Emerging trends in alternative energy
■ A rising energy deficit, overdependence on imports for crude and
nuclear energy, an inability to scale up hydro and the impact of coal on
climate are all factors that will drive the adoption of alternative energy in
India. While near-term concerns could stem from weak macro conditions
and falling crude prices, this is a space that could witness a sustained
growth trajectory given emerging policy support and structural drivers.
■ Wind remains the best way to play the medium-term alternative energy
theme in India, as it should continue to see strong builds. The mediumterm
wind profile for the country, though, offers low average PLFs and
once the windiest sites are saturated, growth could slow, in our view.
We favour equipment companies exposed to global wind capex.
■ Solar will displace wind in terms of relevance in India’s energy mix
over the longer term, as India is endowed with sufficient solar
radiation, given its proximity to the equatorial belt. Tapping a tiny
portion of this is sufficient to meet India’s entire power demand. We
admit that near-term demand will be restricted by higher costs, but
rapid technology advances driving down costs and enabling policies
could accelerate demand growth.
■ The biofuel space is still in its formative stage and the new national
biofuel policy is expected to increase investment in this sector. The
vast amount of wasteland in India for jatropha cultivation and a welldeveloped
sugarcane supply chain offer strong potential, and the nearterm
supply bottlenecks could, in fact, help the early entrants in this
space, in our view. We believe equipment suppliers and some
emerging integrated biofuel producers would benefit from this trend.

Alternative energy in India
The alternative energy sector in India is structurally positioned to play a key role on India’s
energy map, given the deficit of key resources, such as crude and uranium, the falling
reserve life of traditional resources (e.g., crude and coal) and the inability to scale up
hydro. While alternatives are costly in relative terms, improving policy support in India via
generation-based as well as capital incentives should help to drive investment in this
sector. There are several competing alternatives, but we restrict our focus to solar, wind,
bioethanol and biodiesel, where we see large potential for scalability, although their
relative importance would be driven by cost curves, the policy climate and supply.
The case for alternative energy
The global adoption of alternative energy has been driven primarily by the impact of
greenhouse gas (GHG) emissions on climate, but it is largely energy security concerns
that form the backbone for alternative energy in India. With the economy growing at an
average of 8% annually, rising energy needs are expected to increase the supply/demand
deficit. Overdependence on crude imports (7.7% of GDP versus less than 1.5% of GDP a
decade ago) and depleting reserves of traditional energy forms are longer-term concerns.
(By 2030, we estimate the global crude reserve life at 11 years and coal at 40 years.)
Although natural gas could serve as an interim balancing factor (a saving of US$30 bn
over five years), the adoption of alternatives appears inevitable.
Scoping alternatives in India
India offers strong potential for developing solar and biofuel over the longer term, given its
proximity to the equatorial belt, with over 5,000 tn kW/h p.a. of solar radiation falling on the
country, the availability of wasteland for biodiesel cropping and a well-developed
sugarcane supply chain for bioethanol production. Both sectors, though, are likely to
witness a slower rate of adoption in the near term, as growth for solar is limited by costs,
biofuel by inadequate cropping of jatropha, and bioethanol by the inadequate availability of
excess ethanol, based on current sugarcane acreage and cropping techniques. In the near
term, the penetration of alternatives is likely to be driven by strength in wind installations,
driven in turn by favourable subsidies and the cost environment. Structurally, though, we
doubt the longer-term role of wind in India’s energy mix, given low plant load factors for
current installations and the slower pace of cost curve declines compared to solar energy.
The economics of alternatives
The attractiveness of alternatives is usually read relative to crude prices, although over the
longer term we expect supply security (falling reserves of traditional energy forms) to take
precedence on pure cost-based criteria. Costs, though, dictate the pace of adoption and a
detailed cost assessment suggests that solar, followed by wind, continue to be relatively
costlier forms of energy generation, compared to coal, hydro or nuclear. The economics of
biofuel, however, appears favourable at current costs, though future cost curves are
uncertain. Even so, a cost curve analysis suggests a steep cost reduction curve for solar
costs relative to wind and biofuel.
The alternative plays
Investors wanting exposure to this sector, in our view, should focus on stocks that: 1) own
technology, 2) are exposed to global alternative energy capex, 3) have exposure to
multiple alternative energy platforms or 4) are emerging as vertically integrated supply
chains. Some stocks geared to alternative energy in include Praj industries (PRAJ.BO,
Rs72.35, not rated), Shriram EPC (SHRI.BO, Rs138.40, not rated), Moser Baer PV
(MOSR.BO, Rs77.30, not rated) in the listed space and companies such as Naturol
Energy (not listed) Tata BP Solar (not listed) in the private space.