Surge in auctions hard to sustain


There has been a surge in project auctions in the last three months. Since November 2023, total capacity of 12,142 MW has been awarded under 13 auctions. Notable auctions include a 1,184 MW peak power award by SJVN, 3,000 MW solar power by NHPC, 750 MW RTC power by REMCL, and three solar-wind hybrid awards by SECI (900 MW), NTPC (1,104) and GUVNL (200). Actual project capacity is expected to be close to 14,658 MW to meet higher CUF requirement in RTC tenders. This is a new record for project awards in a three-month period barring Q1 2020 when 12 GW was allocated under a single manufacturing-linked solar tender.

Despite a lot of talk about the growing need for hybrid power, solar tenders dominated with 64% share of the allocated capacity. Solar-wind hybrid (18%) and peak/ RTC power tenders (16%) together accounted for nearly a third of the share, while pure wind tenders had a miniscule 2% share. It is worth noting that none of the ‘firm’ power tenders have been awarded yet. Also, interestingly, there were no auctions by states other than Gujarat even though many states have been prolific issuers of new tenders in recent years.  

Bidding interest remains high – there were 28 unique participants across all auctions. But there is also evidence of more restraint in the market than in the past. The top five winners were all Indian corporates or PE-backed platforms – Avaada (1,974 MW), NTPC (1,400), ReNew (1,084), Acme (950) and Juniper (870). Notable absentees were Adani, Azure, Ayana and Greenko. International developers like Shell (Sprng), Sembcorp, Engie and Apraava again chose to bid conservatively winning 19% of total awarded capacity.

Figure: Project auctions completed in November 2023-January 2024, MW

Source: BRIDGE TO INDIA research

Tariffs were mostly stable and range-bound around INR 2.58, 3.25 and 4.36/ kWh for solar, solar-wind-hybrid and peak/ RTC power projects respectively.

Six of the 12 auctions were undersubscribed by 21-67%. More notably, all GUVNL pan India tenders were heavily undersubscribed. Even in fully subscribed tenders, subscription rate was much lower at 1.2-2x than in the past. We believe that the low interest is mainly due to lack of visibility around evacuation capacity, across the country, specially for wind sites. Second, many large developers are sitting on huge pipelines – 38,242 MW between Adani (11,770 MW), NTPC (9,415), ReNew (8,344), Azure (4,979) and Tata (3,645). For many of these developers, execution and fund raising are the main priorities.  

2023 was a bumper year for both new tender issuance (65,920 MW) and auctions (24,164 MW). The government is keen to drive more activity but DISCOM demand and execution barriers are expected to keep progress in check.

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No cogent plan for offshore wind


MNRE has again revised offshore wind plans and outlined alternative project development models. The revised target is to auction 37 GW capacity by FY 2030, up from 30 GW as announced last year, primarily off the coast of Tamil Nadu and Gujarat. Three different models are proposed – i) lease of pre-identified sites to developers for supply of power to DISCOMs with viability gap funding (VGF) support; ii) lease of pre-identified sites to developers for supply of power to DISCOMs or under open access; and iii) others. In addition to the VGF support, the government has agreed to undertake development of power evacuation infrastructure, waive ISTS charges and additional surcharge (AS) for projects commissioned by December 2032, and offer REC multipliers and carbon credit benefits (not quantified yet). Concessional custom duty has also been proposed on import of components required for offshore wind turbines.

Table: Alternate models for development of offshore wind projects

MNRE is proposing to offer VGF for 1 GW capacity, split equally across Tamil Nadu and Gujarat projects, for supply to the respective DISCOMs. The Ministry of Finance has approved a quantum of INR 68 billion (USD 817 million). Final approval from the Cabinet is expected shortly. The VGF is sized to reduce the final cost of power to about INR 3.50/ kWh, maximum tariff that the DISCOMs are willing to bear.

MNRE has also issued a preliminary tender under model B for allocating seven equal sized sites covering an area of 1,443 sq km off the coast of Tamil Nadu for developing 7.2 GW capacity (5 MW/ sq km). Lease rental has set at a floor of INR 0.1 million/ sq km per annum. NIWE shall be responsible for securing stage 1 and stage 2 clearances from various government departments. No firm offtake is on offer. Final bids are expected to be invited in early 2024. The government has offered a lease period of only five years for site surveys, project development and construction, extendable for full operational life post commissioning date. Without a firm offtake, subsidies and long-term lease, the tender is unlikely to make any progress.

The government first announced offshore wind plans in 2018 with a target of developing 5 GW capacity by 2022. These plans have been revised several times with little concrete progress. Model A is the only viable route in the current market environment but a cap of 1 GW is too low for creating an eco-system and improving risk perception. Unless the government offers further funding and offtake support, investors are likely to be deterred by high project development, construction and operational costs, long gestation period and an undeveloped eco-system.

