The Reliance Effect On Solar. Who Should Worry?

When Mukesh Ambani, Chairman of Reliance Industries stepped up to announce the conglomerate’s plans last week on June 24, anticipation was high. On the menu were announcements related to a much awaited $15 billion deal with Saudi Aramco, the World’s largest oil firm, for an oil to chemicals spinoff and and investment, and the contours of the next steps in the firm’s plans for retail, telecom, and its newest focus area, Clean Energy.

One could argue that it is the Rs 75,000 crore plans for Clean energy that delivered real news, as the firm looks to consolidate in the other divisions, and the Saudi Aramco plan is thrashed out over the next few months.

There is no doubt that any clean energy plan today starts with solar, and possibly stops at Green Hydrogen. Ambani stuck to the same script, announcing plans to set up massive solar capacities at an integrated 5000 acre complex in Jamnagar, where, depending on how you interpret his numbers, the firm will eventually set up a manufacturing capacity of 100 GW by 2030. With a significant chunk coming up in the next 3 years. Details on whether the backward integration will go all the  way back to Ingot, wafers, polysilicon, besides cells and modules are still sketchy, although the Chairman’s resolve to be the lowest cost producer worldwide to target global markets, indicates it will.

So what does this mean for the key stakeholders in the solar ecosystem? After all, there is no segment this firm enters, where the contours don’t change massively post its entry, telecom being the best example, and now, organised retail. Consolidation is just one of the after effects.

The Government: There is nothing Reliance does that does not take into account its incredible sense of government policy and intent. In this case too, its manufacturing plans are timed to a nicety, with high customs duties set to kick in next year on module and cell imports. Secondly, by announcing massive scale plans, the firm has also taken care of the weakest spot in government plans to protect domestic manufacturers. Lack of domestic capacity to meet Indian demand. Finally, it might actually have helped the government look at a shorter time frame of 3-4 years for its  protection of domestic manufacturing, especially if it starts with supply of wafers and cells to domestic module makers  at competitive prices early enough. The battery storage plans will also have impact on the many solar-wind hybrid projects planned for round the clock renewable energy. Thus, pure developers will  see no downside in this.

Domestic Manufacturers:  With its entry into manufacturing, Reliance, not for the first time, goes up against  that other giant conglomerate, the Tata’s, whose Tata Power has been pushing aggressively into renewable energy. Not to mention  the Adani Group, which has a massive plan through Adani Green Energy Limited, the largest developer in the space right now, besides being a key manufacturer of cells and modules with expansion plans on the way.

The Tata’s will weather the challenge well, thanks to their integration from manufacturing to project development and distribution of power. The Adani Group, which has competing interests in thermal power and coal, will probably have much more to reckon with. Mukesh Ambani  repeatedly stressed that the end of fossil fuel usage was not a matter of choice anymore. There are no prizes for guessing what Reliance might push for quietly , as its massive capacities come online. A faster reduction of India’s ageing thermal fleet. For Adani, who is months away from starting coal exports from mines in Australia, the window of opportunity for exports to India will need to be reconsidered, unless Coal India finds a way to self destruct. And if doesn’t do it, financial institutions will do it for the group, as lending to coal and thermal power comes under increased scrutiny in India too over the next few years. Plus, Reliance’s large battery manufacturing plans might also  hasten the end of the argument for some of the oldest and most polluting thermal power stations at least. Thus, the biggest impact on the largest private domestic players, will be the possible impact on their financing, as premium valuations for being renewable heavy come down a little due to the Reliance effect. For Adani, who has been on an aggressive acquisition fueled expansion on renewables too, it remains to be seen if this speeds up the process for quality further.

Players including those with manufacturing plans like ReNew Power and Azure will brace for impact, especially in the utility segment, where they will hope their own projects provide a captive market for manufacturing output without hurting competitiveness. The ample scope to open up and allow the rooftop and C&I segments to flower, with the right policy moves and change in attitude at discoms, will allow other domestic manufacturers  to continue finding a market that is not as price sensitive as utility. Ironically, removal of solar subsidies on rooftop segment might actually help here. Schemes , especially the PM KUSUM scheme, which has not really fast enough to meet anyone’s expectations, will speed up to ensure offtake for the larger players.

International Manufacturers: Read, Chinese manufacturers. With the utility end of the market almost an exclusive playground of Chinese majors, they will be rushing to evaluate the possible impact of Reliance plans on their own expectations from the Indian market. Having bet, quite rightly so far, that manufacturing competition would not come from North America, the Chinese majors will surely have been taken by the scale of Reliance’s ambitions. They were quiet comfortable with the 1-2 GW manufacturing announcements so far, as these were primarily on cells and modules. A fully integrated manufacturing set up at scale however, changes the game. While 2022 will give us some indications based on how these majors fare with import higher duties, it is only by 2023 and beyond, when the first of reliance’s production hits the market, when we will know just how competitive it has been. Chinese majors have announced massive capacity expansions  that fortify their dominance and scenario gaming will be in full flow over the next 6 months as they figure out the risks in India and perhaps outside India. Needless to say they will be glad to have the Chinese domestic market buffer, where anything between 65-80 GW of solar capacity will be added for the decade heading to 2030. One option that remains is for some of the Chinese major to establish manufacturing in India, i they believe the policy environment has changed enough.

The EPC segment: EPC’s large and small, will probably see a net positive in Reliance’s entry, as overall distribution and availability of solar equipment improves. The best quality domestic manufacture, currently exported,  might be more easily available for domestic consumption even. Higher domestic availability will reduce the risks of dealing with imports , which many of the EPC’s will actually welcome. Reliance plans of a large battery setup also means better transfer of global low prices in storage costs to India possibly, opening up more opportunities.

Finally, the Solar End Consumer: Always called the most important part of the chain, the solar consumer has actually never quite received that due in reality, thanks to the nature of a heavily regulated, long term power market where change is never easy. However, the entry of Reliance should ensure long term price stability, and provide the impetus for faster movement of key reforms, especially the passage of the Electricity act, which will certainly clear the decks for a faster offtake of solar power. For, as we have long argued, without major reforms in the discom side of things, almost every power move will hit the obstacle of discom weakness, sooner than later. One just can’t see Reliance making a commitment as big as it has , without provisioning for reforms on this end of things.  having said that, it’s safe to say that the firm will continue to stay away from power distribution and transmission, for multiple reasons that will need a while article to present.