Is viability gap funding enough to power India’s offshore wind dreams?

The Government of India has approved a viability gap funding (VGF) scheme worth Rs 7,453 crore ($890 million) to promote offshore wind energy projects. This scheme marks a crucial step towards harnessing the immense potential of offshore wind energy in India. 

With an ambitious target, the funding allocation includes Rs 6,853 crore (~$820 million) specifically dedicated to the installation and commissioning of 1 GW of offshore wind energy projects. This capacity will be strategically distributed, with 500 MW each off the coasts of Gujarat and Tamil Nadu. 

Additionally, an allocation of Rs 600 crore (~$70 million) has been designated for upgrading two critical ports, Pipavav and Thoothukudi, to support the logistical needs of these groundbreaking projects.

Given that, unlike many developed and emerging offshore markets around the world, the Union Ministry of New and Renewable Energy (MNRE) and the Union Ministry of Power are responsible for the cost and construction of the entire power evacuation infrastructure, from the offshore substation in the sea to the grid interconnection to the national grid, the Indian offshore wind market is very appealing.

Understanding viability gap funding for wind energy in India

VGF is a financial support mechanism offered by the government to ensure infrastructure projects are commercially viable (for example in the form of a direct tariff subsidy). It involves providing grants to reduce the gap between the project’s total cost and the expected financial returns. 

This funding attracts private investment into sectors where projects would otherwise be financially unfeasible due to high initial costs or long gestation periods. Both of which we witness in wind energy installations.

The anticipated benefits of this initiative are substantial. The 1 GW offshore wind projects are expected to generate approximately 3.72 billion units of renewable electricity annually (ref). This significant production of clean energy will lead to a reduction of 2.98 million tonnes of CO2 emissions per year, sustained over a 25-year period. 

Such a remarkable environmental benefit underscores the importance of this initiative in combating climate change and reducing India’s carbon footprint.

Furthermore, this scheme is projected to create a robust ecosystem for offshore wind energy, facilitating the development of an initial 37 GW with an estimated investment of Rs 4,500 billion. This foundational ecosystem is vital for enhancing India’s ocean-based economic activities (blue economy) and achieving long-term sustainability goals. 

The upgraded port facilities will ensure the efficient transport and installation of heavy and large-dimension equipment, which is crucial for the smooth execution of offshore projects. This infrastructure development is expected to drive job creation, attract investment and foster the development of indigenous manufacturing capabilities, contributing to economic growth and energy security.

Implementation mechanism of VGF

The execution of these projects will be undertaken by private developers selected through a bidding process, ensuring efficiency and cost-competitiveness. The Power Grid Corporation of India Limited will play a crucial role by constructing the necessary power evacuation infrastructure, including offshore substations. 

The Ministry of New and Renewable Energy, acting as the nodal ministry, will coordinate with various other ministries and departments to ensure the seamless implementation of this scheme. Additionally, the Ministry of Ports, Shipping and Waterways will support the development of the two designated ports, further strengthening the offshore wind infrastructure.

Anticipated challenges

Concerns persist regarding whether the VGF amount is sufficient for Independent Power Producers (IPPs) to generate and sell offshore wind power at competitive rates to state DISCOMs. The power purchase agreement (PPA) tariff is a critical factor, as the current rates may not fully cover the costs without further additional support in implementation. To address this, there are considerations for waiving customs duty on offshore wind turbine generators (WTGs), submarine cables and foundations, as the supply chain for these components is not well established currently in India. 

The MNRE may either (a) extend the RLMM waiver to offshore wind turbines set up in the Exclusive Economic Zone of India by December 31, 2032, with no end-use restrictions, or (b) provide higher tariff restrictions to encourage European, American and Chinese offshore Wind turbines manufacturers to manufacture in India.  

The VGF scheme is a monumental stride towards a greener, more sustainable India. It reaffirms the country’s commitment to renewable energy and its leadership in the global energy transition. State Governments are encouraged to provide additional subsidies to transform coastal areas and create employment opportunities in manufacturing and operations. The future of offshore wind energy in India can be significantly enhanced with the right support and policy interventions.

Besides, financial support there are some associated regulatory challenges anticipated and further deliberation by market entities is required. The support measures must be direct in resolving power procurement risks from DISCOMS and define various environmental standards on off-shore wind which will strengthen India’s wind energy value chain development.

Rajsekhar Budhavarapu, managing partner at Adhimaatra Clean Energy & Storage Solution, a Hyderabad-based advisory firm, stated, “It's a great move, but a couple of clarifications and or interventions are still needed. 

The costs of discovered power tariffs should match the annual escalation costs of DISCOMS’s annual power procurement costs, from the current flat fixed rate for 25 years. In terms of resource potential, Tamil Nadu has higher potential than Gujarat.

To encourage comparative development, the split-share of the VGF can be more directed at Gujarat. This will encourage market development with emerging power infrastructure. Leading to further deepening of markets and discovering resource sites. The project developers also suggest reducing timelines to 10 years.”

The land-use from Wind Energy is riddled with on-site-use issues in acquisition, regulatory clearances, costs, etc. The offsetting of clean energy generation from increasingly contested land-use will shorten implementation timelines. The move towards tapping ocean-based resources is essential, looking at the land footprint of 500 GW of renewable energy capacity, which equals 25 per cent of Tamil Nadu’s land area.

This will accord a higher economic generation value to off-shore projects. Facilitating reforms in this area will pave the way towards realising 36 GW of potential off-shore energy. Without them, the risk profile for generators increase since, power offtake is not guaranteed by the DISCOMS. Therefore, leaving investors to rely on independent power procurers where return on capital gets delayed and reduced.

Development of off-shore activities comes under ambit of India’s Exclusive Economic Zone regulatory rules that govern exploration and extraction. Current rules restrict movements, which may enhance cost-effectiveness of construction and installations. Such as specialized marines vessels to construct large turbines, off-shore platforms, etc.

Presence of personnel from multiple nationalities threatens national security risks. Therefore, deliberations with relevant agencies is key to facilitating long-term project viability in the Indian Ocean. This will also lead to development to promote India’s Blue Economy potential. By increasing manufacturing of such marines vessels, increasing skilled jobs and training, and increasing direct exports.

Enabling sectoral policies within each thematic area such as domestic manufacturing, processing and exports, logistics and transport, employment generation, and security of the Indian Ocean. This will enable India to operate the entire off-share wind energy value generation in self-reliance, making it more Atmanirbhar (independent).

The institutional capacity at the National Institute of Wind Energy needs to be strengthened, with offices in Gujarat and Tamil Nadu linked to the maritime, fisheries, and environment departments, to help guide, process, coordinate and approve every project’s EIA, development and other statutory process smoothly with no congestion-based barriers. They should work in collaboration with state renewable energy departments, coastline management departments in respective states.