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Better days are here for wind power


Concerned by poor progress in the wind power sector, the government has made a series of announcements to stimulate capacity addition. It has notified a specific wind tender issuance sub-target of 10 GW annually until FY 2028 on top of hybrid and RTC tenders. It has also set a separate incremental wind RPO target of 6.94%, within the 43.33% RPO target by March 2030, to be met only by projects commissioned after FY 2022. That equates to new wind capacity addition of 70 GW over eight years. Other measures include replacement of reverse auctions by a single stage bidding process to tone down aggressive bidding behaviour, a move to issue state specific tenders to ease land and evacuation infrastructure availability, and levy of severe penalties on developers failing to complete projects on time.

Wind sector has been slowing down since transition to reverse auction in 2017. While tender issuance and auction activity has been relatively healthy, project execution has been marred by delays in land acquisition, spiralling costs and unviable bids. Capacity addition has averaged a mere 1.8 GW per annum over the last five years. In contrast, CEA has estimated need for 82 GW new wind capacity by FY 2032 as part of the recently announced National Electricity Plan.

Figure: Wind sector progress, GW

Source: BRIDGE TO INDIA research

Meanwhile, the industry has been taking action to correct course. Turbine makers have invested in more efficient technology, cut costs, raised prices and passed on execution risk to developers. After several years of reporting losses, Suzlon, a leading Indian turbine manufacturer, reported a net profit of INR 29 billion in FY 2023 as against a net loss of INR 2.6 billion in FY 2022. Inox Wind and Senvion have restructured operations and are seeing a revival in profitability. Envision has rapidly expanded manufacturing capacity to 3 GW and already built an order pipeline of almost 4 GW. The project developers have also turned more cautious. Tariffs in the latest SECI auction in June 2023 came in the INR 3.18-3.47/ kWh range, up 14% since the previous SECI auction in Dec 2022 and up 37% from the all-time lows of 2017. Bidding interest has also waned significantly.

But the most critical support for wind power is coming from the growing need to balance solar power’s high intermittency. Because of wind power’s complementary output profile, power utilities and corporate consumers are looking mainly to procure hybrid power with a willingness to pay a premium over cost of standalone solar power. In the auctions completed so far, wind’s share of total project capacity under wind-solar hybrid and wind-solar-storage hybrid tenders is about 25% and 70% respectively.

While the rationale for some of the government moves including push for more tenders and move away from reverse auctions is debatable, better technology, more commercial prudence and greater market demand are all strong drivers. We expect sharp jump in market activity with total estimated wind capacity addition of 30 GW over the next five years.

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Private ownership more desirable for renewables


Shell just announced 100% acquisition of Sprng Energy from Actis with an enterprise value of USD 1.55 billion.  The company has a portfolio of 2.3 GW solar and wind projects including 0.8 GW capacity in construction. Earlier this month, Tata Power announced USD 500 million investment from Blackrock and Mubadala, equivalent to about 10% stake, in its integrated clean energy platform comprising project development, EPC, solar manufacturing, C&I, solar pump and EV charging businesses. The two deals, the largest in nearly a year, have been closed reportedly at 9x and 12x FY2023 EBITDA respectively. The deals are a proof that Indian renewable sector continues to be a magnet for the world’s largest investors for its sheer size and growth prospects.

The valuations are significantly more attractive in relation to the two publicly held IPPs, Azure and ReNew, both of which are listed in the USA and currently trading at around 7.5-8.0x FY 2023 EBITDA. The deals again raise the fundamental question: what is the optimal ownership model for Indian renewable assets? A public listing is regarded as the ultimate exit by most project developers and investors – significantly better valuation than in private markets (most buy side analysts assign valuation multiples of 12-20x EBITDA to renewable assets), ease of raising further capital (continuous access to capital markets) and operational freedom for the management (no dominant institutional investors).

But a listing on stock exchanges comes with its own set of constraints and uncertainties. Public markets are impatient and, being prone to general market sentiment, can be irrational. Analysts expect a steady quarter-on-quarter jump in revenues and profits. But that is almost impossible to deliver given the dependence of these businesses on a number of exogenous variables – equipment prices, exchange rates, cost of debt, policy flip flops and delays in PPA execution or transmission connectivity. As an example, US-listed Azure and ReNew are taking a beating along with other international renewable stocks because of fears around rate rises and local regulatory regime.

