Viability gap funding may trigger investments in offshore wind energy

With Government approval for viability gap funding (VGF), covering 36 per cent of the total project cost, offshore wind energy projects may see a rise in investments, analysts say. Developers have been traditionally wary of the space due to high cost, operational challenges and offtake related risks.

According to a report by Crisil Market Intelligence & Analytics, the VGF support will reduce the cost of power from offshore wind projects, which are costlier than onshore wind farms, and encourage developers to enter this space.

The VGF includes ₹6,853 crore for installation and commissioning of 1 gigawatt (GW) of offshore wind energy projects of 500 megawatt (MW) each off the coast of Gujarat and Tamil Nadu, and ₹600 crore for augmentation of two ports to meet the logistics requirements for offshore wind energy projects.

VGF Support

For comparison, the capital cost for an offshore wind energy project is around four times that for onshore on a per GW metric due to enhanced requirements such as high-maintenance outer layer of steel, underwater transmission network and additional port infrastructure for assembly.

However, it does enjoy benefits such as high plant load factor (PLF) of 40-45 per cent compared with 25-30 per cent for onshore and utilisation of sea area instead of usable land mass.

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CRISIL MI&A Research Director Sehul Bhatt said, “The 1 GW of offshore capacity envisaged with the VGF support is expected to come online by fiscal 2032, contributing around 0.9 per cent to the overall wind capacity in India. The capital expenditure for offshore is projected at ₹18,000-20,000 crore by fiscal 2032. VGF will support around 36 per cent of the total project cost, reducing the burden on developers to introduce this high-cost technology in India.”

China, which struggled to install offshore wind projects in 2010 due to lack of expertise and technology, had taken a similar step. In 2017, it provided funding support through subsidies of up to 48 per cent of project cost to developers, leading to capacity addition of around 4.1 GW between 2014 and 2018. At present, China is the leader in this segment with 30 per cent global share.

Tariffs

CRISIL MI&A Research Associate Director Surbhi Kaushal said, “With government support and assuming subsidy is provided at the project construction stage, tariffs may fall 28-30 per cent compared with a no-subsidy scenario to at least ₹6-6.5 per kWh at an equity internal rate of return expectation upwards of 14 per cent.”

This is still 80 per cent higher than onshore wind, for which tariffs are at ₹3.3-3.4 per kWh. The attractiveness of offshore will lie in its ability to provide high PLF more consistently as part of a round-the-clock model. Additionally, it solves the issue of land inadequacy and remains unaffected by physical barriers that can interrupt wind flow over land, overcoming some of the challenges faced by the wind energy sector currently, she added.

The additional provision of logistical facilities such as specific port infrastructure to handle storage and movement of heavy and large dimension equipment is also beneficial. It will be supported by the Ministry of Ports, Shipping and Waterways.

That said, the industry is still in a nascent stage and faces certain structural execution challenges. A turbine size of 5.2 MW was developed only recently for onshore projects, whereas offshore requires 5-10 MW.

Domestic players will also need to develop advanced technological expertise and leverage the spare manufacturing capacity available in the country. To combat a similar technology challenge, China launched three pilot projects before going commercial.

Given the capital-intensive nature of the offshore segment, tariffs are expected to be high compared with other fuel sources in the long term, too. After fiscal 2030, economies of scale and value chain development will likely lower capital expenditure for the segment, as seen in photovoltaic and onshore wind technologies.

However, private sector participation and offtake from distribution companies at elevated tariffs will bear watching, Crisil pointed out.