Private Equity in Wind Industry India

The Indian Wind Energy Industry is currently under a lot of stress as subsidies and incentives have been withdrawn towards the sector. This has led some of the wind industry companies to sharply reduce their projections of demand in 2012 to fall by around 66% from the previous year. However the Private Equity Industry continues to remain bullish about the prospects of renewable energy in India as around 30 GW of green power is planned to be added over the next 5 years. The TINA factor is set to boost the growth of renewable energy in India as coal, gas and hydro power face constraints of cost, availability and delays. A 14-15% ROI on wind energy investments and a huge power deficit is attracting global investment banking majors who continue to invest big time into new green power companies in India. Morgan Stanley, JP Morgan and Goldman Sachs have already invested millions of dollars in wind power and other renewable energy generating companies and more PE investments are in the pipeline as well.

Note setting up a wind power plant in India is already a mature process and there are turnkey installers as well as numerous wind turbine suppliers present in India with a well developed supply chain. Indian banks are also familiar with providing debt towards wind power projects unlike solar power where Indian project financiers have little experience. The support of PE players has emboldened a number of wind farm developers to put aggressive wind power expansion plans in place.

Wind Power in India has shown sharp growth in 2010 and looks to have a bright future with a number of wind farm developers investing aggressively to expand capacity. Wind Turbine Companies have also been putting up factories in India to catch a slice of the world’s fifth largest wind energy market. Even Chinese companies like Dongfang and Shanghai Electric have managed to win contracts from power companies like KSK Energy. Greenko one of the first Green Utilities in India is raising funds to put even more wind turbines in India while Caparo has the biggest expansion plans in place. CLP which is the largest wind energy capacity owner in India too is plowing ahead with plans to add to the wind capacity. The most surprising entry is by Malaysian casino developer Genting which has raised debt from HSBC to put up a 92 MW Wind Farm in India.

ET

I line up my arguments. India has a huge shortage of power —demand far outstrips supply. So, there will always be adequate demand. At peak, the demand-supply mismatch is 12-13%, with the shortfall soaring during peak summer months. India’s current installed capacity is about 170,000 MW. With growth expectation of 8-10% pa, we need to add about 16,000-18,000 MW every year. That looks impossible considering the country’s lack of fuel sources to run power-generating units. After all, India doesn’t have good quality extractable coal. It also lacks harness-able gas sources. Besides, we don’t have sufficient capital to set up nuclear power plants. So, what will we do?

Does the answer lie in sun and wind? In both cases, the input cost is zero. Energy from wind costs about Rs 3.5 to Rs 4.5 per Kwh, depending upon the quality of wind and the capacity utilisation of the turbine. Energy from new coal plants cost about Rs 3 per Kwh — it is about Rs 4 per Kwh if imported coal is used. The great edge for wind energy is renewable energy certificates, which are issued to power producers who use renewable sources.

Producers selling power in open-markets are eligible to receive and trade in RECs. The REC-traded price is now between Rs 1.50 and Rs 2.50 per unit (price varies due to demand-supply of RECs). This is a huge advantage to renewable energy power producers and significantly adds to their profitability. Considering the open access price, which could be around Rs 2.25-Rs 2.50 (it could be significantly higher when the demand-supply gap enhances), RoI on wind-energy projects is very good.