EQ in Exclusive Interview with Mr Srivatsan Iyer, Global CEO of Hero Future Energies – EQ Mag Pro
1. How did you come to join this sector and Hero Future Energies? What exactly is your ambition, vision and mission as you’ve taken such an important leadership role of such a big company?
In terms of my background, I’ve spent around 25 years or so in the world of conventional energy which is hydrocarbons and petrochemicals. Majority of it is in the US, a few years in Germany and a few years in Brazil. Even in that sector the renewable energy evolution is tracked with a high degree of interest because the renewable energy’s growth all over the world has a very important role to play in terms of thinking about how the hydrocarbon energy complex will evolve going forward. That’s when my first exposure to renewable energy happened, in my previous role.
It’s impossible for us to be in any sector industry in any part of the world without realising that ESG is playing a huge role all over the world. Climate change has become a burning topic all over the world. For every participant in the global economy a look at what are all the avenues and levels possible to reduce carbon footprint, learn most sustainable sources of manufacturing. Be it renewable energy, be it the circle economy and so on, has become an imperative and it does not matter today which part of the world we live in and what sector of the market or industrial economy we work in, RE has really become a topic of interest. In the sense that piqued my interest in RE and I wanted to explore the space in a little more depth, so I joined Hero Future Energies, about 16-17 months back. Hero Future Energies is part of the Hero Group of Companies in India. Today we are almost 10 year old. We have got 1 and 1.6 GHz of operating capacity all over India, in a mix of solar and wind. We’re about 60% solar and 40% wind. We are also very active in serving commercial and industrial customers directly where we build specifically for them. We are also now very actively engaged in exploring emerging technology areas that could supplement renewable energy; primarily, in battery storage and green hydrogen.
2. Since the Kyoto Protocol, COP25 and especially after COP26, we’ve seen huge upswing towards the trend net-zero, decarbonization, demand for carbon credits per say. The volume and prices have been going up. We are shifting from the fossil fuel economy to decarbonizing and a net-zero economy. What exactly are the thoughts going on in the world and how would the renewable energy sector or the entire world be impacted with the sudden rise of the trend?
The current events in Ukraine and Russia, the current supply chain disruptions that have been happening around the world, the current disruptions because of COVID, I think a variety of factors are now causing entire countries and companies to relook at security of supply and redundancy or security of supply chain. If you look at energy as one, clearly now Europe is facing the brunt of energy security and availability of energy and now their entire thought process and mindset in terms of migrating to renewable energy has been kicked up a couple of notches even more than it was after COP26. As more and more countries start to look at the geopolitical constraints and start to look at potential supply chain disruptions, energies become a topic where you no longer want to be exposed to global flows of crude and natural gas. Driving countries strategically look at and think how to become energy self-sufficient.
Some countries are actually looking at how to become energy exporters as well. Countries that were not part of the original Middle East that used to export energy and Russia, for example, that is large export of hydrocarbon energy, this is developing a more playing field globally where countries can become energy independent and energy self sufficient at more or less the same economics as any other country more or less. This is a brand new outside development in the world because earlier there was a clear distinction between the ‘oil haves’ and the ‘oil have nots’ where OPEC had a fairly important and prominent role to play. As renewable energy picks up and the installations go up, you are going to start to see that energy no longer is a differentiator among different countries in the world. It could become a true equaliser for countries and for economies, in the sense democratising cheap energy all over the world. So we look at that as a trend that if nothing else has been accelerated by what we’ve been seeing by COP26 or by the geopolitical events around us, that’s going to play a critical role in terms of countries’ view of the components that lead up to renewable energy. All of us can set up renewable energy but where are you going to get the modules from?
Where are you going to get the cells from? Where are you going to get the polysilicon from? Developing a robust domestic infrastructure for all the way from polysilicon to modules, to not be dependent on foreign sources of polysilicon could be the next wave and it is clearly happening in India where we’ve got the PLI scheme that’s been put forward, the BCD scheme, to incentivise local manufacturers to manufacture modules for the Indian consumption. We’re going to see a lot of fundamental changes happening around the world as each country looks to assure itself of energy security. Not just energy security but all the components that will eventually give rise to energy security, today its polysilicon leading up the solar modules, tomorrow it could be Lithium, Nickel, Manganese or Cobalt leading up to battery storage security. As the world evolves, you’re gonna see more and more countries jumping in to say how do we make sure we can bring all of those in-house and manufacturing domestically that way we are truly energy independent across the supply chain.
