Indian Renewable Energy Stocks – Bubble Bursting or Investor Panic

26 Jan, 2012
Energy,Orient Green Power,Renewable Energy,Solar Energy,Suzlon,Wind Energy

Quick quiz. What is common to Suzlon, Moser Baer, Indo Solar, Websol Energy systems and Orient Green Power? All these stocks had successful runs on the stock market and hyped as the next game changers in wind energy, semi conductors, solar power and hydel/geo thermal power. Valuations were more on growth stories than through an hard nosed DCF spreadsheet. But now, they trade at record lows(like other stocks but what is different is the pressing fundamental concerns in each case). Is this a bubble finally bursting, or are investors panicking?

  1. Suzlon cherishes an ambitious vision of being the technology leader in the wind sector, and among the top three wind companies in all the key markets of the world. It expects that by 2015, total worldwide installation of wind energy would cross 442 GW which is almost 2.3 times of the current installation. This will cover about 7.5% of the global electricity supply by then, as opposed to just 4% now. But the solar bubble collapse in Spain, France and Germany(where subsidies were almost withdrawn) has put concerns on the very business model of solar(preferential feed in tariffs at peak hours(morning/noon)), as mentioned by First Solar in its 10K filing. So with gradual withdrawal of subsidies to wind energy generators, will Suzlon be able to regain pricing power for its equipment? Even in India, the most recent round of wind energy purchase tenders, saw bidders discount the CERC approved tariffs of Rs 17.91 by nearly 30%-35%, indicating that new players are willing to slash prices to gain market share. This would impact supplier pricing as well.
  2. Moser Baer, Indo Solar and Websol Energy systems, wanted to capitalize on the boom in demand for solar photovoltaic cells. Indo Solar wanted to take benefit of the 25% capital subsidy scheme for project capex over Rs 1,000 crores( as per the Special Incentive Package scheme announced by the Ministry of Communications and Information Technology, Government of India). But the global over supply(especially from China) backed by costs increases in key raw materials, led to EBITDA margin compressions, and short of domestic protectionism, I do not see a bright future for these stocks. While they are all trying vertical integration, entering into adjacent industries etc, the core business model is facing challenges due to global supply scenario, and price driven market.
  3. Orient Green Power is a slightly different proposition though. In 1H’12(Sep11 half year) alone, it added 80MW of wind energy, and had 300MW generation capacity(250MW wind+50MW biomass) in operation. However, with 250MW capacity wholly in Tamil Nadu and that State Electricity Board being in financial distress, investors seem to have discounted the stock which trades at P/BV of 0.5, despite its aggressive growth plans to reach 550MW capacity by Jun’12! At market cap of Rs 610 crores(with debt of Rs 190crores), the company had an EV of Rs 800 crores(assuming the Rs 170 crores of cash offset the current liabilities of Rs 195 crores, as the loans and advances of Rs 808 crores would presumably not be liquid), which would imply an EV of Rs 2.67 crores/MW, nearly half the estimated Rs 5.3cr/MW replacement cost of that capacity.

So have the factors affecting thermal power stocks(bankruptcy like status of SEBs, increased fuel costs, project execution delays) rubbed off disproportionately on these stocks as investors blindly herd together to sell power stocks? Or is it that the favourable economics may change? For export oriented equipment manufacturers like Suzon, the subsidy withdrawal story may play out, but for domestic generators, the national solar mission and other such plans would seem to give a secure price floor and assured market to sell the generated power.  These stocks are worth tracking though, as a hedge against the general power sector decline.

The paragraphs below features previous GWI takes on the above Green Stocks and is not part of Anand’s article

