China’s decision to cut state support for solar projects will be a mixed blessing for India

Last week, the Chinese government announced that it was cutting subsidies and also introducing a cap on solar power projects in the country. In a statement, the National Development and Reform Commission said that it was indefinitely freezing the allocation of subsidies to new solar plants and lowering the overall value of clean energy tariffs by as much as 9%.

China’s solar industry has expanded at a rapid pace, reaching 53 gigawatts last year. The government now plans to add only 30 gigawatts this year. The government’s decision to curb the expansion of the solar industry was likely motivated by the need to reduce the spending deficit in the country’s renewable energy fund.

Furthermore, China does not have the adequate transmission infrastructure to support all this solar power generation. Its power grids are heavily overused. The policy will likely be rolled back once additional infrastructure is built.

A supply glut of solar equipment

Given China’s status as the world’s largest producer of solar energy, global production of solar power is expected to fall in the immediate term. A cut in subsidies will make a lot of Chinese solar projects less financially viable.

The move is also expected to result in a dramatic oversupply of solar cells and modules, due to a freeze in new solar projects and reduction of demand from domestic solar power developers. This in turn, will cause prices of Chinese solar equipment to plummet.

And, this is why the policy could be beneficial for India.

India is one of the largest consumers of Chinese solar cells and modules. In fact, around 80-85% of the inputs for its solar projects come from countries like China and Malaysia due to a lack of domestic manufacturing capacity.

The reduction in the price of solar equipment will lower the costs for Indian solar power companies, and give the government’s renewable energy plans a much needed boost. The government recently raised its renewable energy generation target from 175 gigawatts to 227 gigawatts by 2022.

Indian manufacturers stand to lose

Once again, India’s domestic manufacturers of solar power equipment stand to lose. They simply can’t match the prices and quality of their Chinese counterparts. They were dealt a blow last week when the Indian government decided against levying a 70% duty on imports of solar cells and modules.

The crash in the prices of Chinese solar cells and modules will hurt them even further. As they face the threat of being completely shut out of the market, the Indian government will have no choice but to support them with generous subsidies - the complete opposite of what China’s doing.