Clean Energy Stocks: The Biggest Beneficiaries of India's EV Boom

Dec 22, 2023

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Clean Energy Stocks: The Biggest Beneficiaries of India's EV Boom

In 2014, oil prices suddenly halved from over US$ 100 a barrel.

An IMF study then concluded that oil prices could stay lower for longer. It blamed supply-side factors such as the emergence of shale gas and new automotive technologies.

In recent years, green energy initiatives proved IMF's assumptions to be true.

Mass production of electric vehicles and generation of solar and wind electricity had a profound impact on the oil market. So much so that experts are now counting the days to what they call the 'end of the oil age'.

No matter the surplus availability of oil or its price, a sharp fall in demand is a given.

As Sheikh Zaki Yamani, a former Saudi oil minister, once said...

  • The stone age came to an end not for a lack of stones, and the oil age will end, but not for a lack of oil.

But oil is not the first fuel to witness such a fate. In early 1900s, coal accounted for close to 80% of global energy consumption.

Within 20 years, that share fell by 50%. Within 40 years coal accounted for 20% share.

Eventually, oil displaced coal as the world's main energy source. This happened even though coal was cheaper than oil.

Motor vehicles became the preferred means of personal transportation than horse carriages. So, oil was the inevitable fuel.

In 2020s, automobiles account for about 45% of oil consumption in the world.

So, it is very common to find companies in the automobile, energy and technology sectors working on alternatives for the future.

With the rise of electric vehicles and renewable energy, the world may be on the verge of a revolution in transportation and energy technology.

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This could transform the oil market the way the coal market was transformed a century ago.

Like coal then, oil could see its share in energy demand plummet in the coming decades.

Ford began mass producing an affordable motor vehicle in 1917. That was tipping point for the demand for oil.

Electric vehicles are on the verge of hitting a similar tipping point. Several auto companies, world over, are starting to offer models for roughly the average price of a new ICE (internal combustion) vehicle.

5% seems to be the inflection point at which most technologies get ready for mass adoption.

The time it takes to get to that level varies widely by country. But once the universal challenges of car costs, charger availability and driver scepticism are solved for the few, the masses soon follow.

According to a Bloomberg analysis, in 2022, nineteen countries had passed what's become a critical EV tipping point. Since then, five more countries have made the leap.

In the US, the EV tipping point didn't arrive until late 2021. The reason for such a delay in EV adoption was the demand for longer range batteries and charging infrastructure.

But by the second quarter of 2023, the penetration of EVs in the US auto market had reached 42%.

India is the third largest auto market after China and the US. EVs made up more than 3% of new car sales in the country in 2023.

But the question is - would there be enough electricity to power these EVs?

Renewable energy resources in India have also witnessed revolutionary growth in the past decade. The cost of producing electricity from solar power has fallen by 80% since 2008 and from wind power by 60%.

As per World Economic Forum , unsubsidized solar and wind energy are already projected to become cheaper than coal and natural gas in more than 60% of the world in the next few years. These can be the biggest sources of electricity generation in India.

But key factors for adoption of EVs over fossil fuel powered vehicles are cheap battery production and availability of EV charging stations.

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China has raced past the United States with its EV charging infrastructure. The US has about 52,000 public charging stations in 2023, Europe about 400,000 and China about 1.2 million.

India envisions a future where 30% of new vehicle sales will be electric by 2030. A substantial amount of battery storage is needed to facilitate this shift - a staggering 34 GW or 136 GWh to support the additional 450 GW of renewables.

According to the International Energy Agency, these projections position India as a global leader in energy storage, with expectations of reaching 200 GWh by 2040.

In September 2023, the government approved a funding scheme for the creation of a robust storage system for excess wind and solar power produced.

A total of 4,000 megawatt hours (MWh) of Battery Energy Storage System (BESS) projects will be developed by FY31 under the scheme. An initial outlay of Rs 94 bn has been provided under the scheme.

So, government support for developing battery technology is a given. Moreover, lithium-ion batteries have come to the forefront of the energy storage revolution.

Their versatility has led to applications in consumer electronics, energy storage, and electric vehicles. Advancements in technology have also led to significant cost reductions, making them an increasingly viable choice.

Stocks in the EV battery ecosystem, like the ones Richa and I have selected for our special report - 2 Backdoor Stocks to Play the EV Opportunity - have huge tailwinds.

But there are also other kind of players that can benefit from the electric storage necessities.For instance, power producer Tata Power has proposed a capital investment of Rs 130 bn in two power storage projects in Maharashtra.

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By 2030, Tata Power plans to achieve 70% capacity generation from only clean and green energy.For this, the company has been gradually raising its own clean-energy capacity. At present, over 38% of its generating capacity comes from green-energy sources such as solar, wind, and hydro.

Unlike NTPC and other energy producers that are still operating coal-based power plants, Tata Power aims to phase out all coal-based generation by 2045, when most of its plants' life expires.

In fact, Tata Power's thermal portfolio has increased by a mere 2.3% per annum between March 2015 and March 2023, with no additions since 2020.

At the same time, the company's renewable-generation portfolio has grown rapidly at 18.4% per annum, almost four times over the same period.

In November 2023, Tata Power has received the first set of Battery Energy Storage Systems from TATA AutoComp, a leading auto-component conglomerate today at Pune.

The Li-Ion Based BESS will be manufactured under its joint venture Tata AutoComp Gotion Green Energy Solutions.

Therefore, stocks like Tata Power that are transforming themselves from fossil fuel based power producers to green energy storage giants are also ones to watch out for.

Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)

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