DESIGN FOR DISRUPTION
Abstract: The Solar Energy Industry in India is on a growth trajectory. With an impetus on Solarization promoted by the Government of India today, there are some viable options and opportunities. The question is given COVID impact and economic volatility can this domain be disrupted? The goal of this paper is to formulate a design or study that indicates the probable factors that can impact this sunrise industry — thereby we can strategically be in a state of preparedness. In this paper I have applied Michael Porter’s Five Force Analysis to the Solar Industry in India.
MICHAEL PORTER’s FIVE FORCE ANALYSIS
The tool was created by Harvard Business School professor Michael Porter, to analyze an industry’s attractiveness and likely profitability. Since its publication in 1979, it has become one of the most popular and highly regarded business strategy tools.
SOLAR ENERGY INDUSTRY IN INDIA. India is the 3rd largest solar market in the world. The installed capacity reached 35.12 GW as of 30 June 2020. India has the lowest capital cost per MW globally of installing solar power plants today.
The Solar Energy Industry in India
In 2019, India installed 7.3 GW of solar power across the country, establishing its position as the third-largest solar market in the world. Solar power in India is a sunrise industry. The country’s solar installed capacity reached 35.12 GW as of 30 June 2020. India has the lowest capital cost per MW globally of installing solar power plants.
- Who are the Buyers
Source: Bridge to India: The India Solar Roof Map December 2019
Buyer Power is – Low/medium/high
High
Rationale for rating
The rationale for Buyer bargaining power is high because of the quantum of local and EPC Companies of all sizes and price points available in the Solar Industry. While data analysis reflects a concentration in the Industrial Segment – the other active areas are grassroots level are Residential and Institutional entities. Moreover there is an active unregistered group of integrators at the local level engaged in setting up of systems. The choices a Buyer has are significant. As a practitioner in this field an entity will sometimes have as many as 10-15 companies submitting their quotations for Solar
Bargaining power of buyers
- Buyer volume (number of customers) – Vast in rural and urban areas, Commercial, Institutional, Industrial, Public Sector, and Residential.
- Size of each buyer’s order – No Data Available. Interesting fact: India’s recent status of lowest-cost producer of solar power further reflects an ongoing shift towards renewable power as the driver of global energy transformation.
https://economictimes.indiatimes.com/small-biz/productline/power-generation/how-india-in-a-short-period-of-time-has-become-the-cheapest-producer-of-solar-power/articleshow/70325301.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst - Buyer concentration – Industrial/Commercial Segment.
- Buyer’s ability to substitute – High, as local and established EPC Companies compete
- Buyer’s switching costs – (1) financial switching costs(estimated high frequency 10-20%variance +-); (2) procedural switching costs (estimated Low frequency); (3) relational switching costs (estimated medium frequency
- Buyer’s information availability – Abundant
- Buyer’s threat of backward integration – Major issue among others “…lack of scale and backward integration in solar module manufacturing process for a majority of module manufacturers are likely to pose constraints,” ICRA Group Head Sabyasachi Majumdar said Source: Economic Times PTI June 26, 2020, 07:29 IST
- Industry threat of forward integration – Major issue among others “..To achieve India’s solar energy target of 100 GW by 2022, India should take up full value chain of solar. The Energy and Resources Institute Director General Ajay Mathursaid the challenge is to match demand and indigenous manufacturing capacity with international manufacturing capacity” Source: Economic Times PTI August 09, 2019, 08:55 IST
- Price sensitivity: India is a highly price sensitive market and for any industry to make significant footprint, price is a key indicator.
- Who are the Suppliers
Supplier Power is – Low/medium/high
High
Rationale for rating
With a plethora of Registered and Unregistered EPC Companies the Supplier, has significant bargaining power. Large EPC Companies may have blanket agreements or OEM with suppliers for cost efficiencies. With growth in the Solar Industry suppliers are poised for further supply chains penetrating rural areas and tier 3 cities where the Solar boom is yet to come. With global and domestic firms entry in the Solar Industry new supply chains and vertical integration is prevalent.
