During Covid, I had looked at buying some Bloom Energy shares when it was trading around $3/share with a Price/Sales of 0.4x or thereabouts. I did not feel strongly about their Hydrogen story, but, who was to doubt that it was a steal at that price. After all, they had growth ahead, and eventually, they would start making money! I did not have enough cash in the US, so never acted on it.
I never really understood the hydrogen story. I always felt it will never be produced cheap enough or in a distributed fashion that will make it usable with PV (using Solar PV for generation at low operational prices once Capex is done).
More recently, I got interested in this sector after speaking with a few knowledgeable friends who piqued my interest. I had really not given Hydrogen a thought as I felt Solar (PV) + Storage (Lithium) is the only way to go. You see, I'm a Solar guy. I feel strongly about the growth prospects there. It had blinded me to certain other possibilities.
At the end of the day, PV + Storage alone has some drawbacks. Especially for a country like India.
I'll try to articulate my thoughts below in this long article. I don't know how this post will unfold, but I'll try to solve this interesting problem here.
I have a rough framework. What I normally write down in my sector analysis notebook, I'm putting my thoughts in a blog post. It may be better this way if someone watching this sector comments. I'd love to engage with people more knowledgeable in this space!
For starters, I read Modi's Green Hydrogen policy that was released earlier this year. You can download it here if you are of a curious mind!
I missed the entire idea of Green Hydrogen until now. The news articles or policy documents do not articulate why "green hydrogen" is important. Or, why, anything, that is taking India a step closer to "energy independence" is of utmost interest.
What's the big problem in India?
Let's start with the problem statement. India, since independence, has acted on reforms only when it has been forced to act. Mostly. The 1991 balance of payment problem forced reforms upon our throats. Read more about that in this longish RBI article for background.
The real problem for India is twofold:
(1) Increasing fiscal deficit: we are spending more than earning. That has always been a problem, there are various reasons. I'll not get into that.
(2) Trade imbalance (leading to current account deficit i.e., CAD): India imports more than it exports, which is a problem as we pay in USD. High capital inflows (FPI's pouring money), Remittances (NRI's pouring savings back) have been funding/financing this.
The problem has escalated as foreign investors have pulled back money when interest rates have increased in their home countries (like the US) just when Oil prices have gone up.
This is the main reason for INR falling sharply versus USD. It's a vicious cycle and will take time to correct itself. Either inflows (remittances, capital inflows) have to increase or outflows have to reduce. I am not an expert on the economy and cannot predict what will happen here.
The larger problem of fiscal deficit (a) may not get solved anytime soon. The grip of socialism is not easy to loosen. Either the country has to grow its way out or the political will needs to be strong enough to cut down the deficit spending (reduce subsidies in various forms).
So, what's the way out: Increasing growth within the economy and reducing (or altogether eliminating) trade imbalance.
Source: Financial Times
The largest bucket under imports is "Oil". A third of India's imports are always oil. The latest breakdown of imports is as below:
The difference between being a net exporter to a net importer for the past few decades has consistently been "oil". If the government of our times in the long term (decade of the 2020s) solves this one critical problem - it would have lifted the country from a low-income, emerging nation to a strong mid-income growing nation.
So, anyway - I have tried to provide a picture of why "energy independence" (self-sufficiency in terms of energy needs) is important.
Off course, one could try to find more oil fields in India to increase oil production. After all, that's a possible solution. I always wonder if the deserts of Saudi Arabia or Africa (Libya) can store great oil reserves, why not the deserts of Rajasthan? That's probably a wrong comparison. We should try to explore more.
But, oil is a dying fuel. It's unloved. Causes pollution. Increases greenhouse emissions. It's a fossil fuel.
Just like the stone age did not end for lack of stones, so too the oil age will not end for the lack of oil.
We need to leapfrog ahead.
What are the possible solutions?
Many countries use oil imports to augment electricity generation. That was the case with India before where Diesel and natural gas were used for electricity generation. Quite a lot (up to 30% of generation in the past).
It has been reduced significantly now. Less than 10% of electricity generation is today through diesel/natural gas (source: power ministry). Fossil fuels (mainly coal) still account for ~60% of energy generation, while renewables form the rest. Back-up power (when there is a grid failure) is predominantly diesel gensets in India.
Ciao till next time...Harsha
Solar is still <15% of generation while plans for 100GW+ Solar generation have been doing the rounds for quite a while now. I will not go into the details of the 100GW+ Solar generation plan. That might take a whole lot of space.
Essentially the grid needs to be capable of handling that much amount of energy produced by solar PV. It will need its own overhauling. India's power distribution is much weaker than many peer nations. Our utility distribution companies (mainly state DISCOMs) are money-losing enterprises as farmers/consumers alike try to either get free electricity or steal electricity.
Generating energy locally (in a distributed fashion) is the best way of powering local communities. Generating local solar power and using battery storage (either large lead acid-based systems or other technologies) is likely the most cost-effective way instead of creating multi-$B distribution networks from centralized power stations leading to further distribution losses (India loses 20% of generated electricity while distributing energy).
Providing solar water pumps (for farmers), and using local distributed solar PV might become the norm going forward. That's clear in the various government schemes for rural electrification.
We need to note, that India's energy consumption per capita is much lower than the western nations and will continue to grow. Massively adopting solar PV is a no-brainer. I think that's already clear to most. Baby steps in the right direction have been taken, but they need to leapfrog massively over time.
But, even as that happens, this addresses only <10% of oil imports.
Transport - The Elephant in the room accounts for 85%+ of India's Oil imports
That's the key. Road transportation.
