The PSU road to green transport — and profits

Back in 2008, Gopalkrishna Vishwanath, a retired structural engineer based in Bengaluru, decided he owed it to the world to go green. He bought himself a Reva, then the country’s only electric vehicle. The first model of the Reva looked like a cartoonist’s impression of a small car, and its distinctive design made Vishwanath a legend in his locality; the kids called him ‘Reva uncle’ and everyone became accustomed to the little silver car being taken out on its weekly journey to the shops or to Vishwanath’s family in the vicinity.

The car’s somewhat eccentric looks made it look very cheerful, but Vishwanath says it wasn’t convenient at all. For one, he could make no unplanned drives, even to the shops, since the car took nine hours to charge, and there were no convenient charging points en route. A full charge would take the car 70 km, so he could definitely not go on long road trips.

Vishwanath sold the Reva in 2014 and still remembers it fondly. At the same time, he’s happy to no longer have to worry about charging and maintenance. He now drives a petrolengine Hyundai hatchback, steering clear of the headache of charging.

Cut to 2018, Noida. The 14th Auto Expo seemed somewhat duller than usual, with many big names choosing to stay away. But what stood out was the prevalence of electric vehicles. Almost every manufacturer present had some variant of a battery-operated car or bike or scooter.

Tata Motors showcased three concept electric vehicles for passengers and three commercial vehicles. Mahindra & Mahindra showed the concepts for an electric variant of its compact sports utility vehicle, the KUV100, an updated version of its existing electric vehicle the e2o, as well as a couple of other concepts in the commercial space. It also displayed a new electric platform.

The reason for the electric vehicle focus is simple: The government has set an ambitious target of selling only electric vehicles from 2030.

Mind you, there’s still no infrastructure in place to support electric vehicles. There’s an appalling shortage of charging points; components cost the earth, so maintaining such vehicles is hugely expensive; and the lack of policy clarity means there’s no real incentive to buy an expensive electric car. Car makers, meanwhile, say there’s no incentive to cut prices unless there’s a steady demand for electric vehicles.

These are all problems that will need to be resolved soon, else India will fall way behind in the global shift to electric vehicles. The problems, of course, are unique to India and so the same solutions that worked in China or the U.S. or Europe are unlikely to work here. And just like the early years of independent India, when the public sector filled the gaps left by private players, a public sector undertaking is stepping in to help usher in the electric age for India’s road transportation.

Energy Efficiency Services Ltd (EESL), a joint venture of four other PSUs—NTPC, Power Finance Corporation, Rural Electrification Corporation, and PowerGrid Corporation—is aiming to help get more electric vehicles on Indian roads. Last September, EESL floated a tender to buy 10,000 electric vehicles. These vehicles would be given to government departments and other institutions on a ‘pay as you save’ model under which EESL will give the electric cars (with a driver) at Rs 40,000 a month to government employees. Reports say that EESL plans to float a tender to buy another 10,000 vehicles later this year.

Saurabh Kumar, EESL’s managing director, says procuring cars for the government and government institutions “itself creates demand for half a million cars”. A report by the International Energy Agency says just 450 electric vehicles were sold in 2016, so getting 500,000 such cars on the road is a huge move.

It’s not a particularly unique plan; government departments and even large companies do this all the time. But EESL is doing this in a somewhat different context.

“We are a thought leader,” says Kumar. “The way we approach a sector is to look at why it hasn’t gone forward. We try and analyse the bar riers which affect the marketplace of that sector and then design our intervention in a manner which overcomes the barrier while keeping the end result simple for the consumer.” In other words, EESL’s mandate is to create demand for electric vehicles, which it plans to do by making these cars affordable.

The company has done this before to great effect. In 2015, EESL undertook what was to become its biggest success: implementing the government’s UJALA scheme to distribute 270 million LED bulbs. The PSU bought LED bulbs in bulk directly from the suppliers and distributed these under the scheme. With the assurance of a steady market, suppliers started to improve production efficiency. The result was a massive drop in the prices of LED bulbs, from Rs 300-plus in 2014 to under Rs 50 now.

