Private equity investments in India’s renewable energy segment has taken a giant leap in 2011, with deal volume doubling and deal value increasing more than fivefold, reaching record numbers in the backdrop of large deals.

Private equity investments in renewable energy companies stood at $522 million across 14 transactions for the first three quarters of CY2011, according to VCCedge, financial research platform of VCCircle. This is a remarkable rise, compared to 7 deals worth $98 million in CY2010 and 8 deals worth $112 million in CY2009.

Private equity investors feel that factors such as implementation and execution issues in conventional energy space, increasing incentives from the government in terms of National Solar Mission and Certified Emission Reductions (CERs) for renewable energy and lower execution timeframe are driving entrepreneurs and private equity investments in the sector.

“Due to various reasons such as favourable government policies, lower gestation period, etc., there is a significant increase in the number of entrepreneurs setting up renewable energy generation projects. This, in turn, is leading to increased deal opportunities for private equity, which is not surprising given the potential of this sector,” said Darius Pandole, Partner at New Silk Route Advisors Pvt Ltd.

Over the past one year, new entrepreneurs entering the business have attracted significant capital at the start-up stage, which also allows investors a deal at compelling valuations. Wind energy start-up ReNew Wind Power Pvt Ltd, founded by prominent deal-maker and former Suzlon Energy COO Sumant Sinha, raised Rs 1,000 crore or $200 million from Goldman Sachs in one of the biggest private investment deals in the renewable energy sector in India in September this year.

Another high-profile start-up is solar power firm Kiran Energy, founded by former KPMG India i-banking head Ardeshir Contractor and Tata Sons executive director Alan Rosling. Kiran raised $50 million commitment from Bessemer Venture Partners, New Silk Route and Argonaut Ventures.

Investment in renewable energy companies is not a new trend although it has come to the forefront only recently, according to Raja Parthasarathy, Partner at IDFC Private Equity. The private equity firm incubated Green Infra Ltd back in 2008 and the company currently has 164 MW in operating renewable energy assets.

“I think investments in renewable energy started with some seriousness in 2008, but the deals in conventional power grabbed the headlines as they involved big numbers and large corporate houses. However, over the past 6-9 months, there has been a slowdown in investment in conventional energy space due to a number of issues such as land acquisition and environmental clearance,” he added.

In 2010, the country witnessed power utility firms dominate private equity deal-making, with conventional power firms raising over $1.5 billion in PE funding. These included companies like Asian Genco (raised $425 million), Moser Baer Projects ($290 million), GMR Energy ($305 million) and GVK Energy ($327 million), among others.

In CY2011, the deal flow in conventional power has considerably slowed down and only five deals worth $419 million happened during the first three quarters, according to VCCedge. “The thermal sector is facing huge issues in terms of fuel supply (both availability and pricing of coal) and also because of the precarious financial situation of the state electricity boards (SEBs). In large hydro projects (of over 50 MW), the gestation period of 6-8 years for project completion can adversely impact returns. Hence, setting up renewable energy projects becomes a commercially viable business alternative,” added Pandole.

While thermal projects have a gestation period (time taken from planning through to power generation) of 4-5years, wind energy projects can be set up in 24 months (including land acquisition). The execution of wind projects might also be done in 6-9 months if the wind energy data of a particular region would be available, said Parthasarathy.

The deal-making momentum is expected to continue in this sector as more and more small and mid-sized entrepreneurs enter this space, given the relatively lower entry barriers (as compared to conventional energy that requires larger investment). “There is an increasing thrust towards the renewable energy space and in the next decade, this will significantly increase,” commented Pandole.

“Renewable energy currently accounts for less than 10 per cent of India’s power needs, but it has the huge potential to represent around 20-25 per cent,” affirmed Parthasarathy.

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