Round-The-Clock Renewable Energy Projects Likely To Give Firms 16% Returns: JM Financial

'Firm & dispatchable renewable energy' helps solve the problems with plain vanilla renewable energy projects of solar and wind. The rising trend of such tenders is poised to benefit companies like CESC Ltd., JSW Energy Ltd., NHPC Ltd., NTPC Ltd., SJVN Ltd., Suzlon Energy Ltd., Tata Power Ltd. and Torrent Power Ltd..

JM Financial notes how these companies already have FDRE projects in their portfolio, and that India's commitment to have 500 GW of installed renewable energy by FY30 gives momentum of more such orders via this business model.

A typical FDRE project with a tariff of Rs 4.5 per kilowatt hour is expected to provide an equity internal rate of return of 16%.

What Are FDRE Projects?

The term FDRE stands for ‘firm and dispatchable renewable energy'. These projects are basically renewable energy projects that are integrated with energy storage systems.

They help provide round the clock power and help solve challenges like grid balancing and underutilisation, that variable renewable energy causes.

Market Trend

A total of 15 FDRE tenders with a renewable energy capacity of 20.9 GW have been issued, so far. Out of these, 8.7 GW is in tendering stage, 7.3 GW has been awarded, and 2.3 GW stands cancelled.

JM Financial notes that projects below 1,000 MW are expected to commence within 24 months, while projects above 1,000 MW have a 30-month timeline. This indicates that the storage component is likely to consist of battery energy storage system rather than pumped hydro storage projects, that require more time to build.

Company Returns

The first FDRE tender was won by SJVN. The contract secured was for a 1,500 MW project with a tariff of Rs 4.38 per kilowatt hour.

As per JM Financial, The FDRE tenders require a minimum demand ratio of 90%, meaning the generator must supply at least 90% of the contracted power capacity each month. This ensures a stable power supply for consumers and increases the cost for the generator.

The brokerage notes that the financial success of an FDRE project depends on its size and the ability to match power generation with demand. Oversizing can lead to surplus power, which needs to be traded on the day-ahead market at potentially lower prices, impacting profitability.

Based on the analysis, JM Financial believes that a typical FDRE project with a tariff of Rs 4.5 per kilowatt hour is expected to provide an equity internal rate of return of 16%. This represents a good return for investors.