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Why marquee investors like Morgan Stanley, Goldman Sachs invest in India’s wind power ventures

According to reports, whichever side of the political divide you are on, it is common sense that coalgate — the ongoing controversy over the allocation of coal mines to big Indian corporates — will further delay project approvals in the country’s core power generation and distribution segment, which has lately seen slower investment. However, India’s alternative energy segment, especially the wind power business, has become hot for global funds and investment banks.

The private-equity division of Goldman Sachs has invested close to Rs 1,000 crore in ReNew Wind Power, which plans to develop 1,000 MW of renewable energy projects by 2015. The company recently launched its first 25 MW wind farm project in Gujarat. It has many more projects under development, including a 60MW wind farm in Maharashtra.

Like Goldman Sachs, which has more than $1.5 billion investment in clean-energy firms worldwide, investment bank Morgan Stanley also picked up a stake in local wind energy company Continuum Energy recently for Rs 1,200 crore through its arm Morgan Stanley Infrastructure Partners. A Reuters report quoting unnamed sources said a few days ago that many global private-equity firms are in talks with Bharat Forge for a stake in the latter’s wind-energy firm Kenersys.

The soaring interest of private-equity firms in Indian renewable assets is thanks to multiple reasons, say analysts Aris Karcanias and Feng Zhao of BTM Consult, a premier forecaster and data source for the international wind industry. These are the same reasons that brought wind-energy original equipment manufacturers to India over the past decade, they note.

“India has grown from around 6.2 GW in 2006 to more than 16 GW in 2011 (in wind power capacity). Apart from China and the US, India is the world’s third-largest wind power market for newly installed capacity for the second year in a row in 2011,” these analysts say, emphasising that the country is expected to “install a further 23 GW” between 2012 and 2016.

It is simple, they add. “Investors are continually seeking new higher-growth markets as traditional European and North American markets are slow and uncertain.” While a few analysts suggest that lifting of subsidies to renewable-energy firms in most parts of Europe in the wake of the ongoing economic crisis may have spurred their India foray, Kameswara Rao, leader, electricity, power and mining, PricewaterhouseCoopers (PwC), begs to differ.

“The interest of global companies in Indian renewable energy is less due to subsidy withdrawal elsewhere and more due to the growing opportunity presented in the Indian market. The RPO [renewable purchase obligation] and REC [renewable energy certificate] mechanisms have together created a national market for renewable energy, attracting states that have more resources than their obligations require, and permitting other states that do not have such factors to buy from the market,” he says; RPO is the minimum amount of clean energy to purchased by the states in order to meet the requirement. REC is a certificate issued to renewable energy producers that can be traded for cash—it helps them earn additional tariff over above the wholesale power price.

That India is now home to large-scale wind farms is a major lure, analysts say. Traditionally, the Indian wind industry consisted largely of small-scale, individual units, set up by small-scale enterprises. “Now, the Indian wind market is fast maturing, with tax-credit-driven sales being replaced by large IPP [independent power producer] procurement, thus reducing cost of development,” says Rao. “On the revenue side, pure wind projects will evolve a hybrid play along with hydro and other technologies to offer a more predictable supply that can compete for merchant or open access supply,” the PwC analyst forecasts.

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