Opinion | MSMEs hold key to India’s Atmanirbhar solar manufacturing4 min read . Updated: 27 Aug 2020, 06:48 PM IST
- Supporting MSMEs that produce the balance of material doesn’t just yield benefits for the energy sector but rather holds the key for building self-reliance in the solar sector
The solar photovoltaic (PV) manufacturing market, unlike the PV deployment market, is much less distributed and democratic, with manufacturing concentrated in just a few countries. However, all is not lost yet.
Globally for solar PV, the transition from a budding market to a mainstream market is on the horizon, as the industry expands from today’s annual production of 100 GWP to an expected 3,000 GWP/year by 2030. In a lot of ways, the 2020s will be the inflection point, such that nations and companies that make the right set of decisions now will be in the best position to ride the growth wave. They may also be able to create value beyond company level profit in the form of energy security and independence from rent-seeking behavior due to lack of diversified value chains. However, for India and Indian companies to realise these gains, a comprehensive and nimble long-term strategy, in spirit, action, and continued enforcement will be essential.
India is already the world’s third-largest solar market by deployment, and has further set an ambitious target of 300 GW of solar PV by 2030. The drivers of this ambition extend beyond climate action and include energy security, delivering reliable and affordable power. The large target setting and continued policy support to solar PV deployment provides the scale and certainty of demand required to build a domestic supply chain for solar PV. This will deliver sizable forex savings and will create thousands of high-quality jobs. While the domestic demand may be the comfort factor for domestic manufacturers, the aim should be to develop an industrial hub that caters to the growing global demand for solar PV, leveraging favorable trade relationships and providing globally competitive prices and quality.
Manufacturing discussions currently revolve around wafers and cells which are made into modules, however, these only contribute 50% of the total bill of materials. The rest of the value is added by the components industry that largely hinges on MSMEs producing several allied components. Currently, Indian manufacturers don’t just import cells but rely heavily on imports for other non-cell components like glass, ribbon, EVA sheet, and others which constitute 30 to 35% of the total module costs. India already has MSME’s producing these, but there are concerns about quality, scale and price. This part of the value chain is much more job intensive than the highly automated wafer/cell assembly lines. In order to truly indigenise solar manufacturing, the MSMEs that provide these materials must also develop their capacity and ambition. This would create a virtuous cycle of developing millions of additional jobs and supporting a struggling sector in its post-covid-19 recovery, while advancing the domestic energy priorities of clean energy and energy security. Identifying this opportunity, an anti-dumping duty is already in place on solar glass and EVA sheets. Despite this there continues to be limited capacity in this space. Mobilising capital and creating a conducive ecosystem to support these MSMEs to competitiveness will be critical to the success of any indigenisation initiative.
Supporting MSMEs that produce the balance of material doesn’t just yield benefits for the energy sector but rather holds the key for building self-reliance in the solar sector. Evidence suggests that large investors are cautious to invest in Giga-scale industry operations without a robust and competent local value chain with deep interlinkages. Coordinated, world-scale investments across the value-chain will be encouraged by the long-term policy vision and innovative and effective market design.
The support mechanisms required for MSMEs to flourish are not dramatically different from the needs of any other industry. They too need demand certainty and access to affordable capital at scale to expand operations and invest in innovation. Just as large target setting and commitments of domestic procurement serve as incentives to the PV manufacturing companies, long term purchase commitments (or purchase intent agreements) between such companies and the MSME balance of materials manufacturers would go a long way in signaling future cash flows.
This demand certainty will not only encourage small businesses to expand capacity but will also boost their ability to do so. Advance order commitments could be used to borrow capital from regional banks and dedicated NBFCs like IREDA and SIDBI at competitive prices, as the future cash flows would reduce the risk of default. However, the post covid paradigm will be punctuated by liquidity constraints and the Government of India may need to make additional capital infusions into banks and NBFCs. As part of these, a dedicated pool of capital for credit to MSMEs supporting the PV manufacturing industry may be set up. Innovative mechanisms like a first loss guarantee, warehousing of profitable production units to access lower cost debt, and access to low cost financing options for new plant and machinery, will also be a cost-effective module to make competent MSMEs bankable.
India with a robust balance-of-materials ecosystem feeding into the solar PV Giga-factories will be an ideal alternative for the Chinese dominance in solar PV manufacturing and the obvious move to enhance India’s energy security, and lock-in benefits of the energy transition for local communities. However, the focus of the policy design to support this move must be on simple but not necessarily obvious interventions that capture the maximum value and are easy to implement.
(Kowtham Raj VS is young professional, Niti Aayog, and Kanika Chawla is director - Centre for Energy Finance, Council on Energy, Environment and Water. Views are personal and do not reflect Mint’s.)