Power Finance Corporation Green Energy has been floated as a subsidiary of one of India’s biggest power sector financiers Power Finance Corporation.As the name implies the company’s mission is to provide loans to India’s Green Energy Industry.Note India requires around  $10 billion dollars according to the government plans of building 17 GW of Alternative Energy Capacity in India between 2012-2017 which is low in my view.However even this low target will require a massive amount of debt financing to the tune of around $6-7 billion annually.Power Finance Corporation is one India’s largest infrastructure financing companies owned by the government.The company which has billions of dollars of loan assets to the Power sector in India has naturally entered the fast growing Green Energy area as well.

Note PFC has already given $400 million to different projects in the Renewable Energy area and has signed an intent to sanction around $300 million more.Wind Power in India is the biggest Renewable Energy Industry in India and Solar Power is seen to be growing at a fast pace as well under India’s JNNSM Solar Subsidy.Debt Financing has been a major hurdle for solar energy in India.However with major financial intermediaries like REC,PFC,SBI,ADB entering the sector some of the problems may be ameliorated.

PFC subsidiary will lend to green energy sector

State-owned Power Finance Corporation is planning to float a subsidiary, Power Finance Corporation Green Energy Ltd, to finance the renewable energy projects in the country.“We have already received a certificate of incorporation from the government for floating this subsidiary and we will begin operation soon,” R Nagarajan, director (finance) of PFC, told reporters.Last financial year, PFC had sanctioned around Rs 3,000 crore to various projects under the renewable energy segment and disbursed around Rs 1,800 crore during the period.“Loan disbursements to the renewable energy sector will be higher than that seen during the last fiscal as there are sound interests shown by both private and public players in this vertical,” he added.

Power Finance Corporation (PFC) will raise ~$1 billion through a follow-on-public offer (FPO) which is the first divestment by the Government for FY12.Note the government of India has set a target to raise $9 billion through divestment of public sector (PSU) companies stocks.PTC India Financial Services another company operating in the same segment offering finance to power generation companies came out with an IPO.Despite advantages of growth,a good business model in India’s booming Energy Sector,the valuation of the company had been kept too high leading to 20-30% losses from the IPO price.However PFC does not have a high valuation trading for around 9-10x P/E which is comparable to the competitors like REC.However the valuation is not very low also keeping in mind the rising interest rate environment which is making life tough for the Indian Banks and financial intermediaries.

Price Band,Dates and Offer Size of Power Finance Corporation

PFC price band has been set at  Rs 193-203 per share with a discount of 5 per cent in the issue price to retail investors and eligible employees. The FPO will opens on May 10 and close on May 13 with institutional bidders able to bid till 12 May only. It comprises a fresh issue of 17.2 crore shares and an offer for sale of 5.7, crore shares by the government.The government is divesting 5 per cent of its stake in the public sector company. The government first sold off  a 10 % stake through IPO in March 2007 which relieved a huge response.

Pros and Cons of Power Finance Corporation (PFC)

Advantages

1) Leading Position as a Strategic Organization in the Power Sector– Company has played a strategic role in, the GoI’s initiatives for the promotion and development of the power sector in India for more than two decades.Acted as the nodal agency for the UMPP and the R-APDRP and as a bid process coordinator for the ITP scheme.The company has  management significant experience in the power sector and the financial services industry.

2) Financial and Business Model – The Financial of the company are quite good though lower than REC and other.The Net Margin at more than 25% for the last 5 years is also quite good.The company has seen a profit of Rs 8000 crores with Rs 2250 crore of profit in FY 2010.

3) Growth – The company has been growing at a rapid pace since inception.Total loans  increased from  35581 crores in  2006 to  921,18 crores in  2010 with  a CAGR of 22.6% .The revenues and profits have also grown at a comparable aboe 20% CAGR.

4) Power Industry Attractiveness – The current revised capacity target for the 11th Plan is 78,700 MW. A tentative capacity addition of  approximately 100,000 MW has been envisaged for the 12th Plan. The total fund requirement to achieve the 11th Plan target was estimated as `10,316.00 billion. Similarly, the total fund requirement to achieve the targeted capacity addition under the 12th Plan is estimated at `11,000.00 billion.

