What's Next for Alternative Energy Technology?

The Future Is Closer Than You Think for Some Forms of Alternative Energy, Says The Boston Consulting Group

Advanced Biofuels, Concentrated Solar Power, and Solar Photovoltaic Power Are on Track to Change the Global Energy Landscape Far Earlier Than Many Assume.

For skeptics, alternative energy has long been more hype than genuine promise. Yet several alternative-energy technologies are approaching inflection points in their development, and the day when they could have a profound impact on the global energy landscapecould come far sooner than is commonly assumed, says a new report from The Boston Consulting Group (BCG). 

The report, released today and titled “What’s Next for Alternative Energy?,” examines the state of seven of the most significant alternative-energy technologies — advanced biofuels, electric vehicles (EVs), concentrated solar power (CSP), solar photovoltaic (PV), onshore wind, offshore wind, and clean coal through carbon capture and sequestration (CCS) — and assesses each one’s prospects in terms of three issues:

– Can it achieve cost competitiveness with conventional energy by 2020

and be economically viable without subsidies?

– Can it overcome barriers to rapid adoption once cost competitive?

– Can it reach penetration levels by 2025 that disrupt the status quo?

Among the report’s key findings:

– Advanced biofuels, CSP, and solar PV will see accelerating adoption

and growth and are on track to change the global energy mix far

earlier than is often assumed. Their costs are falling rapidly, and

they are on the path to becoming cost competitive within the next five

to ten years, if not sooner.

– Onshore wind power will see steady adoption and continued growth. It

is already cost competitive with conventional energy sources in some

instances, and its costs will continue to fall. Without breakthrough

declines in energy storage costs, however, the inherent challenges

posed by the intermittent nature of onshore wind and solar PV will

limit their ultimate penetration.

– EVs will also see steady adoption, becoming economically attractive

for lead segments by 2020. But broader adoption will require

significant declines in battery costs. Major infrastructure and other

hurdles will also have to be overcome.

– In contrast to onshore wind, offshore wind will struggle to move

beyond purely subsidy-driven growth. Offshore wind’s overall adoption

will be slow except in a few countries willing to continue heavy

subsidies.

– Clean coal through CCS will have very slow adoption and won’t be

viable for the next decade or two. The technology is vital for cutting

carbon emissions from coal-fired power plants. But it will develop

slowly for a number of reasons, including slow progress toward

demonstrating large-scale viability and moving down the cost curve.

“There is no question that conventional energy sources will constitute the bulk of the world’s energy for at least the next couple of decades,” said Balu Balagopal, a Houston-based senior partner at BCG and a coauthor of the report. “But a few of these green-energy technologies will make their presence felt very likely within the next few years. Their costs are falling quickly and significantly, pushing them closer to where they can compete on price — without subsidies — against fossil-fuel-based sources.”

As they become more cost-competitive, “their adoption will be constrained more by barriers such as the need for new supporting infrastructure. However, we believe these barriers will likely prove surmountable,” added Balagopal.

The report concludes with a discussion of the implications of these findings for oil and gas companies, utilities and power producers, emerging alternative-energy pure-play companies, industrial suppliers, and governments.

“Even in the relatively slow-moving energy industry, there are cautionary examples of how quickly fundamental assumptions can be overturned,” said Justin Rose, a Chicago-based principal and a coauthor of the report. “Shale gas in the United States and the adoption rate of flexible-fuel vehicles in Brazil come to mind. Companies need to be prepared for the opportunities as well as the risks.”

But the technologies are far from uniform in their near- to medium-term prospects, noted Petros Paranikas, a Chicago-based partner and a coauthor of the report. “It’s vital that companies, governments, investors, and other stakeholders in the energy ecosystem understand the differences among them, revisit assumptions, and redraw outdated plans and timetables. Making the wrong decisions in this space could prove costly.”

Source: Boston Consulting Group

Nagarjuna Construction: Power pangs

Performance of the core business is stable, but concerns persist about exposure to international real estate and power projects.

