Wind Power Projects in India: An Interesting Investment Opportunity for Yield Seeking Investors (Absolute Return)

When Warren Buffet is asked how he times the market so well, he once mentioned, “It’s simple, I withdraw from the market when my liftman starts talking about tips on stocks”. In the recent financial turmoil in the markets, even he was not spared. Berkshire Hathaway, Buffet’s investment company suffered losses of more than $1.5 Bn in the 1st Quarter of 2009 following losses in the earlier quarters as well. So how does one continue to make hay while the sun is no longer shining in the stock markets?

The slumping stock market, falling housing prices, falling commodity prices and weakening economy have serious repercussions for Yield Seeking Investors such as Pension Funds, Endowment funds, Insurance funds etc and consequently losing huge amount of money for the retail investor, many of whom were banking on these instruments for retirement, Universities who were looking to fund education programs, etc.

What went wrong? What could have been done to prevent or insulate the long term funding from the vagaries of stock markets, commodity cycles etc.

Yield Funds Investment Philosophy:
The absolute return or simply return is a measure of the gain or loss on an investment portfolio expressed as a percentage of invested capital. Absolute return strategies aim to produce a positive absolute return regardless of the directions of financial markets. They typically achieve this by investing the portfolio's assets in debt or other low volatility instruments, hedging long and short positions in portfolios of securities that when combined aim to reduce risk while increasing returns. The resulting portfolio should have low correlation with financial market performance.
Typically the yield seeking investor’s investment strategy follows the absolute return approach. Hence by nature they aim to produce a consistently positive return regardless of the development of the markets. They seek a combination of capital preservation and steady long-term growth, and aim to generate positive performance regardless of market direction.

A quick look at returns (ROI, IRR) from investment made in last 10 years in select stock indices as illustrated below clearly highlights the need for alternative investment and also reflects the relative advantage that the “Wind Power Investment” carries over other investment avenues in it being investment with “Predictable Cash Flow”, “Decent Returns” and the “Real Assets” the very essence of concept of Absolute Return on which Yield Seeking Investors dwell upon.



Reference: Yahoo Finance, Bloomberg
Note:
1. Tel Aviv, Nasdaq, Dow Jones, S&P, BSE_Sensex returns calculated based on investment made in March 2000 and Maturity in March 2009
2. Coupon Rates on UK Government Bond, US Government Bond, India Government Bond as available as on today June 2009.
3. Wind Power Investment Returns are Project IRR calculated as on today for a typical Indian Wind Energy Project.
4. Return on Investment, Internal Rate of Return etc are not strictly comparable one to one.

Wind Power Investment in India
“Wind Power Investment in India” has emerged as one of the most attractive investment avenues for Yield Seeking Investors who are looking for reasonable long term return and sustainable cash flow and Investments backed by Real Assets. Wind Power Investment leverages the long term potential in the hi-growth energy sector where the supplies seemingly never catch-up with the demand. Moreover, it also enjoys a premium of being the ‘clean, green renewable energy’ that is most sought after in the wake of global warming & climate change concerns.










There are three key perspectives to investment in wind power. First and foremost is the investment economics. Characteristics like real assets, multiple revenue streams and predictable future cash flows over as long term as 20 years or more are simply unmatched by any other investment option, not even fixed deposits. The multiple revenue streams comprise of primary revenue from sale of power generated and secondary revenue from carbon trading supported by infrastructure benefits provided by government.
Wind energy as an option for diversification has unique advantages. It lets you diversify in to a high growth sector without the hassles of managing the 3 Ms - manpower, material or market. Thanks to the innovative ‘End-to-End’ solutions business model smartly engineered by the industry leader – Suzlon. Under this, a wind power project is literally served on a platter and you do not have to spend your time or engage your manpower at any phase of the project over its entire life cycle.
The project has designed life of at least 20 years. There is a long term power purchase agreement signed in the beginning itself which assures the take-off of the power generated for up to 20 years at a predetermined rate. Add to it the unmatched guarantee of up to 95% equipment uptime from the End-to-End solutions provider, and it explains why you could count on this low risk high returns sector as your preferred investment option.




