RIL’s New Energy Business May Face Project Return Concerns, Says Citi Research

Reliance Industries Ltd.’s New Energy business division’s solar panel manufacturing, green hydrogen production and electrolyser manufacturing businesses face threats of oversupply and cheap imports from China that may impact project returns, according to Citi Research.

As part of its ambitious new energy plans, Reliance is targeting phase-wise commissioning of its solar manufacturing capacity in the second half of 2024. However, the conglomerate's project returns could be hampered by oversupply in China, it said in a note.

The green hydrogen incentives offered by the government under the Strategic Interventions for Green Hydrogen Transition Scheme are still insufficient compared with what is offered by the U.S., Citi said.

These developments warrant some prudence, the research firm said while according valuations for Reliance's new energy business.

It maintained its 'neutral' rating on the new energy business and values it at Rs 101 per share in its target price of Rs 2,910 on the stock.

In the solar equipment segment, there were overcapacity concerns in 2023 as the prices of polysilicon, wafers, cells, and modules dropped by 48–66% in China due to rapid supply additions and intensified competition.

As per Citi analysts, solar equipment will remain in oversupply in 2024E, with module prices facing further downside risks.

RIL’s heterojunction technology is not popular among cell makers; it plans to deploy the HJT used by REC Solar, which it acquired in October 2021, the report said.

The popularity of HJT is waning, and none of the top five global solar cell makers use it due to cost reasons. HJT’s higher production cost is too wide to be bridged by its 10% higher energy conversion efficiency, compared with other technologies like TOPCon and PERC, Citi said.

In the green hydrogen space, incentives offered to Reliance are not sufficient when compared with other countries like the U.S. and China, it said.

Reliance Industries has announced plans for gigawatt-scale electrolysers and green H2 facilities, with the aim of reducing the production cost of green H2 to $1 per kg.

Under the SIGHT scheme of the government’s National Green H2 Mission, RIL has won incentives for producing 90 KTPA of green H2 at a 3-year average incentive rate of around $0.23 per kg. RIL has also secured incentives of around $0.3 per kg for electrolyser capacity of 300 MW.

“The incentives are very low in comparison to the overall levelised cost of hydrogen (LCOH) of green H2 in India at around $5–7.5 per kg (around $3-4 per kg even if we assume cheaper financing). By 2030, we estimate India’s LCOH could be at around $2.5–3.5 per kg (around $1.5-2.5/kg with cheaper financing),” Citi said.

Economies like the U.S. are offering much higher incentives for producing green H2—up to $3/kg under the IRA. There is also a threat of cheaper electrolyser imports from China, where the production cost of alkaline electrolysers is around 80% below the global average.

By measure of LCOH, green hydrogen projects powered by dedicated onshore wind or solar power in India do not enjoy cost advantages over German projects, given much higher financing costs, the report said.

"Assuming the same costs of equity and debt in India as in Germany, India’s green hydrogen exports could become competitive, in part due to higher solar and wind capacity factors."