Excerpts from a paper on Wind Energy

In this paper, I tried to highlight the hurdles faced by investors in India when they want to invest in wind energy projects specifically in wind mills. I have also suggested how effective regulation may encourage private investment in wind energy.

Following are some of the benefits / incentives provided by the Indian government to the investors -

1. 80% Income Tax Accelerated Depreciation
80% depreciation can be claimed in the first year of installation itself, if the project is commissioned on or before 30th September in a financial year; and 40% depreciation in case the project is commissioned on or after 1st October in a financial year

2. Tax Holiday under Section 80 I (A)
100% income tax holiday for the income generated from the project for any 10 consecutive years during first 15 years of operation

3. Equity / Loan Ratio
The project involves app. 30% Equity and 70% Loan Funding. Various PSU and private banks provide funding for wind power projects

Limitations

1. Wind machines must be located where strong, dependable winds are available most
of the time

2. Winds do not blow strongly enough to produce power all the time, therefore energy from wind machines is considered "intermittent," that is, it comes and goes. Therefore, electricity from wind machines must have a back-up supply from another source

3. As wind power is "intermittent," utility companies can use it for only part of their total energy needs

4. Wind towers and turbine blades are subject to damage from high winds and lighting. Rotating parts, which are located high off the ground can be difficult and expensive to repair

5. Electricity produced by wind power sometimes fluctuates in voltage and power factor, which can cause difficulties in linking its power to a utility system

Pain Points in Investing in Wind Energy in India

1. Price / WTG
This price is quoted by the manufacturer as a whole and this
is “negotiated” with the investor. Although C-WET (a regulatory body) certifies
the minimum quality standard, it does not specify the maximum charges for the equipment. If government sets a maximum price for a particular size of WTG then the investors get a reliable estimate of the initial costs

2. Generation (KWH)
At present, manufacturers quote this figure primarily depending on their own estimates and calculations. However government agencies need to estimate the wind speed and generation for a particular location so that investors have a realistic estimate of the potential power generation. This expected potential will also help in setting the price for the equipments.

3. Interest Rates
There is no set policy according to which loan is provided to the investors. At present, various PSU and private banks give loans against the WTG according to their own perceived risks and understanding. Government needs to incentivize the banks to rationalize the interest rates

4. Plant Load Factor
The quoted plant load factor is usually 21-25% in India. However global experience
shows that this high load factor is not possible for all the time. This factor varies
according to environment which is not in investor’s / manufacturer’s control.
There is a need to formalize a policy according to which the manufacturer should quote the realized load factor from the farm instead of only estimated load factor.

5. Transparency and Disclosures
According to me, corresponding figures for load factor, power generation, down time etc should be disclosed to all the investors in a wind farm

6. Payment Collection
The power purchase agreement (PPA) is signed between the investor and the state electricity board. The State Electricity Board (SEB) is supposed to pay the investor within 45 days. However collecting the money from the SEB is problematic and time consuming. Maharashtra SEB has introduced Real Time Gross Settlement (RTGS) payment system so that timely payment can be done. Extending RTGS to all the states can certainly lessen the woes of the investors.

Conclusion
India has set itself ambitious targets in renewable energy generation and government has indeed provided a host of subsidies and benefits.
However a lot of work has to be done in order to standardize the investment process; government needs to instill transparency so that more investors may diversify their portfolio taking exposure to renewable energy sources like wind energy.

Excerpt from my published paper

I had mentioned 2 months back that I my paper on wind energy will be published in a journal and I will post the excerpt on my blog once the paper is published. The paper was published last week however I can only do the needful over the weekend owing to the tight schedule I am running.

Why Baltic dry index is behaving abnormally

I was checking some data today when I realized that Baltic dry index increased by over 100% during the last one and a half month. It was 2185 on 29th September and today it was 4507.

Is this a result of increasing trade activity owing to enhanced confidence in recovery OR is it because of speculative stock piling fearing dollar depreciation?

Less activity on the blog

One of my close friends pointed out that I am less active on blogger these days. Well, this is true but I am working on something exciting.

And trust me it is worth :)

I was working on a paper on "Improving regulations to encourage renewable energy in India". It has been accepted by a journal and now I am in the process to make some cosmetic changes as asked by the editors.

I will put up the summary soon on the blog once the paper is published.

A nice video on high frequency trading

The link was posted on my institute notice board by Mohit Gupta (Class of 2010).

