Solar PLI Scheme to Benefit 8%-13% of Incremental Panels Demand till FY30; Consolidation in the Offing

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India Ratings and Research (Ind-Ra) estimates the allocation of INR45 billion towards the solar modules manufacturing industry by the Ministry of New and Renewable Energy (MNRE) can benefit the sales of 20GW from the capacity developed under the under production linked incentive (PLI) scheme across the five-year implementation period, assuming 100% localisation (up to 30GW in case of 65% localisation). It also means sanction of the PLI facility which will benefit 4-6GW of sales annually over five years from commissioning of the beneficiary manufacturing facilities. The scheme can facilitate additional 8-12GW annual solar cell/module manufacturing capacity in India. Sales up to 50% of the manufacturing capacity set up by the winning bidder will benefit from PLI. This estimate assumes the base PLI rate of INR2.25 per watt power and entirely greenfield expansion.

A Good Start, But Just a Fraction of Demand Gets Addressed through the Scheme: The capacity to benefit under the scheme may further reduce from the stated 20GW level in case of the plants achieve better module efficiency and temperature coefficient than the minimum requirement defined in the notification. India has set a target to install 280GW of solar power plants by FY30 out of which about 240GW is under pipeline or yet to be implemented, which means just 8%-13% of this planned requirement is going to benefit directly from this PLI scheme till FY30 (assuming localisation to be in between 65% and 100%), apart from improving the domestic manufacturing capacity. 

Benefit Based on Actual Performance: The PLI benefit will be calculated based on the actual sales volume, PLI rate, tapering factor (starting with 1.4x in first year and reducing to 0.6x in the fifth year) and the level of localisation. incentivising bidders to opt for high efficiency modules while bidding. The PLI rate will defer with the efficiency and temperature gradient quotient claimed at the time of bidding and will vary between INR2.25 and 3.75 per watt power, benefitting players to invest in better technology. Also, more benefit will be available with increased localisation of raw materials. However, the bidders will in no case be eligible for any PLI over and above the requirement quoted by them for a particular year. Bidders will be selected based on a pointer system based grading for the extent of backward integration and manufacturing capacity. 

Minimum Investment Requirement to Bring Sector Consolidation: Bidders will have to at least manufacture solar cells from outsourced wafers domestically to benefit under the scheme, and preference will be given to more backward integrated players till the most primary stage of manufacturing polysilicon from silica. At least 1GW of manufacturing capacity will need to be established on the scale side. PLI will be calculated on annual sales up to 50% of manufacturing capacity or 2GW, whichever is lower, so that at least three players can be accommodated within the allocated amount. Higher scales and requirement of backward integration will require much larger investments into the sector, resulting in near-term natural consolidation, as small players who cannot benefit from the scheme will become uncompetitive compared to both domestic manufacturers benefitting from PLI scheme and imported cells/modules. 

Strict Timelines Stipulation on Backward Integration – A Huge Challenge: On the execution side, winning bidders may lose on the committed timelines in case they slip on the commissioning timelines of 1.5-3 years from the date of PLI sanction (depending on level of backward integration). As per the agency, bidding players may choose to restrict the level of backward integration, given the stringent timelines. Moreover, the PLI benefit will be available till five years from the scheduled date of commissioning only, meaning that winning bidders will be at risk of losing benefit of the scheme, if they overcommit on the level of integration. Backward integration may take some time, given the already established procurement contracts and supply chains internationally. Also, in case a selected manufacturer fails to meet the promised integration or capacity or minimum module performance after his selection, he will not get any PLI till he overcomes these deficiencies, and/or performance guarantees can also be liquidated by India Renewable Energy Development Agency Limited in the meantime. 

If the manufacturer achieves the promised levels subsequently, he will be eligible for PLI from the next month after which the performance measures are met. Reduction of PLI by additional 5% in case of more than 25% underperformance on PLI claimed by bidder is an additional deterrent. So in nut shell, players may want to play it safe and commit less on the integration part under the current allocated amount, given the strict penalties, thus losing out on one of the main intended purposes of the scheme. 

Brownfield Included in PLI Scheme; Provision of Waiting List: The PLI rate for brownfield projects will be limited to 50% of that available to a greenfield project. . Besides, a waiting list on the basis of marks (valid for six months from the date of selection of the bidder manufacturers) will be maintained in case of substantial over subscription of the bid, but the same is not available immediately as per the notification. 

Key Takeaways: To sum it all up, the scheme is definitely a shot in the arm and the much-required step to tackle import requirement and bring it down from 90% import requirement levels to 64%-74% on an average till FY30. However, the amount under the scheme will have to go significantly up if India has to reduce its import dependence any further, assuming India is to proceed on its target of 280GW solar capacity by FY30. Supply and logistical constrained have already pushed the estimated under-construction solar project costs for developers by 10%-12%, as per Ind-Ra discussion with its rated issuers. 

Furthermore, as per MNRE notification dated 30 March 2021, the overall extension in timelines for commissioning of solar power generation projects is limited to six months (for approval sought from implementing agency) and solar power developers are walking on a tight rope, given that they need to commission projects well before 1 April 2022, when the 25%/40% basic customs duty kick in for solar cells and modules, respectively. These capacities will still have to come up based on imported modules, given that it will take time for domestic manufacturing capacities to set up. More broad-based solar module procurement strategies including a healthy mix of domestically manufactured solar modules may mitigate these kind of risks over the long run. 

Also, the scheme could lead to more sector consolidation (from the current 15-20 players with significant capacities) to benefit from the economies of scale and requirement of minimum capacity to benefit from the scheme. But on the flip side, given the strict timelines for implementation, the scheme may lose out on its intended purpose for the level of backward integration. All in all, this a good start, but timely disbursements, ease of processes and scaling up the scheme amount will be key things to look out for over short to medium tenure to see India self-reliant and simultaneously being economically viable to meet its solar power ambitions.

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