5) Navratna and non-deposit taking systemically important NBFC (“NBFC”) IFC by RBI – The company is registered with the RBI as a non-deposit taking systemically important NBFC (“NBFC”) and were classified as an IFC in July 2010. We believe that our NBFC and IFC classification enables us to effectively capitalize on available financing opportunities in the power sector in India. In addition, as a government-owned NBFC, loans made by us to Central and State entities in the power sector are currently exempt from the RBI’s prudential lending (exposure) norms that are applicable to other non-government owned NBFCs

a) It is entitled to lend up to 25% of its owned funds to a single borrower in the infrastructure sector, compared to 20%
of owned funds by other NBFCs that have not been granted IFC status.

b) It is also eligible to raise ECBs up to 50% of owned funds without prior RBI approval.

c) It can raise capital through issuance of infrastructure bonds at comparatively lower yields, as holders of such bonds are entitled to tax benefits

6) Focus on Renewable EnergySolar Power in India is expected to grow rapidly even as Wind Power in India has already become the 5th largest sector in the world.PFC is establishing a separate division to concentrate on this fast growing renewable energy sector.

Disadvantages

1) High Exposure to small number of Customers and Electricity Sector– PFC has almost 35% of its loans made to 5 customers which makes it vulnerable to a collapse of a major customer.Electricity Sector in India is looking like a Bubble as well (for the short term at least) as every Tom,Dick and Harry enters the power sector in India.Building a thermal power plant has become the latest hobby amongst every business group.This has already led to problems of merchant price crashing and coal prices skyrocketing.

2) Higher Interest Rate Spread and Margins will come down – PFC has had it  higher interest spreads under pressure due to rising interest rates as RBI throws in the kitchen sink to fight double digit inflation

3) Competition Rising in the Power Finance Sector – The company is facing increasing competition with a number of public sector infrastructure finance companies, public sector banks, private banks (including foreign banks), financial
institutions and other NBFCs entering the sector

Power Finance Corp Valuation

Despite its strong growth,the valuation of PFC is reasonable at  9-10x P/E and around 1.3x P/B post the FPO.The company has much same valuation compared to its listed peer REC and PTC and lower than compared to IDFC.

Summary

Power Finance Corporation has substantial advantages of growth,a good business model in India’s booming Electricity Sector where the List of Power Companies are growing exponentially.The valuation of the company also has been kept at a reasonable level at a discount of around 5% from the prevailing stock market price.The growth of the company has been impressive but a rising interest rate environment,competition from other power finance government providers like IFCI,IDFC,REC makes the issue neutral.It is always possible to buy the stock later or buy competitors in the same space like REC.The stock is a good buy for the long term given the fundamentals,good business sector,however current short term macro problems does not make it a great buy .

Gujarat has been leading Indian states in the Solar Energy sector signing PPAs to build more than 900 MW of power capacity in the next couple of years even as the federal subsidy JNNSM flounders.Gujarat is one of the leading industrialized states in the country and has been looking  to boost renewable energy sources like Tidal Energy,Offshore Wind Energy,Geothermal Energy as well.Wind Energy has also been in the radar of the state government which is looking to realize the 10 GW potential of Wind Energy in the state.After a strong 2009 when 295 MW of Wind Power was installed that slowed down to 100 MW.The main reason was the unavailability of the power grid to connect wind power plants.Note Gujarat possesses one of the best wind sites in the country in the western part of Saurahstra.

Gujarat has not been immune to the problems facing the growth of Green Energy in India that is the lack of expertise in solar energy installations,lack of power grid infrastructure .However the government has been proactive in removing hurdles and attracting investment from foreign manufacturers of green power equipment as well.Top Green Companies like Siemens have already committed money in investing in wind power equipment.Solar Power in India despite the initial hiccups has a huge potential due to the unique set of factors favoring solar energy in the country.Gujarat has reportedly acquired 3000 acres at Charnaka village in Patan District which it will give to solar project developers to install solar panels. In the First Phase of this projects,80 Developers will install 1-45 MW Solar Plants to generate 500 MW capacity.The next phase will feature another 500 MW of capacity.

