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Low valuations bring back investors in wind energy projects; sector sees 1,500-crore investment

NEW DELHI: More investors are backing wind energy projects as low valuations make the sector attractive for risk capital deals. This year over 1,500 crore has been invested so far and the momentum is expected to continue with deep-pocketed players, such as Goldman Sachs, increasing their exposure in the sector. Earlier this month, a private equity fund run by the Wall Street investment bank invested 760 crore in wind energy firm ReNew Power Pvt Ltd.

"Wind assets are now available at a very good price. The entry-level valuations are quite cheap, and investors can look to recover money within four to five years," said Arvind Modi, vice-president at Gujarat Venture Finance Ltd. In January, his fund put in 40 crore in a special purpose vehicle of UK-based SITAC Group.

The investment was made out of the Golden Gujarat Growth Fund, a 1,000 crore fund launched in 2011.

ReNew Power, promoted by clean-tech entrepreneur Sumant Sinha, received a first investment of $200 million (about 1,185 crore) from Goldman Sachs in 2011.

Over the past six months, a number of leading risk capital firms, including Goldman Sachs and IDFC, and development finance institutions, such as the Asian Development Bank, have entered into pure equity or equity and debt-linked transactions with wind energy producers.

Valuations have come down sharply over the past 12 months and investors are buying stakes in highly leveraged projects, and replacing external commercial borrowings with equity.

"A 1 MW project, which earlier cost between 7 crore and 8 crore, can now be purchased at half that, which should also help greatly in deciding when to go public," Modi said.

"The good thing now is that large infrastructure funds-Morgan Stanley and Goldman Sachs-consider (wind) as an infrastructure play," said Ashish Sethia, India country manager of Bloomberg NEF.

"The quantum of money in each transaction could be much higher than 10 transactions in the past." In 2012, private capital investments in wind energy companies operating in India were $274.7 million ( 1,628 crore).

The first quarter of 2013 has already seen transaction value cross $188 million ( 1,114 crore), according to data collated by Bloomberg New Energy Finance (BNEF).

The country's highly fragmented wind energy sector is being seen as a surer bet than solar, to meet its massive energy requirements. During 2012-13, wind energy capacity addition was 1,698 MW against solar which added just 754 MW. "Investment costs in solar projects are at least 30% to 40% higher than wind, and there are issues relating to land acquisition," said Modi.

ReNew Power's Sinha, who was earlier the chief operating officer of Suzlon Energy, said if the policy environment is conducive, the wind power sector could add around 2,000-3,000 MW in the current fiscal.

The investments come in face of a number of policy flip-flops, which has seen the government introduce, and then withdraw, incentives designed to boost production as well as investments in the space.

From 2003 to 2012, the government introduced accelerated depreciation, which allowed for 80% of the project cost to be paid back if a project was commissioned before September 30 of that financial year, or 40% of the cost if it was commissioned before March 31.

However, for the fiscal ended March 2012, both accelerated depreciation and generation-based incentives, which had been in place for barely one year, were withdrawn.

"We are long-term investors... There is however a need to clarify certain issues such as implementation of generation-based incentives," said Sanjiv Aggarwal, partner-energy at Actis Capital, one of the world's largest private capital investors in renewable projects.

While finance minister P Chidambaram has announced the re-introduction of generation-based incentives in his Budget, the tariff terms and duration are yet to be clarified.

"Unfortunately, there is considerable policy friction in the wind market, and ground-level execution problems. Investors need to be pragmatic in their roll-out plans," ReNew Power's Sinha said.

Analysts like Raj Prabhu, managing partner of market intelligence firm Mercom Capital Group, believe that while the amounts invested currently are huge, given the size of the Indian market, "even $1 billion (Rs 5,927 crore) seems to be less."