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Green Investing in India – How Tamil Nadu became the Biggest Alternative Energy State

27 Sep, 2010

Biomass Energy,Energy,Renewable Energy,Wind Energy

Tamil Nadu is one of India’s most prosperous and industrially advanced states located at its southernmost extreme.The state has shown remarkable progress in the field on Wind Energy utilizing almost 80% of its Wind Power Potential with 40% of India’s total Wind Installations.With the right mix of policies,Tamil Nadu has also become the hub of Wind Energy Manufacturing with Global Heavyweights like Suzlon,Gamesa,Vestas all building plants in the State.A number of new players like Sterling Infotech and Lietner have also started manufacturing Wind Turbines in Tamil Nadu due to favorable networking effects.The state is also generates the 3rd largest amount of biomass energy with around 340 MW installed.Here are the reasons why Tamil Nadu has become the Biggest Renewable Energy State in India.

1) Tax Holidays and Subsidies – The government has given attractive subsidies to attract Wind Power Developers to the state.Rs 3.39 ( 8c/Kwh) is the tariff given to Wind Energy besides another 1c/Kwh received from the Federal Government as Generation Based Incentive (GBI).The projects in the state easily make 25-30% returns on their investment attracting a whole host of private industry developers.The Industry also gets a 10 year tax holiday,custom duty exemptions and accelerated depreciation boosting the returns even further.A 20 year PPA at fixed prices helps in building investor confidence .

2) Government Technical Support – The Tamil Nadu Energy Development Agency (TEDA) has mapped out the state’s wind power potential measuring wind intensities at different parts of the state.The government has also set up Centre for Wind Energy Technology (C-WET) at its state capital Chennai.TEDA helps in facilitating the setting up of Wind Farms.

3) Industry Networking – The availability of Wind Energy Equipment locally helps in reducing transportation costs,lowers maintenance costs and provide important information networking effects.

Wind turbines – Hindu

NEPC Micon and Vestas RRB were among the earliest wind turbine manufacturers in the country and both were Tamil Nadu-based. Thanks perhaps to that kick-start, a number of wind turbine manufacturers have set up shop in the recent years, to catch the evolving boom in wind energy, making Tamil Nadu a wind energy hub.

Gamesa of Spain is the world’s third biggest wind turbine company. Recently, it invested about €40 million in setting up a manufacturing facility at Chennai. The plant can produce 200 MW worth of wind turbines each year, but that is only for starters, because Gamesa expects to need to expand capacity.

Sterling (or Siva Ventures as it is now called) decided to back-end its takeover with a manufacturing plant at Chennai. The plant, put up with an investment of Rs 375 crore, can produce turbines of total 1,000 MW of wind power capacity annually. Currently, the plant will produce only 1 MW machines, but in about 18 months WinWind will introduce 3 MW machines.

Vestas, the world’s largest wind power company, was among the earliest entrants into the Indian wind power sector. Its joint venture, Vestas RRB, has successfully put up several wind mills all over the country. A couple of years ago, Vestas and RRB parted ways, which turned out to be good for Tamil Nadu, because both companies are now independently pursuing projects in the State.

Vestas has set up its technology centre in Chennai. The centre, spread over a more than 60,000 square feet area and located at TECCI Park, Chennai, will house Vestas Technology R&D’s future activities in India. The centre will play a vital role in Vestas’ global, long-term dedication to R&D in cooperation with Vestas’ technology centres in Denmark, the UK, Singapore and the US.

Shriram EPC, part of the Chennai-based Shriram Group, has joined hands with Leitner of Italy to set up a Rs 200-crore facility to produce gearless wind turbines. Leitner Shriram has a capacity to produce 150 units of 1.5 MW gearless wind turbines annually at the integrated facility which can manufacture the entire turbine, including the critical components, generator, controls and nacelle.

RRB Energy, once a part of Vestas RRB, has its blade manufacturing plant near Chennai. The company now intends to invest Rs 100 crore in the next 18 months to expand its production capacity. This investment, coming on top of the just-concluded first phase of investments of Rs 65-crore, will increase manufacturing capacities of turbines and blades.

4) Huge Unmnet Energy Demand – Tamil Nadu is a power deficient state like most of the other states in India.With blackouts ranging from 3-6 hours a day,Electricity is a very valuable commodity.Wind Power is essential in the summer months when demand for power exceeds supply by a huge amount.

