India has always been a high-energy utilization country. The growing population coupled with the depletion of existing sources of energy has been leading the country towards an energy crunch situation. This has prompted the nation to discover the potential of viable energy sources, the most prominent among them being solar energy. Not only individuals and corporations but the Government is also taking steps to incentivize and facilitate the shift to renewable sources of energy. One such step is the Production Linked Incentive Scheme (hereinafter PLI). This blog aims to analyze the same concerning solar energy. The blog further proceeds to understand the effectiveness of the scheme in the Indian context. The blog also looks at similar solar initiatives in other foreign nations as well as past incentives of India. Based on this research, the author proposes certain suggestions to devise the most viable Incentive scheme for solar energy development in India.
A. Introduction: Production Linked Incentive Schemes (PLI)
The Prime Minister Shri Narendra Modi mooted the Idea for theOne Sun, One World, One Grid initiative at the First Assembly of the International Solar Alliance in October 2018, atCOP 26 in Glasgow. It is an ambitious project undertaken by the Government of India to reduce carbon emission and to open avenues of cooperation between countries under the Paris Agreement.
According to theOne Sun declaration, the main areas of work of the Initiatives are inter alia, investing in renewable energy, support to local production units, to help vulnerable communities gain access to clean, affordable and reliable energy and also developing innovative financial models, market structures for solar grid infrastructure.
The PLI scheme is the latest addition to the list of reforms introduced under the aegis of the ‘Aatma Nirbhar Bharat Abhiyan’ (Self-Reliant India) initiative. The scheme aims to make domestic manufacturing globally competitive and to create global champions in manufacturing. The strategy behind the PLI scheme is to offer companies incentives on incremental sales from products manufactured in India, over the base year. The PLI scheme also invites international companies to set up production units in India and encourages local manufacturers to set up or expand existing manufacturing units, generate employment, and reduce the India’s reliance on imports.
B. Solar Energy-specific PLI Scheme
India is the fifth largest producer of solar energy in the world. The New India is powered by clean energy and India is fast moving towards meeting its renewable energy targets by promoting the local generation of solar power through the Production Linked Incentive (PLI) Scheme. “To achieve solar energy targets by the year 2030, Rs/-19,500 Crore is to beallocated for the Production Linked Incentive which has been announced by the Government of India, Ministry of Finance (2022-2023 Budget)”.
In the year 2021, the Indian Renewable Energy Development Agency Limited (IREDA), a PSU under the Ministry of New and Renewable Energy (MNRE) invited bids from the Solar Module Manufacturers for setting up solar manufacturing units under the Central Government, Rs/- 4,500 Crore PLI Scheme. MNRE appointed IREDA as the Implementing Agency for the Scheme. The Union Cabinet had earlierapproved a Rs. 4,500 crores scheme to boost domestic manufacturing of solar Photo Voltaic (PV) modules. Currently, however, the scheme has been experiencing a setback as the Indian solar power industry is facing a supply crunch. As per the latest reports NASDAQ- listed ReNew Energy Global plans to apply for the second tranche of the production-linked incentive (PLI) scheme for solar modules. Currently, only the equipment of firms on the ALMM(Approved List of Models and Manufacturers), the list can be sourced for government-supported schemes and projects from where power discoms procure electricity. Further, India imposed a basic customs duty (BCD) of 40% on solar modules and 25% on cells with effect from 1 April in a bid to cut imports from China and boost domestic manufacturing.
The National Programme on High-Efficiency Solar PV Modules was approved by the Union Cabinet on 21 September 2022. It aims to build an ecosystem for the manufacturing of high-efficiency solar PV Modules. The scheme will create manufacturing capacity for Materials like EVA, solar glass etc. There will be a scope of Import substitution of approximately Rs. 1.37 lakh crore, thus encouraging the sourcing of local material.
The National Programme on High-Efficiency Solar PV Modules will reduce import dependence in a strategic sector like electricity and as such reinforce the Atmanirbhar Bharat Initiative. Finally, this will boost Research and Development to achieve higher efficiencies in Solar PV Modules.
C.Measures have been taken by the Government for the promotion and creation of new markets in the renewable energy sector such as:
- Permitting Foreign Direct Investment (FDI) up to 100 percent under the automatic route;
- Waiver of Inter-State Transmission System (ISTS) charges for inter-state sale of solar and wind power for projects to be commissioned by 30th June 2025;
- Declaration of trajectory for Renewable Purchase Obligation (RPO) up to the year 2029-30,
- Setting up of Ultra Mega Renewable Energy Parks to provide land and transmission to RE developers on a plug-and-play basis,
- Schemes such as Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan (PM- KUSUM), Solar Rooftop Phase II, 12000 MW CPSU Scheme Phase II, etc,
- Laying of new transmission lines and creating new sub-station capacity under the Green Energy Corridor Scheme for evacuation of renewable power,
- Setting up of Project Development Cell for attracting and facilitating investments,
- Standard Bidding Guidelines for tariff-based competitive bidding process for procurement of Power from Grid Connected Solar PV and Wind Projects.
