Publication - EXAMINING FISCAL ENVIRONMENTS FOR INCREASED LOCALISATION OF SOLAR PRODUCTS - A study on solar refrigerators and walk-in cold rooms in India and Kenya

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EXAMINING FISCAL ENVIRONMENTS FOR INCREASED LOCALISATION OF SOLAR PRODUCTS - A study on solar refrigerators and walk-in cold rooms in India and Kenya
Rahul Bagdia, Yamini Keche, Ankit Agrawal, Apurva Parakh and Akshay Gattu
Published in
March 2023
Over the years, the off-grid solar industry has prioritized cost reduction and profitability, resulting in the increasing globalization of supply chains. For many manufacturers, this has also increased reliance on low-cost countries like China. The COVID-19 pandemic brought with it delays in the worldwide flow of raw materials and components, impacting businesses financially. Post-pandemic, companies are now reconsidering the financial benefits of relying on a global supply network versus a more local one.

The localization of supply chains can, in some instances, raise consumer prices and production expenses due to the limited demand for locally manufactured products. However, it can also have extensive advantages, such as more job opportunities and tax revenue, crucial factors to consider as we recover from the effects of the recent global supply chain crisis following the pandemic.

Localization could provide suppliers with greater control over manufacturing standards and subsequently improve product quality and customer satisfaction. Additionally, localization can help enterprises minimize their carbon footprint as goods and components travel much shorter distances.

Localization is unlikely to meet all of the industry's needs but shifting the balance away from globalization may well provide security, environmental benefits, better job prospects, and increased skills and resilience in times of uncertainty.

Today, many countries are keen to promote localization and are putting in place incentives to stimulate private-sector investment in local manufacturing and assembly. Off-grid solar refrigeration equipment, such as solar refrigerators/fridges and solar walk-in cold rooms are currently only marginally viable when manufactured or assembled locally in India and Kenya, the two countries considered in this study.

With about 0.8 million off-grid solar items sold in 2020, India is one of the largest markets for off-grid solar appliances in the world. Off-grid solar refrigerators have a market potential of EUR 19.6 billion (USD 20.6 billion) but this off-grid sub-sector is still in its infancy due to high upfront capital costs and low awareness of the technology among end-users. India still relies on imports, especially imported solar photovoltaic (PV) cells and modules, primarily from China. The Government of India (GoI) launched several policy initiatives to stimulate domestic manufacturing, including the National Solar Mission in 2010 which required bidders to use solar PV modules manufactured domestically. In 2012 GoI launched the Modified Special Incentive Package Scheme (MSIPS) which provided a 20-25% subsidy for investments in capital expenditure for the setting up of electronic manufacturing facilities. To further help the sector, in 2014 the GoI implemented policies such as the Domestic Content Requirement (DCR) mandating that solar-powered projects source their solar cells and modules domestically and introducing the Safeguard Duty (SGD) of 25% in 2018 to dampen the influx of cheap imports.

Similarly, in Sub-Saharan Africa, despite the use of various policy instruments such as faster processing of business applications, infrastructure development, and fiscal incentives to promote assembly/manufacturing of OGS products, the contribution of manufacturing to national economies remains low. Local assembly and manufacturing companies face regulatory, economic, and financial challenges alongside uncertainties in market conditions and skills limitations. Inadequate information and the fact that importing is cheaper than assembly /manufacturing are added issues. Feedback from interviews conducted with stakeholders as part of this research shows that the most prominent barrier to domestic companies' operations and scalability is their restricted access to credit from financial institutions, such as local banks, impact investors and donors.

Based on the economic assessment, key fiscal and non-fiscal recommendations for both government stakeholders and private companies are made in Chapter 4. Market dynamics and investments in local companies will determine whether there is a compelling economic case for investing in the off-grid solar sector on the private side. This includes whether there is enough unmet demand to make a large facility competitive, as well as the viability of exporting excess production.

Governments have several possible levers to boost local assembly and manufacturing. These include incentives for local assembly/manufacturing, reservations in national tenders, subsidies, and tax exemptions, investment in special economic zones, and skill-development initiatives. The availability of these levers varies by country and the national government's inclination towards the off-grid solar industry determines their readiness to use these levers. Eventually, it will have to be a collaborative effort by the government, industry, donor agencies, and development banks to support the localization of the off-grid solar market in India and Kenya.