Bargaining power of suppliers
- Number of suppliers – No specific data for India. Local and domestic manufacturers and international firms are supplying solar system related components through their respective channels
- Size of suppliers – Segmented Data. For overall perspective “…The India solar power market is expected to grow at a CAGR of more than 40% during the forecast period 2020-2025. Major factors driving the market studied are the declining cost of the solar module and the government policies like allowing 100% FDI under automatic route for renewable power generation and distribution projects which is expected to increase the participation from global players into the Indian market…” Source: Modor Intelligence
- Supplier concentration – Mahindra Susten was the top EPC player for utility-scale solar installations in 2019, followed by L&T, the report said Tata Power Solar had the largest cumulative rooftop portfolio, followed by Clean Max Solar. At the end of 2019, the top ten rooftop solar installers represented 34 per cent of the total rooftop solar market share. In 2019, the rooftop solar market growth came down by 33 per cent compared to CY 2018, the report added.
https://economictimes.indiatimes.com//small-biz/productline/power-generation/top-10-players-consolidating-solar-market-in-indiareport/articleshow/75450767.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst - Availability of substitutes for the supplier’s products – A plethora of options from the local and domestic manufacturers as well as foreign companies
- Uniqueness of supplier’s products or services (differentiation) – the product differentiation is there, but the guidelines of the Ministry of New and Renewable Energy in terms of capacity and quality is outlined. In the Service segment there is a difference between EPC Companies
- Switching cost for supplier’s products – (1) financial switching costs(estimated high frequency 5-25%variance +-); (2) procedural switching costs (estimated Low frequency); (3) relational switching costs (estimated medium frequency)
- Supplier’s threat of forward integration – Lack of scale is impacting small and medium EPC firms. EPC Companies like Tata Power Solar Systems Limited are doing forward integration. “..In a country with an emerging middle-class, a high-quality product for less is crucial to the Indian consumer.
http://timesofindia.indiatimes.com/articleshow/63899970.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst - Industry threat of backward integration – The Centre may have increased its focus on domestic solar module manufacturing through a host of “Make in India” initiatives, but lack of scale and backward integration in the process for a majority of such producers are likely to pose constraints in executing orders, credit ratings agency ICRA has said. Source: Live Mint Updated: 26 Jun 2020
- Supplier’s contribution to quality or service of the industry products – replacement, warranty and guarantee on solar components along with after sale service is essential. No data available for small EPC Companies. As a generalization – medium and large EPC Companies comply MNRE Guidelines.
- Importance of volume to supplier – Essential for profit margins and economies of scale. It’s a high price sensitive Industry
- Total industry cost contributed by suppliers – Typically, the cost of hardware — including modules, inverters and racking and mounting — account for more than a half of the total cost of setting up a solar PV project in India while installation and soft costs like financing and system design account for the rest. Source: Sudheer Singh ETEnergyWorld Updated: May 30, 2019, 08:16 IST
- Importance of the industry to supplier’s profit – Absolutely essential factor that will enhance entrants into the field, increase competition, develop price sensitivity among other aspects –and end result is potentially a reduction in consumer cost.
- What are the substitute products or services
Availability of grid electricity is the major substitute available. • Wind as substitute for coastal area, small hydro for hilly area and biogas for those living in the forest. There are many other technologies to generate electricity that are potentially a threat, including fossil sources and other renewables.
Threat of substitute products or services – Low/medium/high
High
Rational for Rating
With alternative Renewable Energy sources that are yet to be harnessed coupled with potential of electricity rates reduced in the future, there is a definite threat to Solar as other Renewable Energy markets develop. On the upside the reduction in the Solar prices in India still makes it a viable option.
- Number of substitute products available – Other major sources of alternative Energy are Fossil Fuels, Hydro Electricity, Nuclear Energy, Ocean Energy, Biofuels, Natural Gas, Geothermal Power, Wind Power among others
- Buyer’s propensity to substitute – Low
- Relative price performance of substitutes – Higher
- Perceived level of product differentiation – High
- Switching costs (1) financial switching costs(estimated low %variance +); (2) procedural switching costs (estimated Low frequency); (3) relational switching costs (estimated medium frequency)
- Substitute producer’s profitability & aggressiveness – No Data access
- Who might enter the industry as a competition
Foreign and domestic solar related manufacturers, solar consultants, solar product suppliers, investors, global and domestic EPC Companies, private equity firms among other. Solar Energy being a lesser capital intensive domain makes it viable for Entrants and bodes well for Stakeholders. Government has an open policy so there are no exit and entry barriers.
