India’s solar module manufacturing capacity is set to gallop by almost 400% higher by fiscal 2025, compared with fiscal 2021, with 30-35GW of fresh module capacity set to be commissioned following strong demand, favorable policies, likely improvement in energy efficiency, and price competitiveness.

This, according to a CRISIL Ratings study of the capex plans of the top 11 domestic module manufacturers, which account for around 80% of India’s current effective solar module installed capacity of 8GW, and some new entrants.

The solar module manufacturing value chain starts with polysilicon and/or ingots, which are converted into wafers. These wafers are used to produce solar cells, which are then assembled to manufacture solar modules.

As on March 31, 2021, India had 3GW of solar cell capacity (mostly used for captive production of solar modules) and 8GW of effective solar module capacity. However, there is no manufacturing capacity for polysilicon and wafers yet.

Even this 8GW capacity remains underutilized, at around 20%, because of higher cost of domestic modules compared with Chinese ones, which are 15-25% (4-6 cents/watt) cheaper because of subsidies and scale efficiencies. As a result, nearly 80% of India’s current annual solar module demand is catered to by Chinese module manufactures.

This low demand has till now disincentivized major investments in better-technology products and backward integration into polysilicon and wafer manufacturing, which also has high capital cost.

“However, now, with the government supporting domestic manufacturers through policy measures, their competitiveness relative to the Chinese is expected to improve. The imposition of 40% custom duty on imported modules and the Production-Linked Incentive (PLI) scheme2 benefits will not only eliminate the existing price gap, but may even make domestic module competitive by 2-3 cents/watt at current prices,” said Ankit Hakhu, Director, CRISIL Ratings.

These supply-side interventions are complemented by growing demand due to continuing government thrust on renewables, and sharper focus of the private sector on the environmental, social and governance, or ESG, norms.

India’s solar capacity implementation is expected to rise to 14GW per annum between fiscals 2022 and 2024, and further beyond that given aggressive renewable energy plans. This will drive demand for cells and modules. In addition to price competitiveness, developers may prefer domestic modules because they get better control of the supply chain and timely supplies compared with imports. It will also help developers offset risks from surging freight cost seen in the recent past.

Aditya Jhaver, Director, CRISIL Ratings, said, “We estimate ~Rs50,000 crore of investments across the value chain for capacity building in India through fiscal 2025. Module and cell manufacturing capacity is estimated to increase by 30-35GW each, while under the PLI scheme, we may also see backward-integration into polysilicon and wafer capacities.”

A portion of the capex is also moving towards newer technologies such as mono perc/bifacial modules, where efficiencies are higher and comparable with imports. That, along with healthy demand—which is supporting order books—and favorable government policies, is expected to drive operating margins for integrated solar module manufacturers (manufacturing both cells and modules) to 12-13%. It will also result in a payback period of 4.5-5 years, assuming ~50% utilization levels.

However, the capex will increase leverage, given 70% of outlay is likely to be funded by debt. But with low complexity in implementation, a faster payback period, and robust investor appetite, the credit profiles for domestic solar module manufacturers are expected to be stable.

That said, while the domestic manufacturers have reasonable experience in operating module assembly lines, they may have relatively lower experience in operating a cell line. Consequently, it will be imperative for them to get the required technical assistance to ramp up cell lines once commissioned. Also, dependence on Chinese companies for supply of wafers will continue for a relatively longer period considering India will not have sufficient wafer capacity even after the imminent round of capex.