Hero Future Energies (HFE), the Hero Group’s green energy arm, aims to diversify its offerings portfolio and geographical presence supported by the recent $450 million investment by global private equity major KKR, Srivatsan Iyer, global Chief Executive Officer (CEO) of HFE said. In an exclusive interview with Moneycontrol’s Rachita Prasad and Sweta Goswami, Iyer talks about supply chain issues faced by the industry and the opportunities in the new energy space. While he held his cards close to his chest on a possible initial public offering of the company, Iyer said that as the business demands they will continue to raise equity funding.
Now that KKR and Hero group have committed $450 million to HFE, what is the big picture here and why now?
India is on the cusp of a massive aspiration in renewable energy going forward. India’s 2030 target is to have half of its electricity generation come from renewables, as well as reduce its carbon intensity by at least 45 percent. To achieve both of these, renewable energy has to play a huge role. We (HFE) are going to be 10 years old later this month; we've been committed to growing renewable energy and providing clean energy solutions. With the increasing uncertainty in the energy markets globally, several countries are looking at renewable energy not just to address sustainability and climate change but also for energy independence. This is the right time for this investment for us to not just grow in India but also in other targeted geographies. We have a presence in Asia as well as in the UK. It’s a good time for us to grow in renewable energy and also test some of the newer solutions that will help decarbonisation.
We're going to participate in renewable energy – solar and wind power – and also grow in emerging technologies like battery storage, round-the-clock RE and green hydrogen. We have had discussions with our shareholders that we want to grow in conventional as well as in new technologies.
Can you cite some more tangible targets in terms of what kind of capacity you would be looking at in wind and solar? And when you're saying other forms, what kind of plans do you have there?
We've not set explicit capacity targets for ourselves because generally capacity is associated with just solar and wind. If you were to invest in battery storage, for example, you can't necessarily add that capacity only to solar and wind. We have bagged our first battery storage bid from Kerala and in that sense, we are leading the pack. There are going to be several other battery storage bids over the next six months as states look to use it to balance the grid or to maintain grid stability. We are certainly looking at upcoming round-the-clock bids.
We're waiting for the unveiling of the green hydrogen policy, which we expect sometime this month. But in the meantime, we are in active discussions with many customers in India and some in the UK for pilot projects in green hydrogen so that we know what are the levers to reduce costs going forward that would make green hydrogen economically viable versus conventional sources of energy. For us, the quickest win is to try to convert grey hydrogen projects into green hydrogen. Parallelly, we're looking at how to use green hydrogen to do things where hydrogen is not being used today. We will be a producer of green hydrogen. Our role will be to supply green hydrogen to various end users.
You don’t want to specify targets, but with the KKR investment, are you fully funded for your expansion plans? Is there an appetite to get more investors?
We're funded for now. The good problem to have is, "Can I finish using all those monies in the next two to three years?" And if we find the right mix of projects and the right growth, we hope to use it up in the next two to three years. And then at that point, we will decide the next course of action.
The next big step for you would be going to the market at some stage. Do you have in place a plan for an initial public offer (IPO)?
No, we don't have a timeline or a deadline. At some point, we'll have to go back and raise more equity as we grow and as this market grows. Now, whether that will take the form of a market listing or whether additional equity from the same or new shareholders is yet unknown. We'll keep raising new equity every so often.
Do you have any other plans of monetization of assets?
Everything is on the table at this point. The shareholders obviously have to consider what's the best way for them to monetize their investment in the company. It can take multiple routes.
What are your expectations from the Indian government with regard to its upcoming phase II of the green hydrogen policy?
If you rewind 10 years, the solar and wind energy tariff was as high as Rs 10-15 a unit. The government stepped in because they were keen to grow this space and they wanted to ensure the sector learns, grows and reduces cost. Today you can get solar power for as low as Rs 2.5 per unit. We're looking for something similar from the government in terms of green hydrogen as well. Whether it be demand mandates, viability gap funding or something completely revolutionary, like dollar-link contracts rather than rupee-link contracts – there’s a lot that can happen.
Indian renewable energy companies are now seeing an opportunity in the commercial and industrial (C&I) space. What is the mix of government and C&I in HFE’s portfolio? And is that a space you would be looking at increasingly?
