India is endowed with vast solar energy potential. About 5,000 trillion kWh per year energy is incident over India’s land area with most parts receiving 4-7 kWh per sq.m per day. Solar photovoltaics power can effectively be harnessed providing huge scalability in India. Solar also provides the ability to generate power on a distributed basis and enables rapid capacity addition with short lead times. From an energy security perspective, solar is the most secure of all sources, since it is abundantly available.
India’s solar module manufacturing capacity is set to gallop by almost 400% higher by fiscal 2025, compared with fiscal 2021, with 30-35 GW of fresh module capacity set to be commissioned says a CRISIL Ratings study. It is a study of the capex plans of the top 11 domestic module manufacturers, which account for around 80% of the current effective solar module installed capacity of 8 GW, and some new entrants.
Solar module creation value chain
The solar module manufacturing value chain starts with polysilicon and/or ingots, which are converted into wafers. These wafers are used to produce solar cells, which are then assembled to manufacture solar modules. As on March 31, 2021, India had 3 GW of solar cell capacity (mostly used for captive production of solar modules) and 8 GW of effective solar module capacity. However, there is no manufacturing capacity for polysilicon and wafers yet.
Even this 8 GW capacity remains underutilised, at around 20%, because of higher cost of domestic modules compared with Chinese ones, which are 15-25% (4-61 cents/watt) cheaper because of subsidies and scale efficiencies. As a result, nearly 80% of India’s current annual solar module demand is catered to by Chinese module manufactures.
This low demand has till now disincentivised major investments in better-technology products and backward integration into polysilicon and wafer manufacturing, which also has high capital cost. Says Ankit Hakhu, Director, CRISIL Ratings in the study, “However, now, with the government supporting domestic manufacturers through policy measures, their competitiveness relative to the Chinese is expected to improve. The imposition of 40% custom duty on imported modules and the Production-Linked Incentive (PLI) scheme2 benefits will not only eliminate the existing price gap, but may even make domestic module competitive by 2-3 cents/watt at current prices.”
Government thrust on solar
These supply-side interventions are complemented by growing demand due to continuing government thrust on renewables, and sharper focus of the private sector on the environmental, social and governance, or ESG, norms.
India’s solar capacity implementation is expected to rise to 14 GW per annum between fiscals 2022 and 2024, and further beyond that given aggressive renewable energy plans. This will drive demand for cells and modules.
In addition to price competitiveness, developers may prefer domestic modules because they get better control of the supply chain and timely supplies compared with imports. It will also help developers offset risks from surging freight cost seen in the recent past.
Says Aditya Jhaver, Director, CRISIL Ratings, “We estimate ~Rs 50,000 crore of investments across the value chain for capacity building in India through fiscal 2025. Module and cell manufacturing capacity is estimated to increase by 30-35 GW each, while under the PLI scheme, we may also see backward-integration into polysilicon and wafer capacities.”
A portion of the capex is also moving towards newer technologies such as mono perc/bifacial modules, where efficiencies are higher and comparable with imports. That, along with healthy demand — which is supporting order books — and favourable government policies, is expected to drive operating margins for integrated solar module manufacturers (manufacturing both cells and modules) to 12-13%. It will also result in a payback period of 4.5-5 years, assuming ~50% utilisation levels.
However, the capex will increase leverage, given 70% of outlay is likely to be funded by debt. But with low complexity in implementation, a faster payback period, and robust investor appetite, the credit profiles for domestic solar module manufacturers are expected to be stable.