Renewable Energy in India has seen decent growth in the past mainly driven by Wind Energy which accounts for almost 65% of the estimated 20 GW of Green Energy capacity installed in the country.However to meet India’s 2020 Green Energy Target of 15% of power to be generated from renewable sources set by CERC,at least 40 GW more would need to be installed (that is a conservative estimate as load factors for green energy are lower).This is assuming that India meets its target of raising the power capacity to 400 GW by 2020 from around 175 GW at present. Solar Energy in India has not got off to a good start despite immense potential as the federal subsidy program JNNSM has seen irrational bidding by bit players and debt financing is difficult. Wind Power in India has seen the most growth amongst the green sources of power but it too faces hurdles as good quality wind sites have all been taken.

Why 17000 MW is too Low

Biomass,Small Hydro and other sources of green power face problems of scale making the 40-80 GW of the required green energy capacity quite difficult unless the government changes its policies even more.Note 17 Gw of renewable energy between 2012 and 2017 equates to around 3 GW of alternative energy capacity per year which is much lower than the 4-8 GW of green energy needed per year.While out of the 100 Gw of power capacity expected 17 G may seem higher ,not e that renewable energy load capacity is around 25-33% of a normal thermal/gas power plant which means that the power generated from the green sources will be only 7% from the newly installed 100 GW capacity much lower than the 10% target by 2015.That would leave around 23 GW to be installed in just 3 years which seems quite impossible.Note India already faces a massive energy deficit and that will only increase as the prices of fossil fuels like coal and oil are increasing at a parabolic rate driven by the growing demands of China and India.With the fossil fuel a depleting source of fuel,renewable energy is the only alternative left.While the government has put in decent efforts,it has been bogged down by a lack of clear thinking.Using the auction mechanism did not help with JNNSM while Wind Power too faces problems of getting proper payments from bankrupt state distribution companies.It needs to structurally reform the whole electricity market in order to meet the growing energy demand of the country.Otherwise the 8% GDP growth rate will look like a pie in the sky.

India to Add 17 GW Renewable Energy in 2012-17

India plans to add 17,000 megawatts, or 17 gigawatts, of renewable-based power generation capacity between 2012-17, requiring an investment of up to 1.5 trillion rupees ($33.8 billion), as the country attempts to bridge its energy deficit and move to cleaner energy sources, the renewable energy secretary P. Uma Shankar said Thursday.

“India’s electricity demand is expected to increase from 900 billion kilowatt hours to 1,400 billion kwh by March 2017. To meet this demand we will need a capacity addition of 100,000 megawatts during the next five-year plan” Mr.Shankar said at a conference.More than half of India’s current power generation capacity of 173.6 gigawatts is based on coal and this is expected to continue for future capacity additions.

India’s power sector overall will need an investment of $300 billion to $400 billion during the next five-year economic plan that starts April 2012 and ends March 2017 to meet its generation targets, power secretary Mr. Shankar said.

India’s Power Sector is seeing massive investments with innumerable business groups setting up thermal power plants in the country spurred by the electricity deficit of more than  15% and the GDP growth of more than 8% expected in the next decade.India’s private power companies are competing with each other in setting up massive ultra mega thermal power plants of 4 GW capacity.However India’s pathetic state of electricity distribution may lead to huge losses for the investors in the power sector.The reason is that the electricity distribution is controlled by the state utilities which have cumulative losses of  $13 billion which is expected to double to $26 billion in another 5 years.These “discoms’ don’t have money  to pay the private producers of power even with an electricity deficit.With India’s electricity market a tangle of red tape,losses and government control the situation looks bleak for all the business groups deciding to enter the power sector.

