Trade protection for domestic manufacturers is misguided

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1 India RE Policy Brief Trade protection for domestic manufacturers is misguided February 2018 Introduction India is in the midst of trade investigations to consider safeguard duty and/ or anti-dumping duty on imports of PV cells and modules in the country. The Director General of Safeguards, Ministry of Finance, has proposed a provisional duty of 70% for a period of 200 days on solar cells and modules. Final decision is expected shortly. The trade investigations have caused disruption in the industry with uncertainty looming over all solar projects under construction as well as future pipeline. The trade investigations have caused disruption in the industry with uncertainty looming over all solar projects under construction as well as future pipeline We have assessed the complete sector value chain and evaluated each element on employment and value creation to understand their impact on the economy Our recent report, Anti-dumping duty on PV cells and modules, assessed the impact of duties on various stakeholders, projects under construction and overall growth prospects of the sector. Key conclusions from the report are summarized below: i. Even a 30% duty shall reduce total project return by about 2% and pose viability risk to up to 5,000 MW of projects. Many of these projects would face the risk of being abandoned unless duty is waived for them; ii. New tender pipeline is likely to slow down considerably as power procurers and developers grapple with implications of duty on tariffs, power demand and contractual provisions; iii. Tariff increase needed to offset duty barrier will be a major blow to the private rooftop solar and open access markets, which may be pegged back by a year or more in terms of their growth trajectory; iv. Duties alone will not jump-start domestic manufacturing unless the government introduces other policy reforms to improve its long-term competitiveness; In this report, we examine if government is getting its policy prioritization, right? How critical is domestic manufacturing for the growth of solar in India? How do benefits of solar manufacturing compare with those of cheaper and more plentiful green energy generation? We have assessed the complete sector value chain and evaluated each element on employment and value creation to understand their impact on the economy. Solar power value chain Solar power value chain starts with production of silicon, the primary raw material for manufacturing of solar modules and ends with operations and maintenance of solar power plants. It can be split between upstream and downstream activities: Upstream activities - manufacturing of solar modules, inverters and balance of system (BOS) including all components such as mounting Page 1

2 structures, trackers, SCADA systems, cables, switchyard, transformer, transmission lines required for generation of solar power; Downstream activities related to project development, construction and operations: i. project development project bidding, site identification, land acquisition, legal documentation negotiation and fund-raising; ii. construction design, engineering, procurement, installation, testing and commissioning; iii. operations module cleaning, plant monitoring, maintenance, security, asset management and reporting; Unlike all other activities, which are one-time in nature, operations and maintenance is a continuous activity required to be performed for full life of a solar project, typically 25 years or more. Figure 1: Solar power value chain Upstream Downstream Manufacturing Project development Operations Inverters Wafers and raw materials Solar cells Solar modules Business development Construction and commissioning Operations and maintenance Balance of system Job creation We have estimated job creation at each stage of the solar value chain by collecting primary data from various organisations engaged in manufacturing, project development and operations. Jobs created are estimated in man-years for 100 MW project capacity. Our study shows that the upstream value chain creates employment worth 429 man-years for manufacturing components for a 100 MW solar capacity. Page 2

3 Table 1: Employment generation in upstream value chain for 100 MW capacity Component manufacturing Employment, man-years Modules 122 > Wafers -to- cells 57 > Cells -to- modules 65 Inverters 30 Balance of systems 277 > Mounting structures 58 > SCADA 25 > DC and AC cables, transmission cables 2 > Fencing angles, earthing material, steel 192 tubes, scaffold tubes, anti-rust coating, transformers, circuit breakers, control and relay panels, meters, conduits, fasteners etc Total 429 Notes: The first part of value chain production of silicon and wafers has not been considered because India has zero production capacity in these areas. Moreover, these are highly automated activities with very little job creation potential. We have similarly estimated job creation for downstream activities for both utility scale and rooftop solar projects as shown below. Table 2: Job creation in downstream value chain for 100 MW project capacity Employment, man-years Activity Utility scale Rooftop solar Project development 5 60 Construction Operations over 1 year Operations over 25 years 2,500 3,050 Total 2,570 3,418 Rooftop solar is more labour-intensive as compared to utility scale solar because of small project sizes and scattered nature of projects. Assuming that India adds 10 GW of solar capacity every year, split 80% utility scale and 20% rooftop solar, it would generate employment worth 42,900 man-years in the upstream value chain and 273,960 man-years in the downstream value chain. Page 3