You can read about the GWI List of Green Companies in India

Previous GWI take on whether Suzlon is a falling Knife

Suzlon History

Suzlon,the Indian Wind Turbine making company has languished in red ink since the beginning of the Global Financial Crisis in 2008.The company started by Tulsi Tanti in 1995 was a shining example of Asian CleanTech with a 10% global marketshare and ranking amongst the top 5 Wind Turbine Makers .Suzlon buoyed by its success had bought controlling equity stakes in Turbine Gears producer Hansen Transmission and European Wind Turbine producer Repower.Suzlon wanted to leverage Repower’s technological expertise to enhance its own product offering.Like other Indian companies with global ambitions like Hindalco,Tata Steel and Tata Motors,it took on a lot of debt to buy these companies at the peak of the global economic cycle.The GFC resulted in a twin whammy for Suzlon.On one hand its end markets collapsed as project financing disappeared and on the other hand its huge debt burden became unsustainable.The company has failed to recover from the GFC as competition in the Wind Turbine industry has increased with the rise of Chinese players like Sinovel,Goldwind and A-Power.With the 2 biggest markets of USA and China dominated by domestic players,Suzlon has become a shadow of its former self.While other Indian companies have recovered strongly with the Global Economy,Suzlon continues to lose huge amounts of money.Its recent 2Q10 results were quite bad resulting in the share shedding 6% to Rs 50.This is almost 90% below its peak price in the heady days of 2008 .So is Suzlon a Fallen Angel which could turnaround to become a multibagger or a Falling Knife luring investors into further losses.Here are the pros and cons of the argument.

Orient Green Power IPO Analysis

Orient Green Power Ltd (OGPL) is India’s Largest Green Utility and is one of the areas that is a good way to invest in India’s Green Energy Sector.The company is owned by the Shriram Group and a couple of PE Players will issue around Rs 900 crores (~$180mm) which will result in a market cap of $450mm.OGPL is a relatively new company setting up and acquiring most of its 200 MW capacity in the last year which comprised of 152 MW of Wind Energy and the rest is Biomass Energy.The company plans to increase this capacity 4 fold to around 1000 MW in the next couple of years with Power Plants in  India,Europe and Sri Lanka.The centerpiece of this expansion will be a 300 MW Wind Energy Plant in Tamil Nadu for which $10 million has been already been spent.The company’s past profits and cash flow have been negative which is not exactly a concern given that most of the capacity was set up in the last year or so.I like the company’s growth plans and the sector in which it operates.India suffers from a huge power deficit and Renewable Energy is being heavily promoted through Government Subsides and Renewable Energy Mandates by the CERC.Trading of Renewable Energy Certificates (RECs) should start in a year or so giving additional revenue streams to Green Energy Producers.Here are the pros and cons of the issue

 

(The author Anandh Sundar is from the IIM Ahmedabad 2010-12 batch, and a ranker in CA/CS/CWA exams. He blogs at http://financeandcapitalmarkets.blogspot.com/, and http://specialsituationsindia.blogspot.com/  and has a keen interest in investing)

Green News – Fuel Cells and Biomass in USA gets boost with new orders, investment

11 Jan, 2012
Biomass Energy

Green Industry in US continues to flourish despite the general apathy towards global warming from a significant section of the population and parties. USA is the hotbed of green innovation despite stiff challenge by China which is spending billions of dollars to become the No.1 in Green Industry and Technology. US has the lead  in Fuel Cell  Technology with a number of top companies like Fuel Cell Energy, Bloom Energy. Now a start up ClearEdge Power has got one of the biggest fuel cell orders in the world worth $85 million from Austria’s Gussing Renewable Energy. The deal calls for supplying of 50 megawatts of power by the year 2020.

Last August, ClearEdge announced an infusion of $75 million in venture capital in which Gussing was an investor. Note Fuel Cell Energy has also got big orders from South Korea. Bloom Energy has got most of its orders from USA Technology Companies as well. Fuel Cell Technology is well behind the development curve though and it will take another 10 years for it to effectively compete. Compared to that other Green Technologies like Wind and Solar Energy are much ahead of the curve

A Biomass Power Project in Connecticut has got a $225 funding from Carlye to build 37.5 MW biomass power project. The Plainfield Renewable Energy (PRE) being built by biomass power producer Enova Energy Group will use wood available from construction and demolition debris, recycled wood pallets and land-clearing materials as feestock. Note Biomass Energy is a great way to reduce Carbon Emissions if it uses waste materials which would be wasted if not used for Energy.

