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

This is a major step towards implementation of the National Offshore Wind Energy Policy notified in 2015.

The amount includes Rs 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 Rs 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 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% compared with 25-30% for onshore and utilisation of sea area instead of usable land mass.

Says Sehul Bhatt, Director, Crisil MI&A Research, “The 1 GW of offshore capacity envisaged with the VGF support is expected to come online by fiscal 2032, contributing ~0.9% to the overall wind capacity in India. The capital expenditure for offshore is projected at Rs 18,000-20,000 crore by fiscal 2032. VGF will support ~36% 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 subsidy of up to 48% of project cost to developers, leading to capacity addition of ~4.1 GW between 2014 and 2018. At present, China is the leader in this segment with 30% global share.

Says Surbhi Kaushal, Associate Director, Crisil MI&A Research, “With government support and assuming subsidy is provided at the project construction stage, tariffs may fall 28-30% compared with a no-subsidy scenario to at least Rs 6-6.5/kWh at an equity internal rate of return expectation upwards of 14%¹. This is still 80% higher than onshore wind, for which tariffs are at Rs 3.3-3.4/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.”

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.

¹ Assuming no additional revenue stream from any carbon credit mechanism