Developing India’s Solar Power Sector: Potentials and Challenges (Part 2 of 2)

India has yet to take a definitive step in the anti-dumping war that is currently raging in the solar energy sector; however, its policymakers may be guided by decisions made by U.S. and European Union regulators. An ongoing question is whether the Indian government should create a trade barrier against cheap imports from foreign solar manufacturers, primarily those from China. Options include levying an anti-dumping duty (such as a countervailing duty to offset the huge subsidies offered by China to its solar manufacturers) or offering preferential tariffs to domestic solar equipment manufacturers.

Solar power industry in India must overcome numerous development challenges in order to continue its rapid growth. (Source: Solar Thermal Magazine)

One reason why Indian solar manufacturers might be harder hit than those the United States is because India’s solar industry is relatively new, not more than a decade old. It lacks the same level of technical capacity that its foreign counterparts have. As a new entrant, the Indian industry is relatively small scale and fragmented, leading to higher production costs.

Production capacities for Indian module manufacturing range from only 10 to 20 megawatts (MW), compared to the global average of 75 megawatts. Countries such as China and Taiwan have a clear price advantage over Indian manufacturers because of their economies of scale. Both subsidies and economies of scale have helped Chinese manufacturers produce solar panels and equipment that are 25 to 30 percent cheaper than those produced in India.

What makes India’s case singular is that the Indian manufacturers have not only condemned the Chinese solar manufacturing industry as a cause for their trouble, but also accused U.S. financial institutions, such as the U.S. Export Import Bank (Exim) and the Overseas Private Investment Corporation (OPIC), of adding to India’s woes through their pro-U.S. solar equipment policies.

Indian solar panel manufacturers and the media have raised concern about the fact that both ExIm Bank and OPIC offer low-interest loans (with long repayment periods) to Indian solar project developers—under the mandatory condition that they purchase the panels from U.S. manufacturers. While the ExIm Bank and OPIC refer to these loans as “Fast Start Finance,” some Indian environmental think tanks, such as the Centre for Science and Environment, allege that these programs undermine India’s broader development goals by pushing Indian solar equipment manufacturers out of competition.

On the other hand, Indian solar project developers argue just as strongly that cheaper electricity, supported by the lower cost of capital and equipment through such programs, will help Indian solar energy reach grid parity ahead of stated goals. The U.S. banks too have reacted by saying that they are adhering to international rules and regulations for project lending to overseas developers. They also point out that the reasons that Indian solar developers prefer U.S. solar panel imports are because of the superior quality, lower prices, and great post-sales customer service.

Resolving the conflicts

For India, these international trade wars and financial disputes will prove to be detrimental to the planned ambitious growth that the country’s National Solar Mission has charted out. However, there are numerous other actions that India (and other countries) can take to encourage industry development and put their solar energy industries on a level playing field in the short run. These represent an alternative to protectionist trade policies that would raise project costs and perhaps violate international trade law.

These actions include:

  • Countries can make international agreements to set stringent quality standards for solar panels and modules. This will not only curb practices such as price under-cutting, it will also motivate technological innovations and efficiency improvements.
  • As the solar market matures, manufacturers and project developers can consolidate their efforts to achieve economies of scale. In the Indian solar market, one can expect that small, fragmented manufacturing utilities will consolidate to boost larger scales of production.
  • Countries can engage in greater technological collaboration and knowledge sharing. However, India should not lose sight of developing a domestic solar manufacturing industry within a realistic timeline. Such development can start with an assessment of the size of the solar manufacturing sector at present and its growth potential for the near future.
  • Governments can provide partial risk guarantees to lending authorities in order to increase the bankability of solar projects. In India, this would enable solar project developers to procure low-cost loans from domestic banks.
  • Governments can set a separate solar/renewable energy sector-specific lending portfolio requirement for domestic banks. In India, declaring the solar energy sector a “priority sector” will also help mobilize finance for solar project developers. Low-cost debts to project developers can also be mobilized through issuance of long-term, tax-free solar bonds.
  • Government can create National Manufacturing & Investment Zones (NMIZs), or planned industrial zones that include government incentives such as exemptions from capital gain taxes. The Indian government has already proposed increasing the number of NMIZs  to push the contribution of the manufacturing sector from the present 16 percent to 25 percent of GDP by 2020. To reduce costs, the solar manufacturing industry can take advantage of such zones as well.
  • Governments can specify Domestic Content Requirements (DCRs) for certain large-scale projects with capacities exceeding a certain threshold. This would spare smaller developers from being mandated to buy domestically produced solar panels. If the Indian government wants to protect domestic manufacturers, it must begin by rendering more support to project developers in the form of cheaper loans and innovative funding options.

Already, India’s solar power sector has shown exponential growth in recent years, jumping from only 20 MW of installed capacity in 2009 to today’s 1 GW. To continue such growth, however, the sector will need to adapt to changes in the global solar market. Some domestic manufacturers have already become vertically integrated with project developers. Yet few have taken advantage of opportunities for international collaboration with foreign manufacturers.

Instead of protectionist measures, the Indian solar market needs to focus on mechanisms to attract private and international finance. Supporting domestic project developers and manufacturers through innovative finance options and international cooperation will be much more beneficial for the Indian solar sector, and the environment as a whole.

Suparna Dutta is a Climate and Energy intern at Worldwatch Institute.

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