Green Infra is a joint venture between infrastructure investor IDFC Private Equity and clean development mechanism (CDM) advisory firm Emergent Ventures India. The BP deal gives it three wind farms in Maharashtra and Karnataka with a total power generation capacity of 99.4 megawatt (MW). The joint venture was formed last year, shortly after IDFC Private Equity invested a reported $10 million in Emergent. The Mumbai-based private equity firm is among the leading investors in India’s clean-energy sector. It has done three deals worth $190 million so far, including the BP transaction. IDFC PE has also been a consortium investor in two deals amounting to $192 million.

New Paradigm

The heightened interest in clean energy comes despite the recent downtrend in oil prices. High prices have traditionally been the trigger for countries and investors to focus on clean energy. For instance, in 2008, when oil prices peaked at $147 a barrel, India saw nine deals worth $97 million concluded against less than a handful in 2006 and 2007. In 2009, despite oil prices trading at $70 per barrel (as of June), deals have continued at a steady clip. "We are certainly moving beyond the oil paradigm," says Jaswinder Kaur, Managing Director, India, Cleantech Group, a global cleantech services provider.

Renewable energy accounts for just 9.7% or 14.8 gigawatt (GW) of the country’s installed power generation capacity of 150 GW, says Kuljit Singh, Partner, Ernst & Young, in a recent report. He estimates India’s gross renewable energy potential will be 220 GW by 2032. In the backdrop of factors like a looming power supply deficit and rising environmental concerns, the imperatives for renewable energy are growing. "The regulatory framework is also changing in favour of renewable energy," says Alok Gupta, Managing Director and CEO, Axis Private Equity. The Mumbai-based private equity firm invested $11 million in Shalivahana Green Energy, a Secunderabad-based renewable energy company, in June.

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Greenback Mountain

Source: Ernst & Young, Cleantech Group, Industry

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Cleantech Group’s Kaur supports Gupta’s view on the regulatory aspect. "Policy in India is really driving interest in the space," she says. The country is likely to spend over Rs 1 lakh crore in setting up power plants based on renewable energy sources by the end of 2011-2012, noted Devasis Majumdar, Chairman and Managing Director, Indian Renewable Energy Development Agency (IREDA), at a Confederation of Indian Industry seminar in Orissa last August. "As per 11th Five Year Plan targets, power plants with a capacity of 14,500 MW, driven by renewable energy sources, would be set up by the end of 2011-12," he said. So far, Rs 15,000 crore has been invested to set up 3,000 MW, based on renewable energy sources.

In a further push, the Central Electricity Regulatory Commission (CERC) mandated last December that all state-owned power utilities would have to buy a minimum of 5% of their requirements from renewable energy sources from 2009-10 onwards. This will increase to 15% by 2020. States like Tamil Nadu and Karnataka already buy 10% of their power from renewable sources. "This has led to an explosion in renewable energy tariffs," says Vivek Mehra, Managing Director of Mumbai-based Yes Sustainable Investment Bank.

Since green power is in shortage, suppliers charge Rs 8-10 per kilowatt (KW), which is lower than the penalty of Rs 13 per KW for not meeting the 5% renewable energy target. Therefore, says Mehra, a hydro-power plant which was getting a 16-17% internal rate of return at a tariff of Rs 3-3.5 per KW, gets a higher return when it sells at Rs 8 per KW. Part of the imperative to push renewable energy comes from India’s administered oil price regime. Morgan Stanley estimates that if domestic oil prices remain unchanged, every $5 per barrel increase in oil prices above $57 per barrel would increase the fuel oil subsidy by $3 billion (0.25% of GDP).

However, while private equity seems enamoured with the clean energy sector for now, some believe that there may soon be a lull in the deal momentum. "Companies that have grown over the last three years will absorb investments this year and the next. Then, there may be a lull," says Mehra. Moreover, the sector typically has long gestation periods. "It is sensible to get in now, at the early stages, rather than wait for 7-10 years," says Harish HV, Partner (National Management), Grant Thornton.

Further, companies focused on supplying technology to export markets are less likely to be attractive than those focused on the domestic market, where the opportunity lies in services (power generation). For instance, Suzlon uses proprietary technology to make wind turbines for US and Europe. It is now struggling to retire a Rs 11,800 crore debt burden incurred earlier to fund overseas acquisitions. Citigroup, in a September report, expects the company to book losses in 2009-2010.

Technology-driven companies do ultimately spell higher returns for investors, but few local players actually have a value proposition to offer. "In India, players have not yet come up with revolutionary technology," says Ernst & Young’s Kuljit Singh. Most buy the technology overseas and implement it here. Investments in research and development would address that problem, but investors have to be prepared for the long gestation periods. "The gestation periods depend on how much work has gone into a particular technological space," says Pramod Chaudhari of Praj Industries, which works on biofuel solutions.

The silver lining is that specialised investors focused on both ends of the spectrum are beginning to emerge in India. Investors such as IDFC Private Equity and Axis Private Equity are focused on the services side of the business, while early-stage investors such as Sun Group, Draper Fisher Jurvetson and Lightspeed Venture Partners have put their money on emerging technologies. For both, patience is the key to supernormal returns.