Not exactly sunny side up : The policy paradoxes of solar energy sector

India needs to straighten out the kinks of its solar capacity building before it can claim itself to be truly solar-oriented

Solar technology is a good idea, it helps in saving electricity bills and supporting environment. The limitations in terms of cost and infrastructure are something that need to be addressed.

Make electricity while the sun shines seems to be the buzz these days. Take Manas Sachan for instance. Not only is he convinced that solar energy is the future, he is also busy convincing others on the social media. “Installing solar panels is a wise choice. It will help you to reduce your monthly electricity bill,” he urges his friends on various social media platforms. With more people like Sachan signing up for solar, it is not really a wonder then that Bloomberg NEF New Energy Outlook 2018 forecasts that by 2050 wind and solar will dominate the electricity supply with 75 per cent, pushing India’s emissions 22 per cent below what they are today.

This does not mean that all is shiningly bright for solar. Sachan, for instance, also goes on record to state that he will not completely go off the grid as it pushes up the cost beyond affordable – one will need batteries for storage and they need to be replaced every four to five years besides regular maintenance. India is still a long way off and needs to straighten out the kinks of its solar capacity building before it can claim itself to be truly solar-oriented.

But what is established as of now is this: solar technology is a good idea, it helps in saving electricity bills and supporting environment. The limitations in terms of cost and infrastructure are something that need to be addressed. On the one hand, it is not easy to ignore how the government is hard-selling solar power. It has set up an ambitious target of achieving 100 gigawatt of installed solar energy by 2022. On the other hand, the government certainly needs some rapid actions on the ongoing projects as India has slipped two ranks and has became fourth, with the US and Germany overtaking the second and the third positions respectively after China according to Renewable energy country attractiveness index (RECAI) conducted by Ernst and Young each year. Challenges like safeguard duty on modules manufactured in special economic zones (SEZ), confusion regarding goods and service tax and lack of protection against incoming solar module oversupply issue due to China’s new energy policy are slowing down solar growth in India.

Even though people working in the solar sector are facing adverse conditions, experts say that in the long run citizens will use solar power and are positive about the growth of solar industry. According to a well-known player and solar energy solutions provider Vikram Solar, infrastructural development, rooftop solar, new projects and export opportunities in India have started growing at the end of 2017. Policy support has given a conducive environment for green energy progress says the Chief Financial Officer of Vikram Solar, Rajendra Parakh. “Solar parks in India have recorded 103 per cent year-on-year growth by generating 8.54 billion kilowatt per hour of electricity in the first quarter of 2018. And, as compared with the Q4 2017, solar production in India was 31 per cent higher in Q1 2018. Several large-scale solar parks were being commissioned in the first quarter of 2018, boosting solar generation capacity in India,” adds Parakh. Ministry of New and Renewable Energy (MNRE) has plans to add 77 gigawatt solar power projects by 2020. Also, plans for 5-10 gigawatt floating solar power projects auctioning in 2018 are on the table. International solar alliances will not only make technology and strategy exchange possible, but will also help new untapped solar markets get a boost.

According to Mercom Communications India, a subsidiary of energy market tracker Mercom Capital, India emerged as the third largest solar market in the world in 2017, behind China and the US, as it has grown at a CAGR of approximately 170 per cent since 2010. Also India is seeing growth in solar installations with record installations of 9.6 gigawatt which is more than double the 4.3 gigawatt installed in 2016. Saurin Shah founder of Ahmedabad based solar startup Saur see extensive growth in the sector and is extensively working in designing household solar-powered appliances under an incubator iCreate. According to him, “Solar energy is definitely the future of renewable energy resources. It is eco-friendly which means that it can certainly be adopted by regular households without any worries of harmful impact.” Shah strongly believes that its high time that India pushes the boundary and achieves the 100 gigawatt target by 2022. “In May 2014, India’s solar generation capacity was 2,650 megawatt. As of 30 June 2018, India has expanded its installation capacity to 23 gigawatt – a staggering eight times the capacity since 2014! This certainly reflects India’s leapfrogging achievements in expansion as well as consumption in the solar power sector. Also, the European investment bank has invested $400 million in solar power in India. Many entrepreneurs are now diverted towards the solar industry as they understand well that the government is giving them a chance to expand their business in terms of market and money. So, yes, personally, I feel that if this kind of wonderful trajectory continues, India can certainly hope to achieve its 100 gigawatt target.”

