If you are a private equity or venture capital firm looking at investing in solar PV companies in India, you might want to look beyond the obvious PPAs for solar PV power plants.
For one solar PV is not just grid connected power plants and presents many other opportunities. For another, many companies getting the grid connected solar PV through the National Solar Mission framework are lured by high returns for 25 years than by any long term interest in power generation or renewable energy.
As an investor keen on investing in solar PV, you will be better off asking the following questions right in the beginning:
How committed is the developer to renewable energy?
Ultimately, this is probably the most important. Going beyond solar, it is important to gauge the developer’s intreest in renewable energy as a whole. Even if your investee company has obtained a PPA for 25 years for power production, your investment will be worth a lot more if the company is committed to renewable energy and solar in ways beyond just PPA-based revenues.
Which part of the value chain does he belong to?
Solar PV power production is the most obvious segment in solar PV, but not necessarily the best for PE investors. For one, there is little upside. For another, to what extent the client can scale his operations is a big question given that this depends pretty much on governmental decisions right now. A third reason is that the discounting option in the grid connected solar PV power plant applications under the latest phase of the National Solar Mission has thrown a further spanner in the works – now, a financial investor doesn’t know what the return on investment will be.
On the other hand, there are other stages along the value chain where PE investments could accrue much higher value in future – module manufacturing, cell manufacturing, training, developing monitoring software are some of them. As can be easily seen, the potential upsides for these are much better than one for a 25-year PPA. (Pl see a presentation I made in Delhi recently on how the demand for solar can be increased by letting go the mindset that solar = grid connected solar PV power plants)
How well is the government following up with its pronouncements?
Whichever stage of the value chain the company is in, its success to at least some extent depends on government incentives and regulations. It is important for the investor to appreciate and gauge the seriousness of government pronouncements of incentives. That is, some incentives will be announced but will never see the light of day and some will make it through. For example, biofuel mandates requiring 5% of blend essential for both biodiesel and fuel ethanol were passed over three years back, but the oil marketing companies such IOC, BPCL etc are yet to fully implement the mandates. If you were an investor who had invested into a biodiesel company with this mandate as a key driver, you will be sitting with a biodiesel company that is utilizing a fraction of its capacity today.
For solar PV, government incentives are even more critical for the financial sustainability of the project given the much higher capital costs.
How adaptable is the developer to changing market conditions? Is he flexible enough to bring in changes as and when required?
This question is especially valid if the company is in cell or module production. Technology is changing quite fast in solar PV – while crystalline cells and panels appear quite safe today in terms of their future prospects, don’t be too sure. There are enough people around the world who swear that it will all be thin films in a few years from now. Who’s right? Who knows! This necessitates that the company is tuned to what’s happening in the marketplace and can change its mindset and plans within a reasonably quick timeframe.
What is the background of the developer?
In my consulting experience, I have seen all sorts of people keen on getting into the solar industry, especially for putting up power plants – from obvious suspects such as EPC companies to software companies that wish to hitch their wagon to the next big thing to some really surprising sectors such as education. Well, in theory, anyone can succeed in anything, but if I were you, I would be more comfortable with companies that have a background in engineering.
The above are some of the criteria I’d suggest VCs or PEs (or even banks) to use before investing in a solar PV company.
Reference
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