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Interview | Green energy will be growth driver, hydrocarbon capex to be decent: L&T Energy Head

The government’s decision to phase down and not phase out coal-based power plants gives comfort to L&T that it should be able to maintain its order book from the sector, even if it doesn’t grow, Sarma said.

August 30, 2022 / 12:28 PM IST
Subramanian Sarma, senior executive vice president at L&T

Subramanian Sarma, senior executive vice president at L&T

 
 
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Larsen & Toubro recently consolidated its energy businesses – hydrocarbons, thermal power and green energy – to help the engineering company cater to customers as the world pivots to green and clean energy.

Subramanian Sarma, senior executive vice president at L&T, who earlier led its hydrocarbon business in India and overseas, now spearheads the entire energy portfolio. Speaking exclusively to Moneycontrol’s Rachita Prasad, he said L&T has identified green energy as the new growth engine and will invest $2.5 billion in this sector over the next 3-5 years.

Also Read: L&T to work across green energy value chain; to pump in $2.5 billion in 3-4 years

Sarma also said fossil fuel-based businesses will continue to play a key role during the energy transition. The spending slowdown during the pandemic and high crude oil prices will ensure “decent” levels of capex in the hydrocarbon industry for the next three-four years.

Edited excerpts:

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How much green hydrogen does the plant at Hazira produce and how do you plan to scale it up? Who are the customers?

We will have a final capacity of 45 kg per day. Currently, we are not producing that much – maybe we are producing little less than half. But very soon, we will take it to full capacity or 800 KW – it is better to measure it in terms of power output. We want to try two different types of electrolysers – alkaline and PEM (proton exchange membrane). As we are decarbonising, we also want to gather some knowledge in terms of the relative performance of the two technologies so that we can learn and then also take this to our customers.

Who would be the customers for the green hydrogen business?

We will get into electrolyser manufacturing but we haven’t yet finalised the technology for it. Our main plan is to offer whole green solutions to customers—from installing projects to supplying them green hydrogen. We will use the joint venture we have with Indian Oil Corporation and ReNew Power to provide integrated solutions. There are many other facets of green energy solutions, which we will do independently as L&T.

Many companies, including Reliance Industries and the Adani Group, plan to enter this space. How is the industry preparing for green hydrogen?

In the next 5-10 years, this market will become quite sizable because green hydrogen has to become an integral part of the energy basket which today includes coal, fossil fuels like oil and gas, and renewable power. How that energy basket grows and what will be the share of green hydrogen in that will depend on how competitive it becomes.

Currently, it is not competitive. As we get scale and the technology improves, it should become more competitive – that is what everyone is aiming for. Therefore, all industrial houses, private and public sector will have to walk this path. I don't think there is a choice.

There are common problems for everyone; we are still relying on imported technology. So different technology tie-ups are being explored. Many companies are doing research and development to set up electrolyser units with their in-house technology. The renewable energy market is already quite mature in India now. Now, the focus is on electrolysers and various solutions related to hydrogen.

L&T has decided to be ‘asset-light’ and has exited various development businesses. Why has the company decided to be a developer for green hydrogen and not just an engineering, procurement and construction (EPC) player in the space?

We will continue to be an EPC player and our overall strategy to be asset-light is still very much intact. That is the route we want to pursue. But for that, certain services and products, we also had to adapt to the market conditions as it evolves. That requires development capability and we have to be open to that.

That’s why we have formed a joint venture that brings three balance sheets together and the investment gets spread out. This way our balance sheet will be relatively lighter than if we have to do it ourselves. We will invest in a business only when the economics support that; we have clear target on what our return on equity and internal rate of return should be.

Now that you have joint venture partners, would you look for more tie-ups for technology?

In the immediate term, we need to have technology because we have not developed it yet. As a country, we have not invested enough time and resources on that. So we'll have to satisfy the immediate needs based on available technology. We'll have to scout around and look for the right technology and the right framework in which we can operate.

But in parallel, we will continue to also invest effort, time and resources in developing our own technology. With the kind of expertise we have in high-precision manufacturing and the various systems we have developed within L&T, I think we can do it. It is going to take some time to have our own technology but we are getting into it for the long haul.

You recently said L&T will invest $2.5 billion on green energy. What will be the time period for this investment and what will be the focus area?

We are focusing on three main building blocks – manufacturing electrolysers with a technology tie-up, energy storage solutions, and the development role, wherever such opportunities come. We will invest this amount over 3-5 years. These numbers are the current assessment – we will have to see how the market evolves.

What are your expectations from the government’s much-awaited second phase of the green hydrogen policy, said to be on offering financial incentives?

The government is definitely going to do something to allow the industry to kick start. At this point, cost competitiveness is not there, so we have to keep affordability in mind. So they will do enough to kickstart the process.