4 Figure 2: Employment generation across value chain for 10,000 MW of project capacity, man-years Inverter/BOS manufacturing, 30,700 Project development, 1,600 Module manufacturing, 12,200 Construction, 11,350 Operations, 2,61,000 Upstream Downstream Source: BRIDGE TO INDIA analysis As we can see, as much as 80% of total job creation is in the downstream value chain. These are domestic jobs created mostly in the remote regions where projects are located. And it is striking that only 4% of jobs are created in module manufacturing. Other elements of the upstream value chain create far more jobs in comparison. Again, these are all domestic jobs as almost all this manufacturing activity is already based in India. The other way to analyze employment potential of the solar value chain is to consider number of full-time jobs created every year. For annual capacity addition of 10,000 MW, the number of jobs created in year 1 would be 66,300, split between module manufacturing, BOS manufacturing, project development, construction and operations in the ratio 18 : 46 : 2 : 17 : 16 respectively. But by year 25, the total full-time jobs created would rise to 316,860, split as 4 : 10 : 1 : 4 : 81 respectively (for simplicity, we have ignored any efficiency and scale benefits). Figure 3: Employment generation over 25 years, full-time jobs 240, , , ,000 80,000 40,000 Module manufacturing Source: BRIDGE TO INDIA analysis Year Inverter and BOS manufacturing Project development and construction Operations Page 4

5 We have benchmarked these numbers with data available from other countries and found broadly similar trends for upstream : downstream job creation. A job census report for the USA for 2017 shows that 78% of total jobs were created in sales, project development and installation and only 15% of the jobs were created in manufacturing. The number of jobs is skewed towards sales and installation in the USA because of the relatively large residential market share. Figure 4: Solar employment generation in United States in 2017 R&D and finance 7% Manufacturing 15% Sales and distribution 15% Project development 14% Installation 52% Source: Solar Job Census, The Solar Foundation, USA Value creation Value creation is the difference between the cost of raw materials and price of final output. We have estimated value created in different parts of the solar value chain using the following methodology: Manufacturing of modules primary data from domestic and international manufacturers; Inverters and BOS 20% of final price of all such components; Project development and operations revenue from a solar power project over 25 years less capital cost of the project; Total value creation in manufacturing 100 MW of modules is estimated at INR 550 million (USD 8.5 million), about 24% of the final module price Direct cost of manufacturing a solar module in India includes cost of wafers and other components including glass, aluminium frame, backsheet, encapsulant, junction box and sealant. The following chart shows that direct value creation in wafer-module manufacturing is only USD 0.047/ Wp. Assuming further that all non-wafer domestic components are domestically manufactured, and 20% economic value is created in manufacturing such components costing a total of USD 0.188/Wp, total value creation in wafer-module manufacturing goes up to USD 0.085/ Wp. Accordingly, total value creation in manufacturing 100 MW of modules is estimated at INR 550 million (USD 8.5 million), about 24% of the final module price. Page 5

6 Figure 5: Value creation in solar module manufacturing, USD/ Wp Cell production Module assembly Value creation Wafer Coating, gases, sealant and utilities Glass Aluminium frame Backsheet Encapsulant Junction box Interconnect ribbon Edge tape Sealant Total cost of key inputs Price of module Value creation from inverter and BOS manufacturing has been estimated by us as simply 20% of total cost of all such components of INR 8 million/ MW, equivalent to INR 160 million (USD 2.5 million) for a 100 MW project. Value creation from power generation is estimated by us using parameters shown below. Table 3: Value creation from power generation for a 100 MW solar plant Parameter Unit Value Capacity Utilization Factor in year 1 20% Annual degradation 0.7% Total power generation over 25 years Million kwh 5,405 Tariff INR/ kwh 3.00 Present value of 6% INR million 8,610 LESS: EPC cost INR million (3,900) Value creation INR million 4,710 Notes: As project revenue is generated over 25 years, we have calculated present day value of revenues by using discount rate equal to inflation rate of 6% per annum. Cumulative value creation over the life of the project is shown below. Page 6

7 Figure 6: Value creation over the life of 100 MW solar plant, INR million 6,000 4,000 2, Module manufacturing Year of operation Inverter and BOS manufacturing Project development, construction and operations Total value creation across the complete solar value chain is therefore estimated by us at INR 5,420 million (USD 84 million). As shown in the following chart, this value is split between module manufacturing, inverter/ BOS manufacturing and all downstream activities in the ratio 10 : 3 : 87 respectively. Figure 7: Value creation across the value chain, INR million Module manufacturing, 550 Inverter and BOS manufacturing, 160 Power generation, 4,710 Upstream Downstream Other benefits of solar power generation Power is the engine of economic growth. It contributes to economic growth in countless ways besides creating direct jobs and value. It is a vital input in production of all social and economic activities. Solar power brings other immense benefits to an energy deficit and densely populated country like India improvement in energy access and air quality as well as reduction in fossil fuel imports. It has advantages that often get ignored by creating most of the jobs and value in the non-fertile areas where it is deployed, it leads to a virtuous cycle of economic activity in deprived regions. Moreover, the solar technology is still in a relatively early stage of evolution and cost-efficiency curve is expected to get progressively better over time. Page 7

