Why Investors Should Consider Solar Energy Manufacturing Opportunities

The solar energy manufacturing sector in India falls under the ambit of the Ministry of New and Renewable Energy (“Ministry”) and is also regulated by the India Renewable Energy Development Agency (IREDA) and the Solar Energy Centre (SEC). India’s solar energy manufacturing sector has recently witnessed significant growth and currently ranks 5th in the world for its solar power capacity. The growth witnessed herein is on account of several governmental schemes and/or policies along with the logistical and geographical advantages India offers, among other advantages offered under this sector. However, irrespective of the aforementioned growth, the solar energy manufacturing sector is targeting increased growth and production in order to generate adequate energy to meet the demand created in India, thereby, creating a financial incentive for investors targeting the solar energy manufacturing sector.

In light of the aforementioned, this article aims to empower investors intending to invest in the solar energy manufacturing sector in India, by providing a comprehensive analysis of the incentives currently being offered to such investors.

Overview of the solar energy sector

As aforementioned, the Indian solar energy manufacturing sector has in the previous 5 (five) years witnessed significant growth wherein India’s solar installed capacity has increased from 21,651 (twenty-one thousand six hundred and fifty-one) MW to 70,096 (seventy thousand and ninety-six) MW along with setting up of 50 (fifty) solar parks having a capacity of 37.49 (thirty-seven point forty-nine) GW. As a result of such growth, the current target set for this sector is to achieve a renewable energy capacity of 500 (five hundred) GW by 2030, out of which 280 (two hundred eighty) GW shall be achieved from solar energy generation.
Due to the current growth, extremely ambitious targets are being set for the solar energy manufacturing sector, this has thereby resulted in an increased demand for production in this sector, essentially enabling the entry of new players in this sector.

Government Schemes and Policies for Investors in the Solar Energy Manufacturing Sector

The Indian manufacturing sector is incentivised on a two-tier mechanism wherein incentives are granted from the central government as well as the state government(s). Further, the government has also introduced special benefits for the entities engaged in solar energy manufacturing. The primary incentives and schemes offered by the central and state government that have contributed to the above-mentioned growth, including but not limited to, are as follows:

1. Product Linked Incentive Scheme – The current scenario suggests that India depends heavily on imports but intends to increase its domestic production capacity. Thus, the Ministry has introduced the Product Linked Incentive (“PLI”) scheme under which a total outlay of INR 24,000 (twenty-four thousand) crores has been allocated to the solar energy manufacturing sector which shall be disbursed in 2 (two) tranches commencing from financial year 2021-22. The scheme intends to benefit solar energy manufacturers who would procure raw material from the domestic market as the PLI amount disbursed will increase with increased module efficiency and increased local value addition.
2. Development of Solar Parks and Ultra-Mega Solar Power Projects Scheme– This scheme has been introduced by the Ministry in order to curb the difficulties posed on account of setting up multiple small scale solar energy projects. Herein, the Ministry intends to establish solar parks and ultra mega solar power projects with each project having a projected power generation capacity of 40,000 (forty thousand) MW. In order to facilitate the scheme, state government(s) have been granted the authority to allocate project land to identified solar energy manufacturers who shall thereafter be responsible for the establishment of such solar parks. Each project under this scheme is eligible for Central Financial Assistance (“CFA”) of INR 20 (twenty) lakhs or 30 (thirty) percent of the total project cost, including the cost incurred on account of grid-connectivity, whichever is lower, upon such manufacturers achieving the milestone as prescribed under the scheme. The CFA is provided to the renewable energy generators on reaching the prescribed milestone, as specified under the scheme.
3. PM-KUSUM Scheme  - This scheme has been introduced in order to provide aid to rural landowners and farmers by providing them with accessible solar energy, thereby, reducing their dependency of diesel to generate energy. Herein, the scheme shall be implemented in 3 (three) components wherein respective components shall cover the setting up, installation and solarization of the solar energy plants and mandates the use of indigenously manufactured solar pumps, cells, motor pumps and other equipment. The prescribed output limit for solar energy plants herein would be 500 (five hundred) KW to 2 (two) MW, and the generated electricity will be purchased by distribution companies (discoms). The central government and the state government would herein provide a subsidy of 60 (Sixty) percent to farmers and 30 (Thirty) percent of the project cost in the form of loans thereby, only 10 (Ten) percent of the actual cost shall be borne by the farmers.
4. PM Surya Ghar Muft Bijlee Yojana – This scheme has been introduced by the central government wherein the government intends to provide 1 (one) crore Indian households with free electricity up to 300 (three hundred) units per month. Herein, the central government would invest an amount of INR 75,021 (seventy-five thousand and twenty-one) crores in order to provide households with a subsidy of 60 (sixty) percent of the cost to set up the solar unit wherein the generation capacity is up to 2 (two) KW and for solar units with a generation capacity between 2 (two) KW to 3 (three) KW, the government would be providing a subsidy of 40 (forty) percent towards the additional system costs. Furthermore, the central government would be providing households with collateral free and low interest rate loans under this scheme to promote the implementation and adoption of roof top solar units.

