13 2022 to include open access and net-metering projects, in order to encourage an increase of domestic solar manufacturing. On March 28 2022, India postponed this restriction from April 1 2022 to October 1 2022. We believe this move by the government is in acknowledgement of the current mismatch of quantity and quality required by solar project developers and the domestic manufacturing capability. This extension of six months will also allow the domestic solar manufacturers more time to scale up operations to serve India’s growing pipeline of solar projects. We also do not expect the list of ALMM to include any foreign manufacturers in the future, but only expand to include more domestic manufacturers as India expands its solar manufacturing sector. With this six months extension, we expect alleviated downside risks to India’s solar sector growth, as we initially expected the ALMM restriction to present downside risks to solar power projects if domestic production is unable to ramp up fast enough.
We maintain our solar capacity forecasts as India implements basic custom duties on imported solar modules and cells, increasing the costs of solar projects and curbing stronger growth. On April 1 2022, India implemented tax duties of 40% on imported solar modules and 25% on imported solar cells. While the Ministry of New and Renewable Energy (MNRE) announced the tax duties in March 2021, we believe the lead time was insufficient in allowing for domestic solar manufacturers to ramp up their capabilities to match the demand of solar project developers in India. As a result, we witnessed a surge in solar equipment imports from the start of 2022 to right before April 1 2022. Notably, the total number of solar cells (assembled) imported increased from none prior to April 2021 to 49.6mn units from April 2021 to January 2022, according to the Ministry of Commerce and Industry. The ministry also estimates that the total import value corresponds to USD2.8bn. This indicates that developers have yet to make a significant switch to source solar equipment from domestic manufacturers. However, with the implementation of basic custom duties on April 1, the demand for domestically manufactured solar equipment will increase, as it hinders the cost competitiveness of those imported. While this bodes well for the domestic solar manufacturers, the current manufacturing capacities in India still pale in comparison to China’s, indicating more time needed for domestic manufacturers to increase their manufacturing capacity. According to the MNRE, India has annual manufacturing capacities of 3GW and 10GW for solar cells and modules respectively. As for China, the China Photovoltaic Industry Association estimates annual outputs of 198GW and 182GW for solar cells and modules respectively. As a result, India’s plan to wane its dependence on imported solar equipment from China will end up curbing prospects for stronger growth in the short term, contributing to our expectation that the non-hydropower renewables sector will well fall short of India’s 175GW capacity goal by end-2022.
Over the long-term, India’s domestic manufacturing of solar equipment will expand well with the increasing financing support from government and private sector, serving the market’s strong pipeline of solar projects. Our forecast for solar capacity growth in the long term remains strong, as we believe that India’s solar manufacturing capacity will eventually be able to adjust to the increased demand for domestic solar equipment. Strong government support for renewables will support the solar manufacturing sector, notably with the announcement of India’s Union Budget 2022-2023 in February 2022. As part of the Union Budget 2022-2023, Finance Minister Nirmala Sitharaman announced that the government will be allocating an additional USD2.6bn (INR195bn) for its Production Linked Incentive (PLI) to facilitate ramping up of domestic solar manufacturing. We highlight that this is more than four times the previously allocated amount, on April 1 2021, for the PLI scheme of USD600mn (INR45bn). The PLI scheme is aimed at developing India-based manufacturing companies that will be able to compete on the international stage. The reinforcement of the scheme goes to show the increased push of the government for developing the market’s capacity in solar equipment manufacturing.
Additionally, private companies have been expecting the surge in domestic demand and are capitalising on it by developing their own facilities. One major development is the USD771mn acquisition of solar photovoltaics (PV) manufacturer REC Group by Reliance New Energy Solar (RNES), a subsidiary of Reliance Industries. RNES plans to tap on REC Group’s expertise in solar PV manufacturing to construct a silicon-to-solar PV manufacturing facility at the Dhirubhai Ambani Green Energy Giga Complex. Adani Solar and ReNew Power have also committed resources to construct their own solar equipment manufacturing facilities. That said, these developments have only been announced in 2021 and early-2022, which poses an upside for the long term, given the time frame required to construct, train labour and manufacture solar equipment at the quality and quantity for developers. As a result, we still expect India’s short term growth in solar capacity to be hampered, with gradual pick up through the medium and long term.
The article has been sourced from Fitch Solutions and can be accessed here