"Link between prices and value has been completely lost" - Paul Wilmott

Paul Wilmott says that the link between prices and value has been completely lost. Watch him on CNBC here



Even Paul, probably the foremost quant today, is not willing to take a call on any asset classes being cheap or overvalued. According to me, he is essentially saying that all the talks of recovery does not make sense and we can see more bubbles in near future. He even says that the problems with risk managers and models is that many models are being used to "HIDE" risks instead of highlighting potential pitfalls.

Watch it, its worth.

Mailing annual reports to shareholders

A funny thing happened last week. I bought 3 shares (Yes, only 3 shares) of a company to test an algorithm. I sold off the shares after 2 days.
I got the annual report of the company after 3-4 days. This is SEBI's directive that all the shareholders must get the hard copy of the annual report of the company. But going by my experience, I think that all the shareholders holding even 1 share on a particular date will be mailed the annual report.
I am not at all bullish on this stock and bought it for the first time; and sold it in 2 days. Then why on earth I was mailed the annual report. There was a Rs 10 stamp on the annual report and printing the annual report itself would have costed the company (read other shareholders) about 10-20 Rs.

The regulation can be improved and I suggest that a shareholder has to hold a minimum of (number of shares * trading days on which the share was hold) in an entire financial year to be eligible to get the annual report. There will obviously be fine-tunings and changes in the suggestion given above but this would definitely save the money of other shareholders.

India's CIBIL: A misused system

I am writing this from my own experience.

CIBIL database was created to collect and store an individual's credit history. However there is NO regulation in place which could deem banks to furnish positive details about a client.
A few days back, I got a call from a collection agent and he mentioned that I used a credit card way back in 2006 and I am supposed to pay nearly 10 times the transaction amount now. The card was actually misused and I never came to know about the same because I relocated to Ahmedabad to do my MBA.

The bank had given my name to CIBIL which I confirmed from CIBIL however I have been paying two loan EMI regularly since June 2008; and this information was not with CIBIL.

OK, now I have settled (I had to) with the bank for my credit card. I checked with the banks from which I availed loans (and have been paying EMIs regularly) asking them the reason behind not giving my positive credit history to CIBIL. The answer was, "If you are not a defaulter then why should we take extra pains to give the information to CIBIL".

Now this means that in case you want to apply for a loan of 1 million, it can be rejected on the basis of a complaint by a bank for 1000 bucks .... amazing!!! They do not maintain any credit history as such but they maintain negative (apparently) credit history.

More links on High Frequency Trading (HFT)

• Michael Wellman suggests to abolish continuous trading. See "Solving the HFT problem: Abolish continuous trading" and "Countering High-Frequency Trading"
• Zero hedge analyzes the cost of HFT (Zero Hedge)
• Steven Pearlstein from Washington Post summarizes the issues (Washington Post)
• Scott Locklin compares Paul Wilmott, Joe Saluzzi and Chuck Schumer with three stooges (link)
• Prof. Bernard Donefar's views about the potential of algorithms to distort the market - covered at Reuters (link)
  

US Healthcare

US healthcare costs, rising deficit and President Obama's plans (or lack of plans) are extensively being covered during the last few days. Nobel laureate Paul Krugman wrote an article on his blog titled "Why markets can't cure healthcare". He himself was startled to see over 800 comments on that post. In the first post, he mentioned about a paper from Kenneth Arrow titled "Uncertainty and the welfare economics of medical care".

I must admit that the paper is a stunning piece of work. I must admit that I found it difficult to understand it in the first go. Although it would be difficult but if I want to summarize it in 4-5 sentences then -

1. There is high risk and uncertainty (uncertainty in demand, products, behavior of suppliers and pricing)
2. Competitive equilibrium and optimal states are equivalent when following preconditions are satisfied - existence of competitive equilibrium; marketablity of all goods and services; and nonincreasing returns
3. Problems of insurance - from providers as well as from insured (they may not search for best prices and services if adequately insured)
4. High entry barrier to the profession and possible monopoly emerging from patient's belief (and rightly so) about superior know-how of professionals

The paper is a fascinating read and must be read by economics enthusiasts.

About India - Although there is virtually no state sponsored medicare in India and most of the expenses are beared out of the pocket, most of the points discussed in the paper are actually true and relevant for India. Various health insurance schemes actually try to find and target the people less prone to illness (although this increases the administrative costs) and also keeps a cap on the insurance cover. The role of state is critical in non-essential commodities like medicare, law suits etc and we know how and what kind of services are provided by Indian government hospitals and government appointed attorneys.