The frequency of private equity (PE) investments in green-energy projects have risen consistently over the past 12 months. Compared with five merger and acquisition deals in the quarter ended March, there were 10 such transactions in the June quarter, and 14 in the three months ended September, according to Venture Intelligence, a financial research platform. Total investment doubled in the September quarter to $176 million compared with the preceding three months.
This trend may not, however, paint a complete and holistic picture of the challenges facing new projects in the green-energy space. Long gestation periods and risk-prone economic returns from these endeavours, particularly young start-up projects, are two major detractors, as investors’ money continue to chase less risk-prone investments.
Gaining traction: A number of start-up green-energy projects, mainly in wind power, have attracted PE funding successfully in the past. AFP
Start-up funding can be categorized into two broader headings—funding for greenfield clean projects, and for companies with unique product offerings using clean technologies.
The projects, invariably undertaken by reputed entrepreneurs, have certain unique characteristics. For instance, they may not necessarily boast of significant present operational capacities, while project and order pipelines are usually stronger than operating capacities. Also, the expertise in land acquisition and regulatory permits for undertaking greenfield projects are the key wherewithal.
A number of start-up green-energy projects, mainly in wind power, have attracted PE funding successfully in the past. Goldman’s $200 million investment, Baring PE’s $50 million and IDFC PE’s more than $15 million investment in this space are a few examples.
The key reasons why this sector has gained increased traction are that procurement cost for projects have fallen due to improved technology; capital costs have fallen; and supply constraints and cost of traditional fuels such as coal have risen.
Fiscal incentives and subsidies, such as accelerated tax amortization of capital expenditure, cash subsidy under generation-based incentives; power purchase agreements with state electricity boards, and favourable feed-in tariffs for operators; and renewable energy purchase obligation of state power distributors have added to the attractions.
However, the present macroeconomic environment and financing landscape pose newer challenges for new technology projects, especially when monetary concerns are rising.
While the government is placing enhanced emphasis on developing newer technologies through several schemes, such as its national solar mission and state-sponsored incentive schemes, the sector is yet to see a wave of private investments that can escalate it to the next level of strategic growth.
Not many Indian product and technology companies have raised funding since product innovation is not yet the forte of local developers. Also, the Indian venture capital space is still not as mature as the US market. While carbon financing has been happening in the past few years by international financial institutions, one needs to see how the market pans out after the Durban climate meet in December 2011.
Gokul Chaudhri is a Delhi-based partner and head of energy and environment industry programme at consulting firm BMR Advisors.