It would be hard to be more bullish than India has been on solar power The country wants a solar power capacity of 100 GW by 2022 (India’s total peak electricity demand in 2017-18 was 164 GW and is expected to be 235 GW by 2021-22). This involves building more than four times the existing capacity in four years. If all goes according to plan, solar will account for three-fourths of the planned renewable energy capacity of 175 GW by 2022.If the first wave of India’s renewable energy push this century was in wind power, a second and bigger revolution is underway in solar. But recently, gathering clouds have been threatening to rain on India’s sunny parade.The issues relate to India’s conflicting desires to procure cheap solar equipment, on the one hand, and to encourage a domestic manufacturing base through imposition of import duties, on the other. The latter means slower capacity additions and higher tariffs in the short run. The other is the expectation by power buyers, mainly state-owned utilities, that solar power will be available at dirt-cheap rates in all parts of the country, when the cost of generating solar power can vary vastly depending on climate.On September 10, the Supreme Court lifted an Orissa High Court stay on a so-called safeguard duty imposed by the Centre on solar cells (whether or not assembled in a solar module) imported from China and Malaysia. The government had in July imposed a 25% duty for a year from July 30, 20% for the following six months and 15% for six months after that.The idea behind the move was to encourage domestic manufacturing. India imports 90% of its solar cell and module requirements from China, Malaysia and Taiwan. But will the idea work?“Two years (the duration of the safeguard duty) may be inadequate to create a robust domestic manufacturing base that will be able to compete with the global market. However, it will dampen capacity additions and raise tariffs in this period,” says Kanika Chawla, senior programme lead at the Centre on Energy, Environment and Water (CEEW), a think tank. Moreover, measures like safeguard duty work only when there is a large existing domestic manufacturing base, says Sunil Jain, chief executive at Hero Future Energies.Domestic manufacturers believe the safeguard duty will be offset by the fall in prices of Chinese solar panels owing to the phasing out of subsidies for solar installations by the government in Beijing. With demand in China evaporating, Chinese solar panels may be cheaper by up to a third by the end of the year, according to Bloomberg New Energy Finance (BNEF). Global solar panel prices have fallen 84% since 2010 and is forecast to decline another 52% by 2025. China produces nearly half the world’s solar panels.Ramesh Nair, CEO, Mundra Solar PV Ltd, says the initial indications of a 70% safeguard duty were followed by foreign companies wanting to set up joint ventures in India. “But after the announcement of the duty, the response has been lukewarm, given the inadequate safeguards provided by the order in its current form.” Mundra Solar is the solar manufacturing arm of the Adani group.As part of its efforts under the 2015 Paris Agreement on climate change, India, the world’s third largest emitter of greenhouse gases in absolute terms, has committed to cutting its emissions by a third by 2030 from 2005 levels. To meet this goal, the contribution of renewable energy to India’s electricity capacity should double to 40% by 2030. But it is not clear if India will be able to muster the capability to achieve this target, especially given that manufacturing of solar power equipment has not taken off here.Nikhil Dhingra, CEO, Acme Solar Holdings, says Indian solar manufacturers only capture a minor portion of the manufacturing value chain, which includes polysilicon, wafer, cell and module. “There are incremental changes in technology at frequent intervals, which require capital and the know-how to absorb. Backward integration and scale help in managing these factors.”The Supreme Court’s decision on the safeguard duty came days after a report by Mercom India Research said solar installations in April-June had halved to 1.6 GW from January-March, due to the lack of a strong project pipeline. “Tender activity cratered after the lowest tariffs were reached in the Bhadla (Rajasthan) auction in May of 2017, as government agencies started expecting other bids to go down to the Rs 2.44/kWh level that was reached in the Bhadla auction,” said the report. Capacity addition in 2018 would decline 14% from 2017, to around 8.3 GW, it added. The number could be higher if projects set to be commissioned in the past three months of the year stay on course.Acme Solar Holdings, which has 2 GW of operational capacity, won the Bhadla bid at Rs 2.44 a unit. It again bid the same price for 600 MW in a 3,000 MW auction held by the Solar Energy Corporation of India (SECI). Acme was the only bidder to emerge successful. Other bids, which were higher, were not considered and the allotment of the remaining 2,400 MW was cancelled. Even state government entities in Uttar Pradesh and Gujarat cancelled the bids for projects of 1,500 MW, though 1,000 MW of that has been re-tendered, according to Mercom.“The whole point of reverse auctions is that you let the market settle on what it thinks is the best price. When government agencies start dictating what the tariff should be, we get into muddy waters. They shouldn’t dictate the price without accepting any of the risks,” says Raj Prabhu, CEO, Mercom Capital Group.CEEW’s Chawla says it is unclear why tariffs are being capped without taking into account market phenomena such as financing cost and the health of utilities. Developers also complain about the depreciating rupee, which makes importing equipment more expensive. The rupee has declined 13% against the US dollar in 2018.The government wants the lowest possible prices to help indebted and loss-making state-owned power distribution companies keep costs down. Jatindra Nath Swain, managing director, SECI, did not respond to requests for comment.Jayant Parimal, CEO, Adani Green Energy, says it is not viable to bid at Rs 2.50-2.60 a unit even for a project in Rajasthan, an optimal location to tap solar power, much less in other states. “There was a euphoria that was not based on facts in thermal power, and banks and the country suffered. There is a similar kind of irrational exuberance in solar power and we don’t want to participate in it.”There are 34 stressed thermal power projects, with a capacity of 40 GW and a combined debt of Rs 1.7 lakh crore. Thermal power accounts for two-thirds of India’s electricity capacity.Given these obstacles, is India’s solar growth story, as we know it, coming to an end? Allen Tom Abraham, an analyst at BNEF, does not think so. “India will remain the bright spot for solar in the world. We expect India to have the largest solar power installed capacity base across the world by 2050.” At the end of 2017, China had a third of the world’s installed solar capacity, the US had 13% and India just 5%, according to the BP Statistical Review of World Energy 2018.India is also taking a lead in the International Solar Alliance (ISA), launched at the Paris climate change conference in 2015. Headquartered in Gurgaon and with 68 signatory countries, the ISA will help in the transfer of solar technologies across members. “India also sees this as an opportunity for the domestic solar industry to find inroads in some of the smaller and untapped markets like Africa and South America,” says Abraham of BNEF. Smaller countries could use India’s experience in conducting large solar auctions and also learn from the various strategies it adopted to address major risks in the sector, he adds. But Prabhu of Mercom says the ISA has not achieved much: “It has not had any impact, good or bad, on the Indian solar sector. It is more of a public relation exercise at this point.”Regardless of whether or not the ISA is effective, renewable energy, particularly solar, is crucial to India's future. Not only is solar sustainable, in some cases it is already cheaper than thermal power. While thermal power will continue to be necessary to meet India¡¦s energy needs in the near future, its share in the total mix will fall. BNEF estimates that by 2050, 75% of its electricity will be from renewables (from the current 21%), higher than in China (62%) and the US (55%). For the renewables sector to grow at a steady clip, India would do well to not repeat some of the mistakes made in the thermal power sector and ensure consistency in its policies.