Indian Solar Firms Face Rising Costs as China Reduces Key Component Rebates

Indian solar developers are bracing for a potential increase in costs as China reduces export rebates on key photovoltaic components starting December 1. This policy change could lead to price hikes for solar modules, cells, and related materials, impacting the cost structure of new solar projects in India.

Impact of China’s Rebate Reduction

China has been a dominant player in the global solar supply chain, producing a significant surplus of photovoltaic products. This oversupply previously drove down prices globally, benefiting Indian solar developers by reducing the average cost of large-scale solar projects by 25% in the second quarter of 2024. However, with China now reducing export rebates on solar components from 13% to 9%, overseas buyers, including India, may face a price increase of approximately 0.02-0.03 yuan per watt for solar modules.

This adjustment is aimed at managing overcapacity in China’s solar manufacturing sector, which has witnessed bankruptcies and consolidations. For Indian developers, who have been heavily reliant on cheaper Chinese imports, this change signals an end to the cost benefits they had been enjoying.

Heavy Reliance on Imports

India remains highly dependent on imports for its solar industry. As of FY24, approximately 81% of solar cell demand and 23% of solar module demand were met through imports, with China being a key supplier. Despite India’s installed module manufacturing capacity of 70 GW, its solar cell capacity is significantly lower at just 8 GW.

The country’s average annual solar capacity additions of 21 GW highlight a pressing gap between domestic production and demand. This reliance on Chinese imports could pose challenges as prices increase due to the rebate cuts.

How Indian Firms Are Preparing?

To counter this dependency, some Indian solar manufacturers are taking steps to reduce their reliance on imports. They are expanding domestic production capabilities, including setting up new solar cell manufacturing facilities, which are expected to come online by the end of fiscal 2025. These initiatives aim to strengthen India’s solar manufacturing ecosystem and reduce vulnerability to external price fluctuations.

Broader Implications

The rebate reduction is unlikely to significantly disrupt global solar module prices due to the ongoing oversupply situation in China. However, Indian developers may see marginal cost increases for components, especially for projects that are yet to be contracted.

India’s solar policies, such as non-tariff barriers and domestic manufacturing incentives, could provide some relief by encouraging the use of locally made modules. Still, the immediate impact of higher costs could challenge project economics for developers relying on imported components.

A Balancing Act for Indian Solar Developers

Indian solar developers now face the dual challenge of managing higher costs for imported components while working toward reducing their dependence on foreign supplies. Strengthening domestic manufacturing capabilities and diversifying import sources could provide long-term solutions.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.