The Bermuda Triangle in India. up pace in the US as well, we could see a similar decline in market returns going forward.

Transcription

1 Ambit Capital Private Limited The Bermuda Triangle in India The falling cost of both solar power and energy storage in the form of lithium-ion batteries (LIBs) is driving rapid adoption of electric vehicles (EVs). This shift is being driven by Government policy and technological advancements. This disruption has already impacted industries in the US, Europe and China. The NDA Government has announced bold targets for solar and EVs and efforts at state level are already visible in the form of solar adoption and EV fleets. Stock markets will adapt sooner rather than later to this disruption. The effect of the ongoing shift to renewables is clear from the performance of traditional industries which stand to be disrupted by the shift. The impact from this shift is only going to get enhanced further in the coming years as the three nodes of the renewables paradigm - EVS, Battery Storage and Solar Power interplay to reinforce each other, thus creating a virtuous cycle. The thermal power plants in Europe have seen both their revenues and market cap decline since the early part of this decade. While this might be a function also of rather stagnant economic activity and corresponding lack of demand from the commercial sector, the increase in solar power usage would have surely played a role in depressed market returns for investors. In the US, while the revenues have stagnated since 2014, the aggregate market cap has remained more or less stable. This could be a function of renewables driven power being more entrenched in Europe as compared to the US as of now. However, as the pace of adoption picks up pace in the US as well, we could see a similar decline in market returns going forward. Electric vehicles in India M&M an early entrant Chetan Maini formed Reva Electric in 1994 and launched the Reva in India's first EV. However, the Reva failed to notch up significant sales and Maini eventually sold his company to M&M in 2010, the same year that Nissan launched its all-electric Leaf. M&M is currently the only listed automobile player with a meaningful exposure to EVs. It has three products - the e2o which is an upgraded version of the Reva, the Verito is an EV sedan, and the esupro cargo/passenger van. Maruti has two hybrid variants of the Ciaz and Ertiga. In two-wheelers, Hero Electric is a leading manufacturer of electric scooters. In total, there are 51 EVs on which the Government is providing subsidies as shown below. No concerted effort from the Government Compared with the US, China, and Europe, India lags on policy, regulation, and incentives for EVs. The UPA Government had exempted electric cars from excise duty in 2010 and launched the National Electric Mobility Mission Plan (NEEMP) in 201.The Modi-led NDA Government continued NEEMP 2020 and, in 2015, launched the Faster Adoption and Manufacturing of (Hybrid and) Electric Vehicles (FAME) under the NEEMP. Under FAME, currently there are subsidies on specific models of vehicles. As per the FAME website on 18th July 2017, 150,028 vehicles have availed the FAME subsidy amounting to 2bn. There are more than fifty listed vehicles (two-wheelers, three wheelers and cars) on the FAME website and subsidies depend on models. For example, the Mahindra e2o gets a subsidy of 124,000 on an ex-showroom price of7,25,000 (or 17%). EVs account for less than 1% of annual sales The lack of Government effort shows on 4

2 Increase in demand for storage from solar power generators spurs incentive to create cheaper and better batteries Cheaper and more efficient batteries make large scale solar power storage economical for use during downtime Lithium ion Batteries (LIBs) Cheaper and more efficient batteries increase EV demand Increase in EV adoption creates economies of scale to reduce battery costs Solar Power Electric Vehicles (Evs) Cheaper solar power costs further drive down operational coasts for EVS increasing their economicviability Need for self charging Evs leads to solar panel intergration - increasing demand & leading to drop in solar panel costs The Bermuda Triangle the sparse population of EVs in India, most of which are two-wheelers and three-wheelers. The Society of Manufacturers of Electric Vehicles (SMEV) estimates that there are 0.4m electric two-wheelers and a"few thousand" electric cars in Indian roads. Annual EV sales in FY16 were 20,000two-wheelers and 2,000 cars, accounting for less than 1% of total vehicle sales. Aggressive targets bring EVs in the spotlight EVs came in the limelight in April 2017 when Power Minister Piyush Goyal announced an aggressive target at a CII session,...we are introducing electric vehicles in a very big way and we are going to make the electric vehicle just like the LED programme -self-sufficient, selffinancing and not dependent on government subsidies. So, we can look at a large scale ramp up rapidly. And the idea is that by 200, not a single petrolor diesel car should be sold in the country. Using that battery storage, which will be used to power these electric vehicles, we believe we will be creating a natural hedge, as to rage capacity in the national grid, which will help us through demand side management to manage greater and greater