Reliance’s Move Towards Renewable Energy — An Analysis

Reliance Industries Limited (RIL) has proved its mettle as a formidable foe in new and non traditional business lines.. Another one recently joined its list — renewables.

A host of projects were unveiled at its AGM two weeks back, in particular the announcement to commit ₹75,000cr ($10bn) in clean energy over the next three years.

$10bn doesn’t sound out of line for a company which has a market cap of ₹14.1Lcr ($189bn) and has single-handedly managed to raise $44bn of capital during a global pandemic. But it does show an express interest from a conglomerate which has built its fortunes on the back of oil and gas.

Green ambitions are good but they come with challenges. Especially when one’s existing business portfolio is still entrenched in fossil fuels and there are other folks to compete with.

Here’s a deep dive into what awaits RIL on this journey.

Jio Replicated?

Reliance has acquired the unique distinction of being an “industry disruptor”. Within five years, the company upended the telecom sector, established its market dominance and bankrupted several other operators. Could something similar happen in renewables?

Let’s see which biggies are already playing the field. There’s Tata Power Solar which is the largest integrated solar power player in India. Then there are Suzlon and ReNew Power (which recently went for a SPAC listing on Nasdaq), companies which have acquired a substantial operational presence in wind, turbine and solar capacities.

And finally, we have the Adani Group, RIL’s enterprising doppelganger, which has grown its solar energy portfolio by over 50 times in just under three years. Adani Green Energy stock, which had witnessed an 850% uptick in the past year, lost a chunk of those gains in the days leading up to and following RIL’s clean investment announcement.

Although the reasons behind Adani’s stock erosion were attributed to a number of other factors, it is hard to imagine that the juggernaut growth machinery of Reliance won’t impact the operations of other entities in a sector it has set its sights on.

Make no mistake, competition is a good thing for growth, innovation and cost-rationalisation in any industry. Especially in renewables where the key to growth lies in building more efficient technology so that access and usage of clean energy systems can be expanded.

Not to forget that despite the Government’s soaring ambitions to ramp up facilities in the renewable sector, capacity addition has slowed and we are far from achieving the 2022 targets (targeted capacity = 175 GW; installed capacity = 95 GW). So the need for more participation from the private sector cannot be overstated.

Stepping Stones towards Cleanliness

As of now, RIL’s strategy for the renewable energy sector has limited details, except the ten-figure dollar investment target that it has set aside for the purpose. The company plans to spend ₹60,000cr ($8bn) on “Giga factories” to produce solar cells, modules, hydrogen, fuel cells and battery grid to produce and store electricity at the sprawling 5,000 acre compound in Jamnagar, Gujarat.

The use of the Jamnagar facility is particularly interesting because until now it used to be home to the world’s biggest oil refinery complex. In fact, RIL’s recent deal with Saudi Aramco to shed 20% stake in its O2C business is largely centered around its operations at the Jamnagar facility, which is evidently being repurposed from a petrochemicals complex to a green energy complex. Let’s hope the fossil fumes are fanned out well ahead of this transition.

Solar energy remains a vital part of every renewable energy portfolio. RIL has set a 100 GW solar energy capacity target by 2030. The focus is on rooftop solar and decentralised solar installations in villages. This is a refreshing course considering that rural energy has often been overlooked in its potential for capacity generation in the past.

Not to forget that solar consumption, if enabled and expanded at the village level, would create immense possibilities for retail consumption at the micro level.

Apart from these, Reliance has plans to set up the captive production of green hydrogen and fuel cells (to replace internal combustion engines). It is also considering acquisition of renewable energy firms (like the Norwegian solar module maker REC) to facilitate production.

The Price of Renewal

Inclusion of climate-change variables into growth has ensured that corporations are valued on the integration of their green commitments into other businesses. So far, RIL’s strategy looks promising in this regard judging by its large-scale capital allocation towards renewable assets and decarbonisation. This is expected to lift the P/E (price-to-earnings) multiple of the company.

The investments are also expected to boost its ESG (Environmental, Social and Governance) score which is an index of a company’s achievements on sustainability and social impact scale. A growing share of green capex to overall energy capex ratio will incentivise the next leg of growth.

The biggest obstruction on this green mile remains in RIL’s deep-seated occupation with fossil fuel businesses. Although the entry into renewables is a first step in moving towards a clean energy profile, its association with Aramco and legacy oil businesses elsewhere could be an impediment towards complete allegiance to the green commitments.

The Energy Complex

RIL’s strength lies in its deep resource-rich pockets and legendary execution capabilities, something the renewable sector needs urgently to meet its capacity goals. However, there are a great many challenges that await fossil fuel companies while transitioning to clean energy — production, storage, logistics, capacity-building, policy issues etc.

In addition, Indian business houses have traditionally stayed away from sectors with fast-evolving technologies like renewables. Reliance’s foray marks a decisive shift away from that routine. Meanwhile, with the rising tides of opposition gathering against oil companies worldwide, it makes sense for one of India’s largest conglomerates to begin transitioning its legacy businesses into sustainable, circular and net-zero carbon materials business.

Mr. Ambani’s declaration of pledging a net carbon neutrality of the company by 2035 was perhaps a precursor to this year’s renewables incursion.

RIL says it has the capacity to catalyse another $200bn in green investments over the next decade. Although we can count on its corporate diligence to live up to these targets, it can be difficult to count on its focus that is lately divided between e-commerce feuds, telecom battles, retail rivalries and digital business disputes. Trust in green, RIL. But tie your squabbles first.

(Originally published July 12th 2021 in transfin.in)