Sterlite is making a contrarian bet on renewable energy. Will it pay off?

Pratik Agarwal-led Sterlite Group is building a private energy business on a contrarian bet that providing round-the-clock green power and making technological advancements will yield higher margins than backward integration.

Comprising Sterlite Electric, Serentica Renewables and Resonia Limited, the Sterlite Group's private energy business includes manufacturing power conductors and cables, building and operating power transmission lines, and generating and supplying renewable energy from solar and wind power parks.

However, the company plans to stop short of investing in manufacturing solar panels or wind turbines to generate power for it, or battery cells to store it, said Pratik Agarwal, a member of the promoter family member overseeing these three companies. He is the chairman of Serentica and Resonia and the managing director of Sterlite Electric.

Sterlite has the same promoters as the mining and resources major Vedanta Group. Pratik Agarwal is the nephew of Vedanta Group chair Anil Agarwal.

This contrasts with bets by leading Indian conglomerates such as Tata, Adani and Reliance, where the name of the game is backward integration. All three business houses are investing in manufacturing battery cells and solar cells, and at least two also aspire to make green hydrogen using the clean energy they produce. Reliance Industries calls this “from sand to electrons to green molecules".

In the renewable energy business, 'backward integration' means power production companies getting into the manufacturing of key inputs such as solar panels, wind turbines, or battery cells to gain more control over supply chains and improve margins.

Marching to a different beat

Explaining the Sterlite Group’s rationale for choosing a different path, Pratik Agarwal said manufacturing battery cells or solar cells does not yield high margins unless a company is at the forefront of innovation.

“People in the supply business make margins when there is large demand and less supply. Right now there is large supply and less demand for a battery maker or for a solar panel maker," Agarwal said. He pointed to the overcapacity in manufacturing battery cells and solar cells in China, which makes manufacturing these components less lucrative.

Instead, Sterlite has put its chips on providing round-the-clock (RTC) green power, which Agarwal says is still far from being commoditised. Serentica has tied up with Hyderabad-based Greenko for pumped hydro storage plants, he said. The company is also setting up battery storage units for green power.

“Selling round-the-clock green power is not yet commoditised because of the complexities involved—having multi-located wind and solar power, combining it, modeling, balancing with storage and IEX (Indian Energy Exchange)," Agarwal said.

The supply of plain solar or wind power has been commoditised, he said, owing to the oversupply of solar energy during peak sunshine hours, when there is a glut of electricity on the national grid. Meanwhile, there is a shortage of power during non-solar hours.

According to an estimate by Crisil Intelligence, RTC clean energy contracts are being signed at ₹4.3-5.5 per unit compared to ₹2.6-3.2 per unit for plain renewable energy.

Vishal Mehta, managing director & partner and head of Energy, BCG India, said, “Developing standalone wind and solar power projects has now become a commodity business. For power producers, developing round-the-clock renewable power generates a 3-4% higher IRR than standalone solar or wind."

Even for commercial and industrial customers, RTC power is more attractive as it replaces a higher share of their power consumption from conventional sources, he said. India needs at least 70-100 gigawatt-hours of power storage capacity per year for seamless transition to renewable sources of energy, Mehta estimated.

IRR stands for internal rate of return, which is a key metric tracked by independent power producers such as Serentica. The IRR for standalone solar or wind assets stands at about 12-13% at present, according to industry estimates.

Serentica aims to scale up to 4 gigawatts of RTC solar and wind power in the next 12 months. It plans to set up 1 gigawatt of battery storage capacity and 3 gigawatts of pumped hydro storage. It has signed power purchase agreements for 8 gigawatts, which provides further headroom for growth. The eventual goal is 17 gigawatts by FY30, Agarwal said.

For context, Adani Green Energy has 15.8 gigawatts of renewable power capacity at present, which it plans to grow to 50 gigawatts by 2030. Tata Power has 5.6 gigawatts of operational renewable capacity.

Tech bets

Apart from RTC green power, Sterlite is betting on earning richer margins from technological advancements in its cables manufacturing business, Sterlite Electric, which has developed intelligent cables that pinpoint the location of failures in the distribution line. “It is only when you have a differentiated offering that you can really charge a little bit extra to the customer," Agarwal said.

The group’s cable manufacturing and power transmission line businesses were earlier housed in a single company called Sterlite Power Transmission Limited. It was split earlier this year into Sterlite Electric and Resonia. The latter is in the power transmission business.

The Sterlite Group plans to list all three energy businesses—Serentica, Sterlite Electric and Resonia—in the next two to five years, Agarwal said.

Short-seller concerns

American short-seller Viceroy Research, which has published over two dozen notes on the Vedanta Group in the past few months, has raised questions about the dealings between Serentica and the group’s listed companies Vedanta Limited and Hindustan Zinc Limited.

Viceroy has argued that the contracts between Serentica and the listed firms were structured such that they would benefit the promoters at the expense of minority shareholders. Of the 8 gigawatts worth of power purchase agreements (PPAs) Serentica has signed, more than half are with Vedanta Group firms.

Pratik Agarwal declined to comment on the allegations but said the agreements were fixed-price contracts in which the price was discovered by the clients with a triangulation method using third-party reports. “We believe that the standards of governance are absolutely world class, and we can put them up to any scrutiny," he said.

Explaining the group's decision to keep renewable power sourcing in-house, he said power was too critical of an input for Vedanta to completely rely on third parties. If you take any large metal mining group in the world, they will always prefer to have indirect control of their power supply. It's a basic necessity.

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