List of Top Biomass Power Producers

  1. Helius Energy - Helius Energy is an AIM listed company that develops and sell biomass projects.The company is currently developing the 100 MW project in Port of Bristol at Avonmouth.Also a 100MW biomass fuelled electricity pant in  Port of Southampton
  2. MGT Power – MGT Power is an independent British company currently developing two 300MW biomass power generation projects in the North East of England: the Tyne Renewable Energy Plant, and the Tees Renewable Energy Plant, which has received planning consent
  3. Prenergy Power - The company is building the world’s biggest biomass power plant in Wales,England with 350 MW capacity which will use imported wood chips as feedstock.The London firm which is owned by a PE firm in on the sale block
  4. Forth Energy - Forth Energy is developing Four Big Biomass Power Plants at the ports of Dundee, Grangemouth, Rosyth and Leith. The projects represent a £1.7bn investment in renewable energy and would have a total energy capacity of up to 500MW.The Leith Project is in the advanced stages of implementation.
  5. Laidlaw Energy Group - The company is a small US based Independent Power Producer that is listed as LLEG.The company is building a 70 MW plant in Berlin,New Hampshire.The company is also in the process of acquiring a 14 MW Biomass Plant from Renegy in California.

Wood Pellet Companies

  1. International WoodFuels
  2. New England Wood Pellet
  3. Woodstone
  4. Energex Corporation
  5. Forest Energy Corporation

 

Iran Enrichment of Uranium to 20% near Qom shows the dangers of Nuclear Power

9 Jan, 2012
Nuclear Energy

Iran and the West have been in a major tradeoff since the last couple of years with Iran’s enrichment of uranium which can be used to make nuclear weapons. Note the recent tensions were escalated with the EU joining the US in embargoing Iran. This has not gone unnoticed by the Iranian government which has threatened to close the Strait of Hormun which could disrupt a major portion of the global oil supplies.

Note one of the main dangers of nuclear energy is the probability of the fuel getting into the hands of terrorists and rogue nations which can use it to make nuclear weapons. Note the fears of a Taliban like group getting their hands on nuclear arms in Pakistan is all too real.With Iran getting nuclear weapons, this will increase. Nuclear Power is already being phased out in Germany,Japan,Switzerland after the Fukushima nuclear disaster. The dangers of  nuclear energy are too great to make it an option to secure mankind’s energy in the future.Despite the advantages of nuclear power, the risks are too great to be played with.

DISADVANTAGES OF NUCLEAR POWER

  1. Nuclear and Radiation Accidents - This is the biggest con for Nuclear Energy and has been repeated 3 times in the last 30 years in Japan,Russia and USA.The fear of a repeat is so great that despite all the safety arrangements touted by the nuclear equipment operators and suppliers,Nuclear Energy faces an uncertain future
  2. Nuclear Waste Disposal – Again a massive problem as the spent Nuclear Rods of Nuclear Reactors are prohibitively costly and difficult to dispose of.Spent nuclear fuel is initially very highly radioactive and so must be handled with great care and forethought.There is no foolproof way to dispose nuclear waste fuel after it is used in the Nuclear Reactors.The area around Nuclear Waste Sites can be dangerous to humans for hundreds of year as complex nuclear elements have half lives running into many years.the United States had accumulated more than 50,000 metric tons of spent nuclear fuel from nuclear reactors.Permanent storage underground in U.S. had been proposed at the Yucca but that project has now been effectively cancelled.Presently, waste is mainly stored at individual reactor sites and there are over 430 locations around the world where radioactive material continues to accumulate.
  3. Low level of Radioactivity from Normal Operations - The nuclear industry also produces a large volume of low-level radioactive waste in the form of contaminated items like clothing, hand tools, water purifier resins, and (upon decommissioning) the materials of which the reactor itself is built
  4. Nuclear proliferation – Many countries have used the ruse of nuclear energy programs to generate fuel for developing nuclear weapons.Currently there is a major international controversy with regards to the Iranian Nuclear Energy Program.Nuclear Reactors are targets for rogue state actors who can steal the fuel for creating radiation weapons
  5. High Capital Investment,Cost Overruns and Long Gestation Time - The time to construct a large Nuclear power project can take between 5-10 years which leads to time and cost overruns.The Nuclear Plant being built in Finland has been one of the biggest failures in Project Finance.The reactor has been delayed by many year and has led to a massive cost overrun.Areva the main nuclear equipment supplier has endured huge losses.In fact the safety regulations and the long time of construction has brought the Nuclear Energy in the Developed World to almost a halt.
  6. Regulations – The Regulations for Nuclear Energy Power Plants are many and cumbersome due to the massive risks of a failure of a nuclear reactor.This greatly increases the costs of generating nuclear power.It also leads to a long time in the actual start to the completion of a Nuclear Plant .
  7. Fuel Danger - Uranium which is the main fuel used in Nuclear Fission Power Plants is limited to a few countries and suppliers.Its use and transport is regulated by international treaties and groups.India which came under sanctions because of testing of nuclear weapons had to shut many of its nuclear plants because of embargoes.

