Fundamental Funding

Outlook for green finance in India

India’s power sector is advancing rapidly with increasing penetration of clean energy sources in its portfolio. Between 2014 and 2021, the Indian renewable energy sector received over Rs 5.2 trillion in investments. Despite the slowdown in renewable energy investments by over 24 per cent in financial year 2020-21 due to the Covid-19 pandemic, the sector has ex­hi­bited significant recovery in recent mo­nths. The share of reinvestment ri­sen tre­mendously between April and Sep­tem­ber 2021, with investments in renewab­le energy amounting to roughly $10 billion. This value exceeds the cumulative investment made in the sector over the past two financial years. The revival is due to re­covering energy demand as well as rising re­newable energy commitments of the na­tion, its in­dustries and financial institutions.

India’s transition to renewable energy, however, would require securing the necessary finance to achieve its ambitious goal of producing 450 GW of renewable energy by 2030. A report by the parliame­ntary standing committee in March 2021 stated that the country needs Rs 2.61 trillion to achieve these targets. Since the budgetary resources of the government may be limited, mobilising private investment, both domestically and globally, would play a significant role in expanding the country’s clean energy portfolio. With the falling costs of renewable energy segments, batteries and storage technologies, the sector is likely to become more co­mpetitive in the coming months. This is expected to drive further investment. How­ever, the scale of investment is crucial and would require active participation of both public and private sector entities. Finan­cing solutions are also expected to be a key enabler in meeting India’s net-zero emissions target by 2070.

Renewable Watch takes a look at the recent developments, challenges and outlook of green energy finance in India…

Recent developments

The renewable energy sector in India has witnessed several significant developments over the past one year. As per a re­port by Climate Trends and Centre for Fin­ancial Accountability, 74 per cent of the to­tal funding from financial institutions over the past one year have been for clean en­ergy projects. A recent study by CEEW Centre for Energy Finance (CEEW-CEF) and the International Energy Agency has also revealed that the total value of ac­quisi­tions in India’s renewable energy sector surged by more than 300 per cent, am­ounting to $6 million in the first 10 months of 2021 as compared to 1.5 billion in the year 2020. Additionally, according to the CEEW-CEF’s study, over 90 per cent of India’s green energy projects received an investment-grade rating of BBB and above in 2020. In 2015, less than half of the clean energy projects in India received such ratings. This is a positive indication towards the opportunities that the Indian renewable energy market presents for investors, des­pite the various challenges faced by the sector. The enhanced ratings may be attri­buted to the improved financial viability of renewable energy projects due to a substantial policy and regulatory push provided to the sector by the government.

In December 2021, the Ministry of New and Renewable Energy approved the allocation of Rs 4.54 billion for three programmes, whi­ch aim to foster research and development, skill development and awareness for the growth of clean energy in India. The year 2021 also saw several key financings and acquisitions in the country’s renewable energy market. Adani Green’s takeover of SB Energy India for an estimated value of $3.5 billion was one of the major deals in the sector. The largest foreign investment deal was Orix Corporation’s acquisition of 21.8 per cent stake in Greenko for $961 million. AMP Energy India raised $100 million from Copenhagen Infrastructure Part­ners, while CleanMax raised $223 million from Augment Infrastructure.

The US International Development Finan­ce Corporation also approved $500 million of debt financing to First Solar to set up a 3.3 GW vertically integrated solar module manufacturing facility in Tamil Nadu, India. Fourth Partner Energy raised $100 million in equity from Norfund, Rs 2.5 billion from the CDC Group and $25 million from the Rise Fund. Further, Actis signed a Euro 280 million agreement to purchase For­tum’s solar projects in India amounting to a capacity of 500 MW.

The State Bank of India (SBI) too approv­ed over Rs 319.18 billion in renewable en­ergy project finance, in March 2021. A ma­jority share of the financing is attributed towards solar photovoltaic (PV) gro­und-mounted projects, followed by roof­top solar projects and wind energy. The European Invest­me­nt Bank and SBI laun­c­hed a new initiative of Euro 100 million for climate action and sustainability finan­c­ing. The government’s efforts towards creating a promising environment for the re­newable energy sector has also been fairly successful in bringing in support fr­om international fin­an­cial institutions.

Additionally, Indian developers raised over $11 billion through green bonds in international bond markets between 2014 and the first half of 2021. Roughly $3.6 billion was raised until mid-2021, which is higher than any previous 12-month period. A total of eight Indian developers have raised green bonds in international markets. The bonds raised by Greenko and ReNew Power translate to roughly 70 per cent of all such issuances. Other than previous international bond market participants such as NTPC, Azure Power and Adani Green Energy, th­ree developers (Continuum Green Ener­gy, Hero Future Energies, JSW Hydro) made their debut issuances this year.

Key challenges

Inadequate financing and investment may become a great impediment to India’s re­ne­wable energy transition if certain challenges are not addressed. These include high borrowing costs, market uncertainty due to delays in signing of power sale agr­ee­ments, and inadequate land and transmission infrastructure. Further, timely availability and pricing of modules is crucial. Sectoral risks in the Indian market are also claimed to be relatively greater as compared to other large renewable markets across the world. The risk of retrospective contract renegotiation also looms large in India, potentially preventing the flow of new investments into the sector.

Additionally, the lack of a resale market for rooftop solar and inability of lenders to resell assets due to default is a major hurdle for rooftop solar financing. A mismatch between the long-term nature of green investments against the reasonably short-term interest of investors is also pertinent. Finally, asymmetric information and lack of real-time data monitoring for green projects and financings is a key challenge that needs immediate attention.

The way ahead

More funds were channelled into the renewable energy segment by Indian lenders as compared to coal-based projects in the year 2020. The trend has been similar over the past three years. Further­more, greater flow of funds can be expected towards renewable energy in the coming years, especially after the declarations made at COP26, held in November 2021. Accelerating the deployment of renewable energy would require a stable and established financial mechanism.

Specifically, in the green hydrogen segment, India aims to produce approximately 1 million tonnes of green hydrogen per annum by 2030. This will not be feasible until green hydrogen attains price competitiveness in the market. Bridging the cost gap and scaling up storage and transportation infrastructure would necessarily entail a greater role of financing, both public and private. While support of the government will be indispensable, it may not be sufficient to meet the country’s targets. Greater collaboration among financiers, developers, technology industries and state entities would be favourable to the growth of the sector.

Several other steps can be taken to streamline the flow of finance into renewables. For instance, the adoption of a well-defined and consistent taxonomy for green finance will be essential to reduce transaction costs. Further, since more than half of the Indian population is still part of the lower-income strata, a plan that engages this large segment of the population in energy transition must be laid out. This will ensure faster deploy­me­nt and shift the focus towards new and cleaner energy sources throughout the country.

The experience of Indian developers in the international green bond markets can also be used to revive the domestic green bond market. While the bond market has been primarily utilised by large developers so far, participation of smaller developers may also be encouraged. A formal carbon pricing framework may become a significant tool in streamlining the economics of projects and generating greater revenues. Innovation in green finance instruments must also be promoted and supported by the government.

The renewable energy market today presents an attractive array of opportunities for investors in India and around the glo­be. A continuous and undisturbed fl­ow of gr­e­en finance, complemented with adequate fiscal and regulatory provisions, is thus crucial for the renewable energy industry in India.

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