The government has issued orders that power shall be dispatched against a Letter of Credit (LC) or advance payment to ensure timely payment by distribution licensees to RE generators amongst other things.
D. Criticism of the PLI Scheme
A common criticism frequently directed towards the PLI scheme is the Government’s intention to return to an import substitution policy. While the scheme aims to replace imports and help the country become self-sufficient, it looks at export-led growth rather than import substitution to power domestic manufacturing.
Indian companies havestruggled to attract a large part of this capital pool due to shallow and illiquid domestic capital markets (especially for debt) which restrict investment opportunities and increase illiquidity risks, a lack of transparent, consistent, and comprehensive environmental social, and governance (ESG) disclosures.
E. Solar Incentive Schemes across the world: An Overview
Germany’s 1000 roof initiative, which it implemented in 1989, served as the foundation for its incentives. Here, 2250 roofs have a combined 6.15 MWp of installed power. With the completion of 100 000 roof projects later in 2001, the installed electricity rose by a factor of more than 15. A low-interest loan incentive model has worked quite well in this country. In Germany, additional subsidies are also given to encourage rooftop solar energy systems. Microgrids built here between 20 and 100 square meters receive support ranging from 1.863 to 22.500 Euros. Additionally, the support was expanded to the upper level and the roof-top systems were supported in a regulated manner in the installations made in the buildingsidentified by the support mechanism.
Solar system assistance in France is provided by the FIT (Feed-In Tariffs) system. Laws determine the values used in this FIT system. With the Feed-in Tariff, producers or consumers are compensated for transferring extra electricity to the grid, which promotes investment in renewable energy sources. Thus, it compensates organizations for creating, putting in place, utilizing, and preserving energy sources like wind and solar energy. Long-term contracts and cost-based compensation are frequently included. This system provides the network with any excess energy or all of the energy produced. This system is supplemented by a more adaptable energy transfer law. Producers arenot required to sell the energy they create under this law. India seriously lacks in providing Tariff benefits to solar energy developers.
In Malaysia, the Small Renewable Energy Program was established as a renewable energy strategy in 2001(SREP). In 2005 and 2010, this policy was promoted by moving it through various stages. These projects’ main emphasis is on small, grid-connected renewable energy facilities. 2009 saw the advancement of renewable policies under the National Green Technology Policy (NGTP). In Malaysia’s renewable energy policies, this policy is crucial. NGTP focuses on four areas. Theseinclude enhancing energy security and the rate of energy consumption, reducing environmental harm, boosting the economy by utilizing technology more, and improving quality of life.
Due to the interconnectedness of the American energy system, almost every power consumer by default uses some electricity produced from renewable resources. Many states offer the opportunity to choose electricity providers, and some of the participating electricity providers may sell power particularly generated with renewable energy to consumers who choose to buy electricity only produced with renewable energy. The accessibility of these programs is governed by state laws governing retail electric power markets. Even if there is no retail electricity choice, consumers can still choose to buy green energy. Instead of the real or contractual supply of electricity to the consumer or utility, the majority of these voluntary initiatives oftenentail contractual accounting for renewable electricity generation.
Even though the culture and topographic conditions of these countries are very different from that of India, we can still learn a lot from these methods and try to develop our very own system. India can also adopt incentives such as low-interest loans for supporting solar manufacturing units. India could also take from the success of the French system and introduce slab-based tariffs for promoting solar energy development. By and analyzing the current capacity and future requirements for the rooftop PV system, new incentive techniques can be devised after taking into consideration all of these models. Incentives for micro-hybrid renewable energy systems are another matter that can be investigated in the future.
F. Other Initiatives in India
- The PLI Scheme isn’t the first time India has attempted to incentivize domestic production and manufacturing to facilitate India in achieving its target of energy self-efficiency. Another such initiative is the Modified Special Incentives Package Scheme (MSIPS). This scheme was launched by the Ministry of Electronics and Information and Technology in the year 2012 to encourage investments in new Electronics System Design and Manufacturing (ESDM) units and expansion of capacity/modernization and diversification of existing ESDM units in India. It is mainlyaimed at providing subsidies for capital expenditure and attracting investments in manufacturing Solar PV Cells, solar PV modules, EVA, and solar glass. The incentive under the M-SPIS scheme is in the form of a subsidy and is available for a startup project, the expansion of the project (in terms of capital invested), or the diversification of the project (variation in the range of products). The Government offers a subsidy of 20% on investments in special economic zones (SEZs) and 25 percent on capital investments in non-SEZs. The subsidy is valid for 10 years from the date of approval of the application. Reimbursement of central taxes and duties is obtainable for projects with high capital investment. This scheme alsoprovides incentives to relocate units from abroad to India.
