P2 Solar Inc. (PTOS) Positioned to Ride the Coattails of India’s Ambitious New Energy Policy

P2 Solar is an engineering company that builds and designs rooftop solar panel power systems. They also construct solar power and hydro plants in not only Canada, where they are headquartered, but also in developing nations. India in particular offers opportunities for exceptional growth, but first let’s cover some background to understand why.

One of Barron’s biggest investment themes for the coming year is the Americanization of the globe, in other words, the growing demand for consumer products in the Asian developing markets. The middle class in Western industrialized nations and first world countries have been shrinking. This can especially be seen in America, as the wages for the middle class have been flat to down, consumer aggregate demand has been stagnant, and we are still well below the peak employment levels seen before the Great Recession of 2008-2009. However, two countries that have seen an exploding middle class are the ones with the largest populations, India and China.

Part of the growth of the middle class has been due to the large scale of those countries. India has a population in excess of 1.36 billion and China has a population greater than 1.24 billion. Both countries have experienced strong GDP growth due to globalization, as multinational corporations outsourced to labor in those markets. As a result of a growing middle class, consumer spending has been remarkably robust and resilient reaching an estimated $4.3 trillion in 2008, and expected to grow to $32 trillion and 43% of global consumption by 2030. So these economies have been rebalancing from export driven growth orientation to domestic consumption growth.

By standards set by the Asian Development Bank, 63% of China’s population is now considered middle class and India’s middle class is about 25% of its population. China has been more successful in growing its middle class mainly because its authoritarian government has a more state interventionist model on its capitalism, while India is more Laissez faire. As a result, infant mortality, life expectancy, immunization of children, and child nourishment all fare better in China. Nevertheless, India’s middle class is bigger than the entire population of the United States. Also, India’s population is expected to exceed that of China’s by 2028, and by matter of scale, their middle class is expected to grow with it.

A booming middle class means robust demands for electric power. Matter of fact, demand for electricity has been so great, that it often overtakes supply. Typically, base load demand is greater than supply by about 10% on average for India. In some states, this has led periods to lengthy rolling blackouts where electricity delivery is intentionally stopped for non-overlapping periods of time over different distribution regions in order to avoid a total blackout of the power system. This hasn’t been always been managed very well by the way. On July 31, 2012, such delivery problems led to a massive power outage that shut down half the country.

Also, based on World Bank figures, about 40% of India’s residences are still not connected to India’s power grid. Hence, to fulfill short-term and long-term growth economic growth needs, the country has no choice but to continue investing in its electrical power infrastructure.

Currently, about two thirds of India’s power comes from coal burning thermal plants. This model is not sustainable for a variety of significant reasons. Even though India has the fifth largest coal reserves in the world, most of it mined by state-owned Coal India, which provides coal of fairly low quality and only supplies 72% of the demands of their electric utility sector. At a greater cost, the rest of the coal has to be imported from Indonesia and Australia, with imports peaking last year. As a result, coal prices tripled over the past three years, and are predicted to increase another 25% over the next couple of years. In some parts of India, power distribution networks were not able to pay for a more costly coal based electricity and this has also resulted in power outages.

Another factor is the pollution. New Delhi and Beijing seem to be in a contest for who has the most smog. According to the Environmental Performance Index, both India and China tied for dead last in terms of populations impacted by poor air quality. The entire populations of both countries are exposed to harmful particulate matter of about 2.5 micrometers in diameter which penetrate the lungs and blood vessels and are leading cause of lung disease and premature death.

India also needs to reduce its carbon footprint, which grew as the demand for power grew. The figure was 2,240 million metric tons of carbon dioxide at the end of 2012, which is still less than the United States, which was at 5,118 million metric tons of carbon dioxide. A global risk analytics firm, Maplecroft, devised a new Climate Change Vulnerability Index which placed India at ‘extreme’ risk from global warming/climate change side effects such as droughts, floods, sea level rise, and extreme weather events.

As a result of all of the above, India’s government is making a huge push toward usage of renewable energy sources, including solar, wind, and hydroelectric power production. After seeing what happened in Japan with the Fukushima Daiichi nuclear disaster in 2011, the country has no interests in increasing its nuclear capacity beyond the scant 4% of power already produced by that technology. Matter of fact, as of April 2, Bloomberg announced Prime Minister Manmohan Singh a massive boost in their solar target for 2015, adding an additional 1 GigaWatt in capacity, and the country already doubled their capacity in 2013. The goal is to install 10 Gigawatts of solar by 2017 and 20 Gigawatts by 2022.

In a nation desperate to get off coal, P2 Solar has entered the picture at the right time. Currently, the company has plans to build 2 mini-hydroelectric power plants in Punjab (0.7 MW Rajgarh and 0.5 MW Tibba projects) and acquire another 9 MW hydro project in the state of Punjab, as well as acquire the 9.5 MW Gangani hydroelectric project in the state of Uttarakhand.

Most of us know that hydroelectric power is developed from using running water. Water is fed from a reservoir into a pipe or channel into a turbine. The pressure from the water flow pushes the turbine which rotates a shaft connected to an electric generator. To give some sense of scale, the Hoover Dam is considered a 2 Gigawatt facility and currently provides power to about 350,000 homes though it used to power more than double that back in 1984 when the water level at Lake Mead was much higher.

Large scale hydroelectric power stations typically involve building a dam which interrupts the flow of a river and can cause significant harm to a local ecosystem, and often displace people and wildlife. Small hydroelectric power plants on the other hand, have a very low environmental impact and are ideal for small communities. As P2 Solar has a primary focus on engineering solar power systems, the plans are to leverage the additional property rights associated several miles of canal space to place solar panel power systems.

The bottom line is that India’s plans to increase renewable energy capacity are quite ambitious, and so far the government has met desired goals. P2 Solar is already on its way to building a portfolio of profitable projects riding on the coattails of India’s new energy policies.

For more information on P2 Solar, visit www.p2solar.com

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