With a long coastline and numerous high potential wind sites, India has huge opportunities to set up offshore wind projects. However, this segment remains largely untapped, with no offshore wind project having been set up. There are several reasons for this lack of progress. Offshore wind projects have high initial construction, and operations and maintenance costs, they require complex clearances from various authorities, and the grid infrastructure for offshore connectivity is very limited. Despite several policy initiatives in this space, actual on-the-ground project implementation has not taken place.
This scenario is now expected to change, with the government announcing a viability gap funding (VGF) scheme for offshore wind projects, with a total budget of Rs 74.53 billion. This includes Rs 68.53 billion for the installation and commissioning of 1,000 MW of offshore wind energy projects – 500 MW each off the coasts of Gujarat and Tamil Nadu. Additionally,
Rs 6 billion has been earmarked for the enhancement of two ports to fulfil the logistics needs of these projects. According to the announcement, project developers will be chosen through a transparent bidding process. Power Grid Corporation of India Limited will construct the power excavation infrastructure, including offshore substations. As the nodal ministry, the Ministry of New and Renewable Energy (MNRE) will collaborate with various ministries/departments to ensure effective implementation of the scheme. The Ministry of Ports, Shipping and Waterways will provide support to the two ports to meet the needs of offshore wind development.
This is a significant development and will help address the key challenge of high initial costs that hinders the implementation of offshore wind projects. Overall, the commissioning of 1 GW of offshore wind projects will generate approximately 3.72 BUs of renewable energy annually, leading to a reduction of 2.98 million tonnes of CO2 equivalent emissions per year over a 25-year period. Additionally, this scheme will foster the creation of a necessary ecosystem to enhance India’s ocean-based economic activities. This ecosystem will facilitate the establishment of an initial 37 GW of offshore wind energy at an investment of approximately Rs 4,500 billion.
Key policy initiatives
The initial policy impetus in this segment came in 2015 with the National Offshore Wind Energy Policy, which laid the foundation for the strategic development of offshore wind projects within India’s exclusive economic zone, which extends 200 nautical miles from the coast. Following the policy announcement, the National Institute of Wind Energy (NIWE) began assessing the country’s wind resources using light detection and ranging technology. In 2018, it issued guidelines for offshore wind power assessment studies and surveys, allowing private investors to conduct wind resource assessments for offshore projects in India. The assessment identified two promising areas off the coasts of Gujarat and Tamil Nadu. In the same year, the NIWE invited global expressions of interest for 1 GW of offshore wind projects in the Gulf of Khambhat, Gujarat. More than 30 companies showed interest; however, there was no concrete on-the-ground follow-up to it.
After a gap, the momentum to promote offshore wind picked up pace in 2023. Apart from the VGF announced recently, other significant developments include the issuance of the first offshore wind seabed lease tender for 4 GW of projects off the coast of Tamil Nadu (accompanied by the notification of the Offshore Wind Energy Lease Rules, 2023 to regulate the allocation of offshore wind sea blocks to developers), and a revised strategy for the development of offshore wind energy projects, with a bidding trajectory for 37 GW of offshore wind energy capacity.
To facilitate the development of offshore wind farms, three models have been proposed. Under Model A, development will be undertaken in demarcated offshore wind zones where the MNRE and NIWE have conducted detailed studies and surveys, supported by the VGF from the central government. The NIWE plans to develop 1 GW capacity zones off the coasts of Gujarat and Tamil Nadu under this model. In Phase I, bids will be invited for identified zones in Gujarat and Tamil Nadu for 0.5 GW of capacity each. Under Model B, offshore wind power projects will be developed for open access/captive/third-party sale without any VGF assistance from the central government. The MNRE and NIWE will initiate a competitive bidding process for the provisional allocation of identified offshore wind energy sites to interested developers for a period of two years on lease. The allocation will follow a single-stage, two-envelope bidding process. Each offshore site will have a minimum installed wind power capacity requirement. Under Model B, developers can identify offshore wind sites within the exclusive economic zones in Gujarat and Tamil Nadu, excluding sites considered under Model A and Model B, and submit proposals to the NIWE for conducting studies and surveys. Subsequently, the government will initiate a bidding process to allocate the seabed.
In line with the incentives already being given to other renewable projects, the government announced an inter state transmission system (ISTS) waiver for offshore wind projects in a bid to make upcoming and planned offshore wind projects more viable.
Additionally, an amendment to the Electricity (Promoting Renewable Energy Through Green Energy Open Access) Rules, 2022 has exempted open access consumers from additional surcharges when buying electricity from offshore wind projects. Other incentives for offshore wind developers include concessional customs duties on importing critical components for manufacturing offshore wind turbines (similar to those for onshore turbines), renewable energy credits with multipliers, and carbon credit benefits. Furthermore, the central transmission utility has drawn up plans for the transmission infrastructure required for 5 GW of offshore wind projects each off the coasts of Gujarat and Tamil Nadu.
Learnings from onshore wind
The policy initiatives to promote the offshore wind segment are well appreciated. However, with the first projects still at the planning stages, it is important that the offshore segment does not experience the low capacity additions seen in recent years or the ad hoc policy changes that the onshore segment faced, primarily with respect to the bidding regulations.
