Time to Bet on Companies in Renewables Space?

Wed, 15 Jun Pre-Open

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The rate at which air pollution has grown across India is alarming. Until now the issue was treated with scant importance. However, with rising awareness, the topic has been in the limelight these days like never before. The acuteness of the problem has precipitated a series of measures by governments, regulators and courts. Some of the recent moves include ban on registration of diesel vehicles and the odd-even rule implemented in Delhi. The initiation of these measures had a huge bearing on the automobile industry. As time goes on, there will be many more industries that will find themselves in the same pot. Some will feel the brunt, while others will stand to gain. And conventional power generation will be at the receiving end.

It is no news that the renewable energy sector has gained popularity in the last few years. It is seen as a sunrise sector and many businesses have laid their hands in this space or are looking to do so. And if reports are to be believed, the sector is just going to get bigger in the coming years.

As per a recent study, renewable energy sources such as wind and solar will attract two-thirds of all investment in power-generating plants between 2016 and 2040. The forecast made by Bloomberg New Energy Finance expects some US$ 7.8 trillion to be invested globally in renewables between 2016 and 2040. This is said to be the case in spite of persistently cheap coal and gas prices. As per the estimates made by the report, gas and coal will be overtaken by renewables in 2027 and 2037, respectively.

Notably, the above shift is going to be seen largely in India. Companies invested in this space will benefit the most.

So, as all seems well and bright for the renewable sector, should you bet your money on such businesses? While the future looks promising, many hiccups are taking away from the profitability of this business as of today.

Experts suggest that module prices, a key component for solar plants, are unlikely to fall drastically in the near term. On the other hand, price of solar power has skid downwards. Prices have gone from about Rs 18 per unit in 2010 to Rs 5 or so now. On the back of this, few of the solar projects are already running into financial troubles.

Further, while the India has seen record capacity in both solar and wind power, states are defaulting on their mandated renewable purchase obligations (RPO). They've now done so four years in a row, leading to lower than anticipated off-take for renewable power.

Thus, investors should not get carried away by the hoopla surrounding solar power projects. Exposure to increased raw material costs and foreign exchange fluctuations can turn out to be a death knell for these solar power projects. We are not against solar power. It's a much-needed initiative to reduce the pollution levels across the country. However, investors in this space must be extremely cautious.

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