Bolstering India’s Solar Sector: A Strategic Shift to Local Manufacturing

The story so far: India is on the brink of a transformative phase in solar energy production. The media has extensively covered the latest government directives aimed at stimulating the nation’s solar manufacturing base, often characterizing these moves as ‘import restrictions’. This shift is traced back to the Ministry of New and Renewable Energy’s (MNRE) order, dated March 29, which revived its 2021 decree for an ‘Approved List of Models and Manufacturers of Solar Photovoltaic [PV] Modules’, colloquially known as the ALMM list.

The essence of the ALMM list is to delineate select manufacturers whose products are sanctioned for use in an array of government-supported projects, including those for direct electricity sale to Central and State Governments. This notification was initially placed on hold for the preceding financial year, just two years after its introduction. The rationale behind this suspension was not directly disclosed by the government. Nonetheless, it is speculated to have originated from pressures of renewable power producers who had secured sales agreements with the government prior to the rule’s implementation. At that point, the domestic solar industry seemed unable to satisfy the sudden surge in demand for solar equipment—a demand predominantly fulfilled by Chinese manufacturers offering highly competitive prices.

The reinstatement of this rule is grounded on an anticipation that recent initiatives like the Production Linked Incentive (PLI) scheme have invigorated India’s production capabilities, enabling it to more effectively match the domestic demand with competitively priced local offerings. This approach is intended to promote import substitution rather than to serve as an outright import restriction.

India’s solar cells and modules market is steeply reliant on imports, with the majority of its supplies originating from China and Vietnam. As affirmed by the Minister for New and Renewable Energy in the Parliament in February of the previous year, India imported solar cells and modules amounting to $11.17 billion over the past half-decade, which constituted 0.4% of India’s total exports during that same interval. Commerce Ministry data up to January 2023-24 indicates China alone contributed to 53% of India’s solar cell imports and 63% of solar PV module imports. Furthermore, a report by ratings agency ICRA from November 2023 emphasizes China’s dominant position, holding over 80% of the manufacturing capacity across the solar value chain, while India’s capacity is largely confined to the last stage of manufacturing. The report also forecasts that the PLI scheme should catalyze the setup of integrated module facilities within India over a span of 2-3 years.

To diminish its excessive dependency, India has initiated three significant strategies throughout the last five years. It commenced with the release of the ALMM order in January 2019. The agenda gained prominence against the backdrop of the severe global supply chain turbulence incited by the COVID-19 pandemic. In the Union Budget of 2022-23, Finance Minister Nirmala Sitharaman presented the ₹19,500 crore PLI scheme to escalate domestic production across the solar supply chain, covering from polysilicon to modules. Additionally, the government imposed heavy customs duty rates of 40% on PV modules and 25% on cells. However, these were slashed as solar capacity expansion decelerated, and developers indicated exceedingly low tariffs in order to secure power purchase contracts—ultimately based on importing Chinese equipment—which exerted considerable cost pressure on projects collectively valued at roughly 30 GW.

An International Energy Agency (IEA) report from July 2022 identified China as the most cost-competitive manufacturer of all solar PV supply chain components, largely due to its lower industrial electricity costs. The Chinese government’s strategic focus on solar PV as a key sector, fuelled in part by domestic demand, has facilitated scale economies and ongoing innovation throughout the supply chain.

Fuelling the push towards solar energy in India is the government’s ambitious target of attaining 500 GW of installed capacity from non-fossil fuels by 2030. According to the IEA, India boasts the swiftest growth rate in electricity demand through 2026 among major economies, driven by robust economic activities and growing product consumption aimed at mitigating extreme weather. Solar power has comprised about one-third of the total renewable energy generated since April of the last year until February of this year. As per the statement by MNRE Minister R.K. Singh in Parliament, “The country has an estimated solar power potential of 748.99 GW, which remains largely untapped. The government is earnestly working to exploit this potential through diverse schemes and programs.” With these continued efforts, India endeavors to weave a more sustainable and self-reliant energy tapestry for the future.

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