Threat of new entrant is – Low/medium/high
High
Rationale for Rating
This is a clear and present reality – the new entrants are low capitalized to high brand and value players. Solar has a large customer base, and volume matters. The Solar market penetration in India is still low and it’s a sunrise industry. In several States in India having a defined % of Solar is mandatory for example in the State of Haryana. Furthermore, with 100% Foreign Direct Investment allowed in the Country Global players, mergers & acquisitions, joint ventures and private equity investments in the Solar Industry in India are frequent
Threat of new entrants
- Economies of scale – Likely, however especially with “Make in India” promotion by the Government of India, and different schemes and duties may have an impact.
- Product differentiation – Indigenous brand or foreign brand products will be subject to the price sensitivity, quality barometer, and after sale service set-up, by the end-user.
- Brand identity/loyalty – Brand does matter and Clients are attracted to high quality products. However, factors like the supply chain and warranty/guarantees may impact consumer purchases.
- Access to distribution channels – Absolutely essential for new entrants to have Channel Partners or distributors who are in the domain.
- Capital requirements – Capitalization is as per Entrant(s) specific solar business vertical. Existing Industry player may choose to evaluate and invest in similar product or service area.
- Access to latest technology – If not, technology could be sourced.
- Access to necessary inputs – In some cases no for example Silicon Wafers for Solar Panels are still not manufactured in India.
- Absolute cost advantages – The low priced solar equipment (especially solar panels) imported from China and it lead to under capacity operation of solar firms in India is one of the main reason behind the loss-making of Indian manufacturers.
- Experience and learning effects – Entrants enhance allows competiveness and qualitative service and product benefits contingent on the modus Operandi.
- Government policies No entry or exit barriers due to open policy, encouragement to solar industry by providing subsidies and tax benefits. Low capital intensive resulting low entry and exit barriers.
- Switching costs (1) financial switching costs(estimated low frequency 5-25%variance +-); (2) procedural switching costs (estimated Low frequency); (3) relational switching costs (estimated low frequency).
- Expected retaliation from existing players – Generally low as there are no significant barriers to entry and 100% Foreign Direct Investment is permissible in India.
- Who are the existing competitors
Existing Micro Small and Medium Enterprises (MSME), Large Corporates, Global firms, Non Governmental Organizations, Local – Solar hardware manufacturers and service providers; registered solar vendors listed on MNRE website; Automation/Electricity industries also install solar systems acting as unregistered vendors.
Rivalry of existing competitors is Low/medium/high
High
Rationale for Rating
Customer acquisition is highly charged scenario because of the multiple Solar Companies vying for larger market share. As a Channel Partner firm for Tata Power Solar Systems Limited we have to struggle because of the number of competitors for a project, we work with our signature core competencies. Price sensitivity is a major factor – we have to also leverage our brand equity and have the Client focus on our After Sale Service or our indigenously manufactured Solar Panels and Cells. The competition is fierce.
Rivalry among existing competitors
- Number of competitors – Multiple.
- Diversity of competitors – Yes they may have overlapping solar domains or divergent trajectories. Employ different cost and finance options.
- Industry concentration and balance – According to a report by global clean energy communications and consulting firm Mercom, the rapid pace of growth of solar market has largely been brought about by large players with top 10 companies accounting for 68 per cent market share in 2019.
- Industry growth – The growth story of the Indian solar market being the cheapest producer of power is in spite of challenges like absence of uniform & stable policies and high cost of capital compared other South Asian countries.
https://economictimes.indiatimes.com/small-biz/productline/power-generation/how-india-in-a-short-period-of-time-has-become-the-cheapest-producer-of-solar-power/articleshow/70325301.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst - Industry life cycle – With delays in implementing policies and the lack of accessible financing, along with issues with land acquisition, the Indian solar industry is growing at a slower pace than its actual potential. Reports by the Central Electricity Authority (CEA) depict that potentially, the solar industry in India can achieve a capacity of 300 GW by 2030. Source: Economic Times Aug 16, 2019, 03.36 PM IST
- Quality differences – Product offering eg. Solar Edge Inverter models allow from standard to premier offering – contingent on the EPC Company. Service is a prime factor in consumer purchases also.