Major Risks Perceived/Analyzed:

Sr. No Nature of Risk Indicator Perspective/Mitigation
1 Country Risk
With 38th Rank in Protecting Investors, 28th Rank in Getting Credit, 122nd Rank in Ease of Doing Business, 89th Rank in Employing Workers gives India edge over many other geographies however 180th Rank in Enforcing Contract, 140th Rank in Closing Business are some areas of concern.
2 Currency Risk
With Economy expected to grow by 6% in next decade and demographic dividend should augur well however Fiscal Imbalance though temporary global phenomena is worrying concern.
3 Policy/Regulatory Risk
With emergence of Stable Government with majority and relentless thrust on Renewable Energy both at Central and State the risk associated is minimized to a great extent.
4 Construction/Project Execution Risk
The unique offering by all Major Wind Turbine Generators in India in terms of End to End Solution wherein the complete investment solution is provided under one umbrella nullifies the risk. Project Delivery schedules are typically 6 to 9 months in comparison with norm of 18-24 months in developed countries.
5 Off take Risk
With Peak and Average Deficit of around 12% plus and economy expected to grow at around 6% in next 5 years marketability/off take of power generated is guaranteed. The long term PPA (Power Purchase Agreements) offered by various states provides greater degree of visibility to Project Cash Flows.
* DB 2009 Doing Business Ranking 2009 World Bank Group

Conclusion:
Experience in recent past of investment in highly volatile investment avenues such as stock markets, commodity, and real estate markets has brought forward and revitalized the importance of concept of “Absolute Return” specifically for the “Yield Seeking Investors”. Today wind power investments in India provides a unique opportunity for these long term funds to diversify their investment in avenues which are characterized by “Long Term Predictable Cash Flow” with Decent Returns and backed by “Real Assets”, the very rationale of Yield Seeking Investors. Unique End to End model developed by Indian wind turbine generators offers interesting investment opportunity to such funds without worrying about the 3 M (Market, Material & Manpower) and thus helps diversifying their investments.

Disclaimer:
Satyen Kanabar, Senior Manager, Business Development (International Investments), Suzlon Energy Limited
Views expressed above are strictly personal of the author and do not belong to organization and are based on publicly available selective information are of indicative nature only. He can be contacted at ksatyen@suzlon.com

Thorium-fuelled exports coming from India

17 September 2009
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India has announced intentions to export power reactors to other nations and is developing an advanced design for that purpose.



The head of India's Atomic Energy Commission, Anil Kakodkar, announced yesterday in Vienna a special version of the forthcoming Advanced Heavy Water Reactor (AHWR) adapted to use low-enriched uranium (LEU) fuel.



123 Thorium

The long-term goal of India's nuclear program has been to develop an advanced heavy-water thorium cycle. The first stage of this employs the pressurized heavy-water reactors and light water reactors, to produce plutonium.


Stage two uses fast neutron reactors to burn the plutonium and breed uranium-233 from locally mined thorium. The blanket around the core will have uranium as well as thorium, so that further plutonium is produced as well.


In stage three, AHWRs burn the uranium-233 from stage two with plutonium and thorium, getting about two thirds of their power from the thorium.


The first AHWR is meant to start construction in 2012, although no site has yet been announced. A prototype 500 MWe fast neutron reactor being built at Kalpakkam should be complete in 2011.
The original design is fuelled by a mix of uranium-233 and plutonium bred from thorium using fast neutron power reactors earlier in a thorium fuel cycle. The LEU variant is suitable for export because it does away with the plutonium, replacing it with uranium enriched to 19.75% uranium-235.



Producing 300 MWe, the unit is less than one third the capacity of a typical large reactor. It is designed to operate for up to 100 years and has a "next generation" level of safety that grants operators three days' grace in the event of a serious incident and requires no emergency planning beyond the site boundary under any circumstances.



The design is intended for overseas sales, and the AEC says that "the reactor is manageable with modest industrial infrastructure within the reach of developing countries."



The new fuel mix, AEC said, produces less plutonium than mainstream light-water reactors and what it does produce contains three times the proportion of plutonium-238, lending it proliferation resistance. Furthermore, it leaves only half the amount of long-lived radioactive waste per unit of energy compared to mainstream light-water reactors.



As well as introducing India as a potential new major player in reactor sales - especially to new markets - the announcement reaffirms India's commitment to proceeding with the thorium fuel cycle using the original AHWR as the final stage.

India was effectively isolated from international nuclear trade from 1992 until early this year when a US-led initiative resulted in special arrangements for India under the Nuclear Supliers Group, based on an India-specific safeguards agreement with the International Atomic Energy Agency. Overseas firms can now do business with India, which is keen to import uranium and large power reactors. In turn, India may now offer its goods and services to the wider world.

Source:
http://www.world-nuclear-news.org/NP_Thorium_exports_coming_from_India_1709091.html

Changing face of Wind Power in India

A Quick Background:

Indian Wind Power Industry grew from under 400 MW to over 8750 MW from year 1994-95 to 2007-08. Today with installed capacity of over 9100 MW India is 4^th in the global tally of installed capacity. For the last three years India has added on an average 1500-1600 MW year on year. What next?

