Why equity return on investment for wind sector in India is tempting
The equity RoI for wind sector in India could be 14-16% per annum, which is very good and very few segments offer similar RoIs.
Praful Kumar is an investment consultant and a friend of mine. He was searching for medium-risk investment avenues in India that would give foreign investors 14-15% returns. Stephen Bream, also a friend, had a similar task in hand. Thanks to sluggish growth, investment advisers like them are a confused lot.
I thought details of a few recent investments would help un-clutter their minds. Morgan Stanley has invested in Continuum Energy. Goldman Sachs has picked up stake in ReNew Wind Power. There are many more reports that prove there is heightened activity with several PE funds and investors vying to invest in wind-energy sector.
I try to sell them my idea, but Kumar and Bream aren’t convinced yet. Now, the ultimate test of any investment strategy is its “return on investment”. An investor primarily looks at his “equity RoI”. And if this return is satisfactory, it’s a tempting proposition. The equity RoI for wind sector in India could be 14-16% per annum, depending on wind velocity, capacity factor and electricity rates. Very few segments offer similar RoIs.
I line up my arguments. India has a huge shortage of power —demand far outstrips supply. So, there will always be adequate demand. At peak, the demand-supply mismatch is 12-13%, with the shortfall soaring during peak summer months. India’s current installed capacity is about 170,000 MW. With growth expectation of 8-10% pa, we need to add about 16,000-18,000 MW every year. That looks impossible considering the country’s lack of fuel sources to run power-generating units. After all, India doesn’t have good quality extractable coal. It also lacks harness-able gas sources. Besides, we don’t have sufficient capital to set up nuclear power plants. So, what will we do?
Does the answer lie in sun and wind? In both cases, the input cost is zero. Energy from wind costs about Rs 3.5 to Rs 4.5 per Kwh, depending upon the quality of wind and the capacity utilisation of the turbine. Energy from new coal plants cost about Rs 3 per Kwh — it is about Rs 4 per Kwh if imported coal is used. The great edge for wind energy is renewable energy certificates, which are issued to power producers who use renewable sources.
Producers selling power in open-markets are eligible to receive and trade in RECs. The REC-traded price is now between Rs 1.50 and Rs 2.50 per unit (price varies due to demand-supply of RECs). This is a huge advantage to renewable energy power producers and significantly adds to their profitability. Considering the open access price, which could be around Rs 2.25–Rs 2.50 (it could be significantly higher when the demand-supply gap enhances), RoI on wind-energy projects is very good.
In a country where power cuts are rampant and about Rs 13-14/KwH is incurred to keep the power supply on—through diesel generators—generating electricity at a cost of about Rs 3.50/Kwh makes great sense. Plus, with RECs in the picture, open market sales of energy now being made possible, and with the significant demand-supply gap in energy requirement, what else could be a better investment? Kumar and Bream now have a great choice. They agree.
(The writer is deputy MD and group CFO, Bilcare Ltd; he was formerly CFO of Suzlon Energy. Views expressed are personal)