Figure: Relative performance of Azure and ReNew stocks against S&P500 in last 6 months

Source: Google Finance

Trading history of listed power stocks in India also offers a cautionary tale. The power sector has been perennially ridden with acute challenges including delayed payments from DISCOMs, PPA renegotiation, unviable projects and unpredictable policy. Sobered by past shocks, the Indian public market does not quite seem ready to offer heady valuations to renewable stocks. In contrast, private investors are willing to ride out short-term uncertainty and take a longer term view. Moreover, the huge wall of ESG money pouring into the sector offers a readymade put option to private investors.

NTPC and Tata Power are preparing for jumbo listings over the next 1-2 years. Their progress will be interesting to watch for the whole sector.

PS. This note excludes financial deals or valuation of companies involving Adani group. A separate note on valuation of renewable IPPs shall follow in the coming weeks.

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Wind sector hobbled by soaring costs, unrealistic bids


India added only 1,033 MW wind power generation capacity in 2021, down 14% YOY, taking total wind capacity to 40,709 MW. This is the fourth straight year of decline in capacity addition after competitive auctions replaced feed-in tariff regime in 2017. Out of total allocated capacity of 12.4 GW for vanilla wind projects in the last five years, only 4.3 GW capacity has been commissioned so far. About 3.2 GW capacity has been surrendered voluntarily by project developers on various grounds under SECI tenders. Total remaining pipeline of vanilla wind projects is estimated at 4.9 GW.

Figure: Wind power capacity addition, MW

Source: BRIDGE TO INDIA research

Project completion track record continues to remain extremely poor for multiple reasons. Most importantly, significant cost hikes across the whole value chain and severe land/ ROW availability issues have rendered almost all under construction projects unviable. As a result of increase in metal and other input costs, total EPC cost has surged by 15-20% over the last year alone to about INR 70 million/ MW. The turbine suppliers, faced with increasing cost and execution risks, have been reporting losses over last few years. Consequently, they have resorted to higher prices and derisking of the business by switching from lumpsum EPC model to simple equipment supply model. The Indian manufacturers are in particularly deep financial trouble with many of them partly or wholly shutting down plants.

The project developers are, therefore, having to procure other components and services – project design, land, erection and commissioning, and transmission – piecemeal in many cases further increasing execution cost and risk. Unviable bid tariffs have forced the developers to delay or surrender projects. Some of the largest developers have cited reasons like increased capex, unavailability of land, force majeure etc. while surrendering projects. Average commissioning timeline for projects under initial SECI tenders was 36 months from date of auction. But progress has substantially deteriorated for projects awarded since 2018 onwards (see chart below).

Figure: Commissioning status for wind projects under SECI tenders

Source: BRIDGE TO INDIA researchNote: Dates in this chart represent dates of auction for respective tenders.

Unfortunately, cost pressures and land issues are expected to persist in the foreseeable future. SECI has so far taken a pliant view of project delays and given multiple time extensions to project developers on account of COVID and land/ ROW issues. But we believe that with sub-three INR tariffs being sub-optimal in most cases, many more projects are likely to be abandoned.

Such poor progress of wind sector is a cause for alarm. The role of wind power, as a complementary technology for solar power, cannot be understated. It is critical for balancing the grid and meeting India’s lofty climate targets. The government ought to undertake holistic assessment of the sector as well as the competitive bidding framework to unlock growth. More specifically, the tenders should have adequate safeguards against unrealistic bids and punishing errant bidders.

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Offshore wind not good value for money


MNRE has revived offshore wind plans with industry consultation for developing 1 GW and 2 GW capacity off the coast of Gujarat and Tamil Nadu respectively. Power is proposed to be sold to the respective states at a fixed tariff of about INR 3.50/ kWh with SECI as an intermediary offtaker. MNRE aims to award total capital subsidy of up to INR 140 billion (USD 1.8 billion) to project developers through a competitive bidding process. It is proposing to complete bidding process for the first 1 GW project this year with expected commissioning date of 2025. The second tranche of 2 GW capacity in Tamil Nadu is expected to be tendered out in 2024. Overall, the government is aiming to issue tenders for 30 GW capacity by 2030.

It is worth recalling that offshore wind has so far failed to take off since states are unwilling to buy expensive power – expected LCOE of about INR 9.00/ kWh – and the central government has refused to bear the substantial subsidy burden. MNRE had announced the offshore wind policy in 2015 with a target of developing 5 GW capacity by 2022. Preliminary wind resource assessment, environmental impact assessment, geophysical and geotechnical studies were completed for a 1 GW pilot project off the Gujarat coast in 2018 with financial and technical assistance from the European Union. But the project never took off because of economic challenges.

MNRE seems more keen this time possibly because of acute execution challenges faced by onshore wind (note to follow next week) and sharp fall in offshore wind cost (see figure below). It is also more hopeful of the Finance Ministry’s support after getting support for expansion of the solar PLI scheme.