degree of renewables." Major push from the Government remains a much needed driver Unlike solar, where India is already among the global Top 10 players, India lags significantly on EVs. Much of this disappointment can be linked to Government policy. Beyond the FAME subsidy, there is no Government major support for EVs in India. Critical issues such as charging infrastructure remain unaddressed and left to private players to develop. At the state level as well there are no major sops, exemptions, and incentives to spur EV demand. Thus, it is believed that a sustained effort from the Central Government remains crucial for the longer-term success of EVs in India. On this front, please note that Union Transport Minister, Mr. Nitin Gadkari has said in May 2017, that the Government will be ready with an EV policy by December. At the state level, it is noted that some states are pushing EVs. Mr. Gadkari's OEM Two-Wheelers Ajanta Manufacturing Ampere Vehicles Avon Cycles Chris Motors Okinawa Autotech Hero Electric Vehicles Lohia Auto Industries Tunwal Electronics Two & Three-Wheelers Electrotherm (India) Four-Wheelers Mahindra & Mahindra Mahindra Reva Electric Vehicles Maruti Suzuki India Toyota Kirloskar Motor Number of models Exhibit 1: List of EVs on which the Government provides subsidies

3 home state of Maharashtra launched an EV fleet of cabs by Ola in June Andhra Pradesh has deployed electric auto-rickshaws for waste disposal. In January 2017,the Uttar Pradesh Government distributed free e-rickshaws to rickshaw pullers in the state and Kinetic Green Energy had won a 4bn order from the UP Government to supply 27,000 units of its electric W Kinetic Safar. Given the Government's aggressive targets for EVs in 200, it is expected that all states will compete to show their commitment to the Centre's goals. Three hurdles before EVs can take off Besides the lack of any coherent policy or support specific to EVs, there are three specific issues that pose hurdles for mass adoption for EVs in India: High capital cost: With battery costs still accounting for more than 0% of a vehicle's cost, capital costs will fall as battery costs fall. Battery leasing, government support/subsidies are temporary solutions. Lack of charging infrastructure: EV charging points are currently restricted to metro/tier 1 cities and even there, the charging areas aren't adequate enough to provide comfort Range Fuel cost Full charge/tank Full tank Fuel cost/km Annual fuel cost for 12,000km Annual fuel cost for 5 years Service cost/year Service cost for 5 years Battery cost after 5 years Total cost (including battery replacement) Total cost - without battery (i.e. only fuel cost and service cost) to EV owners. Battery swapping provides a temporary solution. In the longer term, Government policy (especially charging standards) will be critical in setting up a robust charging infrastructure to support EVs. Range anxiety: Range anxiety is the fear of running out of battery power before the charging point or /unit Exhibit 2: Operating economics of EV versus comparable petrol/diesel cars in India units /km km e2o ,455 27,27 1,500 7,500 2,50,000 2,84,77 4,77 Ignis Petrol AMT , ,515 1,92,575 8,000 40,000,000 2,5,575 2,2,575 Ignis Diesel AMT , ,898 1,29,488 10,000 50,000,000 1,82,488 1,79,488 45

4 destination. Better charging infrastructure should take care of this before OEMs in India begin selling EVs with higher (100km+) ranges The future of EVs in India - mass transport before personal transport A: Electric two wheelers - lifestyle products In terms of units, electric two-wheelers (2Ws) already sell in tens of thousands in India. Hero Electric alone has 18 electric 2W models that qualify for the FAMEsubsidy. Electrotherm launched a battery-run scooter in 2007 and Ampere set up shop in The reason for these large numbers is that no license or registration is required to ride certain models of e-bikes. As per ARAI regulations, electric bikes with less than 250W of power and speeds of less than 25kmph are exempt from type approval requirements. However, motorcycles and scooters are already firmly established as massmarket commuting products with low operating and maintenance costs. While electricity costs are lower than fuel costs, 2Ws normally have good mileage of around km/liter for an Activa scooter to km/liter for a Splendor motorcycle. Thus, the hurdles of high capital costs and lack of charging infrastructure negate a shift towards electric 2Ws as of now. The lifestyle/luxury segment is a better fit for electric 2Ws with products aimed at environment-conscious, higher-end customers willing to pay for a premium product. At her Energy (0% owned by Hero Moto) is developing a "smart" electric scooter, named the S40 at a reported2 price tag of R s 1 0 0, S i m i l a r l y, T o r k M o t o r c y c l e ' s T 6 X p e r f o r m a n c e motorcycle is reportedly priced at 125,000. These products will be launched in the next 1-2 years and, in the estimates, do volumes of around20,000-25,000 per year - a fraction of the sales of mass market 2Ws. B: Three wheelers - electric vehicles gathering pace It is expected that the passenger carrier segment in three-wheelers (W), or 'rickshaws' to switch to electric platforms faster than other segments of the automobile sector. Rickshaws are ideal for short commutes (from