Surging Costs To Dampen Pace Of Solar Addition This Year

Solar projects in India are getting costlier to execute and the country is now expected to add capacity at a slower pace this year than what is required to achieve its 2030 renewable energy target.

"Project budgeting has gone for a toss," said Gautam Das, chief executive officer of Oorjan Cleantech Pvt., a pan-India solar plant installer. "Solar's prospects are still bright but the pace of adoption has slowed. Investors' returns have declined and installers are running in a bit of uncertainty."

A sharp surge in the prices of solar modules and commodities such as steel, supply chain constraints, and a new import duty are all leading to increased project costs.

"Input costs such as glass, backsheets and aluminum frames for modules have also risen significantly," said Gyanesh Chaudhary, vice chairman and managing director, Vikram Solar Ltd., India's largest module manufacturer. "The surge in downstream demand and substantial rise in freight rates have increased prices further."

According to Crisil, between January 2021 and March 2022, the cost of a typical solar power project has gone up by 25 to 30%.

"I am not saying this will hit India's green energy endeavour. We are still buoyant around that," said Manish S Gupta, senior director at Crisil Ratings. "But it will stack lower than what the country is targetting."

Gupta said Crisil is estimating India will add 13-15 gigawatts of solar capacity in 2022. That compares with 12.7 GW it installed last year. But, if the country is to achieve its enhanced target of 300 GW of solar energy by 2030, it needs to add about 27 GW every year.

Impact On Tariffs

It is unlikely that prices will cool significantly by the end of the current year, according to solar industry officials that BQ Prime spoke to. That also means that solar tenders, which would have won bids at lower tariffs, will see diminished returns on their investment.

"There definitely has been an adverse impact on renewable energy developers, who have committed to lower tariffs but are unlikely to execute tenders profitably, with decent margins, on those terms and conditions," said Karan Chadha, head of business development at Fourth Partner Energy. He doesn't expect prices to cool off significantly, at least for the next 12 months.

The return on equity on a fifth of the 25 GW of private solar projects, that were bid at tariffs as low as Rs 2.35 per unit, could fall by 140-180 basis points, Crisil said.

The remaining 80% will also be hit but the impact will be limited to 60-80 basis points, as projects in advanced stages of completion would have already procured modules at lower prices.

Future projects, too, might be impacted from higher tariffs. The Institute for Energy Economics and Financial Analysis has estimated that tariffs could rise by 21% over the next 12 months.

But as coal prices and thermal electricity are also high, it could keep solar power viable despite the hikes, Gupta said.

Domestic Manufacturing Vs Imports

India's solar sector is heavily dependent on imported components. According to Mercom, in 2021 India's solar imports stood at $3.5 billion compared with $2.6 billion in 2019. The government is trying to boost domestic manufacturing to reduce its import reliance through a performance-linked incentive scheme worth Rs 24,000 crore.

"Currently, majority of the solar energy capacity in India has been built on imports," said Chaudhary of Vikram Solar. "There is an immediate need to develop a robust ecosystem for indigenous solar manufacturing."

However, to disincentivise imports, the government has imposed a 40% basic customs duty on solar modules and 25% on solar cells. Besides, it plans to implement an Approved List of Module Manufacturers where components from only the listed solar manufacturers will be allowed to be used in government-funded projects and schemes.

The two curbs are not conducive to solar growth in India, at least till the country's 3 GW manufacturing capacity is enhanced.

"There is absolute need to incentivise and promote domestic module manufacturing but this cannot be at the cost of hampering the momentum in solar capacity addition," Chadha said. "There is a quality and demand-supply mismatch, especially for high-efficiency domestic modules."

IEEFA predicts that a "substantial chunk" of the projects commissioned by 2024 will not be able to procure domestic modules due to lack of availability amid growing demand.

Oorjan's Das suggested that the government should reconsider the basic customs duty by introducing it in tranches rather than all in one go. If three-fourths of your solar capacity come from imports, then you don't hit that till you have enhanced domestic capacity, he said.

"Instead of 40%, they can consider a lower rate and once a certain threshold of manufacturing capacity is achieved, they could gradually raise the duty in line with that," Das said. "Performance-linked incentives are a better policy to promote manufacturing than imposing high customs duty in one go."