Cheap funding, govt sops power Indian firms' big bets on renewable energy

India is heavily dependent on imports, and local manufacturing capacities are inadequate. Several Indian companies are planning to plug this loophole

As the world gets ready for the 26th meeting of the Confer­ence of the Parties (COP26) under the aegis of the United Nations in Glasgow to discuss climate change, large Indian companies are increasingly investing billions of dollars in renewable energy (RE) and slowly shedding their old fossil fuel-dependent businesses.
 
In the last few weeks, Indian conglomerates led by Reliance Industries, the Adani group, Tata Power and ArcelorMittal have announced mega-plans in renewable energy. It’s not only the private conglomerates, but also government-owned NTPC and Goldman Sachs-backed ReNew Power that are pouring billions in the Great Indian Renewable Energy rush.
 
This is in line with the Indian government goals to generate 175 Gw of renewable energy by 2022 and 450 Gw by 2030. In a February 2021 report, the IEEFA, a Sydney-based research institute, said India will require an additional $500 billion in investment in new wind and solar infrastructure, energy storage and grid expansion, and modernisation to reach the government target.
 
The investment numbers are mind-boggling: Reliance plans to invest $10 billion; Adani announced plans to invest up to $70 billion in the 10 years in the entire renewable energy ecosystem. L N Mittal-owned ArcelorMittal plans to build 4.5 Gw of solar capacity in Rajasthan and green hydrogen production capacity backed by solar and wind in Gujarat. ACME Solar, one of India’s biggest solar developers, has commissioned the world’s first commercial pilot of an integrated green hydrogen and green ammonia production facility in Rajasthan.
 
Acquisitions have become the main strategy of large companies to acquire market shares. While Tata Power was the first in the race by buying Welspun’s RE business for $1.39 billion in June 2016, the Adani group acquired SB Energy for $3.5 billion, and Reliance acquired REC Solar for $771 billion and a stake in Sterling and Wilson Solar on the same day. Bankers say more such acquisitions are on the cards as companies, including global ones, are racing to add capacities.
 
In the past decade, India’s electricity demand from renewable energy rose 10 times from 5-6 Gw in 2010 to approximately 55 Gw in 2020. With coal-based electricity generation plants becoming less attractive for international funding, RE is the new flavour of the season and companies are raising cheaper funds by selling green bonds to global investors.
 

A report by Morgan Stanley says of the Indian government’s 450-Gw target that solar is likely to contribute 280 Gw, which implies 25 Gw of solar capacity additions every year. India is heavily dependent on imports, and local manufacturing capacities are inadequate. Several Indian companies, including Reliance and Adani, are planning to plug this loophole.
 
The big question is, with so much investments being poured into the renewable sector, will the returns on investments be enough? A JM Financial study pointed out that while the variable cost of module manufacturing for solar energy does not differ too much between India and China, the key difference is on fixed costs — especially interest cost on debt taken for setting up the manufacturing capacity where Chinese costs are much lower.
 
RE100, a climate group, has cited India as the sixth most challenging market globally for the corporate sourcing of renewable energy. The major barriers include fragmented policy, differential regulatory frameworks for each state, and uncertain charges and taxes on buying renewable power.
 
The government has, however, taken several measures to incentivise manufacturing and help Indian companies reduce costs, including solar manufacturing-linked tenders, tenders with domestic content requirements, and reducing basic customs duty of 25 per cent on solar cells and 40 per cent on module imports effective from April 1 next year.
 
The government has also announced a production-linked incentive (PLI) scheme for module manufacturing with an incentive of Rs 4,500 crore, which saw good response with 18 players applying with a total capacity commitment of 54.8 Gw.
 
These initiatives will help India increase its annual installed solar photovoltaic manufacturing capacity. At present there is 4 Gw for solar PV cells, 16 Gw for solar PV modules, and 5 Gw for solar inverters, but Morgan Stanley pointed out that there is no manufacturing capacity for components such as polysilicon/wafer/ingots, in the case of solar power systems. This compares to India’s annual requirements of 25 Gw annually for cells until 2030 to hit the 280 Gw of solar capacity installations by 2030, the report said.
 
Taking the RIL plans into account, Morgan Stanley said, “We expect silicon and hydrogen to emerge as the next decade’s ‘New Oil’ for RIL, with potentially up to US$60 billion in value creation if things fall into place by 2025.” In its base case, Morgan Stanley estimates a $25-billion contribution into one year forward NAV (net asset value) and sees an 11-13 per cent steady-state return on capital employed.  “The new energy EBITDA (earnings before interest, tax, depreciation and amortisation) potential is as big as the contribution from RIL’s petrochemicals business now, but we think it will command a multiple twice as large,” the reports added.
 
Adani Green Energy, which has a market valuation of Rs 1.88 trillion, and Tata Power, with a total valuation of Rs 72,500 crore, are also reporting strong numbers each quarter — showing the investors’ faith in their green initiatives.
 
As the Indian markets become more competitive in the coming years, investors can expect interesting times ahead.