Quarterly Newsletter #2
October to December 2024 | Notes from the Solar Industry
Politics of Energy
I received a WhatsApp forward the other day, with multiple video snippets of a certain politician campaigning in various states of India, and in each state, he is repeating the same line '“electricity price is highest in this state”. While the meme was comical, it summarized the nexus of politics in the energy sector. Electricity prices/subsidies are tightly controlled by the politicians. This is something we have always known in India - voters are often wooed on bijli (electricity) and paani (water) during campaigns but last quarter took a different turn in my readings of the solar industry. I spent a considerable time reading about the larger geopolitics of energy and specifically, renewable energy.
It all started with a book recommendation. Confessions of an Economic Hit Man was a real page-turner that provides insights on ways in which governments, development finance institutions, and industry come together to increase a nation’s dominance. The book was primarily about how the US operates but the author also explains how China learned the US game and played it in its way. If capitalism, infrastructure development, and democratic values were the US playbook, China made its story about trade.
This is quite a game, politics. There are no permanent enemies, and no permanent friends, only permanent interests.
I enjoyed this book because it connected many dots within the solar energy sector. I have worked closely with financial institutions (purely commercial and development financial institutions) and regularly speak to colleagues across various countries and hear their views of the roller solar coaster. All those observations suddenly clicked into an understanding of how politics plays a much bigger role in solar than I had imagined. Each country has its foreign policy stance - its agenda, its priorities. I presume such a book can be perceived as propaganda but one cannot deny how deeply the solar industry is to government policies.
China, the US, and India are three major players in solar. Each of these countries has a vibrant demand and supply side of solar. The US and India have taken significant steps to ensure carrot (Inflation Reduction Act / Production Linked Incentives for domestic manufacturing) and stick (Blocking through Antidumping and Countervailing Duties / Approved List of Module Manufacturers / Basic Customs Duties) but there is still a deep dependency on China, which is ~ 80 - 90% of the upstream solar market globally. The further back one goes in that value chain, the higher that number. This dependency doesn’t just end with solar components but also with the machinery used to build those components and with technical talent.
The book also discussed that in the last 20 years, the US was focused too much on the Middle East and China took the opportunity to enter and establish a deep presence in Africa. Chinese dominating position, that too by miles, in upstream solar and now in storage is a proof that they went to places like DRC (Cobalt) i.e. right to the source metal, much ahead of others.
To conclude, in the solar world, where politics have a huge say and one particular country is miles ahead of others, how does a company build a sustainable moat without government incentives? Is it even possible to think of building one? These are important questions to ask in a quarter where we saw a significant number of solar IPOs in India.
The interplay of geopolitics & energy doesn’t end with the study of these three countries. Two other developments in the past quarter made me further ponder over this subject:
The Middle East
I read the book, Blood and Oil, which speaks in great detail about MBS’s ambition for the Kingdom of Saudi Arabia. While oil played and continues to play a major role in the global energy mix, the tides are shifting towards looking at other avenues of energy. The book talks about MBS’s view to move away from oil and the vision for a high-technology future and a consumption-driven economy. Both of those elements need more energy and if not oil, it has to be renewables. The Chinese are establishing presence in the MENA region for solar manufacturing. This will be an interesting space to watch. Low-cost solar, and wind, coupled with desalination plants and access to ports (Oman, Egypt) could make for a strong Green Hydrogen export thesis as well.
Strategic Geographies
I had the opportunity to meet some old friends from Sri Lanka, a country that has significant reliance on crude oil import. As their economy bounces back, there is talk of a growth of the domestic EV industry since consumers don’t want to rely on high-priced oil. However, the external influence on this lovely island is palpable. During my 2016 visit, I saw an open piece of land on Galle Face Road. I am told that the very day, the Shangri-La plan came up, almost immediately ITC Ratnadip was also envisioned. No need to read between the lines here at the Galle Face Road - Standing on it, you can see a port, and two international hotels … All this speaks of the influence of external entities. Sri Lanka’s strategic location makes it a country of great interest.
Trump Won
This topic has been on the solar industry’s mind for the last many months. At the time of writing, Trump is back in office and many major announcements have been made. I have mixed views from all the commentary I am reading from policy experts.
Drill baby drill but then support from Elon Musk
Strong views on trade / tariffs but then most US solar manufacturers of size are non-US domiciled
Pull out of Paris Accord but then most solar manufacturing plants are in red states (read jobs)
Good friends with Modi but then India’s exports may be viewed as a threat (let’s not even get into the H1B visa discussion here!)
Lastly, the $500bn Stargate AI plan caught my attention because any form of high-end computing will need low-cost power. In fact, someone from Europe had reached out to me in 2016 to talk about using solar for bitcoin mining. The world (especially the actors mentioned above) is talking about bitcoin again (100K!).
It’s fascinating to see Masa’s announce something major in the USA, just like the Vision Fund announcement in KSA in 2017. In 2019, I had heard him speak at the Renewable Energy India Expo on the potential of solar and his interests in Softbank Energy. If one bets big on technology, the energy to run it becomes a first principle problem. The Money Trap by Alok Sama throws light on Masa’s thinking and his experiences at Softbank.
So then, here is the triumvirate: ENERGY - TECHNOLOGY - POLITICS
Edge
So, what’s the edge here for a hedge fund manager? I think event driven plays could benefit by translating some of the politics into price movements. Many of the IPOs I speak about earlier are trading on lows right now. Politicians have made solar uncertain, and volatility can be a good thing if you are an opportunistic trader.
Supply Chain
Many legendary investors talk about looking beyond what’s glamorous. They say that in the boring, old business is the magic. Modules are commodity - Cells, Wafers, and Ingots require a deep understanding of technology and significant capital.
Let’s look at aluminum frames, glass, junction boxes, etc. These businesses are poised to grow with the sector, however, even in this space, China competes heavily on price making it unviable for Indian firms to survive without any government incentive. These investors warn that industries that thrive on government incentives are hard to predict and too risky in the long term, but if you go one step further down to aluminum, glass or plastic/cables - Old, boring, multi-generational family businesses with established economics, that may be a good place to look for value.
The solar industry is a potential growth market for them, but they are perhaps less open to regulatory / policy-related shocks.
Insurance / Insurtech
Insurance in solar, especially decentralized solar is highly overlooked. The insurers say that decentralized solar creates moral hazard and the customer acquisition cost is too high. I agree with them but if we must grow the rooftop solar market, we need a strong insurance system in play to protect the stakeholders.
PM Surya Ghar Yojana has big plans for deployment across India. These are grid-connected systems which, if not functioning as expected, can create issues in the local electricity system. Even from a consumer experience perspective, one is buying purely on trust from an installer whose name is on a government website and from a manufacturer, who is promising a 25-year warranty. Neither of those are backed financially as a protection for the customer. Today, it is a legal requirement for every car to be insured, maybe it’s time to think of something similar for rooftop solar.
Beyond the consumer experience, the climate change issues are real - The LA fires, the bad AQI in Delhi winters - more such events mean your solar assets are in danger - there has to be some recourse for the customer.
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Disclaimer: Views expressed are personal and not those of any organization that I am associated with.