In a move to revive the onshore wind segment, the government, in the past year, transitioned from reverse auctions to closed bidding with an aim to bid out approximately 8 GW of capacity each year from January 1, 2023 until 2030. Prior to this, there had been a transition from feed-in tariffs (FiTs) to reverse auctions in the wind power segment. With FiTs (tariffs fixed by the regulators), the segment attracted foreign capital. This policy, along with accelerated depreciation, generation-based incentives and renewable energy certificates, spurred growth. However, the FiT regime was criticised for slow technological innovation and inefficiencies. Therefore, in 2017, the segment transitioned to competitive bidding with reverse auctions to enhance transparency and reduce tariffs.
In the FiT regime, capacity additions saw an increasing trend and, in fact, peaked to 5 GW in 2016-17 due to expiring incentives. However, capacity additions slowed to 2 GW in 2017-18 due to the transition in the bidding process. Post the transition, the annual additions ranged from 1 GW to – 2.5 GW. Nevertheless, the tariffs did see a downward trend. The first reverse auction in February 2017 set a low tariff of Rs 3.46 per kWh and decreased further in subsequent auctions. Meanwhile, pre-bidding FiTs ranged from Rs 4 to Rs 6 per kWh.
The transition, however, was criticised for being unplanned. For instance, discoms, on seeing lower tariffs, questioned the existing rates. Furthermore, the unphased transition led to inventory issues for manufacturers and shifted the focus to centralised discom procurement. Aggressive bidding and efficiency improvements caused tariffs to fall, making projects feasible only in Gujarat and Tamil Nadu, and hence, projects started getting concentrated in these states. In other locations, these low tariffs were not considered viable, leading to an increased risk of payment delays.
The e-reverse auctions became the scapegoat, with the industry stakeholders questioning the transition to competitive bidding and suggesting a return to FiTs or amending e-reverse auctions to prevent aggressive, unviable bids. This led to the transition to closed bidding. However, some argue that reverse auctions were abandoned as a result of lobbying by inefficient players in financial distress, who were unable to compete with more efficient ones.
Therefore, it is key to learn from these developments and ensure that the same mistakes do not occur in the offshore wind segment. One, it is better to stay with competitive bidding as it leads to improved efficiencies and low tariffs, and two, any change in policy should be done in a phased manner so as to prepare all the stakeholders in advance.
The way forward
India aims to reach a total installed wind energy capacity of 140 GW by 2030. Meanwhile, the MNRE has planned an auction trajectory of 37 GW of offshore wind energy capacity till 2029-30. Currently, offshore wind capacity is zero, while onshore capacity stands at approximately 46 GW as of May 31, 2024. Overall, the Central Electricity Authority’s National Electricity Plan 2023 estimates that wind installations will reach 72.9 GW by 2026-27 and 121.9 GW by 2031-32 in the base case. The installations remain the same in scenarios with high hydro, high battery storage and high energy demand but reduce to 61.4 GW by 2026-27 and 92.1 GW by 2031-32 in the conservative scenario.
The current installed wind capacity is low compared to the potential in the country. In a written reply in the Rajya Sabha on August 8, 2023, the union minister for power and new and renewable energy stated that India’s estimated wind power potential is approximately 695.5 GW at 120 metres and 1,164 GW at 150 metres above ground level. Meanwhile, NIWE has identified a potential of about 70 GW of offshore wind off the coasts of Tamil Nadu and Gujarat.
Going forward, meeting the targets (and ultimately the on-paper potential numbers) set for capacity additions will not be easy. In the offshore wind segment, two of the foremost challenges are significant initial investments and lengthy commissioning timelines. According to the Global Wind Energy Council’s “Global Offshore Wind Report 2024”, there are three main stages of offshore wind development after tender award: study/survey, project construction and commissioning, and decommissioning. These activities can span seven to 10 years.
According to CRISIL, the capital cost for an offshore wind energy project is approximately four times higher than that for an onshore project. This is due to the increased requirements of such projects, including high-maintenance steel outer layers, underwater transmission networks and additional port infrastructure for assembly. However, offshore wind projects benefit from a higher plant load factor of 40-45 per cent compared to 25-30 per cent for onshore projects and the use of the seabed instead of valuable land. Therefore, the recently announced VGF is crucial for making offshore projects viable. With government support and subsidies at the project construction stage, tariffs could decrease by 28-30 per cent compared to a no-subsidy scenario, reaching at least Rs 6-Rs 6.50 per kWh with an equity internal rate of return expectation of above 14 per cent. This rate is still 80 per cent higher than onshore wind tariffs, which are Rs 3.30-Rs 3.40 per kWh, according to CRISIL.
Net, net, the offshore wind segment provides an ocean of opportunities; however, several uncertainties remain. Will developers show interest in setting up projects with the VGF in place? Will projects get commissioned on time or face cost and time overruns? And, once commissioned, will discoms be willing to purchase electricity at higher tariffs? It will be interesting to see how developments unfold in this segment over the next few years.
Sarthak Takyar
