As the country grapples with nearly 10% less power than it actually requires, renewable sources such as solar are being viewed as a viable solution. This, in turn, is generating business for young companies and gaining investor attention. Investors have backed over a dozen solar companies in the past three years.
The National Solar Mission is expected to provide an investment opportunity of over $50 billion in the Indian market, with its target of generating 20 gw by 2020, according to the latest Cleantech Report by research firm Venture Intelligence.
"Solar sector has low construction and operating risks. Prices of solar panels are reducing every year, making this power source a competitive business sector in coming years," says Shalabh Tandon , head of Power for Asia , IFC, the investment arm of the World Bank. It has invested in two solar companies in 2010.
In the last three years, a total of $294 million of private equity funding has gone into 13 solar companies. For investors, solar is where the action is, but it will take time for this interest to translate into deals, say industry watchers. The Indian Resource Centre, which tracks the power situation in the country, estimates that the gap between supply and demand for power in India will drop to 6% by 2020, down from 10% in 2009, with solar power viewed as a strong alternative power source.
This trend in India is contradictory to what is happening in developed markets, where investors are moving away from solar investments. In fact, clean tech seems to have lost momentum in the US. According to Siddhartha Das, general partner at VenturEast, the US is shifting its focus to other parts of the solar value chain. "Instead of investing in solar technology, they are focusing more on solar power projects now," says Das.
Germany, a pioneer in the solar technology market where government policies required utilities to pay above market prices for solar-generated electricity, has now cut back on subsidies post the recession. Globally, solar markets have grown due to feed in tariff subsidies.
In India, however, entrepreneurs are innovating with a mix of business models and consumer financing options to drive this fast-growing market. For instance In India, the government does not give any subsidy to off-grid solar device players who make lanterns and other lighting devices.
So start-ups such as Dlight Design , which makes and markets solar lighting devices are partnering with organisations that have a last-mile reach in remote areas, such as NGOs, micro-finance institutions (MFIs), self help groups and rural retail chains.
The company has reached one million people in rural India with their solar power plug-and-play devices.
Mandeep Singh, managing director, Dlight Design, India and Nepal, says his biggest battle is against subsidy. "Compare the cost of acquiring a kerosene lamp at Rs 150 to the cost of acquiring a decent solar lantern at Rs 1,500, even though the latter investment pays back in 12-18 months and becomes virtually free from then on," he says.
Fund in need
Therefore the market for Solar in India will kick start only when business models package the financing aspect as seamlessly as a car loan. A case in point is Intelizon , a VenturEast funded company that addresses the power needs of rural homes using solar driven technologies.
Kushant Uppal, CEO of Intelizon, says the company's sales jumped up 3 to 5 times when he tied up the financing with microfinance institutions, banks and distributors.
Similarly, in New Kalinga village in Orissa, Dlight tied up with SKS microfinance to sell solar lighting devices. SKS gave loans to the villagers who paid an EMI for their solar lanterns. But now, Singh is looking for alternative ways to ease consumer financing because of the ongoing MFI crisis. Dlight has garnered a total investment of $12 million from a clutch of VC investors such as Draper Fisher Jurvetson, Nexus Venture Partners and Gray Matters Capital.
Power Boost
While everyone is talking of large-scale power plants, Hari Kiran Chereddi , managing director of Sujana Energy , believes the future lies in smaller, modular and distributed power plants as each community can then generate their own energy locally. This cuts transmission loss when power is piped in from high-voltage transmission lines over long distances.
Sujana is in talks with PE investors to raise $100 million for scaling up. "The Indian market has a lot of traction and is gearing up for a spurt of growth," says Chereddi. Till date, they have made an investment of $25 million from their parent company. They are at various stages of developing 400mw of solar power and concentrated photovoltaic power plants by FY 2014 and are also looking to accelerate growth through acquisitions.
Chereddi says a key idea for sustainability is innovation. "Companies with holistic energy strategies and newer business models are poised to succeed."
Challenges and Opportunities
While the cost of solar power per watt has been coming down dramatically (globally at 18-22 cents/kWh), it is still not at par with conventional sources priced at between 10 and 15 cents/kWh. Inderpreet Wadhwa, CEO of Azure Power , a solar power generation company, says the challenge is to get takers to buy this power at higher cost.
Unlike conventional power prices, which are dependent on the cost of raw materials, there is no raw material cost for solar power. When prices of coal rise, so will conventional energy prices. "The benefit for solar technology is that I can guarantee a fixed price 10, 20, 30 years down the line," says Wadhwa.
The only cost solar power projects have to bear is that of capital required to set up the plant. Price predictability over the life of a plant, usually around 25 years, is the benefit. "The government in India understands this and is playing the role of a buyer of power through its policy framework," says Wadhwa.
Azure has received funding from Helion Venture Partners, IFC and Foundation Capital. Azure is currently constructing a 17 mw plant. In three years, Wadhwa plans to scale up to 100mw by increasing the existing capacity and adding newer projects.
Therefore the market for Solar in India will kick start only when business models package the financing aspect as seamlessly as a car loan. A case in point is Intelizon , a VenturEast funded company that addresses the power needs of rural homes using solar driven technologies.
