Made for Renewable Energy
In this newsletter, we will talk about the the upcoming NTPC Green Energy IPO
In the vibrant landscape of India’s energy sector, demand is soaring like never before. This surge is fueled by the country’s rapid industrial growth, extreme weather conditions such as heatwaves, the widespread use of household appliances, and the increasing adoption of electric vehicles. Energy consumption is intrinsically linked to this economic expansion and India continues to boast the fastest GDP growth globally. GoI’s substantial investments in infrastructure through initiatives like the National Infrastructure Pipeline, coupled with the burgeoning services industry, rapid urbanization, and enhanced agricultural income due to reforms, among other things, are all driving this power demand.
Currently, India’s installed power generation capacity stands at ~442 gigawatts (GW), with coal-based thermal power plants contributing about 210 GW or nearly 48% of this capacity. While coal remains a dominant energy source in the near term, the real excitement lies in the shift towards renewable energy.
Over the past decade, India’s renewable energy sector which includes solar, wind, large hydrogen, small hydrogen, and biomass has witnessed a remarkable transformation. From a modest 114 GW in March 2018, our renewable energy generation capacity has surged to an impressive 199.52 GW by August 2024. This growth is largely driven by the solar energy sector, which has rapidly expanded from 22 GW to an astounding 89.43 GW over the same period.
(Source: Invest India, Bastion Research)
As you already know, India is on a mission to achieve 500 GW of installed capacity from non-fossil fuel sources by 2030, with solar and wind power leading the charge. And one of the key players poised to benefit from this ambitious push is NTPC Green Energy, the largest renewable energy public sector enterprise in terms of capacity (excluding hydro). Investors interested in the renewable sector have reason to celebrate as NTPC Green Energy, a subsidiary of the ‘Maharatna’ NTPC, has recently filed for an IPO. This IPO marks a significant milestone as it will be the first central public sector enterprise IPO in about 15 years.
So, let’s explore the business of NTPC Green Energy and how it’s poised to thrive amid India’s strong push for renewable energy.
But, first things first!
IPO Details
Issue Size: Rs. 10,000 Cr.
Fundraise Type: Fresh Issue
Proceeds Utilization:
1. ₹7,500 crore will be used to repay or prepay, either fully or partially, certain outstanding borrowings of NTPC Renewable Energy Limited, a wholly-owned subsidiary.
2. The remaining funds will be allocated for general corporate purposes.
Yes, the entire issue will involve selling new equity, which will be used for business operations. NTPC will retain its complete stake in NTPC Green Energy.
NTPC Green Energy: Power Consolidation
NTPC Limited formerly known as the National Thermal Power Corporation, is India’s largest integrated power utility. Since its inception in 1975, NTPC has grown into the country’s largest integrated power utility, with an impressive installed capacity of around 76.3 GW, including its JVs. This accounts for about 17% of India’s total installed power capacity, underscoring NTPC’s ‘Maharatna’ status.
While traditionally focused on coal-based power generation, NTPC has increasingly ventured into renewable energy, developing large-scale solar and wind projects across India. Then in April 2022, NTPC made a strategic move by launching NTPC Green Energy Ltd. (NGEL). This new entity was created to consolidate NTPC’s renewable energy efforts under one umbrella and accelerate its shift towards green energy. NGEL is now the main driver of NTPC’s renewable expansion, targeting 60 GW of installed renewable capacity by 2032 through organic growth, strategic partnerships, and acquisitions.
NGEL’s Business – Long-term Relations
With a focus on solar and wind power, NGEL currently boasts an operational capacity of around 3 GW in solar projects and 100 MW in wind projects across six states. Solar projects account for 90% of the company’s revenue while the rest comes from wind projects and other services.
Business Model
NGEL’s business model revolves around utility-scale renewable projects, which are large-scale installations designed to generate electricity using solar and wind energy. These projects act like huge power plants that supply electricity to the grid (the system that delivers power to homes and businesses.) NGEL has Power Purchase Agreements (PPAs) or Letters of Award (LoAs) with organizations that buy this electricity, such as government agencies and public utilities.