However, latest results of the second quarter of 2018 has observed a significant decline to 1,599 megawatt, a 52 per cent decrease compared with the last quarter where installations were 3,344 megawatt, according to the latest market report of Mercom Capital. Mercom Capital Group attributes this decline to uncertainties around trade cases, module price fluctuations, and power purchase agreements renegotiation after record low bids which contributed to the tender and auction slowdown in 2017, according to the Q2 2018 Solar India Market Update report.

The report further forecasts solar installations in 2019 to be flat due to lack of auctions and the limitations of new guidelines by MNRE which allows for 24 months to commission a project of 250 megawatt and above and 21 months to commission a project of 250 megawatt or below. Over 1 gigawatt of large-scale projects will have their commissioning dates moved from 2019 to 2020. “Due to uncertainty around the safeguard duty, auction activity in the first half of 2018 was weak, which will result in a smaller large-scale project pipeline for 2019. The market is expected to freeze for three to six months following the safeguard duty announcement,” states Raj Prabhu, CEO & co-founder of Mercom Capital in the report.

The rooftop installations have been growing robustly so far but are expected to slow down until module prices decrease after the safeguard duty impact wears off. Rooftop is extremely cost sensitive and an increase in project costs will slow down the installations. However, the market is expected to start growing again once module prices decline and negate the safeguard duty impact.

Safeguard Duty is not helping

The government has clearly shown intent towards building and supporting solar industry in India. However, continuous import of solar modules have limited Indian solar domestic capacity development, thus reducing the opportunity of creating jobs. “Importing is a challenge, more than 80 per cent of the module demand in the country has been met by imported modules, presenting a bill of $3 billion in 2017. This has been going on for years and it has pushed the domestic manufacturers out of the Indian market allowing foreign suppliers more or less 80 per cent of industry share,” informs Parakh.

To stop foreign imports and job loss, government implemented safeguard duty on imports. This was meant to protect local manufacturing against the predatory pricing of foreign products, but it seems safeguard duty has left industry insiders in a dilemma. The safeguard duty notification issued by the Ministry of Finance does not provide exemption to the projects that have already been auctioned out (approximately 20-25 gigawatt). “This will completely derail the solar industry. To add to that, the notification does not provide any relief to solar cells and modules manufactured in SEZs and domestic tariff areas.

Currently, 40 per cent of solar module manufacturing units and 60 per cent of solar cells manufacturing units are located in SEZs”, Parakh explains the phenomena. “In the light of the SEZ issue, the notification defeats the very purpose of safeguard duty, which is to protect and promote domestic industry. While it may seem logical that SEZs should be exempted, considering that the whole purpose of applying safeguard duty is to protect domestic industry against imports so why should they pay these duties? Unfortunately, the policymakers seem to be in a dilemma,” says Parakh.

A recent report by Parliamentary Standing Committee indicated that in recent years solar imports have led to massive job losses. If SEZ units are not exempted from safeguard duty, it will lead to further job losses and harm the manufacturing ecosystem in India, which is already bleeding.

Not only manufacturers but developers are also express concern over the safeguard duty. Delhi-based developer Oakridge Energy deals in solar panel installations in North India. Its CEO Shravan Sampath says safeguard duty for solar panels is a major setback as it has created an air of uncertainty in the future price of solar panels. He says, “For developers in general, this uncertainty has been further deepened due to the temporary revocation of safeguard duties in compliance with the orders of the Odisha high court.”

Where’s the problem

In the government notification itself, there are several elements of the customs notification that are unclear, making it hard to understand for those involved in the solar sector. At the outset, the duties of 25 per cent (for the first year) are not overarching. The domestic cell and panel manufacturers are exempt. Further, for the second year the duty will reduce to 20 per cent in first six months and 15 per cent for next six months. Also, developing countries except China and Malaysia are exempt. Thus, panels and cells imported from Vietnam and Thailand (two major hubs where leading Chinese manufacturers have facilities) will be exempt of safeguard duties, thereby resulting in no additional tariff. Further, most Indian manufacturers – for instance Adani and Vikram solar – have their facilities in SEZ territories. The SEZ Act is unclear about whether duties will be applicable on import of panels from SEZ to non SEZ territory. Thus, it is likely that even solar panels assembled (not just cells) will be impacted and will need to be separately considered.

