India’s Solar Sector is being over regulated. Four reasons too many

It's no surprise that for a sector as dependent on government subsidies as it was earlier, the solar sector would always find it difficult to break away from heavy handed influence. Recent moves by government agencies to 'manage' the solar sector indicate the classic bureaucratic fallacy.We know better, and do as you are told, or else.

First, the numbers. As we have stated earlier, the solar sector in India is the crown jewel among India’s renewable sector, delivering the highest addition to renewable capacity in the past three years or more. It is also the prime engine in India’s quest to meet its 175GW renewable target, with a 100 GW target riding on solar. From 2.5 GW on May 2014 to 23 GW now. Not only has the sector grown almost 9 times since May 2014, it is one of the few unquestioned success stories for the government. Until now.

Carried away by the interest it generated, as well as the investments that a benign bureaucracy and supportive policy enabled, the sector is suddenly facing serious heat, both in terms of rapid fire policy changes, as well as an increasingly cold attitude to their issues.

Before we get into the specifics, it is interesting to put down just what is causing these changes.  One is clearly the single overriding  focus on bringing costs down. Lets call it the Prime Objective. This is the classic government top down fiat which brooks no opposition, which in turn could lead to increasing pressures on bottom lines, as well as a disregard for other quality issues in the long term. Remember, most solar sector projects come with a 25 year warranty of sorts, and with little financial surplus on the table, it is anyone’s guess how many of the developers would be around, or keen to service these contracts after a decade of those 25 years.

The second issue is the challenge before the government to make India a solar hub of sorts. Egged on by its own vision to make India a manufacturing hub, and by a domestic industry which sees sky high protection as the only way to get there.  In direct contradiction of the prime objective, ie, price reduction.  The International Solar Alliance (ISA), one of the biggest institutional moves by India in recent years globally, is set to come out with its first global tender soon for solar lamps, and all eyes will be on how Indian manufacturers perform there.

So just what are the changes that are beginning to  hurt?

First up is the Safeguard duty, still to be formally implemented thanks to legal complications but active from July 30 nevertheless.  The safeguard duty has one objective. To make domestic manufacturing competitive, even as concerns about quality seem to have been sacrificed. The MNRE minister himself had stated, not so long ago that domestic industry was  not just inefficient, it was also obsolete.

If the safeguard duty was not enough, the government, since August, has started mandating use of domestically produced panels and modules, if the not so gentle push through the safeguard duty was not enough.

Reason no 3 is price caps. In an industry that has unfortunately always operated in a ‘fixed’ price scenario, be it through feed in tariffs, subsidies, and more, perhaps this was no surprising. Except, this time, the caps can hurt. By placing price caps on bids, the government is trying to force down ‘a one size fits all’ approach on everyone, in all corners of the country, which is never a good idea.

Complaince wheels
Slow Down, say the Wheels

The final, and somewhat ironic blow t0 the sector is the latest move to mandate commissioning periods for winning bidders. Thanks to the uncertainties around land , equipment and the extensive dealing with  government agencies for grind connectivity, and other permissions and benefits, most developers have dedicated teams to ‘manage’ the paperwork. And every now and then, things do go awry. The latest move to force more ‘discipline’ could simply add pressure, besides more costs as they seek to stay within the new time limits.

In fact, while speaking at an event, Ritu Lal, Senior VP at Amplus, the leading Rooftop player, pointed out the apparent contradiction of having price ceilings but not floors, the fact that total domestic capacity cannot even meet demand  (one reason why developers are being pushed to source 50% domestically, perhaps), and the reality of manufacturing jobs in the sector being more of assembly line jobs with limited skills and growth possibilities.

While all these rules and directives flow in, the government at both state and central level have done precious little to improve perennial problem areas, be it subsidy disbursal for rooftop segment, support in case of land acquisition issues or handover, or stepping in when discoms refuse to play ball despite signed PPA’s.  Caught between the devil and a hard place, unless communication becomes two way, we could be staring at serious value impairment in this sector soon. A possible victim is already out there, Renew Power, the biggest player in the space today, which has deferred its much awaited IPO owing to valuation issues.

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Prasanna Singh

Prasanna Singh

Prasanna Singh is the founder at IamRenew

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