India’s wind power market is undergoing a paradigm shift from Tax & Captive driven investment to large scale grid connected Independent Power Producer (IPP) Projects supplying electricity to state utilities and hopefully exploiting Open Access going forward. The investment from sectors such as textile, forging, cement, automobile, engineering is making way for large scale investment by Conventional Energy Companies, Asset Developers etc and going forward by Pension funds, Yield Funds through the Independent Power Producer (IPP) route. Historically the Major drivers of wind power investment in India are Accelerated Depreciation, Tax Benefit under Section 80 I (A), Energy Security, High Wind Potential (Estimated at 45000 MW in early 1990s), Government both Central and State Support and last but not least Innovative business model offering One Stop Solution with capability of offering 50 MW to 100 MW Projects in 6(six) to 12(twelve) months capitalizing on extensive preparatory work carried out such as Wind Resource Mapping, Infrastructure Development etc. Benefits can be compared with various incentives which are being provided in different parts of world as Capital Subsidy, Subsidized Debt Facility, Tax Credits, Supportive Infrastructure Development etc. Taking a leaf forward, in the hindsight it can be easily seen that similar kind of benefits were extended at various times towards various other industries apart from Wind Energy both in India and other parts of world.

An important point to be noted with respect to available benefits such as Accelerated depreciation benefit or Tax Credit (PTC in US) is the availability of Taxable Profits by the firm (Balance sheet financing in India) investing in Wind Power or by Tax Equity Investor (US). Firms which do not have tax capacity (new venture, dedicated renewable energy companies, Independent Power Producers, Indian subsidiary of Multinational herein after collectively referred as Independent Power Producer (IPP)) are at disadvantage when it comes to competing with the Balance sheet investor who can obtain additional benefits of Tax saving over and above the revenues offered by Project. In the absence of level playing field, Independent Power Producer (IPP) are facing an uphill task in developing the much “ambitious” but “reasonably achievable” wind power asset portfolio in India. On the other hand, Deep pockets (at least before the financial crisis) and expertise or internal appetite for Renewable Energy, resulting in “long term low cost funding” and “Monetization of Clean Development Mechanism” definitely gives an added advantage to Independent Power Producer (IPP). These aspects definitely help bridging the difference in much talked about absence of level playing field between Traditional Balance Sheet Investor and Independent Power Producer (IPP).

Having said the above, there is one more major difference between Balance Sheet Investor and Independent Power Producer (IPP) and that is “Due Diligence Process” & “technical expectation” from the Project where in I believe today’s Indian WTG Manufacturer (both established and upcoming) will have to gear up.

Developments that can pave the way for Independent Power Producer (IPP) in India:

· Projects with bigger Size & visibility of portfolio development with Manufacturer/developer in the longer term.

· Tariff determination process based on a realistic and comprehensive cost of projects with inbuilt option of escalation.

· Additional Financial Incentive such as Generation Based Incentive (GBI), Renewable Energy Certificates (REC), Tradable Tax Credits (TTC) or any other similar instruments which are linked to actual generation.

· Secure & long term Power Purchase Agreements (PPA) before commissioning of projects.

· Open Access as financially viable mechanism for revenue generation.

· Strengthening of Grid to accommodate wind power of substantial capacity.

· Single Window clearance for all application and clearance required.

· Comprehensive and Uniform Renewable Energy Law.

· Availability of Long term Project Finance.

Suzlon: A Case Study

Being a market leader in India for last 9 years with installed base over 4000 MW as on November 2008, Suzlon foresees a sizeable opportunity for attracting investment from IPPs in India Wind Energy Market. As a proactive measure Suzlon has formed a separate team which caters to needs of the Independent Power Producer with special focus on investment from International Investors. Various aspects where in the team focuses are as below:

1. Environmental and Social Due Diligence: Team provides complete support in terms of necessary documentation, site visit etc required for Environmental and Social Due Diligence, While working closely with Investor and various globally renowned consultants such as ERM, Delhi etc.

2. Wind Farm/ Portfolio offering: Usually the project sizes discussed with Independent Power Producer (IPP) are above 25 MW and can go up to 100 MW in a site or at multiple sites. Typically the modus operandi is to work on a Framework Agreement with visibility of projects for next two to three years to develop portfolio of operating assets at different sites/states.

3. Key Account Management: Key Account Manager (KAM) is assigned for specific Investor who acts as single point contact. KAM coordinates for all aspect of the project be it Wind Resource, Land, Legal, Contractual, Power Evacuation, Power Purchase Agreement, Project, Operation & Maintenance etc.

4. Technical Due Diligence: A detailed product presentation with follow up visit of expert team to one of the integrated manufacturing facility in India (out of approximately 4000 MW plus manufacturing base) and further visit to one of the 50 operating sites in 8 different windy states across the country with over 4000 MW under operation are usually among the various steps during the technical due diligence.