5) Regular Payments by State Electricity Boards – One of the biggest impediments faced by IPPs in India is the poor financial health of the SEBs.These Electricity Distributors are poorly managed and run frequently delaying even defaulting on payments to suppliers of electricity.However Tamil Nadu SEB has made payments regularly leading to greater confidence amongst Wind Investors.

Summary

With Tamil Nadu showing the way,Gujarat and Maharashtra the other two Industrially Powerful States in India have also started to push Green Energy in a big way.The state continues to attract a huge amount of Renewable Energy Investment with new wind farms being planned despite reaching 80% of its potential.Orient Green Power plans to build a massive 300 MW Wind Farm in the near future.The government is rolling out subsidies with grants to be given to hybird wind solar plants in the region.Tamil Nadu has served as the poster boy for Green Energy in India and continues to lead despite achieving such high targets.

Green Investing in India – Largest Electricity Producing State Maharashtra looks to boost Renewable Energy through Subsidized Grid Connection and Grants

23 Sep, 2010

Biomass Energy,Energy,Wind Energy

Maharashtra is one of the most industrialized states in India but it lags behind other states in Renewable Energy.The recent mandate by the Central Electricity Regulator to increase the requirement of Renewable Energy to 6% of Electricity Produced found Maharashtra having a severe shortfall.Maharashtra has the largest power capacity in the country with around 21 GW but most of it is thermal based generation.Despite having the second largest Wind Power Capacity with 2 GW which is around 42% of the state’s potential.However Maharashtra is still considerably short of the 6% Renewable Purchase Obligation (RPO) set by it.With CERC set to increase the Green Energy Target to 10% by 2015,Maharashtra needs not only to meet the shortfall but also to increase the share of Renewable Energy.

Other Major Industrialized states like Gujarat and Tamil Nadu are attracting tons of investment in solar and wind energy.Gujarat has become a top Green Investment Destination due to strong subsidies given by the state government over there.Maharashtra is now looking to clean up its act by providing Subsidies and grant to Wind and Biomass Energy.The State Government will give a $110,000 grant per MW of Wind Energy and also bear the interconnection costs to the grids plus providing money for building access roads to the Green Energy Plants.Note the huge power deficit and government push for Green Energy makes Renewable Focused Utilities one of the best ways to green invest in India.

Maha govt offers sop to power generators, distributors – Moneycontrol

The Maharashtra government has finally given the disgruntled generators and distributors of renewable power companies a much-needed pick-me-up. With the aim of meeting its policy targets of 3500 MW of renewable energy, the government is offering some heavy-duty incentives.

For wind power projects with a target capacity of 2,000 MW, the government will bear the cost of infrastructure development up to Rs 5 lakh per MW. It will also pay for redevelopment of approach road to these projects up to Rs 10 lakh per kilometre. Also, the government will bear the total cost of power evacuation up to a limit of Rs 35 Lakhs per MW.

For biomass projects with a target generation of 400 MW, the government will reimburse the total cost of power evacuation up to Rs 4 crore per project.

“Orient Green Power” IPO Analysis- Focused Renewable Energy Utility with Fast Growth Plans however Execution is the Question

20 Sep, 2010

Biomass Energy,Energy,IPO,Orient Green Power,Wind Energy

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

Pros

1) Renewable Energy Sector is a great one right now – India needs to almost double and triple its Renewable Energy Capacity to meet the 10% Renewable Energy Target by 2015 mandated by CERC.There is ample scope for growth of multiple players in this area.Blackstone recently invested a big sum into Moser Baer Projects which currently does not have any capacity.India’s MNRE has been criticized for missing Renewable Energy Targets which implies their is previous backlog.

2) Good Well Defined Expansion Plans - The company has well defined expansion with projects already securing financing and ordering Wind Turbines.The Plant Factors are good and so is the Tariffs received by the plants.

3) Valuation looks decent – The P/B post IPO will be around 2x which is not high compared to other Indian power companies like Tata Power,Reliance Power etc.

4) Management seems Focused – OGPL is one of the few companies to focus purely on Green Energy.Note when every Tom,Dick and Harry is running after Coal Plants,this shows focus.Note the returns,execution and costs are much lower in building Coal Power Plants.Also the management will only make money if they perform as most of the money raised will be spent on capex.