3. We have seen more than 60% to 70% of top-notch corporations committing to netzero. Why is it important for a company like Microsoft or Apple or ExxonMobil or Reliance to commit towards net-zero. How will that possibly impact the world and our sector?
Primarily, the pressure from the entire stakeholder-ecosystem has grown significantly over the last decade. It’s not just the green activists but today it’s the NGOs, the governments, the regulators, the society, the customers, the employees and lastly for private companies, investor groups. BlackRock already went ahead and said that it is going to stop investing in grey areas of energy going forward. There’s a larger investor group around the world that says ESG is to be a critical component of what you do. You may get rewarded for being you know having a commitment for net-zero or you know making a commitment for RE100 but I suspect, in a decade it’s going to be a basic license to play. In other words, making a commitment to RE100 or net-zero will not be a differentiator, decade from now it’s going to be a basic license to play. In other words, if you don’t have it you don’t compete in global markets because the entire ecosystem is now driving companies to change and that’s why companies like Apple, Microsoft and Amazon. All of these are looking to burnish there ESG profile but today we are also reaching a point where it makes a lot more economic sense at the same time, so it’s not only making sure that your image in stakeholder ecosystem is burnished but also economically viable in most countries of the world to switch to renewable energy then to source traditional energy of the grid.
4. As you said that Hero Future Energy is operating around 1.5 and 1.6 Gigawatt capacity. So, what is the pipeline and the vision you have? Do you plan to build these assets only in India or is there a plan for venturing in other countries as well?
We have a shovel ready pipeline of close to 2 gigawatts right now. Our corporate headquarters are in the UK and we’ve got projects that are ready to build in the UK. Many of you may not realise but we have an almost commission project in Ukraine that seems to be a difficult place to do business but that project was in the last stages of connectivity to the grid. So we already had set out to develop our presence outside of India. Ukraine was our first call. We have a project that’s already been granted in LOIA by the government of Bangladesh which is a new concept for the subcontinent called solar fisheries where you actually build an artificial water body and build solar at an elevated height and then allow the local population to fish and help their livelihood in the artificial water body. We are in the process of land acquisition for a 50 megawatt solar fisheries project. We are in the very advanced stages of development for a wind project in Vietnam where we are waiting for the PDP8 to be signed by the Prime Minister of the country. We are exploring other parts of Western Europe, especially in Northern Europe for some opportunities in solar and green hydrogen. Our vision is to grow way we think there is value and not only in traditional areas of renewable energy like solar, wind or hybrid but also start to be leaders in some of the new emerging themes, especially in terms of integration of storage into into networks whether the utility of commercial industrial and green hydrogen which has drawn a lot of interest globally and in India as well.
5. You mentioned green hydrogen, so what kind of scope do you see in the technology, in the price curves and the importance it takes in this entire movement towards decarbonization?
I think green hydrogen has enormous potential to be a significant player in the world energy complex. Today, depending on commercially available green tariffs, it’s possible to generate green hydrogen at somewhere in $3 to $3.5 per kg. If you look at the Western European context or the Indian context, if you were to import natural gas at today’s global prices or import crude and have on purpose hydrogen, your cost of hydrogen will probably be $2 and $2.5 a kg. So, green hydrogen is still a little off but one has to recognise that there’s been very negligible attention and effort played in the role of green hydrogen over the last 4-5 decades because the world of grey hydrogen is very mature. I think green hydrogen is poised to go down the same cost cover experience curve as grey hydrogen, all that is required for more capacity to be built, for more experience with the entire ecosystem and with all players in terms of how do you build these projects, how do you operate these projects, how do you get the cost of renewable energy lower, how do you get the capex of electrolyzer lower. I actually believe that green hydrogen can, at some point, reach and not in the very distant future. In fact, Reliance even had announced $1 a kg of green hydrogen by 2030. A large part of it is the experience curve, how quickly they get on this, how quickly they start building and learning and that learning helps you to decrease cost on an ongoing basis. Green hydrogen has tremendous potential to decarbonize hard-to-decarbonize sectors like fertiliser, steel and. It could also play a meaningful role in terms of heavy-duty mobility and perhaps in marine applications as well. Green hydrogen has a very bright future, clearly a lot of work is left to be done and a lot more technology improvements are still required.