Good news for consumers, sure, but it was also good news for EESL. The PSU was devised as a super ESCO or super energy services company, and not as a manufacturing or distribution company. By definition, ESCOs work as commercial non-profit businesses to help implement energy-saving projects by devising ways of creating demand for efficient products. EESL is not a classic ESCO; it makes money by charging for the products and services it delivers, although it doesn’t aim for huge profits. EESL has a 13% profit markup on all schemes, and is seen as profitable as well as viable.

The UJALA scheme—along with programmes such as the promotion of smart meters, energy efficient air conditioners, and solar-powered water pumps for farmers—helped EESL clock revenues of Rs 1,227.2 crore and a net profit of Rs 51.8 crore in 2016-17. That momentum does not seem to be slowing. In the first half of FY18, the company clocked total revenues of Rs 601.9 crore and a net profit of Rs 29.7 crore. Kumar expects that by next year, revenues will go beyond Rs 2,000 crore.

At a time when PSUs are getting a bad rap for poor performance, EESL stands testimony to the fact that a public sector company can bring in the money, while doing good. Details of the extent of PSU losses are on page 60 (PSU losses: Rs 1000000000000 and counting). Reason enough for government think-tank NITI Aayog to identify some of these loss-making PSUs for closure; it is also planning a strategic disinvestment of 20 more

Of course, EESL is on no such watchlist. It’s one of the unlikely heroes of the public sector, largely thanks to the fact that “green” is now mainstream; things like climate change have entered public discourse.

More important, the government’s green agenda is clear. Less than a year after coming to power, the Narendra Modi-led Bharatiya Janata Party government set a tough target of having 175 gigawatt of renewable power capacity in place by 2022.

More recently, in the Economic Survey 2018, chief economic advisor to the finance ministry Arvind Subramanian used data from the India Meteorological Department to conclude that India is getting hotter and drier. This is the first time the Economic Survey looked into the impact of climate change on agriculture.

To its credit, the government has followed the talk about green with direct action. From finance minister Arun Jaitley’s first budget, the clean energy cess on coal has been doubled every year. In fact, the government pegs this as India’s carbon tax.

In 2014-15, Jaitley doubled the existing clean energy cess of Rs 50 per tonne of coal used to Rs 100. The next year, it went up to Rs 200. The cess has helped the government raise Rs 56,234 crore since 2014-15. (With the introduction of the goods and services tax such cesses have been subsumed in the larger GST.)

The higher cess made thermal power more expensive. Meanwhile, solar power has become cheaper. That’s important to distributors, who are now willing to supply renewable and thermal power because there’s some parity in prices.

Then, of course, there’s the LED bulb distribution scheme, and the electric vehicle plan. Which brings us to EESL’s ambition to repeat the UJALA success with vehicles. But first, it’s worth understanding the genesis of this PSU.

EESL is not a recent creation. Its roots go back to 2002, when the Bureau of Energy Efficiency (BEE) was created under the Energy Conservation Act. BEE started rating products based on their electricity consumption, but the government found it tough to get people to buy BEE-rated energyefficient products at a premium.

“At that point, we were struggling with the creation of a market, and realised this chicken and egg situation of bringing in new products on the one side and demand for products on the other needed to be addressed,” recalls Ajay Mathur, director general of TERI - The Energy & Resources Institute.

That conundrum took nearly a decade to resolve. A decision was made to create a separate company to find a solution to the problem of creating sustainable demand for energy-efficient products. “Anil Razdan, who was secretary at the ministry of power, me, and Saurabh Kumar who was secretary of BEE, created our first concept notes. These moved through government systems and finally it was decided to form a company through a joint venture of four PSUs,” says Mathur.

If any company can help meet the government’s ambitious target of only electric vehicles by 2030, that company is EESL, says Kumar.

The tender for 10,000 electric cars came as a shot in the arm to car makers. “We have seen a company which has not sold a single electric car in India—Tata Motors—come in and offer an electric car. That says a lot. You have suddenly changed the equation, where you had only Mahindra & Mahindra, now you have Mahindra and Tata. The consumer has more choice and the manufacturer has a market,” says Mathur.

