Total Energie SE’s latest marker of an ever-intensifying relationship with India’s Adani group is the decision to take a 25% stake in Adani New Industries Ltd

Total Energie SE’s latest marker of an ever-intensifying relationship with India’s Adani group is the decision to take a 25% stake in Adani New Industries Ltd, which plans to produce 1 million tonnes of green hydrogen by 2030, investing $50 billion in producing not just green hydrogen but in that fuel’s ecosystem as well. Total had previously made large investments in two Adani companies: acquisition of a 37.4% stake in Adani Gas, which got renamed as Adani Total Gas Ltd, and a 20% stake in Adani Green Ltd, which is one of the world’s largest renewable energy producer, with wind and solar assemblies.

The Adani group started off as a ports and power player, swiftly integrated backwards from power to coal and gas, particularly, distribution of gas in cities, and has now been diversifying into solar power and wind energy. Going green in this manner fits in with three kinds of goals.

One is India’s climate agenda. At the Glasgow Climate Summit, Prime Minister Narendra Modi announced five goals: achieve net carbon neutrality by 2070, reduce emission intensity of India’s growth by 45% by 2030, reduce India’s emissions to below their level in 2005 by 2030, produce half of India’s energy from renewable sources by 2030 and achieve non-fossil energy capacity of 500 GW by 2030, which makes the contribution of any company or business group to achieving that target wholly measurable and visible.

In other words, Adani’s going green strategy is essentially to accomplish measurable progress in meeting and advancing the government’s, which, naturally, is also the nation’s, climate action goals. It will, therefore, not be surprising if policy incentives soon come Adani’s way.

The second goal Total and Adani will pursue is burnishing their green credentials. Total is a hydrocarbons major, which is under pressure from the European public’s increasingly eco-friendly predilections (the Greens are part of the ruling coalition in Germany and could have greater bargaining power in France, if President Macron’s newly renamed Renaissance party does not get a majority on its own in the French national assembly in the forthcoming elections) and faces ESG pressure from investors, even if this has eased off in recent months. Adani’s hands are black with dirty coal in India, Indonesia and Australia. Adani also needs to rub as much of that off as possible, with green energy.

Hydrogen can be converted into electricity in fuel cells to run trucks. Liquefied hydrogen or ammonia (which is three atoms of hydrogen combined with one atom of nitrogen) can replace fuel oil to power ships or propel planes. Hydrogen can replace thermal coal in cement and steel. Green hydrogen is a solution to the intermittency problem of renewable power such as solar and wind — use the electricity from wind, when it blows, and the sun, when it shines, to split water and produce hydrogen, which can be stored, unlike electricity, and transported at will.

While Adani has proposed $50 billion of investment in green hydrogen, Reliance plans to invest $75 billion in renewable energy. Mukesh Ambani announced a goal of producing commercial green hydrogen at $1 per kg, at a time when President Biden’s failed Infrastructure bill was offering a subsidy of $5 per kg for green hydrogen. With India's two top industrialists powering its green hydrogen project, the country promises to be a world leader in the space, instead of being an also-ran, as in most other areas.

To be at the bleeding edge of hydrogen, the Adani group has to invest in innovative technologies to convert its most abundant fuel, coal, into hydrogen, ammonia and usable carbon. The International Energy Agency estimates that it is possible, with carbon capture, storage and use, to bring down carbon dioxide production to as low as 3kg per kg of hydrogen. While this is higher than the CO2 production for green hydrogen, in which electricity from renewable sources is used to electrolyze water and split it into hydrogen and oxygen, it is significantly lower than the 25 kg of CO2 per kg of hydrogen that would result from splitting water using grid power that has a share of coal-based power. Further innovation could make coal a low-to-zero carbon source of hydrogen, with usable carbon as a byproduct. Graphene greatly strengthens concrete, when mixed into it, and reduces the use of clinker in cement making. Since Adani is one of the largest users of concrete in the country and one of the largest cement makers, after recent acquisitions, producing graphene from coal, along with hydrogen, would have lots of synergies within the group. Another possible usable form of carbon, after separating hydrogen from coal and the methane to which it is converted, is carbon fiber, which has ever-expanding use in everything from car body panels to lightweight cables to replace steel ones for lifts.

Transmission costs have already been waived for green hydrogen production. If innovative solutions for clean hydrogen from coal call for policy incentives for the startup ecosystem, it should not be difficult to drum that up.

The third goal is reducing Adani group’s leverage. The Adani group has a total debt of ₹ 2.22 trillion, creating a debt to equity ratio of 2.36 at the end of March. This is not all that high, considering that, apart from new, minor adventures such as into drones, the bulk of the group’s investments are in long-gestation infrastructure projects that can easily bear a 3:1 or 4:1 debt-to-equity ratio. The key thing in infrastructure is mitigating risk, then comes project execution capability. While earthquakes and extreme weather events are under no one’s control, policy-related risks are manageable, especially for a group with established lines of communication with the government where, at the very least, sense and logic would not be gummed up during transmission. Still, ratios are something that equity investors factor in. For lenders, the absolute volumes of debt matter.

The RBI has norms regarding how much of the total assets of a bank can be in those of one particular group or one particular sector. Even when large loans are issued by a consortium of banks, it is possible for the debt exposure of large groups like the Ambanis and the Adanis to move very close to how much the Indian banking system can together bear, while complying with regulation. Then, it becomes imperative to reduce the debt.

Adani has been growing at breakneck speed in everything from traditional ports and power to data centres and drones, with green energy as a major expansion area. It has been borrowing both domestically and abroad via offshore bond issues. Selling some of the group equity in companies to other investors will mobilize funds with which to reduce debt. This is the strategy Reliance Industries had followed as well, raising $27 billion of investment in its telecom and retail ventures. Some of Total’s investment would, naturally, be in fresh equity, rather than mere transfer of Adani’s existing equity to Total. But some money would go to lower the Adani group’s debt burden.

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