Under this scheme, Adani Solar has set up a vertically integrated 1.2GW solar photovoltaic manufacturing facility along with research and development (R&D) facilities within an Electronic Manufacturing Cluster (EMC) facility in Mundra SEZ. The PV facility, touted to be the largest vertically integrated producer of solar cells as well as modules in India, is also the first facility to be located in an SEZ under the M-SIPs scheme. The scheme approved the investment made by Mundra Solar PV Ltd (MSPVL).
The Jawaharlal Nehru National Solar Mission (JNNSM) that was launched in January 2010 is another testimony of the Government’s efforts towards making India a global leader in solar energy. This was to be achieved by creating favorable conditions for solar manufacturing capability to boost the creation of indigenous production. It is noted that currently the requirement of Polysilicon which forms the feedstock in the production of solar cells and solar modules is entirely met through imports. The domestic manufacturing capability of Balance of Systems(BOS) comprising of charge controller, battery, and inverter which is used to connect to solar cells and modules to produce the output power, is also very limited and inverters with higher output are mostly imported. Through this scheme, the dependency of the country on imports is to be reduced by making India self-capable in manufacturing equipment for taping solar energy.
G. Suggestions for modification of policy
Despite being highly ambitious and far-sighted, these schemes have lagged in producing the optimum result that was expected of them. It is only wise to incorporate the learnings from the shortcomings of these past schemes coupled with the lessons from foreign initiatives, into the reality of the newly implemented PLI scheme. It is to be noted that the existing state-level incentives are insufficient in promoting the domestic PV module manufacturing industry. One of the primary reasons for the same is that the current schemes only support the capital cost, which ultimately has a negligible impact on the final module manufacturing cost. The need of the hour is to extend financial backing towards raw materials. Furthermore, as per the analysis by the author, even though implemented in good faith, these schemes may be lacking the ground level implementation as well as suitability towards conditions of India. A thorough study as to the circumstances and viability of the project must be conducted to devise the most suitable scheme. Based on this observation, the following are a few recommendations from the author:
- Working capital should be made available at lower rates. The same shall be facilitated with government-backed loans such as green bonds with lower interest rates.
- Like manufacturers elsewhere in the world, solar equipment makers in India, too, ceded ground to the Chinese. Development of an Indian certifications system wherein every manufactured equipment would be required to acquire a certificate before being utilized in India. This may create a more level playing field for Indian companies to compete in the domestic market, as Chinese manufacturers will have added expenditure of getting their modules certified in India.
- Setting up of solar equipment manufacturing clusters should be promoted in states with good resource potential such as states like Madhya Pradesh and Chhattisgarh so that all the necessary components can be manufactured in close proximity. This would help in reducing the cost of transportation and help in overcoming transit losses/damages.
With India celebrating ‘Amrit Kaal’ (a critical time to achieve the highest human potential), the focus is on growth and all-inclusive welfare, so that no one is left behind from the welfare schemes of the Government. India envisages promoting technology-enabled development, climate change, and energy transition. The Production Linked Incentives (PLI) scheme and the cut in corporate tax rates form an essential component of the Indian Government’s strategy to attract foreign companies and capital to the domestic manufacturing sector. The Central Electricity Authority estimates India’s power requirement to grow to reach 817 GW by the year of 2030, and most of the demand will come from real estate and Transport sectors. Rising Foreign Investment is expected to promote further investments in India. The allocation of 19,500 crores in the Second Tranche of the PLI Scheme will boost the manufacturing of high-efficiency solar modules. There are many other initiatives taken by the Government of India that will help accelerate clean energy innovation in India for instance, India has launched theMission Innovation CleanTech Exchange, a global initiative that will create a whole network of incubators across member countries to accelerate clean energy innovation envisaged by the Hon’ble Prime Minister of India. Further India can also learn from similar initiatives in other foreign countries and try to incorporate the same into the Indian landscape. Lessons from past mistakes must also be taken into consideration. Analysis can be done to optimize the incentive periods in light of the countries’ renewable energy targets and economic situations. The appropriate application forms and incentive programs can then be created for each nation.
About the Authors
Mr. Pankaj Singh is an International Law expert.
Ms. Tisa Padhy is a 3rd Year Law Student from National University of Research and Studies in Law, Ranchi.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Muskaan Singh
Senior Editor: Aribba Siddique
Associate Editor: Tisa Padhy
Junior Editor: Intisar Aslam
Preferred Method of Citation
Pankaj Singh and Tisa Padhy, “Incentivizing India’s drive towards clean, affordable, and reliable Solar Energy: Focusing on the PLI Scheme” (IJPIEL, 15 February 2023)