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Union Cabinet's INR 7,453 Crore VGF Approval to Boost Offshore Wind Energy Investment: CRISIL

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.

June 28, 2024. By Abha Rustagi

The Union Cabinet approval of the viability gap funding (VGF) scheme, with a total allocation of INR 7,453 crore, is a boost for the offshore wind energy segment and could trigger investments into a space developers have shied away from due to high cost, operational challenges, and offtake related risks, a recent report by CRISIL said.

This is a major step towards implementing the National Offshore Wind Energy Policy notified in 2015. The amount includes INR 6,853 crore for the installation and commissioning of 1 GW of offshore wind energy projects of 500 MW each off the coast of Gujarat and Tamil Nadu, and INR 600 crore for augmentation of two ports to meet the logistics requirements for offshore wind energy projects.

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. To provide a comparison, capital cost for an offshore wind energy project is ~4x that for onshore on a per GW metric due to enhanced requirements such as a high-maintenance outer layer of steel, an underwater transmission network, and additional port infrastructure for assembly. However, it does enjoy benefits such as a high plant load factor (PLF) of 40- 45 percent compared with 25-30 percent for onshore and utilisation of sea area instead of usable land mass.

Sehul Bhatt, Director, CRISIL MI&A Research says, “The 1 GW of offshore capacity envisaged with the VGF support is expected to come online by fiscal 2032, contributing ~0.9 percent to the overall wind capacity in India. The capital expenditure for offshore is projected at INR 18,000-20,000 crore by fiscal 2032. VGF will support ~36 percent 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 a lack of expertise and technology, had taken a similar step. In 2017, it provided funding support through a subsidy of up to 48 percent of the project cost to developers, leading to a capacity addition of ~4.1 GW between 2014 and 2018. Currently, China is the leader in this segment with a 30 percent global share.

Surbhi Kaushal, Associate Director, CRISIL MI&A Research says, “With government support and assuming subsidy is provided at the project construction stage, tariffs may fall 28-30 percent compared with a no-subsidy scenario to at least INR 6-6.5/kWh at an equity internal rate of return expectation upwards of 14 percent. This is still 80 percent higher than onshore wind, for which tariffs are at INR 3.3-3.4/kWh.”

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 nascent 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.

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