Future Capacity: NGEL aims to expand its operational capacity to about 12 GW by 2024-25 and reach 60 GW by 2031-32 through developing new projects and acquisitions.
As of June 30, 2024, NGEL’s portfolio consisted of 14.7 GW, including ~3 GW of operating projects and 11.8 GW of contracted and awarded projects. This robust pipeline positions NGEL as a key player in India’s clean energy transition.
(Source: DRHP)
Offtakers: These are organizations with which NGEL has agreements to supply electricity, either through a PPA or an LoA. These off-takers are typically government agencies and public utility companies. As of June 30, 2024, NGEL had 15 off-takers across 37 solar projects and 9 wind projects.
Additionally, NGEL collaborates with other Public Sector Undertakings (PSUs) such as Indian Oil Corporation and Gujarat State Petroleum Corporation to develop renewable energy projects. This collaboration strengthens NGEL’s position in the renewable energy sector and supports India’s push towards sustainable energy solutions.
Revenue Breakup
(Source: DRHP)
Currently, the company primarily relies on solar power plants.
Major Strengths
NTPC Support – NGEL enjoys a significant competitive edge due to its strong backing from NTPC Limited, India’s largest power utility. NTPC is a cornerstone of the India’s energy sector, holding about 17% of India’s total power generation capacity and generating ~24% of the nation’s power as of June 2024. This robust foundation stems from NTPC’s core expertise in generating and distributing electricity to state boards, central agencies, and other public sector units.
NGEL benefits from NTPC’s extensive experience in efficiently operating power stations and acquiring land for large projects across India. With nearly five decades of legacy, NTPC’s support provides NGEL with invaluable resources and vision, positioning it as a leader in the renewable energy sector.
Long-term PPAs – The company has secured long-term PPAs with government agencies and public utilities, ensuring stable revenue. All the 15 offtakers that NGEL has are under 25-year agreements.
Diversified Presence – NGEL’s portfolio is spread across seven states in India, which helps mitigate state-specific risks.
(Source: DRHP)
Major Risks:
Heavy Reliance on Offtakers – NGEL heavily depends on its offtakers, which are primarily government agencies and public utilities. If any of these entities fail to meet their contractual obligations under the PPAs, it could significantly impact NGEL’s operations and financial performance.
No Backward Integration – NGEL relies on third-party suppliers for its materials, components, and equipment needs. The company also imports key equipment, including solar module cells and wind turbine components, from China. This dependency exposes NGEL to geopolitical risks, and any supply-side disruption can adversely impact business operations.
(Source: DRHP)
Other Energy Sources – NGEL faces competition from both traditional and renewable energy companies. Solar and wind energy, while promising, struggle with the lack of large-scale battery storage solutions, complicating their integration into power grids due to their intermittent nature. This makes widespread adoption challenging. If coal remains dominant or other energy sources become more efficient, NGEL’s inability to adapt could impact its financial performance.
Peer Comparison:
(Source: DRHP)
Installed Capacity
(Source: DRHP)
Financials
(Source: DRHP)
NGEL and other players have been able to achieve high EBITDA and PAT margins due to several strategic and operational factors:
1. Efficient Cost Management: Costs in solar and wind technologies have dropped significantly due to cheaper equipment and better production efficiency.
2. Long-term PPAs: NGEL secures stable revenue through long-term PPAs with government agencies and public utilities.
3. Scale and Capacity Utilization: Large-scale projects allow NGEL to benefit from economies of scale, reducing per-unit production costs.
4. Geographical Diversification: By spreading projects across various locations, NGEL minimizes risks related to location-specific generation variability.
5. Strategic Partnerships: Collaborations with other PSUs enhance resource sharing and operational efficiency, leading to cost savings.
Closing Remarks
NTPC Group aims to boost its non-fossil-based capacity to 45-50% of its portfolio, targeting 60 GW of renewable energy by 2032. NGEL is also exploring renewable sources like green hydrogen and ammonia for power generation, as well as developing energy storage systems. As India strives for 500 GW of renewable capacity by 2030 and aims for net-zero emissions by 2070, the renewable energy sector is set for rapid growth, positioning NGEL as a key beneficiary in this expansion.
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