6. In India, the power demand is substantially rising, EV penetration is rising and we regularly hear the news about coal shortage and coal price rise. So how is it impacting the entire RE sector in India, especially with respect to the era when there was zero duty on imports and now there is 40% BCD on modules, 25% on cells and there’s PLI scheme? What is your view on this entire opportunity in India and with respect to the projects, manufacturing, current demand for power and all the related issues?
There are so many factors at work. Perhaps a decade back, the world was like, if one factor moves, you could look at the impact on one factor. Today, there are probably 10 factors that are all influx and all are moving the sector in different directions. On the one hand, you have cold shortages, supply chain issues all over the world, which actually drives investments in coal and also in RE. You have global pressure on climate change in ESG that drives RE. You’ve got supply chain disruptions happening all over the world which has stayed with us for 2 years. So, for us to think that this is a transient, may not be a good assumption and that drives a set of dynamics globally. There are PLI and BCD which cause mismatch in terms of tariffs and costs in the short term but in the long term, it will help to develop a more robust ecosystem of manufacturing in a country. The challenge for IPP players is how do they operate when so many factors are changing and are so volatile, all at the same time. If you look at freight cost they’ve gone up by factor 5 to 6. If you look up steel it’s gonna increase by 30% to 40%. If you look at modules, you have a fixed price PPA that you are committed to and you build roughly 18 months before you actually commission. So, you’re betting on a price 12 months from now which the world of hydrocarbons used to do. So, we have to make calls on what we think is going to be the price of modules in the future.
It’s fascinating times and I think that’s where the risk elements for the IPP certainly goes up and clearly the market has to price in that risk in the form of tariffs. We’re going to see more and more IPPs take a more safe route which could slow down the overall evolution of how quickly RE develops. India’s got a wonderful aspiration to add another, give or take, 350 to 400 Gigawatt, over the next 7-8 years which is at a pace that we have not done in the past. This is not only India but also Europe, showing high sense of urgency and the US and China should be interesting to see how in the middle of these dynamics and this extreme volatility, how the industry reacts and does it change how it builds and how it responds and what business model it adopts to deal with this.
7. Renewable energy never made any economic sense like when it all started more than 10 years ago. What primarily caused this huge upscaling of this capacity and this industry was a very strong willpower of the leaders. Somewhere, the process still gets hampered because of the involvement of many departments. Also, challenges with ALMM, BCD, SEOD and LDA. So, do you think there is a need for a stronger willpower and a unified action by the policymakers and regulators in government. What do you need as a CEO of a top-notch company to deliver what India needs in terms of more power generation capacity or manufacturing capacities for solar?
5-6 decades back, the world of oil and gas was very messy, when it began. The government then had to deal with drilling, ensuring environmental ecological protection, and ensuring water treatment. This happened 15 years back in the US. You’re using hydraulic tracking what happens to groundwater, how do you maintain the appropriate level environmental controls, do you incentivize it, do you not incentivize it. Everything that you described, happens in every industry, especially every emerging industry. As we all learn about how these industries got to work, given that, you’ve got many visions, in India the vision is very clear. There are a lot of competing factors that have to happen whether in a policy front or regulatory front, to allow that vision and there is no single right answer, its context is dependent on each country. On the one hand ALMM and BCD are steps of IPPs and on the flipside you look at how it’s critical to the long term energy security of a country. You have to lay the foundation stone at some point where in the short term it may cause a lot of heartburn and pain to some companies but there will definitely be an ecosystem benefit after 5-6 years. The governments and policymakers don’t have an easy job, they have to look at the big picture, they have to look at competing priorities for the country and at the same time they have to look at what’s the best path forward to achieve that mission.