villages to town, between suburbs in cities, from homes till the nearest rail/metro station, etc.) and fill in gaps created by poor public transport. There are already many e-rickshaws in India, especially in Delhi. However, these are cheap, unbranded, and unregulated vehicles with poor efficiencies compared to a LIB-powered e-rickshaw. It is believed that rickshaws are ripe for moving to electric platforms because: a) Higher running = higher savings: The Presence of OEM majors Presence of smaller players Visible efforts from the Government Scope for cabaggregators Two-wheelers Hero Moto has 0% stake in Ather Energy Hero Electric, Electrotherm, Ampere Nothing significant Regulation on bike tax is is still unclear Three-wheelers TVS Motors, Kinetic Motors have erickshaws. Bajaj Auto plans to launch in Largely unorganized market; branded players include Hero Electric AP Govt launched electricw for waste disposal Change in regulation offers huge opportunity Cars Maruti, Toyota, M&M Chinese majors are looking to enter electric car market Transport Minister Nitin Gadkari attended the Ola-M&M EV car fleet launch in Nagpur in June 2017 Ola has already launched 200- strongcab fleet in Nagpur Buses Ashok Leyland and Tata Motors both have electric buses BYD (China) has launched electric buses in India A few state-level road transport undertakings(chandigarh, Bangalore, Mumbai, Nagpur) have tested, deployed and planning to deploy electric bus fleets Major cities are testing electric vehicles and this pace will pick up as Govt pushes EVs in general Exhibit : Segmental outlook for Automobile OEMs Present By 2020 (next years) (next -5 years) After 2022 Fleet transport 2W and W are most popular EV products Ws and buses begin adopting EV platform Electric fleet transport becomes meaningful in W and buses Electric fleet transport for W and buses gainsmarket share from diesel Cab aggregators No presence of EV in cab aggregators Savings in EV platform become visible and proven EV replaces CNG as preferred platform for cab aggregators EV are 50%+ of total population OEMs M&M, Maruti, Toyota are the only OEMs with EV cars M&M continues push towards EV cabs Maruti develops EV platform GM, Nissan adapt global EV platform for India Battery costs Battery Swapping Charging infrastructure Government efforts Battery costs are very high, US$200/kwh No battery swapping Weak charging infrastructure Aggressive targets but no specific policy for EV Battery costs fall to US$150/kwh Battery swapping gets acceptance Charging infrastructure improves in metros Govt formulates EV policy and charging Battery costs fall to US$100/kwh Battery swapping network covers Metros and Tier ½ cities Charging infrastructure improves in Tier 1 cities States provide meaningful benefits for EV adoption Battery costs fall below US$100/kwh Battery swapping is accepted practice Charging structure covers all metros and Tier 1 cities Centre and States have significant support for EV Exhibit 4: Timeline for EV adoption in India 46

5 rickshaw segment is ideal for EV adoption because the high daily usage (80km-10km per day versus 40km for personal usage of cars) helps in higher savings (on both fuel and operating costs), which in turn helps in mitigating the impact of higher capital costs. b) Battery swapping: Batteries for e- rickshaws are lighter than those for electric cars. For example, Kinetic Green's Safar e-rickshaw comes with a LIB that weighs5kgs compared to lead-acid batteries that weigh 120kgs. Range anxiety is also not an issue. Gayam Auto Works has a LIB battery powered e-rickshaw with a range of100km at a price of 2,75,000. Media reports indicate that with higher volumes, these prices can drop to 150,000. Battery swaps can eliminate the time taken to recharge batteries, and should suffice till the development of a robust charging infrastructure. c) Branded lead-acid batteries: Before LIBs become affordable enough for Woperators, higher quality leadacid batteries can be used. As stated in the next section on Battery Storage, Amara Raja Batteries is present in this segment of lead acid batteries for e-rickshaws. d) State permits: Rickshaws are regulated by permits issued by states and a favorable transport policy towards e-rickshaws can be a key positive. C: Car - economics still don't support EV for personal use While the cost economics favour electric car ownership in India, battery costs and lack of charging infrastructure remain big hurdles. A comparison between the Mahindra e2o and the Maruti Ignis diesel and petrol is presented. Refer Exhibit 2. Electricity costs are lower than fuel costs and the e2o has significantly lower service and maintenance costs compared with petrol and diesel costs simply because it has much fewer moving parts. On this comparison alone, the e2o will be cheaper to maintain than petrol and diesel cars. However, the key argument against owning an EV is the battery cost of 200,000-00,000, which is incurred around five years after buying the car. Even on this, it is highlighted that there are ways to structure the EV cost excluding the battery. For example, in February 2014, M&M had cut prices on the e20 by around 170,000 by introducing a scheme where e20 customers would pay an energy fee 2,599/month which would allow them to use the car for 50,000 km over five years. Add to