- Product differentiation – Low performance hardware and high performance hardware.
- Brand identity/loyalty – In rural and semi-rural segments local vendors prevail to provide low cost solutions; brand identity of EPC Companies Tata Power Solar is high in all segments.
- Switching costs – (1) financial switching costs (estimated low frequency 5-25%variance +-); (2) procedural switching costs (estimated Low frequency); (3) relational switching costs (estimated low frequency)
- Intermittent overcapacity –
- Informational complexity – Empirical and Research Data and Statistic may not be readily available.
- Barriers to exit – None currently.
Based on your Five Forces analysis of the Solar Industry, how likely do you think this industry is to be disrupted? Rationale explained.
Disruption in the Solar Industry in India can be caused by multifarious potential activities, actions and products that can change the landscape of the Solar Industry.
- Government Policies – Imposition of duties, discontinuation of incentives, subsidies and tax benefits, promotion of funding and finance schemes, lack of clarity or delay in implementation of policies, among others may be disruptive;
- Import restrictions – Despite India being in top ten countries regarding installed solar capacity, there is no manufacturing facility for silicon wafers (base material used in the manufacturing of solar panels and other electronic items) in the country, which is imported from global sources, with the bulk of it coming from China;
- Technological Innovations in Solar – Commercialization of innovative technologies like Light Sensitive Nano Particles – where radiant light absorption is higher, Bifacial Modules and Thin Film Solar Panels that are already in the marketplace, Hairy Solar Panels, Solar Window Film, and Floating Solar Panels;
- Renewables Segment – The other Renewables could potentially at some in point in time become significant and capture market share or be more cost effective;
- Other Electricity Sources – Rate fall in the tariffs of Grid Electricity or potentially future low costs of Nuclear Power.
Notes:
- For overall perspective “…The India solar power market is expected to grow at a CAGR of more than 40% during the forecast period 2020-2025. Major factors driving the market studied are the declining cost of the solar module and the government policies like allowing 100% FDI under automatic route for renewable power generation and distribution projects which is expected to increase the participation from global players into the Indian market…” Source: Modor Intelligence
- Supplier’s threat of forward integration – Lack of scale is impacting small and medium EPC firms. EPC Companies like Tata Power Solar Systems Limited are doing forward integration. “..In a country with an emerging middle-class, a high-quality product for less is crucial to the Indian consumer.
http://timesofindia.indiatimes.com/articleshow/63899970.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
Do you think the industry is more likely to be disrupted by a new entrant or by an incumbent? Rationale Explained.
From my vantage point – I can see both an entrant and an incumbent having a significant effect on the course of the Solar Industry future business trajectory. Based on the current scenario where markets are fluid, the disruption in the Solar Industry can be impacted by a new entrant EPC Company or technology that has value addition in its product and service portfolio, and that addresses the price consciousness and return on investment sensitive end user.
Furthermore, an incumbent decision maker in a leadership position in the Country through policy changes, restrictions, significant incentives, financial schemes or other socio-economic policy can disrupt the Solar Industry in India.
Notes:
- Industry concentration and balance – According to a report by global clean energy communications and consulting firm Mercom, the rapid pace of growth of solar market has largely been brought about by large players with top 10 companies accounting for 68 per cent market share in 2019.
- Industry growth – “…The growth story of the Indian solar market being the cheapest producer of power is in spite of challenges like absence of uniform & stable policies and high cost of capital compared other South Asian countries…”
https://economictimes.indiatimes.com/small-biz/productline/power-generation/how-india-in-a-short-period-of-time-has-become-the-cheapest-producer-of-solar-power/articleshow/70325301.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst - Industry life cycle – “..With delays in implementing policies and the lack of accessible financing, along with issues with land acquisition, the Indian solar industry is growing at a slower pace than its actual potential…”Reports by the Central Electricity Authority (CEA) depict that potentially, the solar industry in India can achieve a capacity of 300 GW by 2030. Source: Economic Times Aug 16, 2019, 03.36 PM IST
Rena Ghai
Managing Director
Green Ice Solutions Pvt Ltd
