1. China's solar capacity addition is back and at a scorching pace.
The country installed almost three times the volume of solar capacity between January and the end of April than in the same period in 2022, and is on track to add more panels this year than the entire total in the US... The nation could install 154 gigawatts of solar capacity this year, BloombergNEF said on Monday, raising its China forecast from a previous total of 129 gigawatts. The US had a cumulative total of 144 gigawatts installed at the start of 2022, according to BNEF data... The rise in China’s deployments means the world is on track to have a total of 5,300 gigawatts of capacity by 2030 — about the volume of solar that is required in scenarios under which global net zero targets are met.
2. Green Hydrogen is the buzz word. It's estimated that 500 million tonnes of Hydrogen would be needed by 2050 or 10% of the energy mix. The total financing requirement for this would be a staggering $20 trillion by 2050.
For an idea of the size of this capital project, however, it is worth dividing hydrogen capex three ways; the cost of renewable electricity needed to make the gas, expenditure on electrolysers used to split water into oxygen and hydrogen and, lastly, the infrastructure — pipelines, ships and storage sites — required to take the hydrogen where it is needed. Generating this amount of hydrogen will need almost 25,000TWh of renewable electricity a year, about 100 times the UK’s current electricity demand. On the assumption that solar panels and wind turbines are placed in sunny and blustery areas, we would need 10TW of infrastructure, Lex calculates. At an average cost of $800 per kW, the investment required would be about $8tn. The second bucket is the electrolysers. Today, inflation has pushed up the price to about $1,500 per kW but it could be as low as $250 per kW by 2050. Using a midpoint of $875 per kW implies a capex requirement of $7tn to achieve the desired goal. When it comes to infrastructure, the expenditure needed for transport and storage depends on the specific technology. The cheapest option involves pushing hydrogen through repurposed gas pipelines and using repurposed storage sites. Supply chains involving shipping hydrogen transformed into ammonia will be more expensive. Overall, capex may hover at about $5tn....A simple way of calculating the average cost of hydrogen is to divide the capex by how much hydrogen the kit it buys might produce over its 20-year lifespan. By that reckoning, the average cost for the hydrogen would work out at about $62 per MWh... Assuming that natural gas will stabilise at a more reasonable $50 per MWh, that would suggest every unit of hydrogen needs a $12 per MWh subsidy on average. Multiplying that for the whole of the hydrogen produced, we are looking at about $4tn in subsidies... A look at Platt’s hydrogen price wall, which shows the cost of hydrogen produced in different regions, suggests that, while some projects manage to come in at $50-$100 per MWh, the cheapest hydrogen in Europe today costs more than $150 per MWh without transport and storage. European natural gas meanwhile is below $32 per MWh. This means that a serious subsidy push is needed if hydrogen is going to reach the scale required to break even with existing energy sources.
The Americans are supporting Green H2 development by direct tax credit of around $3 per kg for a period of 10 years, whereas the Europeans are mandating green hydrogen in energy mix mandatory (42% of the hydrogen used in industry to be renewable by 2030).
3. Adani Transmission facts of the day,
Adani Transmission, which went from being a fledgling to India’s largest private utility in seven years, has grown its asset portfolio 3.6 times to 19,779 circuit kilometers (ckm) across 33 projects. Of these, 13 projects are currently underway, but many face delays or cost overruns, including the largest one: the Warora-Kurnool Transmission line that runs through three large southern Indian states. Others have been beset by adverse weather, pandemic-era disruptions or legal wrangles — common issues in infrastructural projects in India which makes the Adani group the rare private company that has been scaling up aggressively in this space. With India planning to add more than 27,000 ckm of transmission lines by 2025, the company’s continued expansion will be crucial for the national goal.
The Adani story is important for another reason. It's now clear that India need the likes of Adani who have both the ultra-high risk appetite and the massive scaling ambitions required to support its very large infrastructure addition requirements.
Apart from its long gestation and scarce long-term finance, infrastructure execution is full of messy problems arising from its entanglement with the local political economy. Even the most sanitised contracting cannot avoid the rent-seeking at various levels that extend through the life-cycle of the project. Given the messy realities of infrastructure execution, I've argued here that scale growth in infrastructure requires greasing with rents. This requires a third attribute, the capability and corporate culture to navigate the bureaucracy and polity. And Adani is the rare company which appear to meet all three requirements.