Disadvantages

a) Lietwind Wind Turbines - The company is using Wind Turbines made by LSML which is a 49% Shriram Group owned company.OGPL will buy all its Turbines from this company which is relatively new and uses technology from an Italian Group Lietner which does not have a long history in the Wind Energy Space.If the Turbines fail or perform poorly,OGPL will be in big trouble

b) Limited Management Experience – The company has started recently and there is little in terms of track record in running wind or biomass plants.Executing on these big projects might be tough.

c) Complex Group Holdings - The company has a lot of transactions with the Shriram Group companies.IT is using the Shriram EPC sister concern for doing most of its EPC work and LSCL for the turnkey installations of its Wind Farms.Some of this may lead to a conflict of interest by the promoters.

Summary

The main risk for this IPO is the execution risk ,however the rewards are significant.While there are many concerns about the experience and ability of management,the pluses in my opinion outweigh the minuses.In my view this looks like a good Green plan into India’s burgeoning economy.Comments and Criticism are welcome from readers

After an Epic Nuclear Project Disaster,Finland implements its first Renewable Energy FIT Scheme to promote Wind Power

17 Sep, 2010

Areva,Biomass Energy,Nuclear Energy,Wind Energy

Finland Dependent on Nuclear Energy which is becoming very costly and time consuming

Finland is a Fossil Fuel Deficient country getting 30% of its power from Nuclear Energy and 28% from mostly Biomass and Hydro Energy.It is constructing more Nuclear Power to meet it future needs but a Recent Nuclear Plant has caused massive headache.Finland’s Power Sector has been in the news recently for all the wrong reasons.A Nuclear Plant being built on a Baltic Sea Island of Olkiluoto has entered the annals of Project Finance as one of the biggest Disasters.The main contractor Areva which is the worlds’ leading nuclear equipment supplier has surprisingly totally messed up.The original plan of builing the 1600 MW nuclear reactor for 4 billion Euros has doubled to 8 billion Euros.There are reports of faulty concrete bases and steel containers.There is already a blame game between the constructing companies Areva,EDF,Siemens and the government.The time and cost delay has truly been of epic proportions.Areva which is a giant conglomerate has suffered losses on account of just this one project.

In Finland, Nuclear Renaissance Runs Into Trouble – NY Times

So Areva turned to Finland, where utilities and energy-hungry industries like pulp and paper had been lobbying for 15 years for more nuclear power. The project was initially budgeted at $4 billion and Teollisuuden Voima, the Finnish utility, pledged it would be ready in time to help the Finnish government meet its greenhouse gas targets under the Kyoto climate treaty, which runs through 2012.Areva has acknowledged that the cost of a new reactor today would be as much as 6 billion euros, or $8 billion, double the price offered to the Finns. But Areva said it was not cutting any corners in Finland. The two sides have agreed to arbitration, where they are both claiming more than 1 billion euros in compensation.In addition, nuclear safety inspectors in France have found cracks in the concrete base and steel reinforcements in the wrong places at the site in Flamanville. They also have warned Électricité de France, the utility building the reactor, that welders working on the steel container were not properly qualified.

Finland to Promote Wind and Biomass Energy through FIT

Finland is trying to promote other Greener forms of Energy now with Wind Energy to get a very generous Euro 8-10 cents/Kwh Feed in Tariff.Wind Energy is almost non-existent accounting for just 0.3% of Finland’s Energy Mix.Biomass Energy accounts for a whopping 20% though not a surprise given Finland’s abundant forests.However to increase the share of renewable energy from 28 to 38% by 2020 according to the EU target,Finland’s need other forms of power like Wind as well.Finland has also planned the world’s first Green Highway and this is the second major Green supporting measure.Note Finland did not have any Green Subsidy support like FIT,RPS etc till date which is surprising for a Developed Country.Given the royal disaster that the Nuclear Plant in Olkiluoto has been,it makes sense for Finland to diversify its Green Energy Sources.Biomass Energy is also getting a Euro 5c/Kwh in Subsidies to further enhance the Renewable Energy Share.

Finland to Push for Renewable, Wind Energy With Feed-In Tariffs – Bloomberg

Finland will promote renewable energy with fixed prices for wind and biogas power to encourage producers to meet emission targets set by the European Union.Feed-in tariffs, a set price guaranteed to producers, come into force on Jan. 1 and will last for 12 years, the government in Helsinki said today in an e-mailed statement.