But you have to also recognise that there is an export market. India has become quite competitive in renewable sources of power, especially the generation of solar power. We have the opportunity to leapfrog and not only look at the internal market but also explore the export market.

What’s the outlook for L&T’s hydrocarbon business?

The hydrocarbon business is more or less steady. In terms of outlook, it is more positive because there has not been much investment during the last two-three years. Since 2018-19, investment had slowed down in the hydrocarbon sector. In India, companies have been very steady in expanding refineries and downstream petrochemical capacities.

A lot of new projects have been announced in the last two-three years and it will continue for some more time, maybe not at the same pace. Internationally, particularly in the upstream side, there was a slowdown post-Covid for different reasons. Now, even to maintain and sustain production, the capital has to come back. So I expect for the next three-four years, the capital expenditure will remain at a decent level.

What is the order pipeline for the hydrocarbon business?

In terms of our revenue, our target is always to at least backfill what we burn in orders. So we have to win close to around $3 billion of orders every year. That means the pipeline has to be four-five times of that because our success rate is 20 percent to 30 percent. The supply chain globally has still not come to normal and there are still problems, so that might create some disruption.

What is your outlook on crude prices? When you prepare a business plan, what kind of levels are you looking at?

If I had to put a sustainable range, I would say it will be around $85 a barrel. That's what my personal prediction is; there will be aberrations. But I think somewhere it will kind of get anchored over a longer period around $85. So there is a $20 increase with respect to that average pricing in the near future in the next two to three years. Oil-producing companies will be very happy with that number but it will be a problem for oil-consuming countries like India because they would want it to be around $50-$60.

Also Read: What is green hydrogen? Why Adani, Reliance, L&T are investing in this source of clean energy?

Fossil fuel-based power projects have slowed. What is the outlook on the power business? What’s your strategy?

If you asked me one-and-a-half-years ago, my answer would have been very negative. But at the COP26 (UN Climate Change Conference in Glasgow) India said it will “phase down” instead of phasing out and exiting coal-based power plants. This means that there will be some additional thermal power plant capacity added because it is required.

I am a firm believer that at least for the next decade, you will have all sources of energy playing together and they will coexist. Coal-based thermal power plants will also be necessary because solar cannot provide 24x7 solutions as the cost of storage batteries is still high.

There are now new technologies to reduce emissions from coal-based power plant. I expect that five to 10 gigawatts of capacity should get added annually for the next few years and then we’ll have to watch. There will be a scale-down in the business, but I think it is still too early to hang up boots or call it off. We would aim to maintain the order book; it’s not a growing business.

There is a global push on energy transition. Fossil fuel-based companies are looking at ways to be green. What are the biggest challenges in energy transition now?

The transition to green energy and alternative sources of energy is inevitable. I think every organisation will have to do it because global warming is real now and not just a myth. The whole world is driving towards it, including investments. Now, at what pace it happens will depend upon affordability. Europe has gone much faster because their economy was different. The US, with the new administration in place, is moving little bit faster towards transition.

The developing economies and emerging economies like India will have to balance that. They need clean and sustainable energy and energy security but they also need affordability. I think all the companies will have a leg in all the three sources of energy – clean energy (nuclear), fossil energy, and green energy. Energy transition will not be 100 percent – it will be a gradual process where the energy mix will change.

How conducive is the Indian environment for financing the energy transition?

If you want to access funds, you should be able to get that. I don't see fund availability as a constraint. It's the technology and the cost that are the challenge. If you borrow money, then you have ensure that the project is economically viable and that the consumer should be able to afford that. I think the pace of transition will not be limited by the availability of funds, but the pace may be more if we can add scale and bring costs down.

How are you getting the right talent? Also, are our universities and colleges producing enough talent suitable for the changes taking place?

In terms of green hydrogen or green fuels, this domain is very familiar to us at L&T. We understand the product – L&T has dealing in hydrogen for the past 20 years – whether it is black, gray, or green, it is a molecule. Secondly, the battery storage systems, electrolyser and the paraphernalia which goes around building this have been applied in various segments as we already there in EPC.

Electrolyser is a new thing as a product but we have a deep knowledge of precision manufacturing. So we have the talent and the skills available, which we can always deploy. Having said that, there will always be some gaps and I think we'll have to fill that through our internal training programme. But personally, I will not put skill availability and skillsets on the top of my list of worries.
Rachita Prasad heads Moneycontrol’s coverage of conventional and new energy, and infrastructure sectors. Rachita is passionate about energy transition and the global efforts against climate change, with special focus on India. Before joining Moneycontrol, she was an Assistant Editor at The Economic Times, where she wrote for the paper for over a decade and was a host on their podcast. Contact: rachita.prasad@nw18.com
first published: Aug 30, 2022 12:28 pm
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