NTPC, IOC try 'ITC diversification strategy' to craft plans for clean fuels

Like tobacco major, the state-owned power generator and fuel retailer are seeking to transition from toxic fossil fuel businesses to green energy but rely on those margins to grow these new ventures

What do ITC, India’s biggest tobacco company, NTPC, India’s biggest power generator, and IOC, the country’s biggest crude oil refiner, have in common? Besides the abbreviated names, all three companies sell products that are considered toxic for human health. All three are also trying to transition from these businesses. In fact, NTPC and IOC are plucking leaves out of ITC’s diversification strategy to craft plans for clean fuels.

ITC realised the societal and regulatory implications of its core cigarette business decades ago, and entered hotels, retail, and the fast-moving consumer goods sector, all of which are relatively low-margin, high-investment business with lower entry barriers for competition, compared to selling a licensed product such as cigarette. So, ITC still makes most of its profits from brands like Classic, Wills and Gold Flake.

Two decades later, NTPC and IOC are trying something similar after their fossil fuel businesses came under pressure from governments and climate activists. And as with ITC, both are stepping into a less regulated, hyper-competitive business: green energy.

The return on new energy investments may fall short of what NTPC and IOC typically make from their depreciated fossil fuel businesses, but the pressure on both to retreat from core activities is intense. Both Maharatnas — government-owned companies with a relatively high degree of autonomy — are critical to India achieving net-zero emissions by 2070.

The power sector is India’s biggest polluter, accounting for 34 per cent of the country’s emissions, and transport contributes 9 per cent, according to McKinsey. NTPC supplies a quarter of the nation’s electricity, and IOC is the market leader in fuel sales, accounting for 41 per cent of the country’s retail outlets, reflecting the oversized role both companies play in India’s emission graph.

Mohit Bhargava, chief executive officer, NTPC Green Energy, shared an ambitious plan with Business Standard illustrating NTPC’s role in India’s emission reduction programme. NTPC wants to grow its renewable capacity nearly 20-fold to get on a par with its thermal plants in a decade. What took NTPC five decades to reach a little over 70 gigawatts (Gw) of primarily coal-burning power, Bhargava wants to do in a decade: add 60 Gw of renewable capacity by 2032, which will account for 12 per cent of India’s 500-Gw non-fossil fuel-fired electricity target. That should take NTPC’s overall capacity to 130 Gw. An initial target of 25 Gw of renewable capacity will be achieved by 2025 on the back of a 20-Gw renewable energy (RE) project pipeline, Bhargava said. An electrical engineer with three decades of experience in the power sector, he tossed a ballpark figure of $40 billion in costs to achieve the company’s renewable goals.

IOC, which accounts for a third of the country’s refining capacity, unveiled plans last month to spend Rs 2 trillion ($24 billion) in energy transition ventures. IOC plans to build 35 Gw of renewables, 4 million tonnes a year of biofuels, and 1 million tonnes a year of biogas by 2030. The company also plans to set up 4,700 electric vehicle charging stations and build a 7,000-tonne-a-year green hydrogen plant in north India.

Raising funds for renewable projects may prove to be the biggest challenge for NTPC and IOC in the current global environment, characterised by rising interest rates, recession, and skittish investors. This wasn’t the case in early 2021, a period of low interest rates and easy money, when French oil major TotalEnergies agreed to acquire a 50 per cent stake in Adani’s 2.35-Gw portfolio of operating solar assets, and a 20 per cent stake in Adani Green for $2.5 billion.

Investors ploughed in just $2 billion into Indian start-ups in January-March 2023, a 75 per cent fall from a year earlier period, according to data firm CB Insights. This compared to record investments of $30 billion in the whole of 2021 and $20 billion in 2022.

Being a government company comes with some baggage. Investors are apprehensive about paying a high premium for government-owned companies. Whereas Essar’s Vadinar refinery found a ready buyer in a Russian consortium, there was little interest in buying Bharat Petroleum.

NTPC’s plans to sell a 20 per cent stake in NTPC Green came unstuck for lack of interest from bidders. “Right now, we have a commitment from NTPC to provide equity up to a certain level,” Bhargava said. “But if we do go to the market, we’ll have to ensure that it’s the right timing.” NTPC Green plans to launch an IPO later this year.

NTPC and IOC must ensure favourable returns from renewable projects to catch investor interest. Otherwise, they may have to rely on cash generated by their fossil fuel businesses to fund renewable projects, just as ITC’s cigarette business enabled the diversification into non-tobacco ventures.

As Hetal Gandhi, director in Crisil Research pointed out, most coal plants in India have their tariff determined by central and state-level regulatory bodies under their respective tariff regulation. This tariff regulation provides a 15 per cent return on equity to coal plants though the actual return is 12-12.5 per cent.

But RE projects in India are competitively bid projects. In fiscal 2023, average bid tariff for a ground-mounted solar plant stood at Rs 2.67 per unit, which resulted in an equity internal rate of return (IRR) of 8-10 per cent (at a capex of Rs 5-6 million per Mw), Crisil data show. Similarly, for wind projects equity IRR is usually 7-9 per cent because high competition results in lower tariff of Rs 3 per unit and high capex of Rs 8-9 million per Mw. Going forward, equity IRR for renewable projects is expected to remain in a similar range because of the large number of players present in the market, Gandhi said.

Renewable project costs have also increased after the pandemic because of supply chain disruptions in China, and New Delhi’s sourcing policies. Rising module prices led to a rise in capital cost by up to 25 per cent in FY23 over FY22, according to Crisil Research.

Higher project costs have led to higher tariffs, posing a burden to discoms and risks for developers. Under Bhargava’s tenure, NTPC set a benchmark of a low tariff in India by winning a plain vanilla solar bid for Rs 1.99 per kWh. But at a recent solar auction in Gujarat, the tariff was almost Rs 2.75 per unit (Kwh). Another recent round of bids by NTPC for round-the-clock power came in at Rs 4 per unit.

 

 The greening of business

The plans of both Maharatnas are critical to India achieving net zero emissions by 2070

The power sector is India’s biggest polluter, accounting for 34 per cent of emissions, and transport contributes 9 per cent

NTPC is targeting 60 Gw of RE by 2032, and IOC another 35 Gw by 2030 

Raising funds for renewable projects may prove to be the biggest challenge for NTPC and IOC in the current global environment

Estimates peg the cost at approximately $40 billion to reach NTPC’s renewable goals

NTPC and IOC must ensure favourable returns from renewable projects to catch investor interest

Renewable project costs have also increased after the pandemic because of supply chain disruptions in China, and New Delhi’s sourcing policies