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Azure Power – A Good Way To Play The Secular Growth Of The India Solar Market

Summary The company has been expanding at a CAGR of 135% since May 2012. India offers huge growth potential with the solar market expected to increase to 100 GW by 2022 from around 5 GW now. One of the largest solar power developers in India with a strong pipeline. Azure Power (Pending: AZRE ) is amongst the largest developers and operators of utility scale solar assets in India. The company has committed to install 11,000 MW by 2022 in RE-Invest 2015. Though this target is more for the galleries than the company’s actual target in my view, the company will still grow tremendously even if it achieves a fraction of that figure. Azure Power started in 2008 and is currently present in the Indian solar commercial and utility sectors. The company has also built medium scale solar power projects in the rural parts of India. Currently the company has presence across 11 Indian states, with 242 MW of projects. Azure Power also has strong links with major USA financial institutions, having raised loans from IFC and US EXIM bank. The company is now thinking of doing an IPO in the US to raise $100 million. India is set to expand its solar industry to 100 GW by 2022, from around 5 GW now. Recently the Indian Prime Minister led the International Solar Alliance proposal in the Paris Climate summit, which shows the country’s serious commitment towards solar. India is expected to have a bright solar future and Azure Power should be a good way to play the Indian story. What Azure Power does Azure Power has presence across the utility and commercial segments and is rapidly expanding in rural India. Its top investors currently are IW Green (in which Mr. Inderpreet S. Wadhwa is the sole member), the World Bank’s International Finance Corp, Helion Venture Partners and FC VI India Venture. The company typically enters into 25-year, fixed price PPAs with government agencies and businesses. The company booked $22 million in sales for the 12 months ended June 30, 2015 and has plans to increase its operating capacity to 520 MW by December 2016. (click to enlarge) Extracts of P&L of Azure Power from F-1 filing with SEC Azure Power operates 17 utility scale projects and several commercial rooftop projects across India. The combined rated capacity of solar projects is 242 MW (out of which 18 MW was distributed rooftop solar). Its 100MW solar power plant was commissioned in Rajasthan in March this year and it also completed the first large scale solar plant in Uttar Pradesh in February 2015 The company has a good track record of completing its projects well ahead of the scheduled due dates. Azure Power has a goal to achieve 1GW and 5GW of projects, operating by December 2017 and 2020 respectively. (click to enlarge) “This is the first large scale capacity project operational under the Chhasttisgarh Solar and we are proud to have successfully brought down the cost of power by almost 64 per cent from Rs 17.91 per unit in 2009 to Rs 6.45 today, for this project.” – Inderpreet Wadhwa CEO Source: Indiatimes Project pipeline as of September 2015 Operational States Capacity (in MW) Punjab 36 Gujarat 10 Rajasthan 140 Karnataka 10 Uttar Pradesh 10 Chhattisgarh 30 236 Under Construction Karnataka 140 Andhra Pradesh 50 Rajasthan 5 Bihar 10 Punjab 28 233 Committed Madhya Pradesh 25 Delhi 3 Punjab 150 178 Commercial Rooftop 18 MW Data from Company’s F-1 filing with SEC Azure Power Positives Strong financial backing – The solar power industry is a capital intensive one and requires massive amounts of equity and debt funding. Azure Power has managed to garner both, thanks to its marquee investors. The company recently won a 150 MW order in AP despite stiff competition. A low cost of capital is essential to win and get good returns from solar power projects. In-house EPC – Azure Power is one of the few solar developers in India with an in-house EPC division. This not only allows the company to lower its cost, but also ensures quality components and design. Most other solar developers in India which are backed by PE investors such as Renew Power, get the EPC done from EPC players like L&T, Mahindras etc. This increases their costs and also sometimes may lead to quality issues. India has massive growth potential – The Indian renewable energy market is going to be one of the biggest markets in the world for the next 25 years. India has committed to make 40% of its total power capacity by 2030 to come through green energy sources. This will mean massive opportunities going forward for all solar players. Currently the Indian renewable energy capacity is less than 15%. Risks Although Azure Power looks promising and has executed well, the company has never been profitable in its limited operating history since 2008. Net losses amounted to $17 million for fiscal year 2015. Other problems common to independent power producers in India are related to land acquisition, regulatory delays and evacuation issues. Though India looks well committed on its target to attain 100 GW by 2022, the company’s profitability will further be affected if India is unable to meet its announced targeted capacity. Another major risk being faced by solar power developers is the increasing competition which has led to very low tariffs being bid in auctions. SBG Cleantech and SunEdison (NYSE: SUNE ) recently won solar tenders with an incredibly low price near 7 cents/kWh, which has been considered as risky by some market analysts. Azure Power which also wins projects through these tenders has to bid low in order to win new projects. US-based SunEdison Inc’s aggressive bid for the tender of 500 megawatts (MW) capacity offered under the Jawaharlal Nehru National Solar Mission (NSM) in Andhra Pradesh has seen India’s solar power tariff touch a record-low of Rs.4.63 per kWh (kilowatt-hour)…Some industry experts raised concerns over the viability of such an aggressive tariff, arguing it could result in further aggressive bids in the auction in Rajasthan-to be held later this year for a capacity of 420MW-given the lower solar park charges in the state compared with Andhra Pradesh. NTPC had invited bids from interested parties to participate in July. Source – LiveMint Conclusion Azure Power is one of India’s largest solar power producers with a massive expansion plan. The company has been considering a listing since June this year . It was one of the first players to enter the solar power generation in India. It has a leading market share in India with a good track record in project development across utility scale, commercial rooftop and micro-grids projects. There are no Indian renewable energy stocks listed on NYSE and Azure Power could be a good investment opportunity, given the massive solar installations the country is going to witness. I would look to invest in Azure Power given that the valuation is reasonable.

