The article has been written by Sandeep Bhattacharya with research and drafting help from Shlok Singh, Student, Tanglin Trust School Singapore
It is recognised at the highest levels of India’s policy machinery that, going forward, energy resources will form one of the critical bottlenecks to the country’s growth and the quality of life for its citizens. Total energy demand is forecast to rise by 128 per cent by 2035 (Mukherjee and Panandikar, 2017)[1], at a compounded annual growth rate of 4.4 per cent per year. Currently, there is a 38 per cent gap between domestic energy supply and demand (International Energy Agency, 2020), and policies and reforms targeting the energy sector have attained only limited success. This state of energy deficit inflicts heavy economic and social costs on the country, and energy poverty will have far reaching implications on the overall welfare of the economy.
Globally, non-renewable energy sources such as coal, oil, and natural gas have contributed to 73.2per cent of global greenhouse gas emissions (Ritchie, 2020)[2]. India’s contribution to this is not insignificant. India is responsible for nearly 6.65 per cent of global carbon emissions, ranking fourth next only to China (26.83 per cent), the USA (14.36 per cent), and the EU (9.66 per cent) (Kumar and Majid, 2020)[3]. India is one of the largest coal, gas and fossil fuel consumers in the world and close to 74 per cent of the energy demand in India is met by coal and oil (Energy Information Administration, 2020)[4]. However, coal consumption in India has now outstripped domestic supply, despite an increase in coal reserves by 5.37 per cent in 2020 (Ministry of Statistics and Programme Implementation Government of India, 2021)[5], and the country’s coal reserves are set to deplete in 20 to 30 years (Bhaskar, 2020)[6]. It is noteworthy that coal imports have started to dent the balance of payments as imported coal is twice as expensive as domestic coal (Department of Industry and Science, 2015). India’s domestic oil production, never particularly significant, has further declined over the years (Singh, 2021)[7]. It is well known that India’s dependence on imported oil is one of its critical vulnerabilities and budgetary constraints. In 2019-20 alone, India spent $101.4 billion on crude oil imports, which is circa 21 per cent of the country’s total import expenditure (Shettigar and Misra, 2021)[8]. The domestic demand for natural gas is 96 million cubic meters per day, against an availability of 67, implying a deficit of 43.3 per cent, which is met through imports (Bureau of Energy Efficiency, n.d.).
It is against this background that policy makers in the country require to focus on policy measures encompassing regulatory, taxation and R&D domains, aiming at a rapid transition in its energy systems and structure towards renewable energy sources.
In the long run, achieving the desired rates of economic growth, and sustainably at that, will need continued investment in the non-renewable energy sector. Moreover, it is now being increasingly recognised that the growth of the renewable energy sector can also be a game changer in generating jobs for the unskilled workers, technicians, and contractors.
Despite the energy demand being skewed towards non-renewable sources, policy initiatives aimed at harnessing renewable energy dates back at least to 1982, when the Department of Non-Conventional Energy Sources was established (Ministry of New and Renewable Energy, 2021)[9]. Remarkably, India’s natural terrain and resources are conducive for renewable energy development, particularly for solar and bioenergy (Lu et al., 2020)[10]. Greater integration of renewable sources into the energy production and consumption mix will lead the country towards energy security, lower costs of industrial production, lower utility bills, greater economic growth and sustainability.
There has been some traction and positive developments on this front. Renewable energy sources have grown in strength and are demonstrating a potential to bridge India’s energy deficit (Capital Market, 2021)[11]. India’s installed renewable energy, over the 2016-2020 has registered a compounded annual growth rate (CAGR) of 17.33 per cent (India Brand Equity Foundation, 2019)[12]. In contrast, non-renewable sources of power are seeing a decline in installed capacity growth rate (see Fig.1, below).(Central Electricity Authority, 2020)[13]
From 2017 and onwards, for the first time in the history of renewable energy development in India, the renewable energy capacity addition has regularly outpaced the conventional capacity addition.
In the same year, the country also witnessed a rapid and unprecedented fall in renewable energy prices, in particular the price of solar and wind energy power. Table 1 below depicts the installed capacity of alternative renewable sources.
| Renewable Sources | Total Installed Capacity (GW) | Total Installed Capacity (%) | CAGR 2016-2020 (%) |
| Hydro (Large & Small) | 50.68 | 36.08% | 1.53% |
| Wind | 39.00 GW | 27.77% | 8.38% |
| Biomass | 10.17 GW | 7.24% | 20.15% |
| Solar | 40.60 GW | 28.91% | 46.85% |
(Ministry of New and Renewable Energy Government of India, 2021); (GlobalData, 2021) (India Brand Equity Foundation, 2021); (Ministry of New and Renewable Energy Government of India, 2016); (Statista, 2021).