The problem is with having the scaling ambition and also having the capabilities to realise it. This works at the level of the country and the company. Does India have the capabilities to grow at sustained high rates with its existing capabilities? Does Adani itself have the capabilities to support its spectacular growth ambitions? In Can India Grow, we've argued against the former. On Adani, there's little to suggest its track record for such scale execution.
From its track record, the Adani Group appears to be one that has ultra-high risk appetite, sky-high ambitions, and excellent political economy navigation skills. But its capabilities are nowhere even remotely close to realise its ambitions.
There's no precedent of starting out from nothing to own a third of India's airport capacity in 3-4 years. In any of the several other verticals it operates in, the Group has had little or no experience. There are hard limits to such inorganic growth. Infrastructure execution is not like IT with their network effects and exponential growth.
For a start, there's finance. The Group has followed a virtual Ponzi financing model, whereby it bids aggressively for a project, secures it, raises debt by leveraging the new contract, uses this money to bid more, and so on. And simultaneously start execution. Ultimately, it has to keep generating revenues from the projects it has secured to be able to repay its burgeoning debt pile. In so far as its cash flow challenges, this is like a trapeze artist on the thinnest trapeze.
This trapeze art works so long as either the rate of new project/contract acquisitions and associated debt mobilisation exceeds the repayment obligations and investment requirements, or the rate of project revenues and debt mobilisation exceeds the repayments and investments. The problem is that infrastructure execution is filled with uncertainties and time and cost over-runs are common, which in turn necessitate renegotiations, which in turn demand invoking political economy connections.
Then there is the manpower capabilities. This includes capable sub-contractors at scale, good internal managers, and excellent senior project leadership capabilities. All these are extremely scarce. It's almost impossible to acquire the managerial and execution capabilities at the scale required from the Indian labour market. Talent of such quality at this scale just does not exist.
In the absence of all these, the Adani Group's growth was bound to hit the ceiling. It is all fine as long as they were merely acquiring contracts. However, once the repayments rose enough to demand project revenues too, the strains were inevitable.
4. On the central bank forecasting
Most of the Federal Reserve’s rate-setters failed to foresee that inflation would ever rise, and then overestimated the speed of its decline. Economists at the BoE and the European Central Bank underestimated the scale and persistence of inflation. Across the world, poor forecasts have contributed to central bankers failing to do their main job: maintaining price stability. The failure to spot inflation has not only left central bankers risking financial instability by having to raise rates far faster than usual but threatened the credibility of institutions that rely on trust to steer the economy towards sustainable growth.
HSBC India has 12 per cent share in the foreign exchange business, 9 per cent in exports, and close to 20 per cent of foreign direct investment has been done through this bank... More than 30 per cent multinational companies in India — over 1,000 — bank with Citi. It manages 8 per cent of India’s trade flows and 5 per cent of domestic electronic payments flows... HSBC India... is into multinational banking in a big way (45 per cent of the multinational companies in India bank with it) besides emerging and large Indian corporations.
Foreign banks have avoided the low margin mass-market services and have preferred sticking to the high-margin niche market services.
It is now ASML that is seen as keeping Moore’s Law alive, helping manufacture chips the size of a fingernail that can hold about 50bn transistors. “What’s driven Moore’s Law? It’s basically lithography,” says Jamie Mills O’Brien, an investment manager at Abrdn, a top 50 investor in ASML.
The latest 3-nanometre chips being mass produced for this year’s iPhones will be followed by what some see as an even bigger leap forward to 2nm by 2025. “But once you get to 1.5nm, maybe 1nm, Moore’s Law is 100 per cent dead,” says Ben Bajarin, a technology analyst at Silicon Valley-based Creative Strategies. “There’s just no way.” Chip engineers have defied forecasts of an end to Moore’s Law for years. But the number of transistors that can be packed on to a silicon die is starting to run into the fundamental limits of physics. Some fear manufacturing defects are rising as a result; development costs already have. “The economics of the law are gone,” says Bajarin.
