Small Hydro Power – Investment Opportunities

A large number of SHP projects were established in the public sector during the onset of the early 1990s. However, over the last 10 years, a sizable power capacity is now being added through private players. New incentive systems continue to attract increasing level of investment from the private sector supported by the state policies. The Electricity Act in 2003, Electricity Policy in 2005 and Tariff Policy in 2006 have also helped stimulate investments in this high potential area. The market for clean energy among India’s rural poor is estimated to be around $2.11 billion in the sectors of decentralized renewable energy generation (DRE), solar home systems, solar lanterns and energy efficient cook stoves. The DRE market, which includes community level biomass or SHP plants, is the largest of about $2.04 billion annually. There are a growing number of companies serving this market and the sector has grown at 36 per cent annually since 2004 presenting a significant opportunity for investors interested in clean technology.

As SHP and some other clean technologies are relatively mature, there is an increasing trend of more innovations around the distribution and marketing of clean energy for the poor which is where many of the challenges lie. Companies are developing new business models, partnering with microfinance institutions and rural NGOs to penetrate the rural market and raise greater awareness for their products. The biggest opportunities for innovation in this market are related to technology development that reduces the cost of production, new distribution models to bring these products to the target market more efficiently and the development of effective marketing strategies for rural consumers.

Private power producing companies are lining up to buy small renewable assets as a widening power supply deficit and growing concerns on pollution are prompting firms to acquire clean technology units. According to private equity and advisory firms, investments in small hydro projects has picked up as such projects are built on small rivers and have no issues related to resettlement of villages. Axis PE, which has invested in clean technology firms, says the total private equity transaction in small hydro projects is about INR 1,000 crore. According to Axis PE, investors prefer the SHP industry due to their smaller gestation period and, as such, power projects are usually completed in 2-3 years, whereas bigger projects take 8-12 years.

Companies, Capacities & Projects – Small Hydro Power

The mergers and acquisitions (M&A) activity in India picked up well over the period October 2009 – September 2010 reaching $1.1 billion in 14 deals. The big ticket transaction in the small hydro sector is the acquisition of Karnataka-based Hemavathy Power & Light Pvt. Ltd. by AIM-listed Greenko Group Plc for about $33 million. The transaction was a leveraged buyout by Greenko involving a mixture of new debt and equity. The asset is a 24 MW operational run of the river hydro project located on the Hemavathy river in Karnataka. Greenko Plc is a major player in the renewable energy sector in India and is listed on the Alternative Investment Markets of the London Stock Exchange. Greenko has a target to scale up its capacity from 160 MW to 1,000 MW by 2015.

Table: SHP Projects installed in Private Sector (as on March 31, 2009)

Source: MNRE

The private sector investment continues to grow in SHP sector as more than 3,500 MW capacity SHP sites have been offered/allotted to the private sector so far. As of December 2009, the private sector accomplished 192 projects with a total capacity of 1,005 MW. This corresponds to 39 per cent of the total installed capacity.

The key states to attract private sector participation include Karnataka, Andhra Pradesh and Himachal Pradesh. In addition, 296 private projects totaling approximately 936 MW are in various stages of implementation.

Most project developers and plant operators are not hydropower specialists but come from the broader energy and infrastructure sector – for instance, HEG Limited and Bharat Petroleum Corporation Limited. The presence of a healthy network of local manufacturers and service providers in India can provide complete systems as well as construction and spare parts such as turbines, regulators and generators.

Also Read on GWI:

Advantages & Disadvantages of Hydroelectric Energy

Small Hydro Power in India – Quick Guide to Classification, Potential and Financing.