I am providing a summary of the event I had participated last week at New Delhi. The event was called Private Equity for Power Projects – Investing and Lending.
The event was organized by Arvind Mathur of Private Equity Pro Partners on the 11th – 12th March, 2010 at Taj Mahal Hotel, New Delhi, India. Arvind has been in the private equity industry for many years and had held senior positions at the Asian Development Bank and Citi.
I was a speaker at the workshop as well, and presented on investing challenges in small hydro and wind (if you are interested in having a copy of my presentation, please send a note to narsi@clixoo.com ).
The following were the speakers and topics:
Day 1
Our specialty focus areas include 
1. Suneet Maheshwari – CEO, L&T Infrastructure Finance – Equity & Debt Financing for Power Projects
2. Amitabh Gupta – CFO, Moser Baer PV
3. S.S. Kohli – Chairman, IIFCL – Energy Financing: Role of IIFCL
4. Amulya Charan – CEO, Tata Power Trading Co – Acquisition of Energy Resources, Case Study of Indonesian Coal Mine Acquisition
5. Vipul Bhagat – International Finance Corporation – Investment Models for Public Private Partnerships
6. Alok Gupta – CEO, Axis Private Equity – Case Study of Private Equity in Shalivahana Green Energy (with commentary from Komaraiah, CEO & MD – Shalivahana)
7. Mahesh Babu – CEO, IL&FS Ecosmart – Investments in Waste-to-Energy Projects in India: Challenges & Opportunities
8. Awadh Giri – Head, New Projects – Moser Baer
9. Nishant Bhardwaj – Asian Development Bank – Asian Carbon Fund
10. Karthik Ranganathan – Head, Renewable Energy Investment, Baring Private Equity Partners – Private Equity in Renewable Energy
11. Narasimhan Santhanam – CEO, Energy Alternatives India – Wind & Hydro Energy Investing Considerations
Day 2
1. Rajesh Sinha – International Finance Corporation – Investing & Lending in Power Generation Projects – Criteria, Challenges, Experience & Best Practices
2. Vijay Sirse – Chairman, vTrium Energy – Investing & Lending in Power Projects: Due Diligence Techniques
3. Siddarth Nigam – Partner, Grant Thornton – Mergers & Acquisitions in the Power Sector
4. Vikram Pant – Managing Director, India Infrastructure Fund, IDFC Private Equity – Private Equity Infrastructure Funds: Investing in Power Projects
5. Srividya – Partner, Grant Thornton – Valuation of Power Ventures
6. Prerna Mehndiratta – BMR Advisors – Renewable Energy: Tariffs & Incentives
7. H.L. Bajaj – Technical Member, Appellate Tribunal for Electricity – The Power Purchase Agreement: Key Aspects: Resolution of Tariff Matters.
The two days were extremely informative and useful.
In brief, the following are my take-aways:
1. There is a significant amount of interest among PEs for investments in both traditional and renewable energy
2. PEs – not surprisingly – are not very keen on risky technology bets in renewable energy, but are OK with business model risks
3. Some of the PEs (such as IFC, ADB etc) are willing to take fairly long-term views (with over 10 year horizon)
4. Most PEs consider the Electricity Act of 2003 as a turning point in the Indian power sector.
5. Investment sweet spot ( in terms of the quantum) varies from fund to fund, but obviously for most of the blue-chip, it is upwards of $50 million.
6. PEs are well aware of the regulatory and societal bottlenecks that could arise in large-scale energy sector investing (especially for coal-based and large-hydro based sectors).
7. Many PEs feel that even though they are finance guys, as investors they need to have an excellent understanding of the nitty-gritties of the local markets where they are investing, though they might not have such an understanding in all cases.
8. Many PEs are clear that they wish to invest in businesses that can stand on their own revenues (even if takes a while) and are not keen on business plans that rely on getting bought out.
9. Most every PE acknowledged that while they might not like coal, it is here to stay as the largest contributor to power for the foreseeable future.
10. PE arms of organizations such as IFC and ADB, while not shutting out the option of investing in coal-based or natural gas based power plants, have a mandate to decrease their exposures to these “non-green” sectors.
There were a number of specific points that interested me:
1. Private sector contribution to power sector in India is about 12%
2. While parts of the eastern grid could have surplus power, the transmission capacity to evacuate this surplus to the western grid might not be adequate enough
3. Indian banks could reach sectoral limits for power by end of 2010 and for roads by end of 2011.
4. Prices of solar PV could halve in the next 3-4 years
5. In warmer climates, thin film solar works better because it doesn’t degrade as easily as crystalline solar.
6. To put up a crystalline solar cell plant of 100 MW capacity (per year), it could cost a capex of $125 million.
7. Chinese solar energy companies are more backward integrated than companies elsewhere.
8. 80% of infrastructure projects, and 46% of power projects, are funded by the banking system.
9. Syngas technology is at least a decade away in terms of commercial viability (* I disagree; I think it will be more like 5 years).
10. India’s coal demand will be about 700 million T per year in the medium term and about 3.5 billion T per year by 2030.