Iran has started enriching uranium to more than 20% which has surprised the West at a plant near the holy city of Qom

The existence of the Fordo plant, built into the side of a mountain near the Muslim holy city of Qom, south of Tehran, was disclosed in September 2009, heightening concern among the U.S. and its allies who say Iran’s activities may be a cover for the development of atomic weapons. The Persian Gulf country has rejected the allegation, saying it needs nuclear technology to secure energy for its growing population.Jan. 8 (Bloomberg) — Iran has started to enrich uranium at its Fordo production facility, the official Kayhan newspaper reported without saying where it got the information.

Also Read more about the other Uses of Nuclear Power

Japan may Nationalize Nuclear Industry as TEPCO gets a massive bailout

7 Jan, 2012
Nuclear Energy

Japan which has faced two of the worst nuclear accidents in history,the atomic bombing in WW2 and the Fukushima disaster, is thinking of nationalization of the nuclear industry.This comes after the fallout of the Fukushima,where the utility TEPCO needed a massive bailout. To pay compensation and repair the disaster would have bankrupted TEPCO and still left a massive hole. The Japanese government had to step in with a big money package so that TEPCO could meet its liabilities. Note the biggest disadvantage of nuclear power is the catastrophic tail risk of a nuclear meltdown.

Japan has already joined countries like Germany, Switzerland in deciding to shut down the nuclear power plants in the future. The advantages of nuclear energy are not good enough to compensate the potential of a new Chernobyl in the future. Other countries like India too are facing massive opposition against construction of new nuclear power plants.

Switzerland has voted to not build any new nuclear reactors and not to extend the life of the existing nuclear plants once their expected life ends. The oldest nuclear reactor will be shut down by 2019 and the newest by 2034 which means that Switzerland will become nuclear free by 2034.Switzerland saw huge protests with 20,000 people rallying against nuclear power which was the biggest in the last 30 years.Germany too has seen hundreds of thousands protesting nuclear power. Note Japan too had earlier decided not to build new nuclear reactors which would have increased nuclear power capacity to 50% by 2030 of the total electricity capacity up from 30% at present. The Fukushima nuclear accident has forced a major rethink in major world capitals as it follows the Three Mile and Chernobyl accidents in the last 50 years. Nuclear Energy forms a substantial chunk of the world’s power capacity but the catastrophic tails risks of nuclear power is the biggest con of nuclear energy.

The situation is akin to the bailing out of large banks by USA and Europe where the profits are private but the losses are socialized. Japan too would face enormous pressure not do nationalize its nuclear plants by vested private interests but common sense would advise for it to go ahead. Japan has one of the largest nuclear electricity capacities in the world.

Top 15 Countries with Highest Nuclear Electricity Generation Capacities

  1. USA 101 GW
  2. France 63 GW
  3. Japan 45GW
  4. Russia 23 GW
  5. Germany 21 GW
  6. South Korea 19 GW
  7. Canada 13 GW
  8. Ukraine 13 GW
  9. UK 11 GW
  10. Sweden 10 GW
  11. China 10 GW
  12. Spain 7 GW
  13. Belgium 6 GW
  14. Czech 5 GW
  15. India 4 GW

Green Energy Projects in India preferred by Debt Syndicators over Thermal Power

7 Jan, 2012
Energy,Green Investing,Renewable Energy

Green Energy Projects in India have become more preferred for debt lenders than the conventional thermal power projects.See below for the problems besetting India’s thermal power project developers.  Note wind and solar power projects are seeing more interest from debt  syndication lenders like IDFC, IL&FS because of the following reasons

a) Strong support from state and federal governments which are going all out to support Renewable Energy through tax breaks,feed in tariffs,capital subsidy

b) Secure Power Purchase Agreements (PPA) by NVVN at even higher prices for green energy

c) No problems of fuel supply availability that plagues the coal and gas power plants in India

d) Lesser Environmental issues that beset the Coal Power and Nuclear Power Plants in India with local agitations

e) Land Acquisitions problems are also lower as solar and wind power plants don’t require prime land

Green Companies in India  are increasing rapidly in all sectors like Solar Energy, Wind Power etc taking advantage of India’s massive energy deficit.

