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Saturday, February 13, 2010

Edition 10: Government incentives for power generation

Private equity and venture capital firms have invested $527m in power sector, 24 per cent of the total transaction value in India for the period Jan. 2005 and 21 July 2009. In terms of transaction value, this accounts for only 24 per cent of total transaction value, but in terms of deal count has a substantial share, according to the report.
Kuljit Singh, partner and transactions advisory leader for Infrastructure, Real Estate and Government, Ernst & Young, said, 'The recent years have seen the emergence of several funds with cleantech themes, venture capital backed development companies being set up to aggregate assets in India, growth of carbon financing, etc. With this, greater depth will emerge on the PE/ VC investments front.'
In fact, 20 of the 37 transactions between January 2005 and 21 July 2009 were by PE/VC players. The PE/VC players are chasing up the innovative players, while several funds with specific renewable energy mandates have contributed to the transaction activity. PE/VC transactions activity peaked in 2008 with $301m investments, but has slowed down during the current year due to the global financial and credit crisis. The activity is expected to pick up again in the near term.
PE/VC transactions include Moser Baer (investor CDC Group, Credit Suisse, IDFC, Morgan Stanley and Nomura International); SE Forge (investor IDFC); Vestas RRB India (investor Merrill Lynch); Orient Green Power Company (investor Olympus Capital); Cobol Technologies' (investor Pangea Capital).
According to Kuljit, 'In the near time frame, a significant number of assets are expected to change hands with some of the existing project owners refocusing efforts on core areas, raising finances by selling non-core assets and de-leveraging balance sheet in case of assets which are on the balance sheet of the main company etc.'
The renewable energy space is attracting various types of developers/ investors pursuing both organic and inorganic expansion strategies. Key emerging players include conventional energy developers looking to diversify into clean energy, large international utilities wishing to participate in the Indian opportunity, private equity backed renewable energy development companies, companies with existing renewable energy assets looking to expand their portfolio etc.
India has seen significant transaction activity with deals worth $2155bn announced between January 2005 and July 2009. The average deal size (based on deals with announced value) stood at $69.5m during the same period. Suzlon's acquisition of REPower, worth $1.327bn accounts for 61.6 per cent of transaction activity in value. Another significant transaction was Gammon India's acquisition of a 50 per cent stake in Sofinter for $101bn.
Wind energy has the maximum share of approximately 79 per cent of the transactions in the renewable energy space during January 2005 and 21 July 2009, the report said.
'Growth in this segment will not just be driven by business rationale, but also be necessitated by serious environmental concerns. However, a lot depends upon the extent of Government's fiscal and policy support to this sector,' added Kuljit.
According to Ernst & Young, India, like many developing countries is facing increasing international pressure to reduce its greenhouse emissions. Although, India has one of the lowest per capita rates of energy consumption and pollution in the world, it's indeed one of the polluters due to its large population size. The country has immense Renewable Energy (RE) potential, which, if harnessed, can help it control its emissions, without compromising on its economic growth, and also bridge the supply deficit to an extent. The sector-wise break of the total RE potential in India is - wind energy (48,561MW); small hydro power (15,000MW); and biomass (120-150 million tonnes of surplus biomass per year can be converted into 16,000MW).
Huge demand-supply gap in power, depletion of fossil fuels and energy security have been the key drivers behind sustained investments in the sector, the report said. India has also initiated programmes and incentives to induce rapid growth in the sector. Government incentives such as Generation based incentives (GBI), accelerated depreciation, tax holidays and subsidies are a step in the right direction.
The Government has outlined ambitious capacity expansion and investment plans for the eleventh five year plan period (FY07 - FY12). It has proposed an addition of 15,000MW of RE generation capacity during the period. Wind power projects form 70 per cent (10,500MW) of the proposed capacity addition, while Small Hydro Projects (SHP) account for 9.3 per cent (1,400MW). The total investments on development of RE during the plan period is expected to be about $2bn.

n State Electricity Regulatory Commissions (SERC) have been mandated to promote RE, through renewable purchase obligations, which require discoms to source up to 10% of their power from RE sources.
n The key wind energy incentives include a provision for 80% a 10-year tax holiday, income tax accelerated depreciation in the first year, waiver on power sold to utilities and favorable tariffs.
n Projects that do not claim accelerated depreciation benefits are entitled to generation-based incentives (GBI) that provides INR0.5/kWh of power sold, for Independent Power Producer (IPPs) with capacity >5 MW
n India offers several subsidies to solar power systems, such as solar lanterns, home lighting systems, etc., and GBI of up to INR12/kWh for power plants
n For SHP projects, incentives include concessions on customs duty, 10-year tax holiday and other state-level incentives including sales and electricity tax exemptions and preferential tariffs. These include capital subsidies.
n Incentives for biomass energy include accelerated depreciation, import duty concessions, excise duty exemption and a 10-year tax holiday. The incentives also include capital subsidies. Various export incentives have made India a key player in the global wind turbine generator (WTG) and solar PV cells market.

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