Investment appetite running ahead of fundamentals

12 July 2021 |

There have been some eye-catching growth announcements in the past few weeks. After Reliance stated its plan to establish 100 GW solar capacity by 2030, NTPC, JSW Energy and Tata Power have taken turns to announce their own ambitious plans for the renewable sector. NTPC has upscaled its renewable capacity target from 32 GW to 60 GW by 2032. JSW Energy, one of India’s largest private thermal IPPs and a recent entrant in the renewable sector, plans to add 20 GW renewable power capacity by FY 2030. Similarly, Tata Power has announced that it wants to add 15 GW capacity in the “next few years.”  

  • Soaring investment appetite is driven both by fading prospects of thermal power and high investor enthusiasm for renewables;
  • The market’s capacity to absorb new renewable capacity is limited at 12-14 GW per annum;
  • Sharp mismatch in demand and supply is already pointing to signs of another round of aggressive bidding;

NTPC has set up NTPC Renewable Energy, a wholly-owned subsidiary, to focus exclusively on green energy business. The company aims to invest around USD 3 billion every year to develop 7-8 GW renewable capacity. It is eyeing development of mega renewable energy parks and has acquired land for a 5 GW facility in Gujarat. The sudden enthusiasm for renewable power is of course directly linked to bleak growth prospects of thermal power. The change in business thrust would be transformational for India’s leading thermal IPP, which alongside Adani, JSW Energy and Tata Power has finally acknowledged that it would forsake development of new thermal power plants.

Totting up plans of other large IPPs – ReNew and Adani plan to add another 12 GW and 21 GW capacity respectively by 2025 – we estimate that these six developers want to add a total of about 30 GW capacity on an annual basis. Even discounting for possibility of some of this capacity addition coming through secondary market, these are massive targets.

Figure: Current and planned capacity by 2025 for select developers, MW

Source: Company statements
Note: Planned capacity has been shown with annualised targets for 2025. Reliance’s planned capacity may not be owned by the company.

Meanwhile, more new international (Brightnight, Scatec) and Indian developers (REC, a PSU) have entered the sector recently. The industry is desperately looking for growth egged on by plentiful supply of equity capital and the government’s similarly ambitious target of 450 GW capacity by 2030. Unfortunately, however, the market is not willing to absorb so much capacity. Average capacity addition in the last five years including rooftop solar has been only about 9.5 GW. And we estimate that it may grow to, at best, around 12-14 GW per annum over the next five years.

The sharp mismatch in demand and supply is already telling. SECI’s 1,785 MW Rajasthan tender has been oversubscribed by more than 6x, while Madhya Pradesh’s two Rewa park tenders (550MW and 450 MW) have been oversubscribed by a staggering 15x. Expect more aggressive bidding as the industry forgets any lessons from SB and Mahindra exits.

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