this, the lack of adequate charging infrastructure, long time (nearly 8 hours) for a full charge, and most importantly range anxiety (for example, while the e20's stated range is 110km, user experiences peg this at 50-80km in city conditions).these factors prevent mass adoption of EVs in the personal car segment. These problems aren't unique to India and - as is the trend globally - will be resolved over a period of time with cheaper batteries, better range, and fastcharging. For foreign players, it is believed that adapting their foreign car platforms (Nissan Leaf, Chevy Bolt, etc.) to Indian conditions will be critical for mass adoption. About 85% of car sales in India are priced below US$10,000/car and India is a tougher market than their home countries of the US, Europe, Germany, and China. Simply launching global cars in India is not enough - adapting them to India's roads, meeting customer expectations on mileage, providing extensive after-sales and repair network are challenges to be overcome before EV achieves large sales volumes in India. US$100/kwh. General Motors expects this to happen by Until then it is expected that EVs from Tesla and Toyota to remain status symbols rather than achieve large volumes. D: Buses - State Transport Undertakings hold the key Like three-wheelers, buses also have high usage in terms of daily kilometers driven. Hence, operating and savings costs should help mitigate the impact of higher capital costs. Among large OEMs, Tata Motors, Ashok Leyland, and BYD (China) have electric buses in India. The bus segment is driven by orders from state transport undertakings(stus). Delhi, Mumbai, Chandigarh, Bangalore, and Nagpur are some of the cities whose STUs are deploying electric bus fleets. As the Government pushes targets for RE and EVs, it is expected that states to follow suit with a higher interest in 47

6 electric buses. Pick-up in volumes will only be driven by efforts of STUs and the Central Government's policy on EVs, and it is expected that this to play out on a -5 year time frame. Companies are also increasing their interest in this segment. In July 2017, Ashok Leyland announced a tie-up with Sun Mobility to develop electric mobility solutions. Sun Mobility is developing proprietary smart batteries and a network of quick interchange battery stations. At these stations, Sun Mobility is targeting to refuel electric vehicles at a cost lower than and speed faster than conventional diesel/petrol pumps. Battery swapping and battery leasing can help in reducing charging times as well as higher capital costs for owning and operating electric buses. Battery storage - early stages No hype on LIBs in India Compared with the publicity on RE and EVs in India, there is no hype on lithiumionbatteries (LIB). The DOE Global Energy Storage Database lists 22 energy storage facilities (existing and planned) in India of which there are only two lithium ion projects. The first is the Panasonic-AES combine's planned 10MW storage array in Jhajjar Haryana announced in April 2016 and the second is L&T Technology Service's planned community project in Chennai announced in Feb In its presentation, 'India Leaps Ahead: Transformative Mobility Solutions for all', the NITI Aayog states that lithium-ion (Li-ion) batteries are sparse and expensive in India due to low domestic availability, absence of a domestic auto-battery market, and exclusion from manufacturing tax breaks. News reports indicate that the Indian Space Research Organisation (ISRO) and ARAI(Automotive Research Association of India) have been working on a joint project to develop lithium ion technology capability indigenously. BHEL, Power Grid, and NTPCare also reportedly looking at new businesses in the EV space, including LIBs. Thus, the global fall in LIB costs hasn't really pushed any domestic manufacturer towards LIBs and the demand is therefore met mainly via imports. Till the Government specifically addresses this area, no major change is expected. Assembly capacity gathering pace The Indian Energy Storage Alliance (IESA) estimates that India has already crossed1gwh of distributed LIB deployment for applications such as telecom towers and bank ATM machines by importing complete battery packs. IESA believes that India will add more than 1GW of LIB assembly capacity in 2017 with multiple companies (suchas Acme, Delta, Exicom) putting up 100MWh or more assembly capacity. Exhibit 5: Huge ramp-up in solar installed capacity Exhibit 6: Solar tariffs have plummeted in the past 2-years Advanced lead-acid technology before LIB takes off EV adoption does not have to wait until LIB costs come down is highlighted. As mentioned above, Amara Raja already sells lead-acid batteries for e-rickshaws and Exide is working on Ultra Batteries. Further, note IESA's Knowledge Paper for Evs (May 2017) where it states that, " C u r r e n t l y, m o s t o f t h e E V manufacturers are shifting towards lithium ion batteries but considering advanced lead acid could also be a suitable option. Lead acid batteries will have an advantage in terms of recycling and also will not have dependency on other countries for importing lead acid batteries as we have a well-established in-house facility in the country." (emphasis is ours) Battery safety will have to be established The well documented Galaxy Note 7 fiasco was a stark reminder that safety 48

