By Nirmal Bang

Given the rapid urbanization and industrialization in the country, the demand for power has increased manifold in the last several years. But the supply of power is insufficient, leading to high deficit and power cuts in several parts of the country.

However, the situation will be grimmer if the economy continues to grow and we are unable to produce the required amount of power.

The recent trend is not encouraging as estimates suggest that during the Eleventh Five Year Plan, which ends in 2012, India will only achieve capacity addition of about 60000 mw as against the original plan of 78000 mw. These reasons indicate that the Indian power sector has a long way to go and definitely offers a lot of opportunities. Further, in the power sector if one is selective, there are more opportunities in sources of alternative or renewable energy. For instance, India currently has a total installed capacity of about 140000 mw, which will be increased to more than three times or approximately 422000 mw by the end of 2022. 

During this period expansions in alternative sources of energy will be huge. The total estimated medium-term potential (till year 2032) for power generation from renewable energy sources such as wind, small hydro, solar, waste to energy and biomass in the country is about 183000 MW, which is 14 times higher than the current installed capacity of these sources of renewable energy.

Given that India did not tap these resources so far, there is a huge potential in the non-conventional energy sector and is a solution to the power sector. So far, India has only used a fraction of these resources, which is far less compared to its usage by developed nations and an emerging economy like China.  

Why Alternative Source Of Energy?

One of the main reasons why alternative sources of energy need to the utilized, is that the supply of conventional fossil fuels like coal and gas is limited. The soaring prices of these commodities have pushed companies to seek out alternatives.

There is also growing concern over environmental degradation caused by conventional sources of energy. Due to these factors alternative sources of energy have gained a lot of prominence in the recent past.

Government support and emphasis on clean sources of energy have also resulted in new capacities being built on the basis of such sources.

To further incentivize and increase investment in this sector, the government recently began allowing power plants to earn a higher RoE in excess of 16% to 17% for power produced from alternative sources of energy.

This will allow the companies to earn more on their investments, which is significantly higher compared to RoE of about 14% to 15% earned from conventional sources like coal and gas. Besides tax incentives, higher depreciation allowances and subsidies are also provided to further attract investments to this sector.

Here is the segment-wise assessment of the situation and the opportunity offered by the sector with a brief about some of the listed companies in which investors can invest and take advantage of the growth.

WIND POWER

Currently, India has a wind energy capacity of about 11000 mw. However, this is nothing compared to its potential in India.

According to industry estimates, India can increase its wind power generation capacity to 45000 mw, which is over four times compared to its current installed capacity. Government and private sector companies keen on diversification are investing in this sector to tap its potential.

Suzlon is one of the largest players in this segment providing equipment needed for wind energy. It uses latest technologies to produce all equipment for different kinds of capacities.

However, most of its revenue comes from international markets since there is huge opportunity in wind energy and high expenditure is being incurred on this sector in the American, European and Chinese markets.

The company accounts for about 13% of the market share globally including REpower, which is the European subsidiary of the company.

Globally the growth in wind generation capacities has been in excess of 22%, which will keep the pace going forward given that there is a huge potential in wind energy and there is increased concern about the impact of traditional sources of energy as well as the dependence on wind energy.

Although Suzlon is in the news for reasons like its highly leveraged balance sheet, lower order book growth and aggressive expansion, investors should only invest in this company if they have a long-term view and want to play in the wind power sector.

There are other listed players like Indowind Energy, which develops wind farms for sale, manages wind assets and generates green power for sale to utilities and corporates. It has a current capacity of over 35.65 mw and another 31 mw which it has built for its customers.

SOLAR POWER

Among the non-conventional sources of energy, solar energy is most readily available and is found in abundance. Unlike wind energy, solar energy has not yet been explored in India. It currently has a solar-based power generation capacity of about 200 mw.

However, in terms of potential, India can harness about 50000 mw of power. So far, progress has been very slow given factors like high capital cost, large land requirement and its availability only during the day. However, now in India the national solar mission has been launched under the National Action Plan for Climate Change (NAPCC) to significantly increase the share of solar energy in the total energy mix.

There is also emphasis on building about 20000 mw of solar capacity by 2020. There are few listed players providing the technology (photovoltaic power systems, etc) required for generating power from solar energy.

Companies like Webel SL Energy, Moser Baer and XL Telecom are the known listed companies. Others like Euro Multivision recently came out with an IPO. Webel has increased its generation capacity to about 100 mw currently from 42 mw in FY08. However, it still generates a large part of its revenue from foreign markets.

HYDRO POWER

Unlike wind and solar power generating equipment, a hydro power plant does not require any kind of fuel like coal, gas, etc. However the biggest challenge is to identify projects and get the necessary clearances. Meanwhile, the abundant source of water, especially from rivers can be tapped to produce power.

The country currently has an installed capacity of 38878 mw as against the potential of 150000 mw, as estimated by the industry. The government has taken initiatives like expediting the approval process as well as providing large funds to State utilities to increase the share of hydro power in the fuel mix. Many listed companies like NHPC and JP Hydro, that are mainly into the hydro power projects will benefit from this opportunity. NHPC currently has an installed capacity of about 5200 mw.

The company is planning to increase its capacity to 9467 mw by the end of 2013. NHPC’s strong management, execution capabilities and healthy balance sheet are a few of its strong points. Benefits will also accrue to certain companies that are largely into the supply of hydro power equipment like Alstom Projects. The company accounts for about 30% of the market share in the hydro power segment.

In the construction side, companies like HCC and Patel Engineering will also benefit as they have the capability and the experience to construct hydro power projects such as dams. Although these companies are into construction, a large part of their revenue comes from the construction of dams for hydro power projects.

BIOMASS

Biomass is gaining ground as many companies have begun eying this space. However, this form of power is still used for domestic, commercial and industrial purposes. Currently, India has about 1000 mw capacity but the potential is huge and the industry estimates have pegged this to almost 61000 mw.

The reason is that this form of power is produced by recycling agro wastes like rice husk, wheat straw, corn stalk, sugar cane bagasse, which are available in plenty and are not used. So far among the listed players, companies like Suryachakra Power and Shriram EPC are prominently present in this space.

Wind, solar, hydro and biomass are some of the alternative sources of energy. However, there are many other technologies and means which are at the nascent stage and are used for producing power. There could be many more companies within these segments, which will benefit directly and indirectly from them.

However, it is advised that investors asses and research each company individually before making investments in them. However, companies that operate in the sphere of alternative sources of energy are likely to be in a very rewarding space.