Energy

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

The world's largest renewable-energy company is selling solar power projects in India at rock-bottom prices. That's good news for the country, not bad.

While SunEdison shareholders cheered the deal, the declining price of solar also signals support for India's ambitious targets in sustainable power. Investors have ways to profit from this trend.

To see where the glow is coming from, consider the contours of the SunEdison deal. The company's sale of its 425 megawatts of capacity to TerraForm Global for $231 million values the solar panels at 54 cents per watt. Add a margin for the unspecified amount of project debt the buyer is assuming. Even if the all-in cost works out to 60 cents per watt, it's still a 9 percent discount to what are already very low panel prices: 

Here Comes The Sun
Solar panel prices have crashed
Source: Bloomberg New Energy Finance

Now look at what some of SunEdison's India capacity is going to be used for: Supplying power to the southern state of Andhra Pradesh at 4.63 rupees (7  cents) per unit, a contract the company won earlier this month with a bid that set a record low price for solar power in the country.

It's still unclear if that project will now be under TerraForm. What's evident, though, is that at this rate, Power Minister Piyush Goyal's target of bringing down the cost of solar energy to 4 rupees a unit doesn't look daunting at all. When harvesting the sun's energy becomes that cheap, the choice between thermal and solar power won't matter to distributors. If renewable energy producers can take advantage of falling panel prices to ramp up capacity, lights may start going out at thermal power businesses in India.

For investors, bearish trades on coal-fired power producers are one way to play the solar revolution. KPMG estimates that conventional power plants might see their plant load factors fall by 10 percent to 15 percent by 2020. Throw rooftop solar production into the mix, and demand for coal-based electricity could swoon. 

Thermal Goes Lukewarm
Rise of solar may hit India's largest conventional power producer
Sourcce: Bloomberg

The target of 100 gigawatts of solar energy by 2022 would continue to need a strong policy push. Given the legendary gap between the Indian government's intentions and actions, betting against conventional power producers isn't for the faint of heart. A safer approach may be to buy so-called green bonds. Indian lenders have started lining them up. IDBI Bank got $1 billion worth of orders for a $350 million issue this week. Yes Bank might jump into the fray soon.

Until now, the problem for banks was that they couldn't find borrowers to utilize the proceeds, even though shadow banks in India such as L&T Finance have bragged about high returns from financing solar projects. With the industry going mainstream, Indian green bonds could become a decent-sized category. For those who find bonds boring, a more unconventional trade might be to to use put options to bet on a long-term decline in the Aussie dollar: If India doesn't become the next coal-guzzling China, Australia's hopes of another multi-year commodities windfall are dimmed.

But all that's in the future. For now, what looks like SunEdison's eclipse in India is actually a bright spot in the country's solar journey. Investors could make hay.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net