The satisfactory performance of Nagarjuna Construction Company (NCC) in the September quarter has come on a lower base. Revenues rose 13 per cent year-on-year (y-o-y) to Rs 1,201 crore, as compared to 1.1 per cent y-o-y growth in the corresponding quarter a year ago. Operating profit margin was maintained at 10.3 per cent despite higher costs, while net profit margin came at 3.8 per cent due to a seven-fold rise in other income at Rs 5.4 crore.

NCC witnessed a slowdown of 13 per cent in its order book at Rs 16,075 crore. However, the company has maintained its earlier guidance of order inflows (Rs 10,000 crore), standalone sales (Rs 5,300 crore), consolidated sales (Rs 7,300 core) and operating profit margin (10-10.5 per cent).

Analysts don’t seem to be too worried about sales and margin targets, but are cautious about the order inflow guidance, as NCC needs orders worth Rs 5,500 crore in the remaining five months of 2010-11 (Rs 2,750 crore each in December and March quarters).

Also, if the government’s decision regarding the environmental clearance for the 1,320-Mw venture (expected in a month) goes against the company, it will have to look for alternative locations in Andhra Pradesh, delaying the project. The company has invested Rs 83 crore so far.

Investors also need to keenly track developments in the Dubai real estate project, as the West Asian economy is still not out of the woods. NCC has invested a total of Rs 130 crore in both these projects.

Though the stock, at Rs 152.45, trades at a reasonable 13 times 2011-12 estimated earnings (including value for build-operate-transfer and real estate projects), analysts are cautiously optimistic about the company’s prospects.

Azure Power to invest Rs. 750 crore in Gujarat for Solar installation

 Azure Power, an independent power producer (IPP), plans to pump in around Rs 750 crore for solar power generation and equipment manufacturing in Gujarat over the next three years. The company is already in the process of setting up 15 Mw solar power plant in the state.

Azure Power has selected Modasa area in Sabarkantha district to develop 15 Mw solar photovoltaic (PV) power project involving an investment of around Rs 215 crore. Apart from this, the company is also planning a solar power equipment manufacturing unit in Gujarat, for which it intends to infuse approximately Rs 300 crore.The proposed manufacturing unit will manufacture PV modules, structures and cables. "Azure Power intends to pump in Rs 2,000 crore over the period of next three years across India, of which Rs1,500 crore would be for power generation and Rs500 crore for equipment manufacturing. Gujarat alone will have Rs 750 crore investment from the company," said Inderpreet Wadhwa, CEO, Azure Power.

The company is eyeing a combined production capacity of 50 Mw by 2012 and 100 Mw by 2015.In order to raise funds for its projects, the company is also planning a public issue and it may also divest further stake to private equity players. Azure Power has tied-up with SMA Solar Technology, SunEdison and SunTech for supply of PV inverters, monitoring technologies andd PV modules respectively.

solar power plant in Punjab, has inked a 25 year power purchase agreement with Gujarat government. Its 15 Mw power plant is expected to be commissioned by mid 2011. In addition to this, another solar power project in the state is also on company's radar.

Are PPP's running out of steam?

Good in theory, but quite questionable in practice, is the Indian PPP story. In theory, PPPs are wonderful, because of appropriate risk transfers, efficiency improvements, additional financial resources, a whole life solution, and speedy implementation. In practice, apart from some notable exceptions, Indian PPPs have been about ‘bid and win now, renegotiate later’.

First, innovative financial engineering has ensured that risks remain with the government while private concessionaires take the upside. Renegotiations, cost escalations, and post-award deal sweeteners are quite common. 

Second, incremental private investment is minimal, not counting the inflated lending from public sector banks and IIFCL, or viability gap funding. Concessionaires, in a no-lose strategy, recover their equity contribution during the project implementation stage itself.

