Greenko plugs into Indian opportunity

India's fast-growing economy continues to suffer a structural deficit between the amount of power that its population and industry require and the amount that its sometimes-creaking power plants can produce. Power cuts have become the norm, making a rapid increase in generating capacity a key plank of the Indian government's economic aims.

Forecasts suggest that a peak power deficit of more than 20 per cent will be recorded by the end of the current five-year economic plan in 2012. Current per capita energy consumption in India is less than a quarter of the global average but, with the Indian economy growing at around 6 per cent a year, demand for power will more than double in the next 10 years, according to management consultants McKinsey & Company.

Greenko was established to take advantage of this opportunity through developing and acquiring a portfolio of renewable energy-producing assets. Renewable-energy projects, such as hydroelectricity with its relatively short lead times, are the fastest growing part of India's energy infrastructure. After its acquisition of 20MW of hydroelectric production in January, Greenko has 120MW of capacity from biomass and hydro sources. Furthermore, in the past six months, it has raised £100m to accelerate its development pipeline and give it the firepower to buy more generating assets.

Indeed, January's purchase was funded by a $46m (£30m) cash injection from Global Environmental Emerging Markets Fund in November. Also in January, Greenko raised £72m in a placing at 140p a share in which private equity giant Texas Pacific Group took £21m-worth of shares, its first significant foray into clean energy in India.

Analysts at broker Arden Partners estimate that the recent cash injection gives Greenko the financing to take its portfolio to 700MW, double the 350MW currently financed. This should generate cash profits of around €130m when fully operational in 2015. Greenko's bosses have actually targeted 1,000MW of production by that year, although achieving it would require more capital. Currently, power projects are typically funded with 70 per cent debt and 30 per cent equity and Indian banks are keen to fund them.

Greenko's generating capacity comprises 80MW of hydro power operational and 42MW of biomass and it has recently negotiated improved agreements with customers. Its tariffs for biomass increased by 19 per cent in the first half of 2009-10. Power purchase agreements on favourable terms have also been agreed for five projects under development totalling 90MW. The company has also graduated to selling power direct to end-users where returns can be better, as opposed to the state's grid.

Piper Jaffray, another broker, estimates that Greenko could buy 70-80MW of operational or late-stage hydro assets within the next year. It is also producing a steady stream of carbon credits, which can be sold into schemes to cut emissions of greenhouse gases, such as the European Union's Emissions Trading Scheme. At the half-year stage, it was holding 120,000 credits and its generating assets were capable of producing 300,000 credits a year. Such credits currently sell at around €12 per tonne of C02 gas.