Informist, Monday, Feb 14, 2022
By Sreejiraj Eluvangal
KOCHI – Reliance Industries Ltd, the country’s largest private sector enterprise, has won broad backing from analysts for its ambitious bet on hydrogen as a fuel of the future.
The company had last week announced that it would divert nearly half the output at its petroleum-coke-to-gas unit at Jamnagar for hydrogen production as part of an effort to establish itself as a ‘first mover’ in the field of hydrogen fuel in India.
The company currently uses about half the output at its 20 mln-cu-mtr-per-day gasification plant to meet the energy needs of its refinery, while the other half is used to manufacture various chemicals.
Under the plan announced last week, the half being used as a fuel will be diverted to hydrogen production, while the refinery will be switched to renewable power.
HYDROGEN PLANS
On the face of it, the need to divert synthetic gas supplies to hydrogen production may not be obvious to everyone.
RIL, unlike automakers, does not believe that the future of transportation will be based entirely on battery-based technology. Indeed, electricity can just as easily be stored in the form of hydrogen and other combustible materials, including aluminium, just like it can be stored in batteries.
Storage of power in the form of combustible materials has the advantage of being far, far more weight-efficient than the battery-based method.
For example, a 400-kg battery of an electric car generally gives the vehicle a range of around 500 km. However, 400 kg of hydrogen could give a car a range of over 100,000 km. Hydrogen-based cars from the likes of Toyota give 200-250 km per kg of the fuel.
Second, elements like lithium – which are crucial to the manufacture of batteries – are extremely rare on the earth, with the result that a battery found inside an electric sedan currently costs around 500,000-700,000 rupees.
Therefore, a battery-powered sedan costs around 1.1 mln rupees, while a hydrogen-powered car could start at a price of around 600,000-700,000 rupees, similar to petrol cars.
Paradoxically, the key limitation to running hydrogen cars today is the high price of electricity, along with the absence of a distribution and vending network.
At current power prices, the cost of producing 1 kg of hydrogen by splitting water molecules today is around 350 rupees. With distribution costs, this could rise to around 500 rupees.
However, given that 1 kg of hydrogen can power a car for 200-250 km, this is still less than half the cost of petrol and diesel.
RIL believes that a true take-off will happen when electricity prices and, therefore, the cost of producing hydrogen, falls further. But the company does not want to wait for years for prices to fall, given the speed with which battery-based electric technology and infrastructure are being built up.
It is in this context that the company is diverting its synthetic gas for manufacturing hydrogen.
“Synthetic gas has potential to produce H2 (hydrogen) at a competitive cost of around $1.2-1.5/kg,” the company pointed out in its presentation last week, adding that this could be a stop-gap arrangement until power prices decline.
“Till cost of green hydrogen comes down, RIL can be the first mover to establish a hydrogen ecosystem, with minimal incremental investment, in India,” it noted.
As and when it becomes cheaper to produce ‘green’ hydrogen from water, the company will again divert the synthetic gas to manufacture chemicals and fertilisers.
ANALYST SUPPORT
Analysts have generally been positive on the company’s plan to invest in a hydrogen-based ecosystem by diverting the fuel.
One of the key overhangs around RIL’s valuations has been concerns about what happens to its considerable investments in petroleum refining assets in an electric future. Investors worry that these hydrocarbon energy assets may not yield substantial returns in the future.
However, analysts at Morgan Stanley say RIL’s plans to repurpose such assets to the manufacture of other commodities such as hydrogen and fertilisers could force the Street to look at these assets in a new light.
“…the detailed plan did surprise us with the level of integration that RIL is targeting,” they pointed out, referring to the plans announced last week.
“It highlights the significant upside potential in energy vertical net asset value, where multiples and return on capital can inflect – and, most importantly, it reverses a key area of investor scepticism: life of cash flows from its current energy infrastructure assets.
“The plan highlights how refining and chemical hardware can be repurposed to expand margins by integrating into niche chemicals while simultaneously becoming part of the solution to address energy requirements as the world looks to decarbonise,” they noted.
Analysts at brokerage house Motilal Oswal, however, pointed out that it is likely to take the company another three years to build enough renewable power capacity at Jamnagar to be able to divert the synthetic gas to hydrogen production.
“The giga plants are expected to take three-four years to materialise, post which, we would start seeing the stated foray into chemicals, taking another three-four years to complete the transition. We are currently not attaching any valuation to these initiatives.
“The strong execution capabilities of RIL – as demonstrated in the telecom and retail businesses – if repeated in these initiatives, would take the company into a different orbit altogether,” they noted.
In terms of risks, the company faces considerable technology risk. For example, any breakthrough that makes batteries considerably cheaper, lighter or more efficient could pose a risk for alternative technologies such as hydrogen fuel.
Shares of Reliance Industries today ended 2% lower, outperforming the benchmark Nifty 50 index, which fell 3%. End
US$1 = 75.61 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Avishek Dutta
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