Third, easy exits for developers undermine better efficiency on account of whole life solutions. Fourth, prompt implementation is too closely linked to renegotiation and/or sweeteners. Emaar-MGF’s CWG Village is a good example of all the above. Given our governance structures, more of the same may be expected. Indeed, in the extreme view, PPPs are seen as a new ‘licence raj’ to enrich private concessionaires at the expense of the taxpayer. The private sector has done well in taking full advantage of PPP opportunities.

Sadly, infrastructure delivered by the public sector (over 70% of total) has become an orphan; this is similar to the nineties' focus on ‘adult literacy’ at the cost of primary education. The establishment wryly decries any possibility of improving public sector efficiencies. Some officials describe EPC as a clumsy method, but then every private sector concessionaire signs well-structured EPC contracts for project execution. What is stopping the government from doing the same?

Perhaps the way forward for India is to embrace PPPs for better management of existing infrastructure, especially in health and education. Give out existing public assets, such as highways, power plants, airports, hospitals, colleges, schools, technical institutions and urban infrastructure, with existing cash flows, over to private O&M under PPP. New ‘build’ with early stage risk should be undertaken by the government. The above PPP of existing assets would release large funding for the public sector to create fresh infrastructure assets. However, such ‘build’ should be through SPVs, with suitably incentivised and empowered management teams.

Lanco to raise Power capacity to 4,000MW by March

Lanco Infratech, engaged in infrastructure construction, is looking to increase operating capacity of its power plants to 4,000 megawatt by March, a top official said on Friday. 

The company is also developing eight new projects, with a combined capacity of about 10,500 MW, Chief Financial Officer J Suresh Kumar told Reuters in an interview. 

At present, the company has an operating capacity of 2,100 MW, Kumar said. 

Earlier in the day, Lanco said profit for July-Sept fell 43 per cent, trailing estimates, hurt by higher depreciation charges and weak sales at its major construction unit.

NTPC board OKs investing Rs 31.9 billion in coal project

India's top power producer NTPC Ltd said on Friday its board had approved investing Rs 31.94 billion for a coal mining project in Jharkhand . 

The coal block, which was allotted to NTPC in October 2004, will start production in 2012, the firm added in a statement to the Bombay Stock Exchange.

Coal India bids for Colombian Coal assets

 The world's largest coal producer Coal India is learnt to have placed a bid for Colombian assets of US-based Drummond Co, as the PSU looks to buyout mines overseas as part of its Rs 6,000 crore global acquisition plan.

"The company had earlier this year placed a non-binding bid for some coal assets in Colombia which belong to Drummond business family," a person in the know of the development said. Some media reports suggested that Drummond Co has aimed to raise around USD 6 billion from sales of its assets in Colombia and had hired Bank of America-MerrillLynch for advisory services.

Neither Coal India nor Drummond Co could be contacted for comments.

In its efforts to acquire coal mines overseas and feed rising domestic demand of the fuel, the coal major has earmarked Rs 6,000 crore for acquiring assets overseas for the current fiscal.

At present, the company has shortlisted US firms Massey Energy and Peabody Energy, besides Indonesian Novem/Sinarma, for a possible partnership for their respective mines in Australia, Indonesia and the US. In another arrangement, CIL shortlisted Peabody Energy and 11 others as possible partners for sourcing coal to India.

Coal India, which has domestic market share of over 80 per cent, has maintained that it is sitting on a cash reserve of over Rs 30,000 crore to part-fund its growth projects.

"Coal India finds Drummond's valuation for the asset to be a costly proposition. Moreover, its emphasis is on buying stake in listed global companies," the source said, indicating that the navratna firm might not be aggressive on the buyout.

The company, which has plans to import six million tonnes of coal this fiscal for local firms, has targeted to produce 461.5 million tonnes of the fuel this fiscal as against 431.5 million tonnes last fiscal.

Coal India, which was recently listed on the bourses, on Tuesday closed at Rs 326.05 a share, down 1.33 per cent on the Bombay Stock Exchange from its previous close.