The corporate sector accounts for roughly half the energy consumption in India. So for us to get to the targets we have set ourselves as a country, the corporate sector has to be an important participant. Hence, C&I is going to be important for multiple reasons. One is they are looking at sustainability because they made commitments to their shareholders and the markets in terms of the overall sustainability targets or carbon footprints. Secondly, they are looking at this for the lowest cost of energy supply. Today, C&I is roughly 10 percent to 15 percent of our portfolio.
How is the supply chain looking like right now, whether it's wind or solar, in terms of equipment?
The supply chain is still tight globally. The only thing that has improved over the last 12 months is freight rates; container costs have come down and that part of the supply chain has stabilised globally. In non-solar space, there is still a shortage of semiconductors. This impacts RE in a fairly significant way. On the solar side, there is a global shortage all the way from polysilicon to modules. The good news is a lot of capacity is being added globally.
How effective have the production-linked incentive (PLI) schemes been overall?
The PLI scheme is certainly a step in the right direction and it has been focusing on backward integration all the way to polysilicon which is the last bit of a solar PV (photovoltaic) system. Otherwise, we are still supply-chain dependent on China. In the short term, we don't see PLI making a huge impact in the Indian market context because it would take two to three years to build capacity. But in terms of energy self-sufficiency and in terms of meeting our 10-year goal I think the PLI should help set up enough capacity in India to at least meet domestic growth. It should also allow some of the big players to export. The US is starting to put restrictions on imports from China and so I'm sure the Indian module manufacturers will look at that as an export market that's valuable for them. We really hope module prices come down. Many in the C&I sector are looking at the module prices today and say, "Look, we will just wait." It will take a little bit of time, globally, for the new capacity to come online. In the meantime, we are really looking at some kind of ALMM (approved list of module manufacturers) scheme to broaden the list of suppliers that allows the independent power producers (IPPs) to have a slightly larger range of suppliers.
Are you witnessing any kind of slowing in existing jobs?
It's very hard even for IPPs to compete with each other because we all buy modules more or less at the same price; it's not like one can outbid the other by 30 percent. We saw a lot of activity on hybrid bids and on the solar park bids but IPPs are still bidding based on the expectation of future module pricing because the tariffs that we are bidding at don't reflect today's module pricing at all. They do have a view of the future and they are bidding based on that. I expect softening of prices to happen in the 12- to 18-month range, certainly not in the coming 6 to 9 months.
The 2022 United Nations Climate Change Conference, or COP27, is happening in November. How different would the conversations be from earlier, given the changes in the energy market in the last one year?
The current volatility in the energy markets is going to be the focus of all discussions. Countries would have to defend ramping up their conventional or thermal energy generation. At the same time, I believe that the countries are going to make a deeper commitment to speed up renewables growth for precisely these reasons.
There was a lot of talk in COP26 about supporting investment for adaptation for global regions that are going to be impacted. Because of what's happening in the world around us today, I suspect that conversation may be a little more muted. I suspect it's going to be more about let's not think more about investments in adaptation, let's focus all our investments in building out renewable energy.
With the fresh funding, what is the biggest challenge you foresee for your company right now?
The biggest challenge for us as a company and also for the sector is the uncertainty in the supply chain and the price volatility. No matter what we bid for, whether it's the C&I space or a utility space, we all bid based on a 12-18-month forward outlook on module pricing. The same goes for WTGs (wind turbine generators) because steel prices have become quite volatile again over the last 24 months, and WTG is tied to steel for the most part. That is the biggest worry.
Wind energy in India has seen a decline in capacity addition growth since 2018, except for 2020. Despite having about seven windy states, projects are concentrated only in about two states. Why is that so? What is HFE’s specific plan for wind energy?There are several factors to that. The first thing is the variability of wind speeds in India. The last three years have been about the slowest in history. If you go back four to five years back, the wind speeds were at P50, what you'd expect from a 30-year average. Now, whether the last three years' low wind speed is driven by climate change or it's just a temporary anomaly is yet to be seen. As an industry, we tend to be a little more conservative about wind generation because of what has been happening in the last three years in India. Clearly, everybody wants to run to the states that have the most wind resources and run there first. Now, Rajasthan has been very attractive for that. And so everybody has gone there. Gujarat has its own set of challenges for wind. Karnataka and Andhra had been quite popular. If you ever want to look for RTC (round-the-clock) or peak power-type projects going forward, wind is going to be a critical contributor there. The biggest challenge for wind has always been to find high wind resource sources, and in India those are limited. Our initial estimate suggests that a tariff of closer to Rs 10 a unit is needed for offshore wind to kick off.