Tata Power Co., India's second- largest generator, is seeking investors to help its renewables unit more than double capacity in five years and acquire projects at home and overseas.

The unit of India's largest business group, which plans to spend about 17.5 billion rupees ($328 million) annually, may also consider selling shares in Tata Power Renewable Energy Ltd., Rahul Shah, chief of business development at the generator, said in a telephone interview from Mumbai. The company plans to build 2,000 megawatts of wind, solar, hydro and geothermal plants from a total of 852 megawatts last year.

Tata Power, part of the group led by Cyrus Mistry, is planning to boost clean-energy generation to a fourth of its capacity as coal prices increase and the costs of alternative sources decline. A shortage of fossil fuel used in thermal power projects has prompted India to grant incentives to wind and solar plants to cut chronic blackouts that the government says shaves about 1.2 percentage points off annual economic growth.

"Even though the profitability of clean energy projects is still not on a par with thermal energy at the moment, in the long run, this would be a profitable bet," said Sitaraman Iyer, a Mumbai-based analyst with MSFL Research. As the cost of clean energy drops, "growing in renewables would make sense for Tata Power."

Energy Costs

Tata Power's shares, which have fallen 11 percent in the past year, dropped 0.3 percent to 100 rupees in Mumbai at 9:50 a.m. The benchmark Sensex index has advanced 12 percent in the trailing 12 months.

The company expects to profit from "acceptability" of wind and solar generation at a time when the gap between conventional and renewable energy costs is "narrowing significantly," Shah said.

Government incentives, such as lower tax rates and cheaper raw materials, are driving down prices of clean energy and may help the company attract investors, said Iyer.

The average per-unit cost of wind power in India is now on a par with coal-fired electricity, Shah said. The cost of solar power is expected to drop by 10 percent, according to Shah.

Developers' bids in recent auctions for coal-fired power stations have ranged from $49 to $78 a megawatt-hour, compared with tariffs for wind farms of between $66 and $105 a megawatt- hour, according to Ashish Sethia, India country manager for Bloomberg New Energy Finance.

Installed Capacity

Goldman Sachs Group Inc., the top arranger for renewable- energy stock offerings last year, forecasts more than $395 billion in annual investments in renewable energy by 2020, Stuart Bernstein, the Goldman partner overseeing its renewables unit, said on Jan. 18.

Tata Power, which has 7,700 megawatts of installed capacity, will expand wind generation by as much as 200 megawatts a year and solar by as much as 50 megawatts a year, according to Shah. The Mumbai-based company will also bid for projects overseas, including South Africa and the Middle East, adding a total of 2,000 megawatts of clean-energy capacity in five years, he said.

"Renewable projects are also attractive because these can be set up in 18 to 20 months compared to the four to five years it takes to build a thermal plant," said MSFL's Iyer.

Tata Power has wind ventures in South Africa, after being selected in May to build two projects, Shah said. The country's auction of renewable-energy capacity also drew Suzlon Energy Ltd., India's largest wind-turbine maker, in an earlier round. The company said Feb. 1 it received approval to build a 138- megawatt project.

Tax Benefit

At home, wind installations topped 3,000 megawatts for the first time in 2011, a 138 percent increase in two years, according to data compiled by Bloomberg.

Those investments were driven by a tax benefit called accelerated depreciation and a subsidy known as generation-based incentive, which boosted project returns, helping wind compete with other forms of energy. The incentives expired on March 31 and the Ministry of New and Renewable Energy is seeking Cabinet approval for them to be reinstated, according to Joint Secretary Tarun Kapoor.

Tata Group, which also owns Corus Group and Jaguar Land Rover, has invested in geothermal projects in Australia and Indonesia with Sydney-based Origin Energy Ltd.

Indonesian Coal

Tata Power reported a loss of 838 million rupees in the quarter ended Sept. 30, citing higher costs at its 4,000- megawatt Mundra power station. To ensure supply for the plant, the company in 2007 bought 30 percent stakes in two coal mining units owned by Indonesia's PT Bumi Resources.

Tata Power's unit plans to finance 70 percent of all project costs with loans and 30 percent with equity from the parent company, Shah said. It may also consider selling stakes to financial institutions and companies to raise funds, he said.

The company's fuel costs have risen 25 percent since the financial year ended March 2008, while its total debt rose 200 percent in the same period, according to a January presentation to investors on the company's website.

Copyright 2013 Bloomberg

Lead image: Windmill park in kanyakumari, south india , via Shutterstock