India-China tensions: Will India’s energy transition be a collateral damage?

Domestic solar manufacturing must eventually aim to serve a global market, rather than rely on a captive protected domestic market

By Kanika Chawla

India’s government response, as well as the public sentiment, towards the evolving border tensions with China, has been one of economic boycott of Chinese goods and services. The impact and effectiveness of this response remains to be seen, but it does complement PM Modi’s call for atmanirbharta, or a self-reliant India, where our economic recovery from Covid-19 could be built on the back of the domestic industry and local value creation. Boycott alone, however, whether based on a change in consumer demand or through trade barriers, is not a sufficient condition for deepening the domestic market.

The solar sector, which forms the spine of India’s clean energy ambitions, presents a case in point. As much as 80% of India’s cells and modules are imported from China. India currently has an installed solar capacity of 34 GW, and a target of 100 GW by 2022. As much as 22 GW of solar capacity is in the pipeline and another 25 GW is in various stages of the tendering process. In such a market scenario, an imposition of a 20% and rising customs duty on solar equipment, and a combination of penal tariffs and mandatory local testing for conventional power gears has been planned to discourage imports from China. However, this will not be enough to make domestic manufacturing competitive in price and reach the scale required to meet the market demand. The government recognises this, but any additional support intervention it announces must be based on a strategic industrial policy to support local industry, and effectively counter the competitive advantage of manufacturing in China, or else we will end up creating distorted markets, making domestic solar manufacturing a white elephant for the public exchequer.

An effective green industrial policy that allows maximum domestic value capture from the ongoing energy transition needs to set clear targets, display long-term vision, and reward innovation. To avoid a knee-jerk response, the following three-step process may be most prudent.

First, identifying the value chain. Any policy must clearly know the contours of its target. Is the aim for India to assemble solar PV modules in India, while still importing the solar cells, glass, aluminium frame, junction box, etc, or to completely localise manufacturing from quartz to polysilicon upwards? The fine balance maybe somewhere in between, but a decision must be made now and policy must recognise the value accruing from global supply chains. This must hinge on value creation vs investment support required. Value creation in terms of size of the market, jobs created, and strategic value served from an import dependence point of view can help define these contours. Further, no technology works in isolation, a robust green industrial policy must take a broad and long term view by considering associated technologies such as solar inverters, battery storage, electric vehicles, etc so that an ecosystem of interconnected manufacturing processes can develop.

Second, deconstructing the competitive advantage of trade counterparts. The CEEW Centre for Energy Finance analysis finds that Indian modules are nearly 33% more expensive than their Chinese counterparts. As the utilisation of domestic modules grows and existing manufacturing capacity is utilised in full due to demand growth, this competitive disadvantage in price falls to 22%. To raise import prices by the same amount may provide the domestic market temporary cover, but it is critical to understand the variation in price. While higher cost of input materials accounts for a little over half of the price difference, the remaining of the difference may be explained by differences in other direct costs such as the cost of finance, labour costs, electricity costs, etc. With such analysis, developing an evidence-based industrial policy that helps even the playing field for domestic manufacturers, and identify the industrial policy design of the trade counterpart is easier than ever before.

Finally, balancing the use of multiple tools to support the creation of a market that has scale and nimbleness to evolve as technology improves. A fit-for-purpose response to support the identified aspects of a sector, based on an understanding of the competitive disadvantages, must use a suite of tools from the available support toolbox to signal long term commitment to developing local manufacturing, but not a free pass to existing local manufacturers. In addition to the already proposed basic custom duty, a measured combination of interventions like viability gap funding, access to low-cost capital, and manufacturing zones with production and tax incentives can be deployed. However, manufacturers must be encouraged and rewarded for investing in R&D and for efficiency improvements. This is especially critical in technologically advanced sectors like solar power, where manufacturers must keep pace with the rapid advances being made in global technology standards and products. Domestic solar manufacturing must eventually aim to serve a global market, rather than rely on a captive protected domestic market. In order to do this, all support intervention must have clearly defined sunset clauses.

Concern about the adverse impact of the India-China tensions on India’s energy transition has resulted in a reprioritisation of domestic manufacturing. Energy security is an important lever of India’s clean energy story, and the current political climate has brought the uncertainties of a highly import-dependent sector to the fore. However, investing in domestic manufacturing would not only create a more robust supply chain for solar capacity addition but also create jobs and domestic value at a time when our economy needs it the most. Nimble interventions that are monitored and corrected for the desired impact could form India’s strategic green industrial policy, extending our commitment to a cleaner energy future.

The author is Director, CEEW Centre for Energy Finance
Views are personal