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India's Renewable Sector Outlook: Shining bright as the Sun
Why renewable energy will be the next big industry and how to invest in it?
Today, costs to produce energy via solar and other renewables is at least 50% cheaper than the cheapest available fossil fuel alternative.
If I had made that prediction even 5 years back, you probably would have labelled me as a fool. No one, not even the experts in this field imagined the scale and speed at which the world has adopted renewable energy.
This pace is only set to increase in the coming decade. The closest comparison I can draw is the year 1994 when software and internet had just started to show what's possible. No one in that year could have predicted that 25 years later, internet start ups will not just dominate every other industry but also disrupt them and help us survive a pandemic.
Renewable sector today is at the beginning of a similar trend with disruption happening across the energy sector. Global oil and gas giants like Total and British Petroleum have announced significant capital expenditure plans in renewable space. For the first time in their history, oil and gas companies are spending more towards building renewable infrastructure than they are on building traditional oil and petroleum wells. Here is an extract from a recent presentation British Petroleum did for its investors.
Total (French energy giant) on the other hand announced a joint venture with Adani Green (India's leading renewable energy company) to build renewable infrastructure, including data centers powered by solar energy, in India.
India enjoys a strategic geographical presence in the world that enables it to capitalize on this trend. India's geographic location means that it gets enough sunlight throughout the year to generate energy with minimum to zero down time. With enough solar infrastructure in the country, India theoretically can produce energy from sunlight throughout the year without spending significantly on building a supporting battery infrastructure to store any excess energy generated.
Another factor that helps India dominate renewable sector is low labor costs. Recently, the lowest solar energy rate ever was quoted in India at Rs 2.41 per kWh.
To understand the growth and disruption potential of renewables, we can look at our neighbor China, which enjoys a lead start (compared to other countries) in this space.
China: The current world leader in renewable energy
China started embracing renewable energy at the start of this decade and its investments seem to have paid off. China has about a third of total industry market share in this space. Almost all manufacturing of components in renewable sector (solar glass, solar wafers, manufacturing of modules, etc.) is dominated by Chinese firms.
Effectively China, has a monopoly and if it was a company, it would be facing anti trust lawsuits.
By comparison, India's renewable sector is at its nascent stage. If other countries, esp. India have to build its renewable sector it needs to implement protectionist policies for the domestic industry, in order to allow it to grow and eventually compete in the global markets.
China decided to embrace renewable energy to reduce its dependence on oil imports. This is the same reason majority of other countries including India wants to invest and embrace this sector. Crude oil production is dominated by a handful of countries with resources unequally distributed across the world. On the other hand, if countries can capitalize on solar energy and shift some of their energy needs to renewables from crude oil imports, they can reduce their dependence on oil and save on significant energy spending which can then be routed to more useful expenditure like infrastructure.
Early adoption of renewable energy has made China the biggest market for energy vehicles. Almost all public transport in China runs on electricity, one out of every two electric vehicles sold in the world in 2018 was bought by someone in China.
If China, hadn't embraced renewables and electric vehicles at this pace, it would still be dependent on oil imports for a majority of its energy needs. Here is an old chart from McKinsey that explains what China needed to do in 2010 in order to achieve energy security.
Every country aims to achieve energy security, with renewables, countries like India stand a chance to make that a reality. Current government in India realizes this and over the last few years, has implemented policies that will take us further in achieving that goal. These policies combined with a rapid pace of development have made renewable sector one of the fastest growing industry in India.
The Paris Accords - A Big Catalyst
22 April 2016, is one of the dates that will be remembered in history. On this day, all 197 countries in the world signed The Paris Agreement. The Paris Agreement, lays out a framework with set targets for each country to meet in order to limit the global average temperature increase to below 2 degree Celsius and prevent irreversible climate change.
There are only two ways to limit carbon emissions:
Find ways to limit the use of coal and oil
Replace the use of coal and oil with climate friendly alternatives
Either way, we have to leverage renewable energy to achieve the goal. The agreement acted like a booster shot for research and development in the industry. Every country had to now invest and help the renewable sector grow in order to meet its goals.
Just look at how even in India, Ministry of New and Renewable Energy's budget has increased YoY after 2016.
Paris agreement also helped create the biggest market for renewable sector. Before 2016, renewables was an experiment, cost to produce energy was still higher than oil and there was a big issue on where to store the excess energy. Signing of the Paris Agreement, transitioned renewables from an experiment to the next big industry. It helped cement the future global demand of renewables and attract significant investment in the process.
Where India currently stands in renewable energy?
India has a lot of policies when it comes to renewable sector, and I mean a lot! There is one for installing solar powered pumps for farmers, one where barren farmland can be converted by a farmer to a solar electricity producing point all paid for by the Govt., one where all energy distribution companies have to source a share of their energy from renewable resources, one where all vehicles on the road need to be electric by a certain year. If you want to read about them in detail, you can find them here.
Summary for all of them combined - India is betting big on renewable energy. We are not only aiming to generate enough energy for our needs but also want to export energy to our bordering nations like Sri Lanka!
Who are the major players and the investment ideas?
Okay, so there is growing demand, Govt of India is on board, everyone can make money and a new industry can be build. But wait, who will build it?
This is the fun part of the article, companies I have identified that are most likely to benefit in this industry.
I should put out the disclaimer now, I am not an investment advisor and this is not investment advice. You should consult a financial advisor and understand your risks before making any investments.
These are the players in the Industry, we will explore each company in detailed research in following articles.
Tata Power - aims to build electric vehicle charging network throughout the country. Diversifying into renewables, backed by Tata.
Tata Chemicals - company is transforming from producing low margin commodity chemicals to high margin specialty chemicals and aims to build biggest lithium ion battery production facility in India.
Indian Energy Exchange - India based energy exchange that enables power producers and power distributors to trade electricity contracts and discover prices. As renewables develop, more of energy will be sourced from the exchange rather than traditional 25 year fixed price agreements.
Borosil Renewables - only Solar Glass manufacturer in India, backed by good management. Company has doubled its capacity twice in last 4 years and still cannot meet the demand. One of the few profitable non China solar glass manufacturers in the world.
Adani Green Energy - producers and distributors of solar energy, company is the largest solar company in the world and has the maximum renewable market share in India. Company has plans to build data centers powered with solar energy across India.
ReNew Power - another big solar energy producer in India, private company cannot be invested in via public markets. Backed by Goldman Sachs.
Ola Electric - one of the most interesting of all companies here. Ola is still a private company but I had to mention it in this list simply cause I think it may be the biggest winner in all of this. I firmly believe that electric vehicle transformation in India will happen via two wheelers and not four wheelers (at least initially). Ola Electric wants to produce and export electric three wheelers (e-rickshaws), two wheelers and electric public transport. It recently announced that its building the world's largest electric two wheeler factory in Tamil Nadu.
I plan to write more about each of these companies in subsequent articles. There may be more winners to be identified along the way and some of the above companies may even fail but one thing is certain - renewable industry will be bigger in 2030 than it is today and there is real money to be made by investing along the way.
Until next time.