Quite a few wars were fought over energy in the good old days, one variant or the other. Uneven distribution of energy resources coupled with an inelastic demand for such energy across the globe, meant that self-reliance in this realm makes up for a subtle superpower. While the customer countries had to depend on few suppliers in the case of fossils, the struggle to establish equilibrium has forever been the focal point of multivarious institutions. This brings to focus the need for self-sufficiency in energy for countries like ours. Now, to add more chaos to the fray, enter climate change!
While we have not been lucky as far as key fossil fuels like crude oil and natural gas are concerned, we now have an opportunity to flip the script with renewables.
The power demand in India has surged from around 1,114 GW in FY16 to 1,512 GW in FY23 at around 4.5 per cent CAGR. And going forward, the surge is expected to be steeper with additional demand riding in from mounting data centres, increased adoption of electric vehicles and widening use-cases of energy-guzzling artificial intelligence, amidst a growing GDP.
This sets the stage for a sustained and sizable capex drive with a renewable push, away from fossils. Where are we today, and how is the future likely to shape up? Read on to find out.
Landscape of Power in India
India has set an ambitious target of reaching a non-fossil capacity of 500 GW by 2030. The play is already in motion with permitting foreign direct investments up to 100 per cent in this space, robust investments planned in transmission and distribution (T&D) over ₹9.1-lakh crore up to FY32, as per the Central Electricity Authority, and favourable policy tweaks and initiatives such as, but not limited to, PM Surya Ghar Yojna, PM KUSUM, renewable purchase obligations, generation-based incentive for wind projects, government-scheduled auctions for renewable energy projects and waiver of inter-State transmission system charges for inter-State sale of solar and wind power. Alongside the above, the emphasis on green hydrogen has also been pronounced with two distinct financial incentive mechanisms – incentive for manufacturing of electrolysers and incentive for production of green hydrogen – with an outlay of ₹17,490 crore up to FY29-30, which too will drive demand for renewable power.
While the shift towards renewables helps India minimise carbon footprint, it will also help democratise energy and power, and cut down the bills spent on importing fuels. For example, in recent years the government has been invoking Section 11 of Electricity Act on an annual basis since FY22, to meet the power demand which has been far surpassing the supply. Typically, power plants might be unutilised or underutilised due to various reasons such as fuel shortage, high cost of fuel, lack of power purchase agreements (PPAs) or financial distress. Under Section 11, the appropriate government has the power to direct gencos to operate and maintain certain generation stations at maximum productivity, and bring down the power deficit. However, power costs have shot up as a result. As against incurring these expenses, India is ideally placed to tap the vast potential for renewables today to set the course for the future.
The renewable push
Non-fossils include nuclear, hydro and bio energy alongside renewables (solar and wind). With nuclear and hydro suffering from safety concerns and not so environment-friendly despite zero emissions, and bio energy being dependent on feedstock availability and lower on PLF, renewables emerge as the preferred choice in the transition towards non-fossils, as they are easily scalable, safer, environment-friendly and not fuel dependent. India is well-placed with vast sunlight and wind resources. While the cost of conversion of such resources into electricity was a limiting factor earlier, that is no longer the case.
PLF (Plant Load Factor) is the ratio of actual energy generated by a power plant to the maximum amount of energy that could be generated, if the plant is run at full capacity for a year. And considering the relatively-low PLF for renewables, capacity additions required for a certain amount of power generation will be more than that of fossils.
Since FY17, renewables have contributed to more than 50 per cent of net capacity additions made, with the number shooting upto around 87 per cent since FY22. Solar energy, in particular, has been the fastest-growing energy segment in terms of capacity added, amongst all other sources by a good country mile, with installed capacity growing at a CAGR of around 28.2 per cent since FY17, while second-in-line number is from wind energy, which is at 4.9 per cent during the same period. This outperformance is not only in terms of CAGR growth but also in real GW terms.
While ACAS (average cost of electricity supply — cost to supply electricity to consumers) has gradually inched up from ₹3.6 per kiloWatt Hour (kWH) in FY10 to ₹6.7/kWH in FY23, the average solar tariff has demonstrated an opposite trend, dropping from ₹11/kWH and stabilising in the range of ₹2.3-2.6/kWH since FY19. This is very competitive to thermal-based power and is cheaper than all other sources, painting a promising outlook while making a compelling case for transition towards solar.
Even though wind energy projects have gained steam amidst favourable policy tweaks and enjoy relatively-higher PLFs than solar, solar is expected to be the torchbearer and continue to dominate capacity additions, as sizable land parcels are required for the former, while the latter is relatively flexible. However, hybrid models are a hot commodity now, combining both solar and wind power by integrating solar photovoltaic panels and wind turbines. By having a shared infrastructure and often employing energy storage systems (in the form of batteries) to store excess energy generated, they prove to be cost-effective and reliable, while improving energy production and reducing downtimes. Thus, leading gencos in India today, have latched on to this opportunity not just because it is good for the environment, but equally so for their businesses as well.
