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Clean energy: Investors bet on demand-supply gap, growth prospects

According to reports, on May 6, when US-based Stanford University said it would divest $18.7 billion in coal stocks, it became the first major educational institution to join some dozen others in America to purge endowment funds of fossil fuel investment.

Renewable energy (RE) companies in India are citing this move to say investment in their sector will rise further. Only last month, GE Energy Financial Services made its first investment in a solar power project in India, announcing $24 million funding for a 151-Mw solar photovoltaic power project of Welspun at Neemuch in Madhya Pradesh, one of the world’s largest solar plants. A year before, the private equity arm of Goldman Sachs invested $135 million more in ReNew Power, raising its total equity in the company to $385 million.

At the same time, the conventional power sector in the country is going through a slowdown. “Globally, pension funds, large private equity funds and sovereign wealth funds are increasingly being held to higher environment and social standards by their investors and climate change activists. Stanford University endowment’s divestment from the coal industry is part of a growing group of funds to partially divest from fossil fuels,” said Vineet Mittal, vice-chairman, Welspun Renewables.

While making the announcement, Stanford said it would also recommend to its external investment managers that they avoid putting money in publicly traded coal mining companies.

Back in India, faster growth prospects in the clean energy sector is seen as a necessity, primarily due to an energy deficit and the surging demand forecast. Beside, India has pledged to reduce the emission intensity of its gross domestic product by 20-25 per cent by 2020 in comparison to the 2005 level, during the Copenhagen climate change negotiations. Foreign investors see an opportunity here to participate in the sector’s transformation, by funding the creation of long-term clean energy assets, said Mittal.

RE projects have significantly lower construction and project execution risk. A typical project takes six to nine months to complete. It can be commissioned in a modular, piecemeal manner, unlike conventional power projects which are much longer gestation ones and more complex to implement. Most new projects in the conventional sector are stuck and have been facing issues on regulatory clearance, fuel availability, logistics and cost increase. More, as Mittal notes, since the cost of conventional power is expected to go up, grid parity of RE, when the rate gap between the two no more exists, is likely to happen sooner rather than later. “From a returns standpoint, RE projects in India have proven less risky and have stable long-term return generating potential.”

The spurt in demand for RE also came from the reduction in levelised cost of electricity produced by such projects. This as Kameswara Rao, leader in PwC India for energy, utilities, and mining points out, has coincided with a period when conventional projects are facing risks due to fuel constraints and other project development challenges. “The gap between the two has reduced so much that RE players have taken to competing with conventional power head-on.”

Achieving the targets depends on financial and structural support from the government. While the Manmohan Singh government in its first tenure started with an accelerated depreciation benefit to those putting up wind energy capacity, this created distortions and saw the entry of non-serious entities. The scheme ended in March 2013 but another concession in the form of a generation-based incentive of 50p a unit of electricity fed into the grid was provided last year, both for wind and solar power plants. The Jawaharlal Nehru National Solar Mission was simultaneously launched.

According to Mittal, solar and wind energy currently dominate among clean energy assets in terms of investor interest. This is because of the rapid advancement of technology that has improved efficiency and reduced costs (especially with solar) and their limited project risk. Globally tidal and geo thermal energy also hold significant potential.

Sumant Sinha, chairman, ReNew Power, said the government push through incentives for wind energy and solar programmes have to a certain extent been able to propel investor interest. Grid-connected wind and solar energy farms, engineering, procurement & construction for these sectors, as well as off-grid solutions, are the most attractive for investors. “However, a lot of the policy making sits at the state level. Unless states are willing to buy more renewable energy, it will not be sufficient. While the central-level incentives have helped to a point, we need to take the next step to further increase the incentives and make RE more competitive and acceptable to the eventual buyers, the state distribution companies.”

Though the regulators have spelt out RE purchase obligations (RPOs) under which distribution companies are required to buy a certain percentage of their power from renewable sources, a recent ICRA study noted 11 of 28 states are yet to meet the long-term trajectory for RPO norms. Beside, as Sinha said, rapid policy changes in regulation, and execution challenges in terms of availability of land, could prove risky in the longer run.

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