By Debabrata Ghosh, Head of India, and Ashutosh Padelkar, Research Lead, Aurora Energy Research
In 2024, the renewable energy platform, BlueLeaf Energy, announced that it had reached financial closure for its 200 MW Pachora wind-solar hybrid project. Expected to be commissioned later this year, the Pachora hybrid power project exemplifies the growing trend of projects incorporating merchant sales as a component of their offtake. This offtake structure is distinct from what the market has seen in the past. Historically, power producers would contract their volumes on a long-term basis at a fixed price. In contrast, some of the power produced from the Pachora plant will be sold through a power exchange at a variable price.
The volume of power traded at exchanges in India has grown four-fold over the past 10 years, rising from under 3 per cent of the total demand in 2013-14 to 7 per cent in the last financial year. One of the key drivers for this rapid growth is the increasing prevalence of complex auctions such as round-the-clock and firm and dispatchable renewable energy tenders, which require power producers to build a portfolio of oversized assets, leaving uncontracted generation to be traded on power exchanges. Discoms are increasingly procuring power through hybrid tenders, with 14 GW of generation capacity procured in 2024 as a result of the Ministry of New and Renewable Energy’s announcement in March 2023 to have 50 GW of tenders per year until 2027-28. In a system with rapidly rising demand for power, rising peak demand and the government’s ambition to reach 500 GW of renewable energy generation capacity by 2030, the volumes traded in exchanges are poised to keep increasing. The Central Electricity Regulatory Commission (CERC) aims to increase the share of power traded on exchanges to 25 per cent by 2030.
There have been similar transformations of power markets over the past few decades. Much of Western Europe’s power markets transitioned from being predominantly centred on long-term PPAs to spot markets in the early- to mid-2000s. One key trend that arises in such transitions is the perspective of developers, investors and financiers on the value of power and the risks associated with investing in generation assets. While historically, their volumes were sold at fixed prices — typically a premium over their levellised costs — now the same PPA would be priced at a discount on the market reference price. This transformation is relevant to all classes of market participants in the power sector — those seeking to negotiate PPAs must now consider the market prices, and those participating in hybrid auctions must now consider the value that their merchant volumes would fetch in order to bid competitively.
While there are a number of projects under development that intend to sell at least a part of their volumes on power exchanges, there are discussions of a contracts-for-difference (CfD) scheme that would guarantee a minimum price for renewables. A number of designs are under consideration, such as a one-sided CfD, where the power producer is guaranteed a minimum price but is able to keep the upside if merchant prices exceed this minimum level, or a two-sided CfD where the government guarantees a minimum price but takes away any upside if the outturn prices exceed this level. While these designs have different advantages and drawbacks, they share a common feature – the guaranteed minimum price significantly reduces the cost of financing the project. These reforms could lead to offtake structures which increasingly rely on merchant markets.
Banks, both domestic and international, are becoming increasingly comfortable with financing merchant projects. The Pachora hybrid power project secured $170 million from Axis Bank, while a number of public sector undertakings, including State Bank of India and Bank of Baroda, are being encouraged by the government to support the green transition. In addition to domestic banks, international players such as ING and Société Générale, with their expertise in financing merchant projects in Europe, are keen to invest in India’s renewable energy space.
However, there is no guarantee that the move towards merchant markets will lead to higher profitability. In fact, one of the key outcomes of market-based pricing in a solar-dominated power market like India is the infamous “duck curve”, where power prices dip in the middle of the day due to an excess of solar generation in the market, and prices are high in the mornings and evenings due to reliance on more expensive sources of generation. As the Indian power market is divided into thirteen zones, with the CERC reporting emerging decoupling of power prices last year, both the location and generation profile of each asset are crucial determinants of profitability. Granular analysis is critical for building asset portfolios, combining batteries and longer-duration storage with solar and onshore wind to capture the maximum value from the merchant market while hedging against lower outturn prices.
