Viability Gap Funding For Offshore Wind Energy Projects In India 2015: A Comprehensive Analysis

Policy Update
Gayathri Pramod

Introduction

India’s commitment to renewable energy has taken a significant leap with the strategic introduction of the Viability Gap Funding (VGF) scheme for offshore wind energy projects. This initiative, strategically aimed at harnessing the vast offshore wind potential within India’s exclusive economic zone, particularly off the coasts of Gujarat and Tamil Nadu, is a game-changer. The VGF scheme is a strategic move to overcome the financial and infrastructural challenges associated with offshore wind energy, making it a viable and attractive option for private developers.

The Union Cabinet approved the VGF scheme with a total outlay of ₹7,453 crore. This includes ₹6,853 crore allocated for the installation and commissioning of 1 GW of offshore wind energy projects, split equally between Gujarat and Tamil Nadu, and ₹600 crore earmarked for upgrading two ports to support the logistics requirements of these projects. The scheme is a significant step towards implementing the National Offshore Wind Energy Policy notified in 2015, aiming to exploit the vast offshore wind energy potential within India’s exclusive economic zone.

Financial Structure and Implementation

Offshore wind energy projects are capital-intensive, with costs approximately four times higher than onshore projects per GW basis. This is due to the enhanced requirements such as high-maintenance outer layers of steel, underwater transmission networks, and additional port infrastructure for assembly. The government’s support of the VGF is expected to reduce the cost of power from offshore wind projects, making them viable for distribution companies (DISCOMs) purchase. The support will cover about 36% of the total project cost, significantly reducing the financial burden on developers.

Bidding Process and Developer Responsibilities

Implementing the VGF scheme involves a transparent bidding process managed by the Solar Energy Corporation of India (SECI), a key player in the renewable energy sector. SECI will issue bids for the 500 MW offshore project in Gujarat and sign 25-year power purchase agreements (PPAs) with offshore wind power developers and power sale agreements (PSAs) with the respective states’ DISCOMs. The bidding process requires developers to quote the necessary VGF per MW as part of their financial bid, which must be less than or equal to the ceiling limit.

Developers should have experience commissioning offshore or onshore wind energy or offshore infrastructure projects in India. The VGF will be disbursed in a phased manner: 25% after the completion of foundation works, 35% after commissioning 50% of project capacity, another 35% after commissioning the total project capacity accepted under the PPA, and the remaining 5% after one year of operation of the project. The first instalment of VGF will only be released after the developer submits an equal amount of equity/debt.

Project Timeline and Infrastructure

Implementing offshore wind projects under the VGF scheme is governed by a structured timeline and infrastructure development plan. According to the guidelines issued by the Ministry of New and Renewable Energy (MNRE), the projects must be commissioned within 48 months of signing the Power Purchase Agreements (PPAs). This timeline ensures a disciplined approach to project execution, facilitating timely delivery and integration into the national grid.

The projects are designed for inter-state transmission systems (ISTS) as per the regulations of the Central Electricity Regulatory Commission. These projects’ interconnection or metering point will be an offshore pooling substation, an integral part of the ISTS network. Developers are responsible for power evacuation from the project site to this offshore metering point. Beyond this point, the Central Transmission Utility (CTU) will develop the necessary offshore substation and transmission infrastructure to integrate the generated power into the national grid.

This delineation of responsibilities ensures clarity in project execution and facilitates efficient coordination between developers and government agencies. Given the technical complexities and logistical challenges involved, the structured approach to infrastructure development is crucial for the successful implementation of offshore wind projects.

Port Infrastructure Development

The development of offshore wind energy projects necessitates specialized port infrastructure to handle heavy and large-dimension equipment required for turbine installation and maintenance. Recognizing this need, the VGF scheme includes provisions for upgrading two ports to meet the logistical demands of these projects.

The Ministry of Ports, Shipping, and Waterways is tasked with upgrading these ports and ensuring they are equipped to handle the specific requirements of offshore wind energy projects. This includes developing facilities for the storage, assembly, and transportation of large components such as turbine blades, towers, and foundations.

Enhancing port infrastructure is a critical component of the offshore wind energy ecosystem. It not only facilitates the efficient execution of projects but also contributes to developing a robust supply chain, fostering domestic manufacturing capabilities and creating employment opportunities in the maritime and logistics sectors.

Environmental and Economic Benefits

Offshore wind energy offers several advantages over traditional onshore and solar energy projects. One key benefit is the higher adequacy and reliability of power generation. Due to stronger and more consistent wind speeds at sea, offshore wind farms can achieve higher capacity utilization factors. This leads to a more stable and predictable power output, reducing the need for energy storage solutions and enhancing grid stability. Additionally, offshore wind energy projects have a lower land footprint than onshore projects, minimizing land acquisition issues and associated ecological impacts.

The development of offshore wind energy contributes to reducing greenhouse gas emissions. The commissioning of 1 GW of offshore wind projects is projected to produce approximately 3.72 billion units of renewable electricity annually, reducing 2.98 million tons of CO2 equivalent emissions over 25 years.

From an environmental perspective, offshore wind energy projects have a lower land footprint than onshore projects, minimizing land acquisition issues and associated ecological impacts. More importantly, the development of offshore wind energy contributes significantly to reducing greenhouse gas emissions. The commissioning of 1 GW of offshore wind projects is projected to produce approximately 3.72 billion units of renewable electricity annually, reducing 2.98 million tons of CO2 equivalent emissions over 25 years. This substantial reduction in emissions is a clear testament to the positive environmental impact of offshore wind energy.