India’s Power Industry Woes

India’s Power Industry is in the most severe crisis since the sector was reformed and private power sector companies were allowed. India’s electricity companies which were considered as a great investment with fancied valuations have now found the going tough.  A number of factors have converged to make the electricity industry go into the crisis mode. India faces a dark 2012 summer as the energy demand remains high and growing while power plants remain stuck due to absence of fuel and remunerative prices.  ith the Indian banks also looking at debt defaults, the government is trying to come up with a new plan.

India faces a Long and Dark Summer in 2012 with its Electricity Industry in Shambles. The list of woes is almost non-ending and the government is the biggest culprit.Locked in a policy paralysis due to its corruption taint,the authorities have failed to move.Indian Electricity Companies too are facing losses and may even default on some project debt. The state distribution companies already have racked up billion of dollar in losses due to total mismanagement of  tariffs and power theft. So the whole supply chain is in trouble with the Indian Banks also in trouble as they have lent billions to the power producers.

India is one of the biggest electricity consumers in the country.Despite massive demand,the supply is not coming up as the power plants are locked in litigation and protests by locals as well.Land acquisition has been a point of concern leading to deaths. Nuclear Power  Plants in Tamil Nadu and Maharashtra are not being built due to Fukushima dangers. Hydro Power Plants too face problems as people are concerned about the environmental impact. Coal India the monopoly producer has nto managed to meet targets.It keeps raising prices and lowering production while imported coal makes the electricity generated too costly to be sold.

Biomass Plants in India Shutdown as Feedstock Costs Race ahead of Prices

5 Jan, 2012
Biomass Energy,Energy

Biomass Plants in India are shutting down as feedstock costs have increased rapidly while government regulated electricity tariffs have yet to increase.60% of India’s Biomass Plants have closed down as they are longer profitable.Note India has a massive growth target for biomass electricity capacity up from 1 GW at present (2 GW if you count cogeneration).A number of agricultural companies have set up a number of plants besides dedicated green utilities.However inflation in India has affected the operation of plants specially those who don’t have inhouse feedstock supply.

Green Companies in India are appealing to the electricity regulation CERC to increase the mandated tariffs which are different for different states.Like the thermal power generators increase in fuel prices had made operation unviable.The electricity sector in India is heavily regulation and lack of a free market causes these periodic booms and busts.

CERC Feed in Tariff for Biomass Produced Electricity for Different States

Note India’s Electricity Regulator gives a number of Incentives for Biomass Generated Electricity namely

1) Depreciation

2) Feed In Tariffs for 13 Years out of a useful life of 20 Years

3) Sharing of Carbon Credits under the CDM Protocol

4) Preferential Loan and Interest Rates

5) Payment Rebates by Utilities

Some of the state Feed in Tariffs

India does not have a centralized rate of FIT for Biomass Electricity and it is different for different states depending on the assumptions.Here is the FIT for a few of the major Biomass States in India

State                          Feed in Tariff (Rs./kWh)
Andhra Pradesh                  Rs4.15
Gujarat Cogeneration       Rs 5.17
Madhya Pradesh                 Rs3.93
Maharashtra                          Rs4.76
Maharashtra Cogeneration RS4.80
Punjab                                        Rs5.49
Rajasthan                                  Rs4.73
Tamil Nadu                              Rs5.08
West Bengal                             Rs4.88

Biomass Energy in India

India had set up around 500 MW of Biomass Capacity by 2007 and has increased it by almost 150 MW since then to reach around 1 GW capacity today.Most of Indias’ Biomass Electricity is being generated in Andhra Pradesh,Maharashtra,Tamil Nadu,Karnataka and Rajasthan.A lot of new capacity is being built in Punjab and Chattisgarh as well.India with a total biomass capacity of around 1 GW is planning to increase it by 10 times to 10 GW by 2020.Between 200-600 acres of land are required to support 1 Mw of Biomass Capacity .This is much more than what is required for even thin film solar energy which is around 10 acres.The large land requirements make Biomass Energy Scaling a difficult proposition,however it has a great use in niche applications where there is a large amount of crop and animal residue/waste

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