ASML produces machines capable of vaporising tiny droplets of molten tin up to 50,000 times a second, creating a 13.5nm wavelength of light. This EUV light is then bounced off a series of mirrors inside a vacuum chamber, narrowed and focused until it hits a silicon wafer... The company’s high numerical aperture (NA) machine is the latest output of its huge research and development investment, which rose 30 per cent to €3.3bn in 2022. High-NA essentially expands the numerical aperture — or range of angles — over which the light can be bent and emitted, allowing it to create smaller transistor patterns on a wafer. ASML has just five customers for its existing EUV machines — TSMC in Taiwan, Samsung and SK Hynix in South Korea, and Intel and Micron in the US. All of them have ordered the latest model.
The company is also a monopoly in Deep UV (DUV) machines used to make larger chips used in cars and electric equipment.
First, a large section of the population is still struggling financially... Second, there has been a marginal turnaround when it comes to investment in the economy, but the question is if this can be sustained without a more equitable growth in consumption... Third, more people have gone back to agriculture over the last few years and that is not a good trend... “the agricultural sector witnessed a return of 36 million workers between 2017–18 and 2021–22”. This has led to a scenario where “the absolute count of workers in agriculture stood higher in 2021–22 than in 2011–12.” This is perhaps an impact of the gradual destruction of the informal sector, which has always been a major job creator... Fourth, micro, small and medium enterprises, which are usually major job creators, have been struggling for a while now... Fifth, there are not enough jobs for India’s youth.
9. In the context of mobile phone manufacturing and the PLI scheme, Andy Mukherjee raises questions on the value addition potential in India.
On each phone assembled locally, the government pays the likes of Foxconn and Wistron Corp., another Taiwanese contract manufacturer for Apple Inc., up to 6% of the invoice price... The emerging consensus in policy-advisory circles is that in a decade the nation will go on to capture about 20% of the final price of a device. That’s optimistic, considering that China garnered $6.5 on the first iPhone in 2009. It took the People’s Republic nearly a decade to raise its take to $104, or 10% of the final price of iPhone X, economist Yuqing Xing has estimated.
On this, Raghuram Rajan et al write,
For the Apple iPhone 12 Max, industry estimates are that Foxconn’s value added from final assembly and testing is about 4 percent of the manufacturing costs, which in turn are about 1/3rd of the value of the mobile phone. As India goes further into sub-assemblies, the value added in India will increase. But so long as India does not make the component parts themselves (such as the memory, the processor, the lens, the display, and the battery), the manufacturing value added in India will be small. Indeed, a key question is whether the 6 percent subsidy India pays on the finished mobile phone, coupled with state subsidies, actually outweighs the value added in India.
10. Finally, private equity investments may be posing national security concerns in the US vis-a-vis China as Chinese state-backed sovereign funds are investors in PE funds floated by US PE firms. Chinese state funds State Administration of Foreign Assets (SAFE) and China Investment Corporation (CIC) with $1 trillion and $1.35 trillion in assets have a quarter of their funds invested in alternatives, mainly through western buyout funds.
Private equity executives insist there is no risk to national security in having money from Chinese state entities in their funds because the way they are structured typically does not give such investors board seats or voting rights. Indeed, some see it as a risk-free way to attract Chinese capital without giving up any actual corporate influence. However, the close relationship between private equity and the Chinese state has become increasingly at odds with the shifting political mood in western capitals, where governments have become much more vigilant about the potential for Chinese influence over strategic industries. In the case of private equity, this is aggravated by a wider lack of transparency...The investments by Chinese state-based funds are starting to attract political scrutiny because they have created ties between Beijing and western economies that could be nearly impossible to unpick. “It is deeply concerning that Chinese state investors effectively own such large swaths of our economy and infrastructure, through their investments in private equity funds and other investment vehicles,” says Alicia Kearns, a Conservative MP who chairs the influential foreign affairs select committee in the UK. “The private nature of these funds means it is impossible to know the true extent of this phenomenon.”... The fallout from the global financial crisis helped the Chinese sovereign wealth funds build closer ties with private equity firms, many of which were struggling to raise money from more traditional sources of capital... the large sums being channelled through private equity funds could make it much harder for the US government to consider using sanctions as a policy tool against Beijing in the event of heightened tensions between the two countries. “The more China is integrated financially and economically, this will act as a deterrent to introducing sanctions or mean it’s very difficult to implement them,” she says.
This indirect mode of Chinese capital inflows into the US skirts the rigorous scrutiny of direct investment under the Trump-era Committee on Foreign Investment in the US (CIFIUS) legislation.
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