The motion will tomorrow be sent to parliament for approval. Finland had 118 wind turbines at the end of 2009 with a combined capacity of 147 megawatt-hours, the Finnish Wind Power Association said on its website.The target for the feed-in tariffs will be 83.50 euros ($109) a megawatt-hour, the government said. Electricity from biogas will get an additional 50 euros a megawatt-hour for combined heat and power generators. For the first three years, wind power would be paid 105 euros a megawatt-hour to ensure implementation, the government said.

New Czech Renewable Energy Policy to Bust the Solar Boom with a 50% Subsidy Cut

27 Aug, 2010

Biomass Energy,Europe,Solar Energy,Wind Energy

Czech Republic came out with a Renewable Energy Framework which will finish off the Solar Sector in the country if passed in the current form.Czech despite its small size has become the 3rd largest market for Solar Energy in Europe driven by high Feed in Tariffs.These guaranteed electricity rates have led to a Boom in the country due to IRRs in excess of 30%.The Parliament had already overwhelmingly voted to overhaul the country’s Solar FITs in March.In the new plan submitted by the Czech government to the EU,there are limits imposed on each type of renewables biomass,solar,wind etc with emphasis given to Biomass Energy.Czech Republic has a EU set target of 13% Energy generated from Renewables.Wind and Solar Industry Groups have already started crying blue murder as the proposed FIT in 2011 for Solar will be cut by almost 50%.This will make it almost uneconomical for a solar installer to put solar panels in the country and don’t be surprised if you see a 90-95% drop in 2011 Czech Demand compared to 2010.

The whole story of Czech Boom and future Bust is predictable and has already been played out in countries like Spain and Greece earlier.Like Spain,Czech electricity customers might see a 10-15% rise in electricity prices due to the high guaranteed payments to mushrooming solar installations.With the Czech Republic,implementing a Fiscal Austerity program involving pay cuts to public workers and other severe cuts in public expenditure,such huge payments to Renewable Energy seems an unnecessary luxury.Some more thought and preparation by the authorities would have avoided such a Failure.

Czech government adopts plan to rein in renewables – Reuters

The Czech government approved a renewable energy framework plan on Wednesday aimed at curbing the kind of subsidies that have led to a solar boom that ranks as Europe’s third largest.

The plan, adopted late in the day, calls for a cap on tariffs for solar energy of about half the current level and seeks mandatory recycling of old solar panels. It also seeks annual limits on subsidies for wind and solar power.

The legislation came after the combination of a drop in the price of solar panels and high fixed tariffs brought the return on the initial investment for some plants down to as little as three years.

A Green Power Utility to IPO in India

25 Apr, 2010

Biomass Energy,Energy,Green IPO,Solar Energy,Wind Energy

Orient Green Power Ltd (OGPL), is planning to raise Rs 900 crore to fund its expansion plans of raising capacity to 1000 MW by 2013 from the less than 200 MW now.Shriram EPC, Bessemer andOlympus Capital are the promoters of this company started in 2007 . From its website

OGPL is a leading renewable energy producer in India. Established in 2007, OGPL is a diversified renewable energy company focused on the development, ownership, and operation of wind, biomass and small hydel projects.OGPL currently has an aggregate installed capacity of 175MW, which comprises of 134.5 MW of wind and 40.5 MW related to biomass projects. OGPL has more than 500 MW under construction/implementation pipeline.

While more details on valuation and the quality of their existing projects would come out later , seems a very good time for the promoters to get additional funding given the hot theme of “power” and “green” which their company combines.

China’s Longyuan Power Group Corp., the country’s biggest wind-power producer and with a similar green power utility profile managed a very successful IPO raising more than $2.6 billion in HongKong in December 2009 . Stock price is up 15% from its IPO price.2 other big Chinese electricity utilities (Huaneng Group and Datang group) are thinking of raising money from the market by spinning off their renewalbes unit .Italy’s huge utility Enel is thinking of doing it as well.

With the globe excited about green power utilities , why should India be behind . However the main difference between these IPOs and Orient Power is one of scale and parentage. All these foreign companies have strong expertise in the electricity industry with a large portfiolio of renewable projects diversified over a number of sites.Orient Green Power seems quite small less than 200 MW of capacity and no deep expertise/parentage in the electricity industry .

With regards to valuation , it might seem rich again at $700-800mm considering that you can build 1 MW of wind power at around $1.5 million. With 175 MW of wind and biomass their existing assets without consideration about how much debt they have would be no more than $300 million . However the data is very scant now and I would post a much detailed valuation post when the prospectus comes out.

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