“The next step would be to wait for the decision of the Odisha high court. Unfortunately, the customs department has ordered the release of panels on submitting a bond. The threat of safeguard duties still applies retrospectively in case the panels are imported in the interregnum.” explains Sampath of Oakridge Energy.

Even rating agency, Crisil Research has predicted delay in the 1,200 megawatt solar project due to imposition of safeguard duty. In its recently released analysis Crisil states that a 25 per cent safeguard duty entails a rise in capital costs by 15-20 per cent, which will have 30 to 40 paise per unit impact on bid tariffs so as to maintain the same rates of return. “There will be procedural delays as developers would have to approach the appropriate authorities (electricity regulatory commissions) to approve the new tariffs with pass-through of costs,” says Sampath.

With the projects under National Solar Mission, state solar policies and other schemes by Solar Energy Corporation of India and public sector undertakings (PSU), it is likely that solar power capacity will ramp up to 56,000-58,000 megawatt between fiscals 2019 and 2023, compared with 20,000 gigawatt between fiscals 2014 and 2018. In this scenario, reports suggest that domestic module manufacturers will become the main suppliers to solar developers in the country. “However, their supply capacities are far short of the annual demand of the sector. Hence, we expect a rise in capital costs over the near-term due to the duty, as even domestic module manufacturers are likely to charge a premium on their products in the event of a surge in demand,” says the Crisil report.

The Crisil agency further said that as domestic capacities expand, costs can drop again. “A weakening rupee will cause additional cost pressure with increased foreign exchange volatility faced by importers unless they have hedged in advance. This could amp up the cost pressure slightly,” it adds.

Other dampeners

Apart from duty, import and policy feuds there are several other blocks that need to be overcome. Firstly, availability of land is a major roadblock. To overcome this challenge, the government can perhaps use the surface area of water bodies like canals, lakes, reservoirs, farm ponds and the sea for large solar power plants. Highways and railways could also be used for solar installation, which can provide energy charging for electric cars and run the rail network respectively.

The second issue will be the price for solar installation for the regular Indian consumer. Not everyone can afford to install solar panels by themselves. The government has tried to address this situation by providing a subsidy for installing solar panels in some states, but unfortunately this initiative has not been met with much success. Perhaps, there is still a certain skepticism or prefixed notion in the mindset of people with regard to new-age innovations like solar energy or maybe there is complacency in adopting the tried-and-tested approach to such infrastructural challenges. Thus, this calls for more effective solutions where the mass is educated and made aware of the advantages of solar energy.

Despite ambitious plans some projects were cancelled. For instance, the 250 megawatt solar project by NTPC, a PSU engaged in the business of generation of electricity and allied activities (auctioned in October 2017). Increasing tenders, and awarding more projects without cancellation has to be considered if targets need to be met.

Overall, renewable sector is going to see strong growth and favourable policy support as investments are getting bolder in the power sector. According to the latest HSBC report the solar sector will continue to receive favourable policy momentum, especially given India’s leadership role in the International Solar Alliance. Coal now forms one-third of total installed generation capacity, but some projects are unable to sustain themselves due to issues, including the non-availability of fuel, lack of purchase agreements and tariff disputes, the Crisil report states. “We think the economics will continue to shift in favour of lower carbon power in India, especially as it promotes solar,” the report adds.

According to the report, an additional 12 gigawatt of renewables (mostly wind and solar) were installed between April 2017 and May 2018, more than double that of coal power plants (5 gigawatt).

Renewable installations have been outpacing coal largely because the price of solar power has declined by over 40 per cent, making it more competitive against coal and more attractive for new projects. Also, it could play an important role in improving the living standards of a section of a population who still live without electricity.

Also watch: SMEs power game in solar energy sector

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