Solar Make-in-India wants a long-term technique
By Anurag Panda & Abhishek Malhotra
To bolster Make-in-India for solar, the center recently announced a PLI (Production-Linked Incentive) program for solar manufacturing with a budget of Rs 4,500 billion over five years. From April 2022, a basic duty of 25% on cells and 40% on panels will also be levied on imported panels. These measures follow a series of efforts over the past decade to establish domestic production of solar modules. However, some problems remain, including a volatile domestic market and weak industrial innovation capabilities.
Solar modules are mass-produced, with low costs achieved through economies of scale, high capacity utilization factors and optimization of manufacturing processes. Leading Chinese manufacturers such as Jinko Solar and Trina Solar have production facilities with capacities over 10 GW. Indian manufacturers need time to achieve economies of scale, develop their manufacturing know-how and become globally competitive. In order to catch up, they will have to rely on a large and stable internal market over the next few years.
However, the Indian solar module market was faced with headwinds. Annual solar PV use peaked in 2017 at more than 9 GW and has since stalled due to the pandemic, falling to 3 GW in 2020. In the short term, internal market risks need to be addressed, including counterparty risk, renegotiation of power purchase agreements and difficulties in acquiring land. The manufacture of solar modules is a rapidly developing industry. Manufacturing facilities can be out of date in 2-5 years. To ensure the Indian energy sector benefits from the continued panel performance and cost improvements, a long-term roadmap is needed to reach the global technological frontier.
China’s dominance is due to several policy measures. First, the Chinese government made subsidized inputs such as electricity and debt available, and gradually directed its subsidies to manufacturers who were able to achieve scale and efficiency. Second, the aggressive pricing of solar modules with wafer-thin profit margins was made possible by the gradual vertical integration of the value chain. Thirdly, the manufacturers developed their know-how in relation to manufacturing processes through in-house research and development as well as learning how to deal with suppliers of production systems from Germany, Switzerland and the USA.
Policy makers can draw three important lessons from the Chinese experience. First, regular targets should be set for system capacity, capacity utilization factor, module efficiency, price and R&D investments. The allocation of subsidies should be made conditional on the achievement of these goals, which puts pressure on companies to continuously innovate. Second, incentives for the production of cells and modules should be complemented by measures to develop a manufacturing ecosystem for the entire value chain. This should be done gradually, starting with the production of cells and modules and gradually incentivizing the local production of wafers, bars and polysilicon. Third, manufacturing incentives should be complemented by incentives for industrial R&D and international collaborative R&D to allow companies to reach the technological limit. In the past, solar panel manufacturing was very competitive. No single company – and until recently no single country – has been able to achieve a high market share over a long period of time. While it is relatively easy to import turnkey manufacturing equipment and set up a manufacturing facility, developing and maintaining a competitive advantage will be a slow and uncertain process that requires huge long-term public subsidies and carries serious risks.
To address the risks, we need to be clear about the political objectives. If the goal is cleaner, more abundant, and cheaper electricity, solar panels should simply be bought where they are cheapest (i.e. in China). If the goal is job creation, then the use of decentralized rooftop solar systems should be prioritized as downstream jobs account for nearly 75% of employment in the industry. If the strategic localization of the supply chains is a priority, incentives for the production of regular, time-bound, realistic and long-term goals, which aim to make the domestic industry globally competitive, should be made. In addition, investments in a diversified portfolio of technologies such as lithium-ion batteries, electrolysers for green hydrogen and energy efficiency technologies should be made as part of India’s green industry strategy.
Panda is a postdoctoral fellow and Malhotra is an assistant professor at IIT Delhi
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