India must revisit its solar policy

India needs to supplement it with an environment that breeds research.

That the US government plans to impose trade sanctions against India for the latter’s policy on solar panels, as news reports indicate, is only to be expected. However, the gathering clouds are a strong provocation for the government to review its policy.

This is not to say that the US is in the right. If anything, the domestic policy sieves have in the past (there was only one before) favoured American manufacturers. The current one, though, makes it harder for American companies to sell their products.

What is flawed, however, is actually the government policy to develop domestic manufacturing capability. This, even as the Americans accuse the policy as one that protects domestic industry and, hence, flouts global trade norms.

Here’s why

Let us look at the earlier policy, the first major government initiative to add solar-based power plants in the country, and what came of it.

Smooth sailing

The first phase of the National Solar Mission (NSM), started in early 2010, set out a tariff-based competitive process to offer subsidies for 450 megawatts (MW) generation capacity. On its own, solar power cannot compete with the available alternatives. Coal- and gas-fired units sell at a third of solar prices. Second, annual power generation capacity addition is higher by a staggering 20 times the phase I solar target.

The latter, however, makes room for subsidies—the government blends the high cost electrons with a portion of that generated by state-owned NTPC Ltd to make it financially palatable to the distribution utilities.

The Americans had little reason to complain about this menu. Using technology as a sieve, the policy provided protection to the domestic manufacturing industry. It necessitated purchase of solar panels, the most expensive part of the entire power plant, from domestic manufacturers. Yet, it offered a way out for prospecting American manufacturers who had, back home, established solar panel capacities based largely on a technology that pasted a thin film of light-electricity converter on glass. This technology was exempt from the infant industry promotion clause.

The battle was set—locally produced panels that sliced silicon wafers were more efficient but more expensive than the American thin-film modules.

The tariff bids captured one more element—cost of funds. The Americans scored well, aided by US Exim bank that funded several projects.

The final score read well for the Americans—solar panels in close to 65% of projects that won subsidy for selling power to discoms under the NSM phase I were of American origin.

Choppy waters

However, round II has gotten tougher. Kicked off late last year, the rules of the game have been changed. The narrow edges of the sieve now hurt the US industry because there is no technology handle that favours American companies. Under the second phase of the government scheme that supports 750 MW of solar capacity, half the capacity is reserved for domestic production, with the remaining half open to foreign vendors.

This means that in the open category, the Chinese are in. That, for sure, is bad news for the Americans. For, over the last two years, led by Chinese industry, the price of silicon panels has plummeted 40%. And, the US solar industry has been left stranded. This is summed up in a recent open letter by the chief executive officer of a leading solar panel manufacturer, Solarworld AG, to US President Barack Obama.

“Beginning a few years ago, the Chinese government saw an opportunity not to join but to exploit and dominate this growing industry, as it has done with many other industries. Through state planning, billions of dollars of government subsidies and below-cost pricing, China built massive solar production capacity—enough to supply the world twice over—and drove down pricing to unsustainable levels. It harvested US taxpayer-funded incentives, while keeping foreign competitors out of its own market.

“This drive has hurt and bankrupted dozens of well-run US solar manufacturers and cost the jobs of thousands of US employees. In late January, Sharp Corp. became the latest to announce it would exit the US solar manufacturing industry.”

The American complaint, however, doesn’t take note of another aspect of the changing market and the Chinese harvest: technology. Over the last few years, the efficiency of Silicon modules has vaulted from the 10-12% mark to 20%; in contrast, the thin-film modules haven’t kept up in this chase to produce cheaper electricity.

That takes us to why India needs to review its policy towards protecting domestic industry in the solar arena. For sure, there is no case of excessive protection. But that’s not enough. It needs to supplement it with an environment that breeds research. Not the kind that just stays printed in journals but also finds its way to the shop floor. For this to happen, public-private partnerships between technical universities and industry need to be forged. This is all the more relevant since the solar sector suffers from a high degree of obsolescence.

Else, India will be burdened with not only ghost factories and unemployment but also wasted public money. After all, the factories are financed, for a good part, by lenders who raise money from the public.