Gencos’ transition to renewables
India’s leading gencos are driving the fluid transition to renewables, as can be seen from the transition underway in the top-five gencos. Here is a brief on how these elephants are dancing to the changing tunes.
NTPC: NTPC, with total current installed capacity of around 76 GW as of Q1 FY25, is India’s largest power producer, owning 17 per cent of India’s installed capacity and generating 24 per cent of total power generated in India.
NTPC has a target of reaching 60-GW renewable capacity by 2032 alongside a total 130-GW target, and progress is well underway. While existing renewable capacity as of Q1 FY25 is a tiny 3.6 GW, the share as a percentage of total installed capacity of the company is at 4.8 per cent from 2.9 per cent in Q1 FY24. The upcoming IPO of NTPC Green, the renewable energy arm of the NTPC Group, is a firm stride underlining the commitment.
TATA Power Company: Tata Power Company (TPC) has been aggressive in this pivot towards renewables, and when the work-in-progress (WIP) projects get commissioned, the company would end up with 49 per cent of its installed capacity skewed in favour of renewables. Of the current total installed capacity of around 15 GW, as of Q1 FY25, wind and solar account for around 32 per cent, while all its projects under construction are pertaining to renewables to the tune of 5.3 GW. The company plans to have clean and green (non-fossils) capacities account for 70 per cent of its overall capacity by 2030 and phase out the existing thermal portfolio completely and be 100 per cent clean and green by 2045.
Notably, TPC has commenced operations of its 4.3-GW solar cell and modules manufacturing plant in the current fiscal, and is India’s largest vertically-integrated power company also having its presence across T&D and adjacent EPC contracting of solar business.
JSW Energy: JSW Energy is set to more than double its capacity from the current operational capacity of 7.5 GW to 20 GW by 2030. The company has also been venturing into energy storage and plans to scale it to around 40 GWH (gigawatt per hour) by 2030 from the current 1.3 GWH. Storage is crucial for solar and wind, as these are intermittent energy sources, and we need a way to save the excess energy produced during peak generation times and release it back to the grid when the demand is high. Efficient energy storage solutions balance the variabilities and ensure a stable energy supply.
Also, around 74 per cent (1.7GW) of the under-construction projects are in the renewable segment.
Adani Green Energy: Adani Green Energy (AGE), one of the few listed pure-plays on renewables, has ever been buzzing since Covid-19, with its 100 per cent renewable power capacity. While Adani Power focuses on thermal power, renewable energy projects of the Adani Group are housed under AGE. The current capacity of 11.2 GW, as of Q1 FY25, is proposed to be scaled up more than 4x to a massive 50 GW by 2030, with solar, wind and hybrid projects forming 95 per cent of the portfolio and hydro filling in the rest. The company has a notable track record executing large-scale projects and owns the credentials for setting up the world’s largest single-location solar project in Tamil Nadu and the world’s largest hybrid RE cluster in Rajasthan.
Torrent Power: Torrent Power is also an integrated player into power generation and T&D, but much smaller in size compared with TPC. Torrent Power has a total installed capacity of 4.4 GW as of Q1 FY25 and renewables add up to 1.3 GW of it. All projects under developments (2.8 GW) and projects in the pipeline (3.2 GW) are renewables.
Anti-thesis pointers
And as every thesis goes, there is seldom one without anti-thesis pointers.
One: With significant transmission capacities expected to come online only from FY27 and FY28, the lack of an adequate transmission capacity to efficiently evacuate power generated will slow down the execution of projects. The management of TPC quoted this as a concern in the analyst call following Q1 FY25 results.
Two: China houses 80 per cent of global module and cell manufacturing capabilities ((for FY23 as per recent F&S report), and is the lowest cost producer in this regard. The solar ecosystem in India, currently, is largely dependent on government policies and incentives (including but not limited to PLIs) to support profitability and any pullback might put them in troubled waters.
Three: The valuations of this sector, not limiting to gencos, but also other ancillary players in the ecosystem ranging across transmission, distribution, transformers and ancillaries, solar cells and modules, wind turbines and the adjacent EPCs, have all been largely powered up. While AGE trades at abnormally high three-digit PE, all other companies covered too are trading expensive, at a premium to their five-year average PE in the range of 47 per cent to 119 per cent, offering no margin of safety. As Aswath Damodaran says, “We relate to and remember stories better than we do numbers, but storytelling can lead us into fantasyland quickly.” And at this juncture, this space looks skewed towards the story. While times are totally different today and the course of the future can be even better, it’s worth remembering how the unprecedented optimism in power sector fizzled out quickly in 2008 and it took over a decade for the large companies to get their house in order. So for investors it is important to jump in only when the price is right.
The opportunity is huge and investors need to have this sector in their radar, and plug in when the risk-reward is attractive. While this story has focussed on gencos, we will analyse how many other players across the renewable power supply chain are preparing to seize the opportunity in future stories.