Hidden Power in Energy Storage Stocks 

Indian Forest Service (IFS) officer Parveen Kaswan recently came across a post by a foreign publication about the heatwave alert in the United Kingdom.

The temperature for which the alert was sent out was barely 26-degree celsius. Kaswan's comment that the 'heat wave' temperature in UK is just two degrees above default AC setting in India caused a riot of memes.

Rightly so, for several cities in India have been battling scorching weather with temperatures rising to 50 degree celsius in certain cases. And barely a fraction of households in the country can afford cooling of any kind.

Even then, cities like Delhi that reported peak temperature in summer caused power demand to soar to unprecedented levels.

Now the profits in the power generation sector are expected are likely to come from three major catalysts:

• New capacities
• Rise in power tariffs
• Power storage

First let's talk about new capacities.

India has set a target to achieve 50% cumulative installed capacity from non-fossil fuel-based energy resources by 2030. The pledge is to reduce the emission intensity of GDP by 45% by 2030.

For India's power producers, a mix of policy amendments and a stronger corporate interest in green energy is making the segment more lucrative than ever.

However, to meet the peak power demand, the contribution of thermal power is here to stay.

India will be adding fresh capacity of about 10,000 to 12,000 megawatts of thermal power over the next five years. But as per Niti Aayog, the share of new thermal power capacity would be restricted to a third of total incremental capacity.

Next comes tariffs.

While there is a firm commitment to bring in renewable power capacities on stream, the pace of commissioning new plants is not in keeping with the targets envisaged earlier. This is due to various reasons like land unavailability, the restriction of imports from China etc.

Hence, given the potential demand supply gap in power availability, most power producers are betting on an attractive increase in merchant power tariffs over next five years.

And therefore, there is an unwillingness to sign long term power purchase agreements (PPAs) at relatively lower prices.

So, what does it mean?

It means that the bulk of the incremental power produced will need to be stored to fetch competitive rates at a later stage.

Hence, the biggest catalyst is expected to be the demand for energy storage capacities. Such storages come in three variations....

First is obviously battery storage.

Second is pump hydro storage where you use renewables during sunshine hours to pump a water and at night-time the water cascades down, runs turbines and generates power.

Third is green hydrogen or green ammonia related storage. The hydrogen produced from electrolysis can be stored and converted back to electricity when required. Green hydrogen carries great potential for energy storage because it can be burned when required without any carbon dioxide emissions or used directly in fuel cells.

Surplus renewable electricity produced during off-peak periods can power electrolyzer plants to make hydrogen. This hydrogen can then become a store of carbon-free energy converted back to electricity when demands peak and provide balancing power for the grid.

So, the Energy storage facilities basically help in improving grid stability, catering to peak demand, providing ancillary support services, enabling larger renewable energy integration, bringing down peak tariffs, reduction of carbon emissions, allow energy arbitrage etc.

As per National Electricity Plan (NEP) 2023, India's energy storage capacity requirement is projected to more than double to 82.37 GWh by FY27 and to 411.4 GWh by 2032.

Further, CEA has also projected that by the year 2047, the requirement of energy storage capacity is expected to multiply almost 50 times to 2380 GWh due to the addition of a larger amount of renewable capacity. This is considering the net zero emissions targets set for 2070.

But is such a catalyst backed by regulatory mandates, which is typically the norm for utilities?

A long-term trajectory for Energy Storage Obligations (ESO) has been notified by the Ministry of Power. This will ensure that sufficient storage capacity is available with obligated entities.

As per the trajectory, the energy storage capacity shall gradually increase from 1% of total capacity in financial year 2024 to 4% by the end of the decade i.e 2030. This requires an annual increase of 0.5%.

This obligation (ESO) shall be treated as fulfilled only when at least 85% of the total energy stored is procured from renewable energy sources on an annual basis.

So, the catalysts are firmly in place for the power sector to rake in bigger profits in the years ahead. But green energy producers may no longer remain the blue-eyed boys of the sector.

Rather, it is the power storage segment that could be the gold mine that most investors are ignoring.

EV battery makers like Amara Raja Energy and Mobility and Exide Industries are certainly amongst the few power storage stocks that are already in limelight.

However, others like Tata Chemicals are yet to make their mark.

Tata Chemicals is primarily known as a salt and soda ash maker.

However, with its our inherent strengths in chemistry, Tata Chemicals is creating a platform for electro-chemistry solutions.

The company is partnering with Indian R&D centres (like ISRO, CSIR-CECRI and CMET) for indigenous development of actives, cells and recycling.

The scientists at the Tata Chemical Innovation Centre in Pune are also working on multiple chemistries as well as cell design and active manufacturing technologies.

Plus, with strong capabilities in chemistry, Tata Chemicals has already launched recycling operations to recover key materials.

Now, you would be mistaken to assume that Tata Chemicals is the only company to be working on innovations for energy storage and battery recycling ventures. There are several other companies in the fray.

As we keep building a watchlist of such stocks, check out the Equitymaster Screener for fundamentally sound and actionable stocks in this space.

Hope you like this video. Thanks for watching.