Today the largely noted alternative to oil usage is EV adoption. That's not a bad alternative. City transportation where range anxiety is not an issue can be addressed with EV vehicles.
The issue again becomes that of charging the EVs. Today many of my friends are buying EV cars and charging the vehicles from the grid (at their homes or offices).
It is no surprise that our coal/gas powered generation units (read again that 60%+ of power generation happens through fossil fuels) are transported through leaky distribution networks (with 20%+ leakage in distribution) further weakening the already suspect grid through the massive consumption posed by EVs!
The only way to counter that is through super sweetened net energy metering programs (government funded) for residential rooftop solar PV adoption. This, along with home energy storage (lithium-ion-based systems with at least 10+ year life, 4000+ cycles are much needed.
Storage systems that are lithium-based will have two issues:
(a) sourcing of lithium on large scale (that is low-cost, sustainable, and environmentally friendly)
(b) re-use or disposal of used batteries
Today, China controls most of the battery cell market and indirectly the lithium production. Three countries - Chile, Australia, and China account for 98%+ of Lithium production.
White gold (as it will soon be known) exploration is widely conducted in many countries. It is expected that Russia, Argentina, and other South American countries will likely hold the majority of lithium deposits.
The more I think about this, adopting large-scale EVs might lead eventually to replacing oil imports with lithium imports! These are large-scale future second and third-order impacts. I am no expert - but, this does not look sustainable unless we find large local reserves or come up with alternate storage technologies (both seem far-fetched today).
We may replace our Middle east dependence (Oil) with China's dependence (Lithium). We'll likely move from multi-sourced procurement to single-source procurement. That might not work out well. Alternatively, India must already make heavy commitments (buy mining rights) in countries like Chile, Argentina, Russia, Afghanistan, etc.
Also, the disposal or reuse of lithium is a big question. Lithium is highly combustible. Unlike lead acid batteries, a lithium-based battery is not easily re-usable. Read this article to understand some problems associated with the disposal/re-use of batteries.
Lithium batteries are extremely heavy. No doubt an EV car is super heavy today. A 100kWh battery-powered Tesla is basically transporting a large battery that's otherwise useless (but for its stored energy)! Gasoline is lightweight in comparison.
Gasoline energy density is 47.5 MJ/kg (34.6 MJ/liter); the gasoline in a fully fueled car has the same energy content as a thousand sticks of dynamite. A lithium-ion battery pack has about 0.3 MJ/kg (0.4 MJ/liter. Gasoline thus has about 100 times the energy density of a lithium-ion battery!
No doubt, oil has been powering cars for over a century because of its super high energy density! Human progress has been based on improving the key parameters in every sector. It's interesting that in Fuel-cell, we seem to be going backward.
One should always understand that oil = fuel, lithium = storage. Lithium is not fuel. Fuel will be Solar PV / Fossil fuel / Hydroelectric generation.
Hydrogen as fuel?
Let us again look at the specific energy density. That is the key metric.
Hydrogen has an energy density of 120 MJ/Kg i.e., ~3x gasoline. Of course, that's a no-brainer. The Japanese with their first hydrogen-powered Toyota's were always right in their argument!
A single Kg of hydrogen roughly is equivalent to 33.6kWh or 1 gallon (around 3.7L) of diesel in terms of usable energy.
The problem for Hydrogen has always been the extreme difficulty of producing and transporting that at prices that are less than that of diesel.
I will not go into the full arguments about producing hydrogen that requires more energy today. Today's electrolyzers use about 50kWh of energy to produce 1Kg of Hydrogen. Note again, that 1Kg of hydrogen in terms of energy density is equivalent to around 33.6kWh (i.e., 3.7L of diesel).
So, that was my argument that today - you are using more energy to just extract hydrogen and it's not sustainable!
Also, transporting hydrogen in liquid form is difficult. It's like transporting more metal than hydrogen when transporting between fuel stations. Basically, the heavy pressurized metal container holding lightweight hydrogen gets transported in trucks. Transporting diesel by the way is super simple and easily done.
What's different now? Why the hydrogen policy may have long-term implications?
If local solar PV stations power small distributed hydrogen electrolyzer stations (that will also act as future fuel stations), that solves both generation and distribution problems! The generation will depend on Solar (abundantly available) and if they are distributed enough, they can also act as fuel stations! So, essentially grid power is not used in the generation process. That's the key.
Or even if transportation is complicated, hydrogen can be produced very cheaply (since the raw material is water!) using large utility-scale solar farms. Getting to scale at a generation cost of less than $1 per Kg - will simply obliterate the case for EV cars or the current diesel cars/trucks.
A barrel contains roughly 160L of oil. At $100/Barrel of oil, it translates to $0.625/L i.e., $100/160L which is equal to Rs. 50/L of diesel. Diesel that gets procured at Rs. 50/L in international markets gets sold at Rs. 90-100/L in our local retail outlets.
At $1/Kg (Rs. 80/Kg) of Hydrogen, in specific energy density terms, you are getting energy equivalent to roughly 3.7L of diesel. So, essentially it's like producing 1L of diesel for Rs. 80/3.7 = Rs. 21/L. Even if international crude prices drop to $50/Barrel (i.e., Rs. 25/L), locally produced hydrogen will win hands down.
This solves the oil problem. That, I think is a huge step.
There need not be a single winning technology. But, I do believe that this decade will be the decline of oil as the primary fuel source!
Hydrogen will find a place in the scheme of things. It's a busy place today with many technologies. There might not be a single winner here. Through this decade, we'll come to know how the story unfolds.