GSAM Makes The Case For Multimanager Alternatives

By DailyAlts Staff Record-low interest rates and historically high stock valuations have more and more investors considering liquid alternative investments, which Goldman Sachs Asset Management (“GSAM”) defines as “daily liquid investment strategies” that seek to deliver “differentiated returns from those of core assets” and the potential to mitigate overall portfolio risk and severe drawdowns. In a recent Strategic Advisory Solutions white paper, GSAM makes the case for a multimanager approach to liquid alternative investing – through single turnkey multimanager funds, allocations across multiple managers of the investor’s choosing, or a combination of both. Why Diversify an Alternatives Allocation? GSAM categorizes the liquid alts universe into five peer groups: Equity long/short Event driven Relative value Tactical trade/macro Multistrategy As shown in the table below, the median returns of each peer group have very little persistence from year to year. Therefore, by diversifying across peer groups, investors can avoid the highs and lows of any given year in any given strategy. Building from Scratch One approach to diversifying across liquid alternative peer groups is to “weave” several liquid alts into a “unified portfolio construction framework.” This approach may be best for investors seeking to express high-conviction market views of their own, or for those who possess deep knowledge of particular strategies and managers. But in GSAM’s view, the process of selecting liquid alts requires expertise in the asset class, knowledge of manager capabilities, and judgment of manager and strategy risks, among other things. This makes the “build” approach research-intensive, which may be a bit much for many investors. Turnkey Solutions On the opposite end of the spectrum is the “turnkey” approach – a pre-assembled package of alts, such as a multimanager alternative mutual fund. In this approach, investors effectively outsource the research-intensive process cited above to professional managers. On the downside, investors employing this approach don’t get a customized allocation, which means that their specific investment needs could potentially be better-served. What are some other risks to the multialternative approach? GSAM lists several, including: Performance may depend on the ability of the investment advisor to select, oversee, and allocate funds to individual managers, whose styles may not always be complementary. Managers may underperform the market generally or underperform other investment managers that could have been selected instead. Some managers have little experience managing liquid alternative funds, which differ from private investment funds. Investors should be mindful of these and other risks, according to GSAM. The Best of Both Worlds? GSAM calls combining the “build from scratch” and “turkey” approaches “Buy & Build.” This hybrid approach generally entails complementing a multialternative fund with one or more high-conviction managers the investor believes can potentially contribute to specific investment objectives. This “middle ground” between pure customization and an off-the-shelf solution gives investors additional flexibility with a fraction of the research-intensity. Conclusion In conclusion, GSAM states the company’s belief that multimanager strategies have the potential to help investors pursue additional sources of returns and to diversify their alternative investment allocations. In the firm’s view, investors who are new to investing generally opt for the single package approach to multimanager investing, while more experienced liquid alternative investors often consider building from scratch. The important thing, in GSAM’s estimation, is to understand the potential that liquid alts offer as an additional driver of portfolio returns. For more information, download a pdf copy of the white paper . Jason Seagraves contributed to this article.

