Management Discussion & Analysis

GLOBAL SOLAR INDUSTRY OVERVIEW

While 2014 undoubtedly remained a challenging time for the solar industry, it did mark an inflection point in the market's development. Volume demand grew at a double-digit pace again, largely thanks to policy in China and Japan. Global solar PV installations in 2014-15 reached 44.2GW, compared to its last published forecast of installs reaching 45.1 GW, a 14% increase over 2013. One of the reasons for the lower than expected installs was the decline in demand within European countries, despite record installs in the UK that made it the biggest market in Europe for the first time.

All of the signs point to a strengthening recovery of the solar industry in 2015 even if the recovery itself remains incredibly fragile. Policy support will continue to be key, and demand still will be highly concentrated in a handful of countries, brsenting significant risk. Nonetheless, the rapid price declines seen by the industry has opened up solar to an enormous number of countries around the world, with several new business models emerging in the post-FiT world. More than 40 countries globally will install at least 100 megawatts of new solar PV capacity in 2015, signaling the true entry of solar into traditional energy generation.

The cumulative global market for solar PV is expected to triple by 2020 to almost 700 gigawatts, with annual demand eclipsing 100 gigawatts in 2019. Solar demand will likely be almost entirely market-based in 2020; a dramatic shift from 2012 when almost all demand was brmised on direct incentives. One implication of an increasingly unsubsidized market is that management and governance of the electric grid will change dramatically, creating both new opportunities and challenges for solar companies. This transformation is already underway with the implementation of market-based mechanisms for PV procurement and solar companies exploring innovations in business model design.

INDIAN INDUSTRY OVERVIEW

The Ministry of New and Renewable Energy (MNRE) announced that India's total grid-connected solar capacity crossed 3 GW in December 2014. A total of 886 MW was added during the calendar year 2014, which made it another year of less than 1 GW installation. India crossed the 1 GW mark in July 2012 and the second GW mark in August 2013. The policy and regulatory uncertainties ensured that it took an inordinately long time for the 3rd GW to be completed. India is likely to become one of the largest solar markets globally in the next three years and is already on track to add more solar capacity than Germany for the year 2015.

While the first half of 2014 was full of uncertainty and indecision due to the elections, the second half was action packed, and laid a good foundation for a vastly better 2015. The MNRE started the process for allocation of 3 GW of solar projects under the state specific programme. Several Central Public Sector Undertakings (USA) and government organizations are also in the process of setting up solar plants. 3 southern states - Karnataka, Andhra Pradesh and the newly carved Telangana - allotted 500 MW of solar projects each, and if all goes well, a majority of these projects will be commissioned by end of 2015/early 2016.

Apart from that, several projects that were started in 2014 will be completed in 2015. These projects include the 750 MW of solar projects allotted under the Phase 2, Batch 1 of JNNSM, allocation under the state policies of Uttar Pradesh, Punjab and Madhya Pradesh. Overall, it is expected that around 2 GW of solar capacity will be added in 2015.

While the 2 GW growth prospects give immediate relief to the industry, what excites and sometimes overwhelms the industry is the ambitious revision of solar targets by the new government. The government is proposing a 5-fold increase in the JNNSM targets and is planning to revise it from 20 GW of grid-connected solar to 100 GW by 2022 or even earlier. Considering the fact that it took India about 5 years to add 3 GW, adding another 97 GW in 8 years looks extremely challenging. The government has nonetheless gone ahead and released the year-wise roadmap to achieve the goal of 100 GW by 2020.

CHALLENGES APLENTY

Reaching the ambitious target of 20 GW of installed capacity would require addressing a number of challenges including a lack of access to low cost financing, inadequate infrastructure, underdeveloped supply chain leading to high inventory costs, and a lack of raw materials for solar manufacturers. Of all these challenges, one that has acquired prominence in the recent months is the trade battle that has erupted between India and the US. The US has taken its battle to get India to open its solar market to the World Trade Organisation.

At the heart of the battle is the stipulation for "domestic content requirement" (DCR) in Phase II of the JNNSM program. The US wants India to back off from its requirement of incorporating locally-made cells and modules into solar projects as it would discriminate against US exports. India on the other hand argues that the domestic content requirement is necessary for protecting domestic solar industries that cannot match the low prices offered by other nations like China.

Some kind of protectionist policies has been brsent in the JNNSM program from the outset. In Phase I, DCR was limited to crystalline silicon photovoltaic (PV) panels. PV technology is broadly classified into crystalline silicon and thin film. Phase II of the JNNSM program expands the domestic content requirement to include thin film solar technologies which comprises the bulk of US solar products exports to India. While Indian solar cell and module manufacturers obviously support DCR, since they cannot compete with the much larger and lower cost Chinese companies, Indian installers and developers have opposed the domestic content rule as this leads to higher costs and fewer choices of suppliers.

Solar PV technology is evolving very fast and India needs to breed an environment that prioritises innovation and research in this area. Other countries like Germany and the US have been spending large amounts on R&D for a long time. In addition to investing in more R&D, forging partnerships between the country's technical colleges and universities and the solar industry as well as forging international collaborations will go a long way in moving to technologies that reduce costs, improve efficiency, and scale up the deployment of solar projects.

OUTLOOK

To support the domestic PV industry, the Government has also declared Manufacturing Policy announced in 2011 was merged with the 'Make in India' incentives were announced specifically for PV module and BOM manufacturers. Exemption from custom and excise duty comprised the bulk of incentives. The exemptions were also extended to equipment purchased for manufacturing the aforementioned components. In addition, under the Modified Special Incentive Package Scheme (M-SIPS), announced by the Department of Electronics and Information Technology (DeitY), 20% and 25% subsidy on capital expenditure has been announced for entities establishing cell and module lines in Special Economic Zones (SEZ) and Non-SEZs, respectively. Reimbursement of excise duty and countervailing duty is also applicable for capital equipment purchased for Non-SEZ units. Further, for high technology units, such as fabrication units (wafer manufacturing facility), reimbursement of central taxes and duties have also been provided.