Energy Transition to Quadruple Profit Pool; Tata Power, Acme Solar Among Top Picks

The ongoing energy transition is expected to significantly expand the profit pool for renewable developers, according to the IIFL Capital report titled 'India-Energy Transition'.

The report highlights three key factors driving this transformation viz. the shifting of profits from government, railways, and primary energy suppliers to developers; the value capture through backward integration into solar manufacturing; and the creation of new profit streams via forward integration into energy storage, green hydrogen, and adjacent sectors. While execution challenges and constraints posed by the ‘Solar Maximum’ may slow the pace of supply additions, integrated developers with the ability to leverage adjacent opportunities and deploy large balance sheets are expected to be the biggest beneficiaries.

The shift in the profit pool from government entities to developers is being accelerated by the growing penetration of renewable energy. Unlike coal-fired power generation, where profits are distributed across multiple stakeholders, including developers, the government, railways, and coal miners, renewable energy consolidates most of the value in the hands of developers. As a result, developers' share of levelised profitability per unit of electricity generated is expected to rise from approximately INR 0.6 per kilowatt-hour (kWh) in coal power to between INR 1.4 and INR 1.7 per kWh for round-the-clock renewable energy. This value capture is further enhanced through backward and forward integration strategies, providing integrated developers with significant advantages over pure-play renewable firms.

India’s renewable energy transition is unfolding in four distinct phases, each offering unique opportunities for profit pool expansion. The first phase was marked by basic renewable capacity additions, driven largely by government mandates and declining capital costs. During this period, the profit pool for developers remained smaller than that of coal-fired generation due to intense competition. The second phase saw an increased emphasis on dispatchable renewable energy, leading to a rise in complex projects involving a combination of solar, wind, and storage. This phase resulted in substantial profit pool expansion as developers capitalized on the need for greater reliability and larger capital deployments. The third phase is being shaped by the government’s focus on building a domestic solar PV supply chain, which is expected to temporarily disrupt global demand-supply dynamics. More renewable energy firms are now investing in captive solar cell and module manufacturing capacities, while traditional solar manufacturers are expanding into renewable energy development. In the fourth phase, the constraints of the ‘Solar Maximum’,where the grid’s ability to absorb excess solar capacity is increasingly limited, are expected to become a major challenge. Developers that can secure access to low-cost electricity storage at scale, such as pumped hydro storage, or integrate forward into demand-creating sectors like green hydrogen and energy-intensive manufacturing, will be best positioned to thrive in this environment.

The key differentiators for success in this evolving landscape include execution capabilities, balance sheet strength, and access to low-cost storage solutions. Renewable energy execution is becoming increasingly complex, necessitating timely transmission access, large-scale energy storage, and significant capital deployment for full-stack vertical integration. Developers with backward integration into solar manufacturing, secured land and transmission capacities, and the financial strength to fund large-scale projects will have a distinct advantage.

On the other hand, public sector utilities (PSUs), which have traditionally relied on sovereign-backed balance sheets to offset weaker execution capabilities, may find themselves at a disadvantage in the third phase due to their lack of backward integration. This could leave them exposed to higher module prices, impairing their competitiveness against vertically integrated developers.

Tata Power stands out as the top pick due to its vertically integrated business model, which positions it to maximise value capture. The company’s earnings are expected to accelerate from the first half of the fiscal year 2026 as it begins placing its domestically manufactured solar cells and modules into high-margin rooftop and domestic content requirement (DCR) projects. With a target price of INR 435 per share, Tata Power is seen as India’s leading integrated renewable developer. Acme Solar also presents a favorable risk-reward profile, with a target price of INR 290 per share. The company has strengthened its position by securing a significant market share in firm and dispatchable renewable energy (FDRE) auctions and benefiting from the sharp decline in global battery prices. Its portfolio is expected to deliver industry-leading capital returns.

NTPC Green Energy Limited (NGEL) has been assigned an ‘Add’ rating with a target price of INR105 per share due to its strong growth trajectory, sovereign-backed balance sheet, and access to cost-plus or fixed-return power purchase agreements with other PSUs and state governments. However, execution delays remain a potential downside risk, though the company could benefit from improved internal rate of return (IRR) expansion through debt repricing at an opportune time. JSW Energy, while uniquely positioned to capitalize on both energy security and energy transition themes, has been given a ‘Reduce’ rating with a target price of INR 495 per share. The company has delivered strong growth in recent years by leveraging its balance sheet to make opportunistic acquisitions and meet captive power requirements within the JSW Group. However, at current valuations, the stock offers limited margin for safety, especially in light of rising execution challenges.

Beyond these renewable-focused companies, NTPC has been assigned a ‘Buy’ rating with a target price of INR 400 per share, as its growth outlook is expected to exceed market expectations. The company is expected to benefit from ongoing supply-demand imbalances, expansion into nuclear power generation, and sustained cost escalations in coal plant development. Rising free cash flows and lower capital expenditure following the NGEL IPO are expected to support an increase in dividend payouts. Similarly, Power Grid Corporation of India Limited (PGCIL) has been rated a ‘Buy’ with a target price of INR 350 per share, as the government’s estimated INR 9 trillion transmission capital expenditure is likely to see further upward revisions. This will be driven by rising equipment costs, additional high-voltage direct current (HVDC) transmission projects, and the inclusion of corporate and industrial renewable energy capacities in the planning process.

While the energy transition presents immense opportunities, execution risks and supply-demand dynamics in the solar manufacturing sector remain critical factors that could impact long-term profitability. Execution delays of more than a year could significantly impact equity returns, while an oversupply of domestic solar cells or a lack of policy support for further backward integration into ingots and wafers could weaken the competitive advantage of integrated manufacturers. On the other hand, a faster-than-expected decline in battery storage costs could alleviate grid constraints, leveling the playing field for all developers. Additionally, stronger-than-expected export demand for Indian-manufactured solar components could provide an upside surprise to industry projections.

As the energy transition deepens, developers that can navigate execution challenges, secure backward integration, and tap into emerging demand-side opportunities will be best positioned to capitalise on this multi-phase shift. The next few years will be crucial in determining which players successfully adapt to these changing dynamics and emerge as long-term leaders in India's renewable energy sector.