The renewable sector now contributes 37 per cent of India’s power capacity (Invest India, 2021). Yet, the growth of the renewable energy sector is neither on auto pilot, nor on par with the government’s goals. The Indian Government has targeted 175 GW production capacity for renewables by 2022 (and 450 GW capacity by 2030) (Livemint, 2021)[14]. This has been dubbed overly optimistic by those with ears close to the ground. IEEFA (Institute of Energy Economics & Financial Analysis) and TERI (The Energy and Resources Institute) have commented that the target is “out of reach” (Frangoul, 2020)[15]. Bridge to India (BTI), a renewable energy consultancy, predicts that India is more likely to reach 110 GW (Jhalani, 2021)[16].
One of the principal constraints to reaching the targeted capacity is finance. It is estimated that building this capacity would require investment to the magnitude of $500-700 billion (Buckley and Trivedi, 2021)[17]. India must free up significant liquidity in banking to fund this capacity build-up. Currently with a little more than a trillion rupees of NPAs in the energy sector (Mathew, 2020)[18], investment in the renewable sector appears less lucrative. Moreover, interests on loans for renewable projects are variable, whereas the earnings of the energy producers are fixed (Gupta, 2020)[19], making investments riskier.
Green bonds have been identified as a key untapped source of finance that have the potential to finance India’s transition to clean energy, when coupled with traditional sources of finance.
To the uninitiated, Green Bonds are financial instruments where funds raised are earmarked for financing or refinancing existing or upcoming green projects. Refinancing through green bonds will introduce greater liquidity and tradability. Green bonds have the potential to liberate firms stifled by high interest rates. Since 2014, Indian developers have raised a sum of USD 11 billion via Green bonds (Livemint, 2021)[20]. Council on Energy, Environment & Water (CEEW) reports issuance of USD 3.6 billion worth of green bonds by Indian renewable energy developers, in just the first half of 2021 (Duggal, 2021)[21]. Despite, in a relative sense, Green Bonds in India are in their infancy. They are currently issued by only eight renewable energy developers in India (Duggal, 2021)[22].
Moreover, most of the activity in the Indian Green bond markets have been offshore, lured by the dedicated green capital (i.e., capital which can be invested in only green assets) present in the west. Also, interest rates in the western world have been low for decades now and there is a hunt for better yields. Furthermore, it is also believed that low interest rates are not a short-term aberration, but part of a long-term trend (See, Bernanke, 2015).[23] As the figure 2 below shows, ten-year US government bond yields in the United States were low in the 1960s, rose to a peak above 15 per cent in 1981, and have been on the decline ever since. That pattern is partly explained by the rise and fall of inflation, also shown in the figure. All else equal, investors demand higher yields when inflation is high to compensate them for the declining purchasing power of the dollars with which they expect to be repaid.
As one would expect, the declining trend has only accentuated in the wake of the ongoing pandemic. Readers will note that 19 nations in the Eurozone, including Sweden, Switzerland and Japan, have all had negative interest rates[24]. Yet, this observation begs the question: Why is money not rushing into developing countries such as India? And, what needs to be done to attract investment generally, and green capital specifically?
Firstly, the swap market in INR has a limited range (beyond 5 years is very difficult to hedge). Swap markets need some stimulus and organizations like The Currency Exchange Fund (TCX)[25] , who have the mandate to develop currency markets can possibly be persuaded to do some pioneering transactions in the green space. Secondly, there is serious case of information asymmetry. More information exchange on policies on renewable energy and the nature of the market mechanisms, and aggressive selling of the continuing reforms can possibly get India a greater share of the global capital pie – both through green bonds as well as other instruments. Both are low hanging fruits, and perhaps there has been no better time to initiate policy in this space than now, when the interest rates are at a historical low, the renewable sector is developing a critical mass, and the energy needs of the country is rapidly rising. While it is not a given that inflows via green bonds may suffice to bridge the identified investment gap, it is a case in point that India punches way below its weight in this space, and there is clearly a latent potential that is waiting to be exploited.
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