Kushant Uppal, CEO of Intelizon, says the company's sales jumped up 3 to 5 times when he tied up the financing with microfinance institutions, banks and distributors.
Similarly, in New Kalinga village in Orissa, Dlight tied up with SKS microfinance to sell solar lighting devices. SKS gave loans to the villagers who paid an EMI for their solar lanterns. But now, Singh is looking for alternative ways to ease consumer financing because of the ongoing MFI crisis. Dlight has garnered a total investment of $12 million from a clutch of VC investors such as Draper Fisher Jurvetson, Nexus Venture Partners and Gray Matters Capital.
Power Boost
While everyone is talking of large-scale power plants, Hari Kiran Chereddi , managing director of Sujana Energy , believes the future lies in smaller, modular and distributed power plants as each community can then generate their own energy locally. This cuts transmission loss when power is piped in from high-voltage transmission lines over long distances.
Sujana is in talks with PE investors to raise $100 million for scaling up. "The Indian market has a lot of traction and is gearing up for a spurt of growth," says Chereddi. Till date, they have made an investment of $25 million from their parent company. They are at various stages of developing 400mw of solar power and concentrated photovoltaic power plants by FY 2014 and are also looking to accelerate growth through acquisitions.
Chereddi says a key idea for sustainability is innovation. "Companies with holistic energy strategies and newer business models are poised to succeed."
Challenges and Opportunities
While the cost of solar power per watt has been coming down dramatically (globally at 18-22 cents/kWh), it is still not at par with conventional sources priced at between 10 and 15 cents/kWh. Inderpreet Wadhwa, CEO of Azure Power , a solar power generation company, says the challenge is to get takers to buy this power at higher cost.
Unlike conventional power prices, which are dependent on the cost of raw materials, there is no raw material cost for solar power. When prices of coal rise, so will conventional energy prices. "The benefit for solar technology is that I can guarantee a fixed price 10, 20, 30 years down the line," says Wadhwa.
The only cost solar power projects have to bear is that of capital required to set up the plant. Price predictability over the life of a plant, usually around 25 years, is the benefit. "The government in India understands this and is playing the role of a buyer of power through its policy framework," says Wadhwa.
Azure has received funding from Helion Venture Partners, IFC and Foundation Capital. Azure is currently constructing a 17 mw plant. In three years, Wadhwa plans to scale up to 100mw by increasing the existing capacity and adding newer projects.
"Several private companies are investing in solar energy sector and PE firms are likely to benefit by investing early in these companies with reducing input costs," says Tandon of IFC. Applied Solar Technologies , one of the companies IFC invested in, is an off-grid based hybrid power provider to telecom towers in India. IFC invested $5.5 million in equity and provided $10 million loan to the company.
Despite the support of the ecosystem, there are concerns for entrepreneurs. The bidding process for power purchase agreements goes to the lowest bidder who may not have the necessary technological abilities to set up such a plant. "Today, existing technology from Spain or Germany or US is being applied in India, we need to create our own innovative technologies localised to our needs," points out Chereddi.
Other challenges include the lack of depth in debt markets and the lack of talent in the sector. Indian banks look for balance sheet funding, because of which a lot of growing companies are unable to attract project-based funding, driving up the cost of debt.
Says Ramesh Venkat, CEO of Reliance Private Equity: "In solar technology, particularly many of the emerging opportunities in India lack scale, though over the years this will change dramatically."
Apart from scale, solar companies also need a longer gestation period. According to Venkat, it makes them more suitable for VC funding rather than PE. "PE firms require different set of skills to work with. Such companies offer an exit window of 5-7 years," says Venkat.
Industry watchers point out that the return on investment in solar is pitched between 12-18%. Solar power projects, on a utility scale, would give higher returns and is more a PE play as is the manufacturing sector like the Moser Baer PV cell manufacturing project. For off-grid devices like solar lamps and technology innovation, venture capital is a better option.
Clearly, with both money and government support available, entrepreneurs can quite literally make hay while the sun shines.
Despite the support of the ecosystem, there are concerns for entrepreneurs. The bidding process for power purchase agreements goes to the lowest bidder who may not have the necessary technological abilities to set up such a plant. "Today, existing technology from Spain or Germany or US is being applied in India, we need to create our own innovative technologies localised to our needs," points out Chereddi.
Other challenges include the lack of depth in debt markets and the lack of talent in the sector. Indian banks look for balance sheet funding, because of which a lot of growing companies are unable to attract project-based funding, driving up the cost of debt.
Says Ramesh Venkat, CEO of Reliance Private Equity: "In solar technology, particularly many of the emerging opportunities in India lack scale, though over the years this will change dramatically."
Apart from scale, solar companies also need a longer gestation period. According to Venkat, it makes them more suitable for VC funding rather than PE. "PE firms require different set of skills to work with. Such companies offer an exit window of 5-7 years," says Venkat.
Industry watchers point out that the return on investment in solar is pitched between 12-18%. Solar power projects, on a utility scale, would give higher returns and is more a PE play as is the manufacturing sector like the Moser Baer PV cell manufacturing project. For off-grid devices like solar lamps and technology innovation, venture capital is a better option.
Clearly, with both money and government support available, entrepreneurs can quite literally make hay while the sun shines.
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