Reliance Leads Way in India's Transition

While India has not set a net-zero emissions target, that doesn't mean it is ignoring the energy transition. Privately owned industrial conglomerate Reliance Industries is leading the way in a major strategic pivot that rivals UK major BP's bold shift into low-carbon energy (PIW Aug.21'20). Reliance Chairman Mukesh Ambani, the richest man in Asia, pledged last week to invest $10 billion over the next three years to transform the west Indian town of Jamnagar, home to Reliance's 1.4 million barrel per day refining complex, from a “cradle of the old energy business” to a “cradle of the new energy business.” Reliance aims to build four factories that will manufacture and integrate key components of low-carbon energy: solar photovoltaic (PV) modules, storage batteries, electrolyzers for green hydrogen, and fuel cells. At the same time, Reliance is seeking to cut exposure to its legacy oil-to-chemicals business, which includes the Jamnagar refinery, with a proposed partial stake sale to Saudi Aramco this year. Ambani is aligning his business with Prime Minister Narendra Modi’s vision of reducing India’s dependence on imported fuels to shield the economy from volatile prices (PIW Jul.17'20). Ambani aims to establish 100 gigawatts of solar power generation capacity by 2030, which will be key to Modi’s goal of 450 GW of green power generation capacity by the end of the decade. Modi wants India’s solar module demand -- 80% of which is now met with imports -- to be sourced domestically. Modi's government seeks to impose a basic customs duty of 40% on imported solar modules and 25% on solar cells from April 2022 to boost domestic production. In February it announced production linked incentive schemes for 13 manufacturing sectors, including solar PV modules. It also plans to roll out a "national hydrogen energy mission" this year that is likely to pave the way for subsidizing electrolyzers for green hydrogen. Such moves would help Reliance cut capital expenditure on its new factories. Reliance shareholders, who have enjoyed a 10% return on capital employed over the last five years, remain skeptical of the pivot. Reliance stock has slumped since the announcement amid uncertainty about the rate of return the new investments will generate -- a sentiment Western majors can relate to as they devote more capital toward renewables and other clean energy technologies (PIW Jun.18'21). Analysts at Mumbai-based brokerage JM Financial said the new energy capex in the next three years may defer free cash flow generation and drag on Reliance stock until there is more clarity on returns. Reliance is entering the solar business late. Adani Green Energy, owned by billionaire Gautam Adani, and others have already made deep inroads. Adani Green, which was listed on Indian stock exchanges in 2018, is today more valuable than any of India's state-owned oil titans. Adani spent $3.5 billion last month to acquire Japanese SoftBank’s majority-owned renewable player SB Energy. Even state-owned coal fired utility NTPC Ltd has proposed to build a 60 GW renewables base by 2032. The market is already crowded, and competition is stiff across India's clean energy markets. Reliance's proposed investment in new energy projects may also lack ambition compared to its last major capex cycle -- a $73 billion outlay in oil, gas and digital services over the five years that ended in March 2019. Although the outlook may be uncertain, there also advantages to the strategic shift. Reliance expects to tap money from environmental, social and governance (ESG) funds globally and could benefit immensely if hydrogen and fuel cells gain momentum from policy support and the government's green agenda. Reliance is known for executing difficult projects on time and with a sharp eye on costs, leading some analysts to believe it can play a pivotal role in transforming India’s coal-fired economy. In stark contrast to Reliance, India’s state-owned refiners are investing only pocket change in the energy transition since they do not see the oil economy unraveling anytime soon (PIW Apr.2'21). Instead, they have announced plans to invest billions in adding over 2 million b/d of refining capacity in the next few years to the existing base of 5 million b/d. The divergent path taken by Reliance could help it emerge as India’s most credible renewable energy player, Jefferies analysts say.