Growth led by Europe and ChinaTotal global offshore wind capacity is currently estimated at 55,678 MW. China has leapfrogged other countries by installing a mammoth 17 GW capacity in 2021 ahead of its USD 134/ MWh (INR 10.20/ kWh) feed-in-tariff expiry date. Other leading nations including the UK (total installed capacity of 12,700 MW), Germany (7,747 MW) and the Netherlands (2,460 MW) have also relied on feed-in-tariffs and other subsidies to kick-start the market. The USA, Denmark, France, Japan, South Korea and Taiwan are planning significant offshore wind development in near future.

Figure 1: Annual capacity addition, MW

Source: IRENA

Developed nations prefer offshore wind mainly as they run out of suitable onshore sites due to complex planning laws and resistance from local populations.

Improving techno-commercial viabilityWith improvement in technology, scale and increase in turbine sizes (up to 16 MW each), capital cost and LCOE have declined by about 50% since 2016, but are still relatively steep at about USD 2 million/ MW and USD 0.10-0.12/ kWh respectively in the Indian context.

Figure 2: Offshore wind LCOE in other countries, USD/ MWh

Source: U.S. Department of Energy

Weak case for offshore wind in India.We believe that the government plan to tender 30 GW capacity by 2030 is too ambitious to be realistic. DISCOM appetite is likely to be nil in absence of central government subsidies. Moreover, gestation period for first few projects is likely to stretch to over five years since requisite infrastructure and manufacturing capacity is not available in India.

Given the substantial subsidy burden and lack of domestic manufacturing capacity, a robust debate is needed on future of offshore wind in India. Certainly, there is no scarcity of suitable onshore sites in India unlike in more developed nations. Use of government funds would be significantly more beneficial in accelerating build out of storage and transmission capacity.

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Investment enthusiasm spills over to wind


SECI concluded its 1,200 MW ISTS wind tranche X auction earlier this week. The tender was oversubscribed by 2.6 times. Successful bidders include Adani (300 MW), Ayana (300 MW), Evergreen Power (150 MW) and JSW (450 MW) with tariffs between INR 2.77-2.78/ kWh. Azure (300 MW, INR 2.79/kWh), O2 (300, 2.80), Shirdi Sai (300, 2.84), AMP (150, 2.88), Enel (150, 3.06), ReNew (300, 3.28) and SITAC RE (300, 3.39) were the unsuccessful bidders. Entire power output would be purchased by Rajasthan DISCOMs.

A combination of lower wind speed in proposed locations, more expensive land and lower tariff would put margins under pressure;

Pressure on developers to deploy capital has led them to bid aggressively notwithstanding operational and financial concerns;

Competitive proposition of wind power vs solar power looks better after 40% BCD on solar modules;

Transmission connectivity is restricted to six pre-identified substations in Karnataka, Tamil Nadu, Maharashtra and Madhya Pradesh. The tender is SECI’s attempt to seek wider geographical spread for wind projects after repeated undersubscription in pan India ISTS tenders. Most projects under these tenders, proposed to be located in Gujarat and Tamil Nadu because of higher wind speeds, have been delayed extensively due to severe land and transmission capacity constraints (besides rising capital costs).

Figure: Wind auction results since 2018

Source: BRIDGE TO INDIA research

Remarkably, this was the first fully subscribed pure wind auction by SECI in over 1.5 years. The number of interested bidders, 11, is the highest for pure wind auctions in nearly three years. For Ayana, Azure, O2, Shirdi Sai and Amp, it is their first bid ever for a wind project. Mixed record of solar auctions in the recent past – lack of DISCOM interest despite record low tariffs – has forced developers to turn attention to wind power. Increase in bid intensity has inevitably led to aggressive bidding. As seen in the chart, the auction tariff of INR 2.77-2.78 is the lowest since September 2018.

Pressure on developers to scale up and deploy capital has led them to set aside concerns related to land acquisition, supply side problems and rising capital costs. We understand that most project developers are looking to set up projects in Karnataka. But a combination of lower wind speed, more expensive land and lower tariff would put margins under pressure. Our financial calculations show equity IRR in the sub-10% territory. With little expectation of wind turbine cost coming down unlike solar equipment, it is hard to justify these tariffs.

The auction result is a sure but small step towards revival in wind power procurement after lull over last couple of years. Competitive proposition of wind power looks better with solar tariffs set to rise by about INR 0.52/ kWh after 40% BCD. Wind also does a better job than solar in meeting evening peak power demand. But turbine supply side – both quantity and prices – remains a daunting challenge.

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