Will The Supreme Court Alter Your Utility Investment Strategy?

An obscure legal case could impact several electric utilities in states where wholesale power pricing is controlled by Regional Transmission Organizations, such as PJM Interconnect. Demand Response technology is at the heart of the issue. Is the Federal Government overreaching into the territory of state’s rights? The US Supreme Court SCOTUS could be intruding into your electric utility investment strategy. In an obscure case entitled Federal Energy Regulatory Commission v. Electric Power Supply Association (FERC v EPSA), SCOTUS will settle a long standing dispute between the FERC and power producers. At the heart of the conflict is the implementation and impact of Residential Demand Response (DR) technology. Pricing for electricity and hence the profitability of several electric utilities hang in the balance. Demand Response is the ability of specific electric appliances to turn off during times of high cost power, also known as “smart” appliances. Stated more clearly: Conservation implies whether to consume energy; Efficiency deals with how to consume energy; Demand Response concerns when to consume energy. Oilprice.com offers an interesting recap of the issue: Demand-responders argue that a megawatt saved is financially equal to a megawatt produced by a power generator. The power generators who comprise EPSA recognize that DR will hurt them, reducing both power prices and their profitability, to the benefit of consumers. Adding DR to a power market is the competitive equivalent of adding more generators. Either way, added competition lowers prices. The issue before the court is whether the FERC can compel regional power producers to pay consumers who reduce their use of power at peak times and if so, at what price. An interesting analogy could be the government program to pay farmers for not planting crops. In this case, power companies would pay consumers not to use electricity from the grid during times of peak demand. Daily peak demand varies based on location. For example, in Arizona where air conditioning is a large portion of demand, Arizona Public Service bills customers the following schedule: The plans billed on an off-peak and on-peak basis, with a super peak period in the summer billing months of June – August. Off-peak hours are weekdays from 7 pm to noon and all day Saturday and Sunday, as well as 6 major holidays; on-peak hours noon – 7 pm weekdays are billed at a higher rate; super-peak hours (3-6 pm weekdays during June – August) are billed at the most expensive cost per kWh. Save money when you use more energy on weekends and weekday mornings before noon or evenings after 7 pm. From their rate card , APS off-peak hours are billed at $0.05517 per kWh while on-peak rates vary from $0.19847 in April and $0.24477 in May, with super-peak costing $0.46517 in June. FERC Order 745 implements a program where power producers pay retail customers the going purchase rate for power not consumed, if the demand response is economical and helps balance the energy load on the Grid. The power producers contend this overcompensates as the variable cost to generate electricity is less than the retail price. In addition, the power producers claim the Order is an over-reach by the FERC as retail power rates are set by individual state utility commission boards, some of which are elected by the general population. In May 2014, the DC Federal District Court of Appeals ruled in favor of the power producers, resulting in FERC’s appeal to the SCOTUS. The Circuit threw out FERC Order 745’s compensation calculation and found that FERC has no jurisdiction over Demand Response, placing jurisdiction back on the states. The amount of money Demand Response could represent are not insignificant. The table below is an estimate from GTM Research for the forecast of the U.S. demand response market – with and without FERC Order 745. Source In a review of Con Ed (NYSE: ED ), I discussed the implementation of the “Clean Virtual Power Plant” where ED is developing a network of solar panels and electricity storage to supply the Grid with power when the solar panels are ineffective. If this becomes a viable business model in connection with higher Demand Response expansion and the FERC Order 745 of paying the highest prices for DR, wholesale power prices controlled by Regional Transmission Organizations, such as PJM in the Mid-Atlantic and eastern Midwest, could alter profitability for power producers. Which electric utilities could affected? GTM Research offers the following map of the highest kW replacement from DR, by Regional Transmission Organization: (click to enlarge) As shown, 68% of the Demand Response reduction in MW demand comes from areas under the jurisdiction of PJM and MISO, and includes a large swath of 31 states. Utilities with power generation in these states affected include Exelon (NYSE: EXC ), FirstEnergy (NYSE: FE ), American Electric Power (NYSE: AEP ), Dominion Resources (NYSE: D ), and Duke Energy (NYSE: DUK ). More information can be found in an interesting article published by utilitydive.com. Investors should keep an eye out for the ruling by SCOTUS concerning FERC Order 745. The impact could affect the profitability of many utilities selling wholesale power in various RTO jurisdictions. Author’s Note: Please review disclosure in Author’s profile.