11. NOx is a greater contributor to acid rain than is SO2 (interesting! Didn’t know that)
12. While private equity folks could like IRRs of about 25%, power and infrastructure IRRs is only about 12%
13. Biomass plants have an expected PLF of about 75%
14. The capex for biomass based power plants is about Rs 5 crores per MW
15. Some of the new feedstocks that are being in biomass-power plants are cotton husk, tobacco stem and chilli stem.
16. In India, traded power forms less than 4% of the total power generated
17. Some private equity companies might wish to play a consolidator’s role as well where they consolidate a diverse portfolio of (say) energy companies such that they win even if 7/10 companies do well enough.
18. There are colonies in Delhi and Gurgaon that buy power at Rs. 9-12 per kWh.
19. Some states are serious about RPO (renewable purchase obligations), but they are able to obtain enough green power to fulfil the RPO!
20. Significant amounts of power lost is owing to theft rather than owing to technical losses
21. Investors such as IFC have specialists/experts in every project to take care of social and environmental aspects.
22. Many small biomass-based projects have shut down, the key challenge having been economical access to feedstock.
23. Tendency for utilities to pay up on time is higher if the supplier is a private company than a state-owned power producer.
24. As small hydro projects are at the “tail end”, close to where the power will be consumed, it also implies that the power losses will be low.
25. While methodologies exist for carbon credits for waste to energy projects, there is no clarity on the exact amount of carbon credit that one unit of electricity generated from waste can avail
Insights from an investor-investee combined presentation
While all presentations added significant value, there was something unique about one of the presentations. It involved both the investor and the investee – I’m referring to the panel comprising Shalivahana (investee) and Axis Private Equity (private equity fund investor).
This was a most interesting part of Mr. Arvind Mathur’s event because both the private equity fund and the investee company were on the same panel.
Shalivahana, based in Hyderabad, is developing fifteen new renewable power projects – biomass, MSW, small hydro – with a potential total generation capacity of 229 MW. Now, that’s a fairly large amount for renewable power. (Shalivahana home page here )
Alok Gupta, CEO , Axis Infrastructure Private Equity Fund, in his excellent presentation, elaborated the macro factors (demand supply gap in electricity et al) and micro factors (the strategy of Shalivahana to go big in a diversified way on green power, for instance) that attracted the Axis private equity fund to invest in Shalivahana.
Apart from the presentation, I also had an opportunity, over the networking luncheon at the Taj, to talk to Mr Komaraiah, Managing Director of Shalivahana.
The following was gleaned from the presentation and the over-the-lunch
discussion:
1. Their biomass plants have an above the average load factor of 80% (average is about 70-75%).
2. For its biomass plants, the company uses unique feedstocks such as chilli stems, tobacco stem & cotton husk.
3. While putting up biomass based power plants, Mr Komariah mentioned that special care should be given to choosing the boilers and turbines, as those with the most optimal designs can make a big difference to the output of the plant.
4. The capital cost of biomass power plants is about Rs 5 crores per MW
5. It was reiterated that security of feedstock supply at predictable and economical prices was a key bottleneck. It was pointed out for instance that rice husk cost Rs 300 per T a few years back but was now costing about Rs 1600-2000 per T.
6. Mr Komariah suggested that those looking to put up small hydro plants should expect at least two years for implementation alone (and this does not include the initial phase during which clearances are obtained).
7. Overall, Komariah felt that they have had an excellent relationship with Axis and the private equity fund had been able to provide not just the financial support required but also strategic support and value-add for the firm’s growth.
There were also a number of other interesting experiences:
1. The audience comprised people who knew what they were talking about. This made the question-answer sessions most interesting. Interesting questions were frequently asked by an executive from Pioneer Wincon and a pretty lady who appeared to be a banker.
2. My presentation went reasonably well, though I presume most folks would have been quite sleepy by that time, as I was the last presenter on Day 1.
3. Contrary to expectations (my expectations!), many folks found the presentation useful and some even have asked for a copy (do surprises never end!)
4. I especially found presentations from Vijay Sirse (of VTrium), Mahesh Babu of IL&FS Ecosmart and Awadh Giri of Moser Baer most interesting (possibly because they involved the least amount of finance / banking terms and most of renewable energy terms).
5. I especially was impressed by Awadh Giri’s (of Moser Baer) presentation on small hydro. He did it impromptu on the organizer’s suggestion, took perhaps all of 10 minutes, and was exceptionally crisp and to the point. He seemed to know precisely the questions that investors and developers had in their minds. (he also made my presentation on small hydro investing essentially irrelevant!)
6. Found a new “friend” in Karthik Ranganathan of Barings, after I got to know that he was from IIT Madras as well (though unfortunately the similarity between us ends there, given the heights he has reached 🙁 ).
7. Overall, I was thoroughly impressed by the professionalism and knowledge of all the folks who presented.
8. As an aside, the food was good, and the environment at Taj was what you would have expected of Taj – excellent.
9. I was not there for the last session, as I had to leave a bit early to catch my flight. But then, I might as well have stayed back, because the flight took off after an hour’s delay!
10. To end on a trivia – I must have been the only presenter (among all male presenters) who did not sport a suit and a tie, and that fact alone says how far away I’m from the finance crowd!
All in all, a thoroughly useful two days. It being in Delhi only made it more interesting, as Delhi is a city I like – its wide roads and tons of trees (at least in some parts) endears it to me.
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