Other Advantages for Investors in the Solar Energy Manufacturing Sector

Investment in the manufacturing sector of India is a suitable option for domestic as well as foreign investors due to the diverse range of advantages that India’s manufacturing sector offers, thereby, rendering this sector as a lucrative option for investments.

Due to the geographical location of India being tropical in nature and close to the equator, approximately 5,000 (five thousand) trillion kWh per year energy is received in India with most regions receiving 4 (four) to 7 (seven) kWh per sqm per day. The vast amount of sunlight that falls on India can be effectively harnessed to provide solar energy through the utilisation of multiple production techniques. Furthermore, recently the Indian manufacturing sector in totality has also witnessed a visible impact as in terms of export, the Indian manufacturing sector stands at USD 447.46 (four hundred forty-seven point four six) billion for the financial year 2022-23.

In furtherance to the aforementioned, India also serves as an ideal location due to the logistical advantages provided to its manufacturing sector on account of the existence of well-established grids and powerlines that efficiently transfer energy and provide access throughout India. Furthermore, access to several maritime routes renders the transportation and distribution costs involved herein to be cheaper, in comparison to other locations. Furthermore, due to the presence of over 200 (two hundred) ports along with having the 2nd largest railways and being the 4th largest railway network in the world provides manufacturers unhindered connectivity in India. In addition to the aforementioned, the existence of cheap and accessible skilled, semi-skilled and an unskilled labour force serves as an additional advantage to investors.

Although India has been building up its solar production capacity, there still exists a requirement of increased production and therefore the Ministry has been incentivizing the solar energy manufacturing sector. In an attempt to attract foreign capital along with domestic investments it has offered several fiscal incentives to manufacturers, including manufacturers involved in the solar energy manufacturing sector. The government of India has permitted 100 (hundred) percent Foreign Direct Investment under the automatic route. Additionally, National Clean Energy Fund (NCEF) has been created by the government of India to fund the clean energy projects from the funds collected as clean energy cess which is a penalty amount imposed on industries wherein non-renewable energy sources are utilised such as coal among others.

Key Regulations & Compliance Requirements

As a result of the recent developments in India’s manufacturing sector, the sector has witnessed an ease of doing business, thus, essentially reducing the overall compliance requirements by providing single window clearances along with reduced registration requirements.

However, certain compliances, registrations and regulatory mandates are mandatorily required to be undertaken and fulfilled by new companies entering India’s manufacturing sector. Herein, the compliance requirements are two-fold wherein certain compliances, registrations and regulatory mandates are general in nature and the other compliances, registrations and regulatory mandates are sector specific. As the solar energy manufacturing sector is primarily regulated by the Ministry, the sector specific mandated herein would be provided by the Ministry.

The primary step for new companies would be to establish their manufacturing plant in India through either incorporating a new company in accordance with the Companies Act, 2013 and the rules made thereunder or executing either a joint venture or an acquisition with/of an already established Indian company. Foreign investors herein, are mandated to additionally comply with the provision of the Foreign Exchange Management Act, 1999 and the rules made thereunder along with the current Foreign Direct Investment policy of India. Upon establishing their business, however, prior to commencing operations, investors are mandated to procure licenses and registrations, including but not limited to, factory registration, GST registration and labour law registration(s). In furtherance to this, investors shall thereafter, procure additional licenses and registrations, including but not limited to, site clearances, environmental clearances and registrations for specific governmental schemes.

The primary sector specific regulation for solar energy manufacturers in India are for the manufacturers of solar photovoltaics, systems, devices and components. Such manufacturers fall under the ambit of the Bureau of Indian Standards (“BIS”) under which such manufacturers are obligated to procure a BIS registration and thereby, are further mandated to comply with its subsequent notifications. Furthermore, in the event the photovoltaic systems that have been manufactured herein have a capacity of more than 10 (ten) KW, the manufacturer herein shall mandatorily obtain the approval of the Chief Electrical Inspector to Government (CEIG) from their respective zonal office.

Conclusion

In conclusion, India's solar energy manufacturing sector is witnessing robust growth, due to government incentives, ambitious targets, favourable geographical advantages and the constant increase in demand for energy. The comprehensive analysis provided in this article essentially lists down the lucrative opportunities available for investors, supported by several governmental schemes. As a result of India's commitment to achieving a renewable energy capacity of 500 (five hundred) GW by 2030 and its streamlined regulatory processes, the sector provides promising financial incentives for domestic as well foreign investors intending to capitalize on India's solar energy manufacturing potential.