5. Energy Yield Assessment: Energy Yield Assessment for the projects based on long term wind resource data by third party consultant such as Garrad Hassan, IREG, CECL etc depending upon the requirement and comfort. Option of Energy Yield Assessment by in-house experts following international best practices is also a plus point.

6. Legal Due Diligence : Assistance in complete documentation with respect to various laws applicable, land related documents, necessary environmental clearance, necessary approvals from government agencies etc. This assists in smooth decision making process.

7. Power Evacuation and Load Flow Study: Detailed Power Evacuation Scheme study with respect to evacuation infrastructure but not limited to type of equipment used, type of instruments used, evacuation voltages, type of conductor, and detailed in-house load flow study of the area are carried out at pre-offer stage. Independent opinion can be obtained depending up on the requirement.

8. Operation and Maintenance: Detailed operation and Maintenance procedures are prepared and discussed at length to work out the best possible operation and maintenance services contracts on terms and condition mutually agreeable to both the parties.

9. Health, Safety, Security and Environment (HSSE) aspect: Best learning from past experience, HSSE policy of company and HSSE policy of Investor are blended to finalize the best suitable HSSE policy for the project on terms and condition jointly agreeable to both the parties.

10. Corporate Social Responsibility (CSR): A comprehensive Corporate Social Responsibility plan can be worked out jointly with Investor ensuring the overall growth of the geographical area where in the project is developed.

11. New Initiatives :

a. Web Based Monitoring Facility: A prototype web based monitoring facility option has been worked out which will give an option to investor to have comprehensive look at the wind power investment as operating asset. Work is under progress and facility can be provided customized to expectation on terms jointly agreeable to both the parties.

b. Hybrid: Options are being explored to maximize the utilization of assets such as Land and Power Evacuation by exploring option of hybrid such as Solar etc. Further options to convert the in-firm power to firm power using the storage mechanism are also in drawing board stage.

c. Maximization of Revenue from Sale of Power: Team also works on understanding various policy aspects to explore the opportunities which could come going forward such as Third Party Sale, Group Captive Scheme, and Power Trading etc.

Caroline Schoeder rightly said “Some People change when they see the light, others when they feel the heat”. Suzlon being the torchbearer for wind power industry in India has steadfastly decided to be the first one and to augment its core competency in providing Concept to Commissioning Solutions, Gargantuan strength of Manufacturing base of over 4000 MW per Annum and extensive Operation & Maintenance expertise from over 4000 MW operating assets with top-up of “Critical Contemporary Understanding of all techno-commercial aspects” as expected by Independent Power Producer (IPP).

About author:

Satyen Kanabar, Senior Manager, Business Development & Strategic New Initiative, Suzlon Energy Limited, India looks after Independent Power Projects (IPP) in Wind Power in India with Special Focus on International Investment. Further as part of Strategic New Initiative Team explores option of “Maximization of Revenue from Sale of Wind Power through Open Access, Hybrid Solar- Battery Storage etc.

Disclaimer:

Views expressed above are strictly personal of the author and do not belong to organization and are based on publicly available information and are of indicative nature only.

Article got published in international magazine : Energetica India as below:

http://www.energetica21.com/digital/revistas/india02.html#/63/

Nuclear powers Exelon's emissions certificates

Exelon is to introduce an emissions-free energy product, with over 90% of the power to come from nuclear plants.

In a pilot scheme, a selection of the utility's business customers will be able to purchase Emissions-Free Energy Certificates for the power they use. "Our customers have overwhelmingly expressed a need for low-carbon products," said Kenneth Cornew, president of Exelon's energy retailing business and senior vice president with the overall corporation.

The certificates will be tracked by PJM Environmental Monitoring Services' Generation Attributes Tracking System. This will allow Exelon customers to compare the effects their choice of low-carbon energy is having on the environment compared to using the normal mix of grid generation. Exelon said an Illinois customer holding certificates to cover the electricity used at a 500 kWe facility for one year "could claim carbon dioxide avoidance equivalent to 359 acres of trees or 289 passenger vehicles removed from the road for a year."

Around 93% of the power to support the certificates will come from nuclear power plants, of which Exelon has ten in Illinois, Pennsylvania and New Jersey. The 17 reactors at those sites produce a total of about 24,730 MWe, while other contributors to Exelon's low-carbon pool are hydro at 1620 MWe and wind power at up to 150 MWe. Exelon also operates 6500 MWe of coal, oil and gas power plants, which are excluded from the certificate scheme.

If the pilot trial is a success, the certificates will be widely offered later this year.
source: http://www.world-nuclear-news.org/EE_Nuclear_powers_Exelons_emissions_certificates_1103091.html