Greater Policy Focus Towards Domestic Manufacturing a Positive for Indian Solar OEMs; Long-term Policy Clarity on Customs Duty & Other Concessions Awaited: ICRA

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The Government of India (GoI) has recently increased its policy focus on domestic manufacturing through its “Atmanirbhar Bharat Abhiyan” as well as “Make in India” initiatives. In an endeavour to support domestic module manufacturers, the GOI has formulated various schemes in the last one year such as the Central Public Sector Undertaking (CPSU) Scheme which envisages installation of 12 GW solar power capacities by FY2023 with a defined sourcing requirement from domestic module manufacturers. Further, the Ministry of Railways
has a plan to meet 10-15% of its energy requirements through solar power over the medium term by setting up about 3 GW of projects on barren land available alongside the railway tracks as part of the “Make in India”initiative. In addition, there has been a greater thrust on the domestic manufacturing linked orders by Ministry of New &Renewable Energy (MNRE), GoI.


Commenting on these trend, Mr. Sabyasachi Majumdar, Group Head & Senior Vice President, ICRA Ltd says,“Business outlook for domestic solar OEMs remains strong over the medium term, given the greater thrust towards encouragement of domestic manufacturing. This is evident from the schemes already notified such as the CPSU scheme (12 GW), KUSUM scheme (10-25 GW), Railways (2-3 GW) and domestic manufacturing linked orders (12 GW). This itself is likely to result into a favourable order pipeline of about 35-40 GW over the next 3-
5-year period, for domestic solar OEM players. However, timely implementation of the notified schemes through time bound award of projects and availability of power supply agreements (PSAs) with the ultimate off-takers remains critical. Further, the lack of scale and backward integration in solar module manufacturing process for a majority of module manufacturers are likely to pose constraints.”


ICRA notes that the Indian solar sector has been import dependent with respect to procurement of cells, modules and other equipment given the cost competitiveness of imports as compared to domestically manufactured products. The safeguard duty on cells and modules imports from China and Malaysia, currently at 15%, is about to expire
in July 2020. “Thus, the long-term policy clarity on customs duty trajectory post July 2020 as well as other concessions (either fiscal or financial, if any) is now awaited to promote domestic manufacturing till scale & cost competitiveness improves for domestic OEMs. Also, clarity is required for a pass-through of customs duty impact for the projects already bid out in last one year which are likely to be executed post July 2020, given that there have been significant delays in implementation of such “change in law” pass-through for the affected
IPPs in the past,” says Mr. Girishkumar Kadam, Sector Head & Vice President, ICRA Ltd.


Under the CPSU scheme, projects would be set up by Government producers with a viability gap funding support of Rs 8,580 crore and the maximum permissible VGF would be Rs 0.70 crore/MW. Across two tranches of auctions completed under the CPSU scheme by SECI in the recent past, NTPC won the maximum capacity (1.69 GW out of 2.3 GW allotted capacity) at usage charges of Rs. 3.5/Kwh (exclusive of open access charges)
and VGF of 0.7 crore/MW. In a recent amendment in April 2020, the tariff ceiling has been reduced to Rs.2.8/Kwh. Assuming an average net realisation of Rs. 2.8/Kwh for a solar power project under this scheme with a capital cost assumption basis modules price of Rs. 0.25 cents/watt, base PLF assumption (DC) of 18% and AC:DC ratio of 1:4 and VGF support of Rs.0.70 crore/MW, the debt coverage metrics for the project are expected to remain comfortable with cumulative debt service coverage ratio of 1.34 times over an 18-year
debt repayment period.

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