Economically, the offshore wind sector is a promising venture and a potential goldmine. It is expected to attract significant investments, estimated at around ₹4.5 trillion, and create employment opportunities across the value chain. The development of this sector will also foster indigenous manufacturing capabilities and promote technology development, positioning India as a key player in the global offshore wind energy market. The offshore wind sector’s economic benefits are promising and potentially transformative for India’s energy landscape.

Challenges and Considerations

Despite the promising outlook, implementing offshore wind energy projects in India faces several challenges. One of the primary concerns is whether the VGF amount is sufficient for Independent Power Producers (IPPs) to generate and sell offshore wind power at competitive rates to state Distribution Companies (DISCOMs). The power purchase agreement (PPA) tariff is critical, as the current rates may not fully cover the costs without additional support. Additionally, there are considerations for waiving customs duties on offshore wind turbine generators (WTGs), submarine cables, and foundations, as the supply chain for these components is not well established in India. Such measures would reduce developers’ capital costs and enhance projects’ financial viability.

To address this issue, there are considerations for waiving customs duties on offshore wind turbine generators (WTGs), submarine cables, and foundations, as the supply chain for these components is not well established in India. Such measures would reduce developers’ capital costs and enhance projects’ financial viability.

Another challenge is the need for a robust regulatory framework to facilitate the smooth execution of projects. This includes clear guidelines on project approvals, environmental clearances, and grid connectivity. Ensuring timely and efficient regulatory processes is essential to maintain investor confidence and attract private sector participation.

Furthermore, developing offshore wind energy projects requires significant technical expertise and experience. Building domestic capabilities in this domain is crucial for the sector’s long-term sustainability. This includes training and capacity-building initiatives to develop a skilled workforce capable of handling the complexities of offshore wind energy projects.

Future Outlook

The VGF scheme is anticipated to create an ecosystem supporting an initial 37 GW of offshore wind energy, attracting investments of around ₹4.5 trillion. This initiative is expected to create employment opportunities across the value chain and contribute significantly to India’s energy transition targets.

The offshore wind energy development aligns with India’s broader renewable energy goals, including achieving 500 GW of non-fossil fuel capacity by 2030 and attaining net-zero emissions by 2070. Offshore wind energy is poised to play a critical role in diversifying the energy mix, enhancing energy security, and reducing dependence on fossil fuels.

To realize this potential, continued policy support and strategic planning are essential. This includes developing a comprehensive roadmap for offshore wind energy, encompassing aspects such as site identification, infrastructure development, regulatory frameworks, and financial incentives. Collaborative efforts between government agencies, private sector players, and international partners will be key to overcoming challenges and unlocking the full potential of offshore wind energy in India.

Conclusion

The Viability Gap Funding scheme for offshore wind energy projects represents a strategic initiative by the Indian government to overcome the financial and infrastructural challenges associated with offshore wind energy. By providing substantial financial support and developing the necessary infrastructure, the scheme aims to make offshore wind energy a viable and attractive option for private developers.

The successful implementation of this scheme will contribute significantly to India’s renewable energy goals, enhance energy security, and promote sustainable economic growth. However, addressing the challenges related to financial viability, regulatory frameworks, and technical expertise is crucial to ensure the long-term success and sustainability of India’s offshore wind energy sector.

References

Cabinet approves Viability Gap Funding (VGF) scheme for implementing Offshore Wind Energy Projects. Retrieved from https://www.pmindia.gov.in/en/news_updates/cabinet-approves-viability-gap-funding-vgf-scheme-for-implementation-of-offshore-wind-energy-projects/
Government Issues VGF Guidelines for 1 GW Offshore Wind Projects. Retrieved from https://www.mercomindia.com/government-issues-vgf-guidelines-for-1-gw-offshore-wind-projects
Viability gap funding may trigger investments in offshore wind energy. Retrieved from https://www.thehindubusinessline.com/companies/viability-gap-funding-may-trigger-investments-in-offshore-wind-energy/article68343751.ece
Viability gap funding set to boost offshore wind energy space: Crisil. Retrieved from https://economictimes.indiatimes.com/industry/renewables/viability-gap-funding-set-to-boost-offshore-wind-energy-space-crisil/articleshow/111322901.cms
Offshore wind energy reaps viability gap funding tailwind. Retrieved from https://intelligence.crisil.com/content/crisilcom/en/home/newsroom/press-releases/2024/06/offshore-wind-energy-reaps-viability-gap-funding-tailwind.html
The government approves the VGF Scheme for implementing offshore wind energy projects. Retrieved from https://www.moneycontrol.com/news/economy/policy/govt-approves-vgf-scheme-for-implementing-offshore-wind-energy-projects-12752282.html
Is viability gap funding enough to power India’s offshore wind dreams? Retrieved from https://www.downtoearth.org.in/renewable-energy/is-viability-gap-funding-enough-to-power-india-s-offshore-wind-dreams-91234
MNRE issues VGF guidelines for 1 GW offshore wind projects. Retrieved from https://renewablewatch.in/2024/09/17/mnre-issues-vgf-guidelines-for-1-gw-offshore-wind-projects/
Scheme Guidelines for implementing “VGF Scheme for Offshore Wind Energy Projects”. Retrieved from https://mnre.gov.in/en/document/scheme-guidelines-for-implementation-of-vgf-scheme-for-offshore-wind-energy-projects/
India’s Offshore Wind Energy: High Potential, Low Implementation. Retrieved from https://www.downtoearth.org.in/renewable-energy/uncharted-waters-india-s-offshore-wind-energy-has-high-potential-but-remains-low-on-implementation-91233

About the Authors: The article is written by Ms. Gayathri Pramod Research Intern at IMPRI. She is a final year PhD student specialized in West Asia.

Acknowledgement: I extend my sincere gratitude to each and every one who guides me through this process, especially Dr. Arjun Kumar and Aasthaba Jadeja.

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.

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