Oil shaped the 20th century more than any other commodity. The quest for oil led countries to war, dictated nations’ foreign policies and transformed our way of living and, with it, the global economy.
With the crisis of global warming looming large in the 21st century and developed countries weaning away from fossil fuels, solar power could be the new oil. The country that dominates the solar supply chain, technology and manufacturing capacity might go on to become a dominant global power, at least in the arena of energy.
While Manmohan Singh and Narendra Modi have both been prescient in emphasising the strategic and economic importance of the solar industry (Singh spoke of creating Solar Valleys in India 10 years ago), India has lagged woefully behind China in solar manufacturing and solar technology.
Twenty years ago, both China and India were at the bottom of the global solar industry. In 2003, China had a mere 2% share of global solar manufacturing. Today China’s share is 80%. Of the top 10 solar companies in the world, eight are Chinese. From having a minuscule rural-oriented solar program in the 1990s China has become the hegemonic solar power and may soon be the world’s largest renewable energy source.
China has a chokehold over all three key items that go into the manufacturing of solar panels –polysilicon, ingots and wafers ( polysilicon is the raw material used to make solar ingots and wafers). It controls 64% of polysilicon material worldwide, while its share of manufacture of solar ingots and wafers is nearly 99%. Close to 80% of all solar equipment used in India are imported from China. India imported $2.16 billion worth of solar photovoltaic cells, panels and modules in 2018-’19.
Why China dominates
So how did China become a dominant solar manufacturing country, exporting solar components to the rest of the world, while India failed to develop its domestic solar manufacturing industry and has instead become completely dependent on Chinese solar imports?
This is because while we kept talking, China acted on a massive scale – giving all kinds of fiscal, financial, material and policy support to its domestic solar manufacturing industries.
“The Chinese government views solar as a strategic industry, and as such, the solar sector has received numerous subsidies, including in land, electricity, indirect and direct financial support in addition to tax relief,” said a recent report by the Coalition for A Prosperous America, a non-profit organisation representing American manufacturers.
Another report in 2011 found that Chinese solar companies incurred an average annual loss of 40% on net sales. The Chinese government-funded these humongous corporate losses as part of the strategy of cornering the global market. In July 2020, the European Commission concluded that there was sufficient evidence to show that China was subsidising its domestic solar glass industry which had damaged the European PV industry.
Free land, free electricity, free capital and at times even free labour supplied by the Chinese state has created Chinese solar manufacturing behemoths who are now dominating the global solar industry.
Artificially cheap prices of Chinese solar components have killed the global solar manufacturing industry. In the United States, where solar cells were first invented in 1954, over 100 solar manufacturing companies have gone bankrupt over the last two decades.
Whether it is the US, Europe or India, solar power plants have been set up largely using Chinese solar equipment.
It was only in 2018 that the US decided to fight back with aggressive measures after the Obama era tariffs imposed on Chinese solar panels did not yield the desired results. The Trump administration levied steep tariffs on imported solar modules, giving a new lease of life to the US domestic solar manufacturing industry. Three years later the signs of a US solar manufacturing revival are already evident.
India can beat China
The question looming before India is how can we become self-sufficient in solar power technology and manufacturing?
The process of module manufacture can be broken up into two parts: pre-cell up to wafer stage and post wafer stage up to cells and modules.
The Modi government is focusing primarily on the post wafer side simply because the pre-cell up to wafer manufacturing stage is extremely capital intensive.
Since China has already made massive investments in the wafer sector in the period from 2008 to 2017, now there is little incentive for private players to invest in wafer manufacturing.
Chinese investments are 99% of the total wafer industry in global terms.
There are three key elements to wafer production in terms of competitive advantage:
- Labour costs: the Chinese industry competed against the then existing German industry for wafer production by dropping the cost of labour (average annual per capita) to 10,000 euros compared to the average of 85,000 euros in Germany.
- Power costs: Typically, the power cost is roughly 30% of the total production cost and most Chinese industries have reduced this cost by locating themselves in power surplus areas with captive generation facility.
- Scale: This is a function of investment. The larger the investment, the lower the per-unit production cost and therefore higher the competitive barriers for non-Chinese manufacturers. China has excelled in this area by concentrating the entire wafer manufacturing of the world into China.
This is what the government of India must battle against. It should make manufacturing solar wafers a national priority.
The government needs to roll out a combination of financial and fiscal incentives, including tax holidays, extending lending at cheap rates, subsidised land and energy and flexible labour policies, for the domestic solar wafer and module manufacturers.
The Modi government’s current approach is too minuscule and incremental. The recently announced production-linked incentive scheme for solar modules and 40% basic customs duty on imported solar modules and 25% on imported solar cells is merely a band-aid approach.
Trying to encourage solar manufacturing by linking it to solar power generation is bound to fail. This is like asking Tata Motors to set up a steel plant before manufacturing cars because govt wants steel to be made in India before cars are made here. This is not how the Chinese have done it.
There has to be a clear division between promoting solar power generation and encouraging solar manufacturing. These are two separate businesses. Some companies may find economies of scale and financial and commercial prudence in doing both, while some won’t. But to develop manufacturing by necessarily linking it to power generation is bound to fail. Who would set up an ingot and wafer plant when the size the government of India is offering is negligible compared to the capital investment it requires?
In a tender floated last year by the Solar Energy Corporation of India – a fully-owned subsidiary of the Ministry of New and Renewable Energy that functions as the implementing and facilitating arm of the National Solar Mission – for setting up 12 gigawatts of solar power plants and 3 Gw of photovoltaic cell-manufacturing projects, there were no takers for the tender component that involved manufacturing of wafers.
Thinking like China
To encourage domestic manufacturing of solar power equipment (wafers, cells, modules and panel), Solar Energy Corporation of India had invited bids asking bidders to set up a solar manufacturing facility in India along with a solar power generation project against which Solar Energy Corporation of India ensure assured power purchase agreements for the successful bidders.
The tender was divided into two packages: Under “package A”, a bidder was supposed to manufacture solar cells, while under “package B”, the bidder was required to manufacture ingots and wafers.
In the end, the bidders only participated under Package A. Nobody came forward to manufacture ingots and wafers. Why? Because it requires massive capital investment and for that to happen the government has to give the required fiscal, policy and financial support to the private players. Or alternatively, India sets up a few public sector units and give them all the funds and material support in the world to compete with Chinese solar manufacturers (perhaps this is what Nehru would have done).
If this government cannot think and act like Nehru, it must at least act like Xi Jinping.
The bottom line is that India needs to build a long term end-to-end Indian solar supply chain, solar manufacturing and research and development ecosystem to end our dependency on imported Chinese solar components.
India has set itself an ambitious target of installing 175 Gw of renewable energy capacity by 2022. This would require building 25 Gw of domestic solar manufacturing capacity every year till 2030. The government need to go all out on building a Solar India. We in the past have missed many buses. This is one bus we cannot afford to miss.
Ashish Khetan is a lawyer and author. He specialised in international economic law at Cambridge University.