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(A summary of this article appeared in Energy Efficiency Services Limited (EESL)'s Newsletter Innovating Energy in August 2021)

Backed by the Government of India's Energy Efficiency initiatives, India has emerged as one of the largest LED consumer markets in the world. Being a global economic powerhouse and the world’s third-largest energy consumer, India's primary energy consumption has risen by 5.2% between 2008-2018, estimating 34.06 exajoules (EJ) in 2019, making it the second-largest growth contributor to the world's primary energy consumption [[1] ]. India’s increasing population, urbanisation and industrialisation trends are expected to more than double the nation’s energy demand as the Gross Domestic Product (GDP) expands to USD 8.6 trillion by 2040 [[2] ].

At the backdrop of this significant growth in the energy ecosystem, there is a realisation that most of the energy demand is being met by some form of fossil fuel. Globally, electricity demand from lighting is estimated to account for about 15% of the total power consumption, 5% to 6% of worldwide CO2 emissions, and a shift to efficient lighting can potentially reduce power consumption by 60% to 80% [[3] ]. This trend is synonymous with India, and though the mix of renewables in India’s energy mix is rapidly scaling up, the Government has also understood the need to reduce the demand side energy by rolling out energy efficiency initiatives.

Launched in 2015, Energy Efficiency Services Limited’s Unnat Jyoti by Affordable LEDs for All (UJALA) and Street Lighting National Program (SLNP) schemes have set targets to replace 770 million and 83 million conventional lighting solutions with LEDs respectively. By mid-2021, the UJALA scheme has distributed 367 million LEDs, which annually saves 47,719 MU of energy and 39 million tCO2 emissions. And, SLNP has implemented 12 million LED streetlights, annually saving 8,148 MU of energy and 5.61 million tCO2.

The Manufacturing Perspective

EESL’s schemes are a leading case study globally for creating a market for energy-efficient products, developing economies of scale, driving down costs and leading to mass regional penetration. Looking at the domestic manufacturing perspectives, we see that most of the value-added manufacturing of LED components is outsourced, whereas the domestic market is more service or assembly oriented. As it is evident from the figure below, local sourcing is primarily focused on ‘final assembly/testing’ and ‘system fixture and fitting’ [[4] ].

Figure 1: LED localization trends in India

The global supply chains have a dominant footprint in Asia, where the manufacturing supply chains for LED packages/die involve a distributed supply chain, though as we move up the value chain to lamps and luminaires, the supply chains concentrate around China [[5] ].

Figure 2: Trade flow of LED packages and die (chips) for lighting (2019) [5]

Figure 3: Global trade flow of LED lamps (2019) [5]

Figure 4: Global trade flow of LED luminaires (2019) [5]

The Production-Linked incentive (PLI) scheme

At the backdrop of COVID-19 and emerging geopolitical relations, the LED supply chains have wide diversification potential, presenting an emerging domestic value creation opportunity for India. The Production-Linked incentive (PLI) scheme has been launched with the specific objective of developing domestic manufacturing capabilities in the next-generation infrastructure, expanding the capacity to cater to the emerging export markets, and narrowing the trade deficit by USD 55 billion [[6] ] over the 5 years of the scheme implementation.

For the white goods, with incentives of USD 855 million [[7] ], the GoI is aiming to develop domestic production capabilities of more than USD 17 billion over the 5 years of scheme implementation.

The scheme defines LED products as LED downlights, tubular and battens, streetlights, and other luminaires and assigns a higher priority to components that are deeper in the value chain, i.e., those that are not a product of general assembly, and components or sub-assemblies that are not manufactured in India at scale. Further, since the overall objective of the scheme is to boost domestic manufacturing, the manufacturers have to specifically demonstrate their plans to increase domestic manufacturing and will have to specify domestic value addition (%) and targeted exports (INR Cr.) as part of the initial applications. The following are the two LED target segments under PLI:

1.????Core Components: LED Chip Packaging, Integrated Circuits (ICs), Resistors, Fuses and large-scale investments in LED components

2.????Components of LED Lights: LED Chips, Drivers, Engines, Modules, PCB, Mechanicals – Housing, Wire Wound Inductors, Drum Cores, Heat Sinks, Diffusers, Ferrite Cores, LED Light Management Systems

A key feature of the scheme is outcome-based and result-oriented incentives, i.e., a manufacturer can only avail of the scheme’s incentives if they achieve the minimum investments and production targets as specified under the scheme. This also implies that if a manufacturer selected under the scheme fails to meet the targets for a particular year, they will not be eligible to receive any incentives for that particular year and will have to meet the requirements for the following year to access incentives. Below is a simplified summary of the scheme:

Figure 5: Key highlights of the PLI scheme for LEDs

The scheme will run for two simultaneous five year periods and manufacturers can choose any one of the periods for their PLI applications (as shown below). The difference being the gestation period, wherein Period-2 allows manufacturers two years (FY21-FY23) to commit their investments. The investment commitment to sales and then accessing incentives is a three-step process followed over three years (four years in the case of Period 2) - Step 1: Commit investment; Step 2: Show Corresponding sales à Step 3: Access incentives.

Since the scheme is fund limited, the incentives will be capped at the net incremental sale of eligible products up to 6X of the cumulative threshold investment in the previous year. This essentially means that the sales value on which the incentive will be calculated will be capped at 6 times of the investment in the previous year, i.e., if a manufacturer commits an investment of INR 200 Cr in the first year and makes a sale of INR 1,500 Cr in the corresponding year, their PLI will be calculated at a maximum value of INR 1,200 Cr. The table below highlights the structure of the scheme:

Figure 6: Structure of the PLI Scheme for LEDs

Key considerations for navigating the PLI Scheme

From applying for the scheme to implementation, we have highlighted four broad steps that should be vital for manufacturers:

1.????Initial Application: Deadline 15 September

Manufacturers have to demonstrate their capability to not only manufacture but to create domestic value through manufacturing. Some key metrics and documents under focus will be – yearly plan for manufacturing, domestic value addition and exports, employment generation metrics, detailed manufacturing process notes and detailed manufacturing flow charts with inputs required in each stage of the process flow chart and the output at each stage of manufacturing.

2.????DPIIT/PMA coordination

After the application process, DPIIT and its assigned Project management agency (PMA) and Empowered Group of Secretaries (EGoS) may invite bidders for a presentation and seek clarifications on the submitted application.

3.????Scheme integration and implementation

Once the incentives are allocated under the scheme, the manufacturers should explore enhancing their business and financial strategy by considering threshold investments, sales and incentives. Also, a key consideration should be given to developing product and supply chain strategies to meet long-term eligibility and compliance with the scheme.

4.????Filing disbursement applications and DPIIT follow-ups

To access the incentives, manufacturers will have to submit disbursement applications and strengthen coordination with DPIIT. This will need the internal firm processes of auditing, data collection, and approval to be streamlined. Further, a firm-wide task force could be set up with the responsibilities of coordination and process monitoring.

About the author(s)

Pradeep Singhvi is an Associate Director and Tanmay Nag is a Consultant with PwC Management Consulting Practice focusing on Energy, Utilities & Resources.

The views represented within this article are the personal views of the authors, and only the author is responsible for any acts of omission or commission.