8 As per a United Kingdom government study, low carbon and renewable energy technologies have a turnover multiplier of 1.8x and employment multiplier of 1.9x. Average lifecycle greenhouse gas emission from solar power generation is only 85 tonnes CO2/GWh as compared to 888 tonnes CO2/GWh by coal. Figure 8: Greenhouse gas emission from power generation, tonnes/ GWh Wind Hydroelectric Nuclear Biomass Solar photovoltaic 85 Natural gas 499 Oil 733 Coal Source: World Nuclear Association Report Comparison of Lifecycle Greenhouse Gas Emissions of Various Electricity Generation Sources In the 2018 environmental performance index report by Yale and Columbia Universities in association with World Economic Forum, India plummeted 36 points to 177 from 141 in 2016 Once modules have been imported, the fuel is free and plentiful for entire life of the solar project. There is no subsequent risk to solar power generation from currency volatility, trade disruption or any other international events In the 2018 environmental performance index (EPI) report by Yale and Columbia Universities in association with World Economic Forum, India plummeted 36 points to 177 (out of 180) from 141 in According to Greenpeace report, Airpocalypse, 1.2 million deaths occur in India every year due to air pollution, which is almost equal to deaths caused by tobacco usage. As per another report, Assessing the cost of climate change and adaptation in South Asia, produced by Asia Development Bank, if no action is taken to reduce the air pollution, India s GDP will be negatively hit by 1.8% by Air pollution presents a growing social and economic cost for India. There is no carbon pricing in the country, but the government does need to consider solar power s environmental benefits and design policies to encourage its growth. An argument is also made that heavy reliance on module imports means that India is simply moving its dependency from fossil fuel imports to solar equipment imports. This argument is flawed in our view. Coal imports account for a very significant share (up to 40%) of total value creation in thermal power projects. But module imports account for a relatively insignificant 10% share of value creation in solar power generation. Moreover, once modules have been imported, the fuel (radiation) is free and plentiful for entire life of the solar project. There is no subsequent risk to solar power generation from currency volatility, trade disruption or any other international events. Page 8

9 Figure 9: Various benefits of solar power Energy security Minimal risk of disruption from external influences Energy access Modular nature suitable for remote areas and off-grid application Social development Employment generation Significantly higher employment generation potential as compared to coal Local jobs Employment multiplier: 1.9x CO 2 Reduction in carbon emission 10 times less emission as compared to coal-fired power Improvement in quality of life Multiplier benefit on economy and GDP Turnover multiplier - 1.8x Low cost power Cheapest source of power Falling cost profile India has only very recently started assessing multi-dimensional impact of different energy sources. Much more work needs to be done in this area, but it is clear that solar power has many unique and compelling benefits for India. Indeed, it is easy to argue that solar is the most desirable source of power for India. Conclusion Indian solar market has grown rapidly over last three years from 3.5 GW at the end of 2014 to 20 GW today. India has become the third largest solar market in the world and billions of dollars of overseas investments have flown into the country. At the same time, hundreds of thousands of jobs have been created in not only downstream construction and operation activities but also in manufacturing of inverters and ancillary equipment. Many multinational companies such as ABB, Schneider, TMEIC, GE and Hitachi have set up manufacturing operations to India and a strong sector eco-system is emerging. All this has been possible largely because of improving technology and falling module prices. Page 9

10 It is important that the government calibrates its sector policies with due consideration to relative merits of the entire value chain without jeopardizing the country s immense solar potential. Instead of creating abrupt trade barriers, which seem unlikely to boost manufacturing, the focus should be on improving long-term competitiveness through genuine policy reform, investment in R&D, creation of supply chain and associated infrastructure. Disclaimer For further enquiries, please contact contact@bridgetoindia.com C - 8/5, DLF Phase I Gurgaon India Subscribe to our mailers contact@bridgetoindia.com Read our blog for up-to-date market insights and opinions Track the Indian RE market with our reports Follow us on Twitter BRIDGE TO INDIA Energy Private Limited Authors Arti Mishra Saran, BRIDGE TO INDIA Vinay Rustagi, BRIDGE TO INDIA This report is owned exclusively by BRIDGE TO INDIA and is protected by Indian copyright and international copyright and intellectual property laws. BRIDGE TO INDIA hereby grants the user a personal, non-exclusive, nontransferable license to use the report pursuant to the terms and conditions of this agreement. The user agrees not to export full or any part of the report to a country that does not have copyright and intellectual property laws that will protect BRIDGE TO INDIA's rights therein. The user cannot engage in any unauthorized use, reproduction, distribution, publication or electronic transmission of this report or the information/forecasts therein without the express written permission of BRIDGE TO INDIA. The information contained in this report is of a general nature and is not intended to address the requirements of any particular individual or entity. BRIDGE TO INDIA aims to provide accurate and up-to-date information, but is not legally liable for accuracy or completeness of such information. Page 10

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