Already private utilities like Adani Power and Monnet Ispat are having trouble in selling the power to discoms as these utilities don’t have cash.Monnet Ispat has been forced to sell power for as low as 1c/KwH as demand has plummeted.This has happened despite Indian customers facing power blackouts even after paying more than 10c/KwH for power.The distorted nature of  the electricity market with government entities in the middle is responsible for this situation.Even India’s largest utility NTPC has seen its profit growth dip as state discom  are not buying power despite electricity shortage.These discoms buy power at inflated rate during elections and once they are over stop buying power.India’s pathetic transmission and distribution infrastructure is a major hurdle in installing more renewable energy in India as was seen in the case where solar power plants are not being debt financed by banks due to bankrupt discoms.India’s Solar Program JNNSM launched with much fanfare is already facing problems on multiple fronts,this will only add to them.

Thermal power cos grope in dark as states cut buys despite shortage

Cash-strapped state power utilities have cut offtake from thermal power generators, hitting their output and driving down tariffs in the short-term market. State power utilities, which buy the entire output of thermal power generators such as NTPC, Adani Power and Monnet Ispat, have cut off take because of a cash crunch and are resorting to load shedding, industry experts said. The accumulated losses of these utilities are expected to touch 1,50,000 crore by 2014 -15, against 70,000 crore now, according to the Planning Commission.

NTPC, the country’s top power generator, lowered output last fiscal after state electricity boards did not draw power. I am living in an extreme dichotomy. On the one hand, we talk about acute energy shortage, and on the other I do not have buyers for my electricity. The question is should we scale down our targets or scale up domestic coal production or keep importing coal,” NTPC chairman and managing director Arup Roy Choudhury said.

A top executive at Monnet Power said the company was forced to sell electricity at 0.50 per KWH in January, as there was no demand from states. Adani Power chief executive officer Ravi Sharma said state load dispatch centres that ensure integrated operation of the power system, ask distribution companies to back out. The power sector regulator, Central Electricity Regulatory Commission, is unable to address the issue. According to Pramod Deo, the commission’s chairperson, distribution companies are owned by states and their regulatory commissions are responsible for taking action.

Renewable Energy Investments surpassed investments in Fossil Fuel Electricity investments in Europe and USA in 2010 as developed countries focused on alternative energy as a solution to the problem of Global Warming and higher Fossil Fuel Costs. While Wind and Solar Energy are currently the dominant forms in different types of Renewable Energy, others like Tidal and Wave Energy are also seeing a lot of investment in R&D. The major advantage of Renewable Energy is that it does not emit GHG which is the leading cause of Climate Change. While this is the biggest Need for Renewable Energy other needs are equally if not more important.

Need For Renewable Energy

Environment Friendly, Global Warming and Climate Change – Renewable Energy does not produce any GHG emissions or cause air pollution from the combustion of fossil fuels unlike coal, oil or gas. Alternative Energy does not require major mining activity leading to health hazards like thermal power. Renewable Energy also does not cause pollution disasters like the BP Oil Spill

Energy Security – Most Developer and large countries are dependent on importing billions of dollars in fossil fuel from countries with unstable and repressive political regimes. The Middle East is the biggest exporter of Oil and Gas. The region is ruled by despotic,undemocratic rulers. This make them volatile leading to the disruption in the supply of crucial energy supplies. Libya, Bahrain revolutions and civil wars underline the problems with importing energy. Europe has faced a number of disruptions in the supply of Russian Gas. Note all these fossil fuel countries are notoriously negligent in Global Warming Efforts. Russia and Saudi Arabia the 2 biggest exporters of Oil are the worst offenders in this respect

Peak Oil – Rapidly increasing population and growing prosperity in developing countries like China and India has put growing pressure on global resources. Oil has been increasing in price as the supply fails to keep up with the growing demand. Note a number of important think tanks and countries have said that Peak Oil is about to be reached when supply stops growing because lack of Oil Deposits. This will lead to a drastic change in lifestyle as the global economy is heavily addicted to Oil. Coal and Gas Prices have also been rising in sympathy with Oil Prices making Energy costlier.

Summary

Renewable Energy also helps in supporting the democratization of energy production by allowing people to generate electricity themselves through rooftop solar panels and improves energy efficiency as no need for expensive electricity transmission is needed. Different Renewable Energy types have their own pros and cons which differs from each other. However one thing is sure, all types of Clean Energy will be needed to replace the massive energy needs of the world which is being unsustainably fueled by Fossil Fuel Sources.