If you ask me what I ask from the government I think more than anything rather than something specific, that says, “Hey, I’m an IPP, get rid of BCD and ALMM”, would be a trivial ask but I don’t think that’s the right kind of ask because that may not be the right answer for the country as a whole. So, what I would really ask for the government is two things, first is for mature areas of renewable energy which are solar, wind, hybrid, etcetera and second is policy consistency, in other words give us a runway view of 10-15 years like, this is the policy, these are the rules and this is how it’s going to work. One is policy regulatory consistency through the country at the central level or the state level by enforcing contracts. Also, give the appropriate level of support to the new emerging technologies such as battery storage and green hydrogen, both in supply side and demand side for a period of time that then allows them to develop technologically and economically and allows them to compete on their own. If I were to ask the government, these are the 2 things I would ask, for conventional areas consistency of policy and for emerging areas a very integrated view of how these are going to be supported and incentivize development of these technologies.
8. What do you think is going to be the technology in the pricing road map for solar PV modules, cells and upstream products. What is your take on it as there’s a lot of volatility? What is now going to be the short term, mid term or long term pricing and tech road-map of solar modules?
This is a commodity industry that’s so far a global industry. The epicenter of this industry is still China. I suspect that in the next 5 years, it’s going to be distributed around the world. However, even if you distribute this industry around the world, there’s going to be strong price linkages between the different regions because it’s a commodity. Like every other commodity, the solar industry has gotten used to the price stability and volatility because it was a small industry and now that it’s a large industry, it has to get used to being a global commodity and getting used to global commodities, price volatility is here to stay. We’re gonna go through wild price swings because in any commodity cycle, there are periods of overbuilding and under building and that’s what is going to happen in the world PV modules, independent of whether the capacity is all built in China or whether its built all around the world. We need to get comfortable dealing with it and we have to look at ways that other commodity industries such as oil, gas, steel or aluminum have dealt with it and how they mitigate those risks going forward.
9. Financing these projects, in terms of equity finance or debt finance, what kind of changes have you observed in the past couple of years. Also, in terms of investors terms and conditions, return expectations, holding period exit strategies and the entire scenario of financing these projects.
There’s plenty of equity money out there in the world chasing projects, a lot of that equity money is starting to get a little more selective because there are projects that are lower risk projects and then there are projects that are higher risk projects. So, the amount of equity that comes in is going to be very selective in terms of the types of platforms or the types of projects that it chases down. That is the case in every country in the world. While they will continue to be equity money that’s around because of the huge investor focus on ESG and also there are a lot of investors who have that kind of return expectation of a fixed annuity type structure for 25 years. The world of debt is a little different. There is debt financing available both from multilateral agencies as well as from NBFCs in India. I would really like to see that the debt world perhaps modify a little, in terms of the tenure of the fixed interest rate as well as the ease of the financing. Debt finances are very quick to raise rates when the MCLR goes up and quite reluctant to lower rates when rates come down. So, no real issues regarding debt or equity financing. It’s readily available for most players. One additional thing I’d like to see is a little more activity in the debt community to fund new projects like battery storage and green hydrogen that are at an early stage of maturity.
10. We have seen massive inflation in India and on the other side we see discoms to be in losses and cash crunches. Even though transportation costs have risen, electricity prices are not rising and that is somewhere kind of limiting the growth of renewables even at the rooftop level or at the utility scale level. Why do you think this is happening and is there a solution for it?
For example, I primarily live in the US and we have seen for the first time in the history of the world where the inflation rate in the US is higher than that in India. Petrol now is $6 a gallon. Energy, in most societies, has become a basic need as food and water. The inflation in energy drives inflation in everything else. It’s one of the primary drivers of the core inflation of countries. India being a developing country where energy is still not as widespread as a developed country and is considered an essential need for large sections of the population that cannot afford any escalation in energy cost. Large portions of the countries are already seeing the impact of inflation on food and other essentials, for a government to sit and say that energy’s cost is going to inflate. There’s a lot of indirect effects of increasing the price of petrol and diesel, such as the price of all commodities has increased because things move. People who buy electricity are people in all sections of economic society, some of whom cannot afford a significant inflation and electricity prices, based on their livelihood that they have, whether they are farmers in rural areas whether they are small to medium sized enterprises or they just individuals right who are self employed who rely on electricity and stable electricity. It’s a tricky problem, it’s a large country with a large population that doesn’t have the ability to deal with inflation in every respect and so I think, the government has to be sensitive and clearly, it’s a balancing game. You have to understand the ground reality and the impact that it has on real people trying to earn a livelihood everyday and so it’s a tricky balance and governments around the world have to work that balance and there is no single right answer.