Funding Gaps

Public sector involvement needed in financing

Over the past decade, India has witnessed tremendous growth in the renewable energy sector. It is the fastest growing green energy sector in the world, reaching nearly 90 GW of installed capacity from just 15 GW in 2011. That said, India still has a long way to go to meet its renewable energy target of 175 GW by 2022 and 450 GW by 2030. It has been estimated by the Natural Resources Defense Council (NRDC) and the Council on Energy Environment and Water (CEEW) that the country will need to invest about $30 billion every year in climate action to meet this goal. In contrast, only $8 billion-$10 billion is invested every year.

The renewable energy sector has also faced roadblocks due to the Covid-19 pandemic, which has led analysts to believe that the country may not be able to meet its capacity targets. Before the pandemic hit, Wood Mackenzie had estimated that India could fall short of its nationally determined renewable energy contribution by up to 25 per cent. Thus, going into the next decade it is important to assess the current state of renewable energy finance in India and highlight the challenges and opportunities.

Renewable energy finance ecosystem

The foundation of renewable energy financing was laid in 1987 when the government established the Indian Renewable Energy Development Agency (IREDA) to provide financial assistance and promote renewable energy technologies in the country. Among other sources of finance are soft loans by the agency that bear low-interest rates and are lent either directly to developers or through intermediaries. The agency launched the $100 million “Green Window” in 2019 to support and scale-up the underserved renewable technologies. Organisations like the Power Finance Corporation (PFC), Rural Electrification Corporation and National Bank for Agriculture and Rural Development have also been involved in the financing of green energy projects. Further, many public and private sector banks as well as non-banking financial institutions have been involved in financing renewable energy projects.

As India started adding significant renewable energy capacity into its mix at the start of the previous decade, the government established the National Clean Energy and Environment Fund (NCEEF), which was mobilised by charging a cess of Rs 400 per tonne on coal power. A portion of the fund was allotted to IREDA, which would lend to banks at an interest rate of 2 per cent. These banks, in turn, would lend to project developers at a maximum interest rate of 5 per cent.

Historically, government-based financial institutions have been reluctant to invest in India’s renewable energy sector, whereas coal-based plants have been largely funded by government institutions like PFC and the State Bank of India. The Centre for Financial Accountability reported in 2018 that of the funds directed to the renewable energy sector only about 32 per cent were from public sector institutions.

According to the NRDC and CEEW, Tata Cleantech Capital Limited has emerged as a leader in renewable energy finance among private lenders. Since its incorporation in 2011, the company has funded about 200 renewable energy projects with a cumulative capacity of over 7.5 GW. The company has also been instrumental in co-financing other lenders in the industry. The issuance of green bonds to fund renewable energy projects has also been growing rapidly since 2015 to keep up with growing renewable energy installations. India is currently the second largest issuer of green bonds among developing countries as it has issued over $11 billion worth of financial instruments in the past six years.

Challenges in green energy financing

Owing to its high-risk profile, the sector faces challenges in obtaining funding. This can be attributed to the gap in information in the Indian market. Since the sector is relatively new, there is a lack of historical data on return rates. The poor supporting infrastructure of the Indian renewable space also adds to the funding woes.

The NCEEF has been subject to criticism with reports of funds being diverted to other sectors. The trend of phasing out of coal plants and reduction in thermal capacities in the country may call for a revision of the fund altogether. In 2015, the Reserve Bank of India categorised the renewable energy sector as a priority sector for lending, as per which banks would lend 40 per cent of their credit to these sectors. The loan ceiling for each borrower from the renewable energy sector was set at Rs 150 million. Similar to the NCEEF, this initiative generated underwhelming results with a larger portion of funds being transferred to the non-renewable sector.

For obtaining finance, the Indian renewable energy sector still remains a costly prospect for investors as interest rates on borrowings are typically in the range of 12-15 per cent. In the US and Europe, these rates have been recorded in the range of 5-7 per cent. Further, banks have been reported to prefer lending over the short term (six to eight years) rather than the long term (12-15 years). Although pension funds are a good option for this, they represent a very small portion of financial savings in the country. Hence, there is a need to improve the availability of long-term finance in the country.

How low can tariffs go?

The past decade has seen tariffs hitting new lows at regular intervals. Solar tariffs have fallen from a range of Rs 10-Rs 11 per kWh in 2010 to a record low of Rs 1.99 per kWh in 2020. Although this was a trend that spurred solar and wind installations initially, it has reached a stage where financiers are doubtful about the viability of the project. Down to Earth reported returns from equity in the renewable energy sector have fallen from 16 per cent to an average of 9-11 per cent at present. It has raised concerns over whether project developers will cut corners in quality so as to generate a profit. In this scenario, debt financing from banks and other financial institutions has been difficult to procure given the concerns regarding project viability.

The poor financial condition of state-owned discoms has added to the problem. Discoms have expressed a reluctance to sign power purchase agreements as they are unwilling to accept tariffs for relatively higher-priced projects. This has led to a vicious cycle in which banks are willing to lend only to high-tariff projects and discoms only accept low-tariff projects. This is one of the key issues in the Indian renewable energy space.

Supporting infrastructure

As of today, the country is promoting domestic manufacturing. To this end, safeguard duties of about 14.5 per cent have been imposed on the import of solar panels from China, Thailand and Vietnam. In the Union Budget 2021, import duties on solar inverters and solar lamps were raised. Although the move is aimed at reducing the cost of debt as well as panel prices, solar manufacturers are still heavily dependent on imports with domestic manufacturing only contributing to about 10 per cent of the solar panels in the country. This too has threatened the profitability of projects and reduced investor appetite. Hence, efforts must be made to develop the domestic manufacturing capacity gradually with capital investments rather than forcing a shift through high import tariffs.

Further, there are uncertainties in acquiring land and transmission infrastructure. Developers have called for the simplification of the land procurement procedures and digitalisation of land records. At the same time, the development of transmission infrastructure must keep pace with capacity installation. Developing a strong supporting infrastructure could be vital in reducing the uncertainties in renewable energy projects and, hence, improving the flow of investments into the sector. In this regard, the government can play a key role by addressing the delays in project implementation.

Future outlook

India has an ambitious renewable capacity target that has to be met by 2022 and is facing challenges in obtaining funding for the same. Despite how far the country has come in setting up renewable capacity, the sector is still categorised under the power sector. Although it is a priority sector, it is at risk of being crowded out by conventional power. Hence, there must be mandates for financing institutions to set aside funds solely for renewable energy development.

For financiers, high interest rates and short tenures are a key deterrent in the Indian renewable energy sector. Given that renewable energy projects are for the long term (25-30 years), a loan tenure of eight years and interest rates of up to 13 per cent can be extremely challenging to cope with. The public sector has a key role in building the creditworthiness of the sector and a stable market for long-term finance at lower interest rates. The government can potentially absorb the perceived risks of the sector by providing partial or full loan guarantees to lenders.

India must take rapid strides in financing its ambitious renewable energy targets. All the challenges such as the lack of supporting infrastructure, poor health of discoms and inefficiencies in the policy framework contribute to difficulties in obtaining funds. The government must involve itself in all aspects of renewable energy financing and plug the gaps in this space. With these efforts, it is set to become a leader in the green energy space.

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