7 needs to be an utmost priority in battery storage. In the early days of CNG adoption, safety was a key issue and this will play out in the EV space as well. Thus, it is highlighted that battery makers for EVs will have to put in a significant effort to establish the safety of EVs in general and batteries in specific before mass adoption takes place. Solar energy - disruption potential in the medium to long term Huge potential for solar energy With an average of clear sunny days and hours of sunshine per year, India is well placed to develop solar energy as a major source of renewable energy (RE). This natural advantage was specifically addressed in the 1980s in the Sixth Five Year Plan ( ). The Ministry of New and Renewable Energy (MNRE) was formed in 1992 and India launched the Jawaharlal Nehru National Solar Mission (JNNSM) in Since the 2000s, the world is moving towards RE following concerns over climate change. Solar energy is in the limelight since Prime Minister Narendra Modi assumed office in2014. Gujarat, PM Modi's home state, has been a leader in solar power generation. Government commits to ambitious targets India is rapidly expanding its solar capacity and by FY17 yearly installed capacity has grown more than 1 fold over Fy12. Counter view: Why there might be consolidation ahead While the falling solar module prices have driven a fall in tariffs, they might not continue in the future. At.0/unit, the discussions with another set of experts suggest IR of 11.5% in the Rewa project. Lower IR elongate the break even periods of projects; if private equity investors in projects exit in the medium term, the longer-term viability of projects could come under pressure. This raises the possibility of consolidation in the solar power sector. Sun Edison USA went bankrupt in the USA (due to high debt, not due to Indiaspecific issues) in April2016 and sold its Indian portfolio of solar and wind projects to Greenko in September2016. In June 2016, Tata Power acquired the renewables portfolio of Welspun Renewables Energy at an enterprise value of 92bn. Grid balancing and storage are key issues While the Government has set ambitious targets for RE in general and solar energy in particular, there are a few inherent challenges. First, given the intermittency of solar energy, managing the variability and uncertainty of RE (also known as grid integration) is a key challenge. Second, while solar tariffs are below coalbasedpower tariffs, storage batteries are yet to see mass adoption. On the first issue, the Government will work on upgrading grid technology but this will take time. The second issue holds the key to disruption as discussed below. Micro-grids before larger scale grid deployment? Till issues like grid balancing and storage are resolved, micro-grids present an interim measure of deploying solar energy systems. As per IESA, a micro-grid is a standalone small transmission and distribution network which leverages on decentralized distributed power generation systems and exploits locally available resources. In a way, it is a selfsustained power system which serves various electrical loads in a radial distribution network and can operate in acentralized grid-tied or completely isolated mode. Micro-grids have been deployed across the states of West Bengal, Bihar, Sikkim, Odisha, Uttar Pradesh, etc. These grids run on lead-acid batteries with a life of around -5 years. IESA believes micro-grids can be run using LIBs if campus-based micro-grids are encouraged in urban townships and establishments such as SEZs or hospitals etc. since the appetite for investment may be higher compared to a rural setup. Big disruption looms if cost of solar storage declines In addition to the fall in the solar tariff, the cost of storage batteries is trending downwards. As per the Centre for Science and Environment (CSE), the cost of solar rooftop with battery backup is 7-8/unit ( With consistent improvement in battery storage technology, there is a high risk that expensive coal based power generation plants (cost above 4.5/unit) will find no off takers over the next decade. This shift towards LIB is already evident in the field of mobile towers - one of the significant users of LIB. According to the Indian Energy Storage Alliance (IESA), in the last two years, Lithium-ion batteries worth about US$500 million have been bought for use in Indian telecom towers. The number of 'green sites' (i.e. where there is minimal diesel consumption of around 1litre/day or 0mins/day running time, tracked quarterly) has risen steadily. Investment implications of the Bermuda Triangle The Bermuda Triangle of EVs, LIBs, and solar energy is already causing waves in global markets. Tesla, which still makes losses, has a market capitalization equal to Ford Motors. In Europe, the market value of power utilities has shrunk as renewable widen their presence. Demand from electric cars is already causing a fear of shortage of lithium. The combined impact of the Bermuda Triangle on listed Indian companies is still some time away. But markets are expected to begin discounting the impact of disruption on conventional companies much before migration. As with every disruption, the results will not be evident immediately, but the longerterm shift will likely surprise investors. 49