The big stumbling block for EESL, as it was with LED bulbs, is price. Although Kumar claims that the procurement tender has brought the “lowest cost in the world for an electric vehicle of this size”, it doesn’t mean much in a market as price-sensitive as this one.

The cost of an electric vehicle is much higher than one with an internal combustion engine. Tata Motors’ winning bid for the EESL tender was Rs 11.2 lakh for an electric variant of the Tigor compact sedan. The top petrol or diesel variant of the same car is a good Rs 3 lakh cheaper, even when Tata has thrown in a comprehensive five-year warranty for the electric car.

Mahindra & Mahindra’s bid was for the electric variant of the Verito sedan, and it first estimated the price at Rs 13.5 lakh but later chose to bring down the price and match the Tata price. Even at the lower bid, the electric variant costs at least Rs 2 lakh more than the diesel car.

The high price is one of the reasons companies like Maruti Suzuki and Hyundai are sitting this round out. On the sidelines of the Auto Expo, managing director and CEO of Maruti Suzuki, Kenichi Ayukawa, admitted that “Indian people rate cost and affordability highly”, and product development teams need to keep that in mind.

There’s also the high cost of the lithium-ion batteries that power such vehicles. “The cell cost is 70% of the battery packs that we buy at this point,” says Naveen Munjal, managing director, Hero Electric, and president, Society of Manufacturers of Electric Vehicles. He anticipates that battery prices will fall sharply by 2020.

In April, Suzuki Motor Corporation, Maruti Suzuki’s parent, announced a joint venture wit Toshiba and Denso to manufacture lithium-ion batteries packs in Gujarat. The companies are to jointly invest nearly $180 million in the venture. In November, Suzuki signed a memorandum of understanding with Toyota to introduce electric cars in the country by 2020.

As important as price is infrastructure. Ayukawa says the industry has to “ask the government to prepare infrastructure for electric vehicles, like charging stations, because at this moment, there is almost nothing”. That’s the problem Vishwanath faced almost a decade ago. Clearly, little has been done on this front. “I think, as we go forward, they (government) have to come up with plans to provide charging infrastructure which is going to attract customers to purchase electric vehicles,” says Rakesh Batra, partner and national leader, auto, EY.

Things are different in China, where the state-owned power distributor operates a majority of the 150,000 charging stations. In India, that’s not possible, since distribution and sale of electricity comes under state governments, and the Electricity Act does not allow private companies to set up charging stations for electric cars. (A bill to amend this is expected to be debated in Parliament soon, but we aren’t holding our breath for the outcome.)

The one company that can get past this barrier without a legislative change is EESL. “I see EESL playing a major role in charging infrastructure,” says Kumar. But, he adds, “under the Electricity Act, no one apart from distribution companies can sell electricity. As and when the policy framework evolves, we can look at setting up charging stations for the general public.”

To that end, EESL has already come out with a tender to procure equipment for 2,000 charging stations. “As of now, the heart of electric mobility is charging stations. Unless such stations are visible and available at short distances, electric mobility does not work,” adds Kumar.

Which is good for the future of electric vehicles, no doubt. But what this move also does is demonstrate EESL’s startup-like ability to tweak the business model by learning from market behaviour. Storied PSUs have not often kept up with the changing dynamics of the economy, but EESL has managed. “We talk about innovation in a lab but innovation in the marketplace...that is what EESL has done,” says TERI’s Mathur.

The future seems bright. Jonathan Drew, managing director of the infrastructure and real estate group at HSBC, says financial institutions are hungry for opportunities to fund assets which will form a part of the low carbon emission economies of the future. A large chunk of those will have to be in India as the country steps up its fight to mitigate climate change. Here lies EESL’s opportunity. Kumar’s task is to ensure that EESL remains fleet-footed, and create a new generation of ‘Reva uncles’.

Additional reporting by Debabrata Das

(The article was originally published in the March 2018 issue of the magazine. )