By Lavkesh Balchandani
India has made remarkable strides in advancing renewable energy over the past decade, with installed renewable capacity (including large hydro) nearly doubling to 190 GW as of June 2024. The country has now set ambitious climate targets and aims for 500 GW of non-fossil fuel power capacity by 2030 and ultimately achieving net zero emissions by 2070.
To meet these goals, the country will need a rapid scale-up of investments in the renewable energy sector, and the National Electricity Plan estimates this number to be over $300 billion. Mobilising finance at this ambitious scale requires India to tap into a more diverse range of domestic and international sources across both debt and equity while also addressing the key challenges prevailing in the financing of renewable projects. This article delves into these topics…
Initiatives to encourage investments in the renewable sector
The Indian government has been taking significant steps to encourage investments in the renewable energy sector. One of the key measures is permitting foreign direct investment (FDI) up to 100 per cent under the automatic route, which has attracted $3.8 billion in FDI in the solar energy sector over the past three financial years as per the Department for Promotion of Industry and Internal Trade. Additionally, the government has waived inter-state transmission system charges for inter-state sale of solar and wind power for projects to be commissioned by June 30, 2025. These key policy decisions have helped renewable energy developers and investors to make renewable energy projects more viable.
To further boost the sector, the government has announced a plan to add 50 GW of renewable energy capacity annually over the next five years and has set a trajectory for renewable purchase obligation up to the year 2029-30. This has given investors policy clarity, bolstering their confidence. The standardisation of bidding guidelines for tariff-based competitive bidding process and the implementation of the production-linked incentive scheme for solar PV manufacturers are also expected to drive growth in the sector.
The government is also focusing on reducing PPA counterparty risk by making energy purchases through highly rated central public sector enterprises. To increase the overall health of the sector, especially in the distribution space, which is one of the weakest links of the power sector, various schemes such as the Liquidity Infusion Scheme to help settle the debt of discoms, Electricity (Late Payment Surcharge and Related Matters) Rules, 2022, to encourage the timely payment of dues, and the Revamped Distribution Sector Scheme have been announced.
The 2024-25 Interim Budget has allocated $1.2 billion to solar power grid projects, which is a massive 110 per cent increase from $568 million allocated in FY24. The government has also announced that viability gap funding will be provided for offshore wind energy for an initial capacity of 1 GW. These strategic measures and investments are expected to drive significant growth in India’s renewable energy sector in the coming years.
According to Ember’s analysis, India will require an investment of $293 billion between 2023 and 2030 to achieve its current solar and wind energy targets. Additionally, to enhance the country’s renewable capacity to match the International Energy Agency’s (IEA) net zero pathway, it will be essential for India to secure an extra $101 billion in funding for developing solar, wind, storage and transmission infrastructure. Finding different sources of finance with low costs and reduced risk of developers and investors alike is key for the growth of the sector. The following section discusses these trends.
Financing sources for renewable energy projects
India’s early renewable energy financing came primarily from private non-banking financial companies (NBFCs), which recognised the sector’s potential and built the initial frameworks for project financing. As the market evolved, public NBFCs and public sector banks joined in.
On the equity side, renewable energy has attracted a wide variety of long-term investors from the start due to its positive environmental and socio-economic impact. Sovereign wealth funds, global pension funds, private equity, oil and gas majors and Indian conglomerates have all made significant equity investments in the country’s renewables.
International investors have played a key role in scaling up finance in the sector. From 2019-2021, foreign banks and financial institutions provided 50 per cent of the debt raised by India’s renewable energy projects. At least eight major sovereign wealth and pension funds have taken direct equity stakes in Indian renewable energy companies as of March 2022, according to Bloomberg New Energy Finance.
Since 2015, rooftop solar project developers have raised more than $2 billion, 48 per cent ($985 million) of which came from equity funding and 29 per cent ($599 million) from debt. According to Resurgent India, almost all (99 per cent) of equity investments in this sector came from foreign entities. Investments have been limited to a few major players with sizeable portfolios, bankable track records and the distribution of portfolios across different states in India, which reduces risks for investors.
One of the key developments has been Indian renewable energy companies increasingly tapping into both domestic and international bond markets, with Greenko, ReNew Power, Adani Green Energy Limited and Azure Power being amongst the top issuers of green bonds in the country. Record green bond issuance of $9.7 billion was witnessed in 2021 by Indian renewable energy companies, with a cumulative value of green bond issuance reaching $43 billion till March 2023.
In 2023, India made its debut in the sovereign green bond space, issuing the first tranche of a sovereign green bond, worth Rs 80 billion, in January 2023, followed by a second issuance of Rs 80 billion in February 2023. In 2023-24, the government issued sovereign green bonds worth Rs 200 billion in four tranches of Rs 50 billion.
Many companies have also taken the public route to raise finance for funding renewable energy projects. So far, in the Indian renewable energy sector, about 49 companies have gone public with three initial public offerings (IPOs) in 2023 and two in 2022. The average IPO market cap was about $417 million as of May 2024.
These initiatives have led to a surge in clean energy financing in the country, with total spending reaching over $68 billion in 2023 according to IEA figures. Under the current policy settings, annual clean energy investments are set to double by 2030; however, an additional 20 per cent scale up is required to meet energy and climate goals.
Challenges in scaling up renewable energy financing
The main risks facing India’s renewable energy projects are delays in payments from discoms, challenges in land acquisition and infrastructure availability, rising interest rates, and the risk of contract renegotiations.
Overdue payments from discoms to power producers stand at $10.42 billion as of June 2024, putting pressure on project developers. Land acquisition and transmission infrastructure have also caused significant project delays and cost overruns.
Expected equity returns for renewable projects have come down in the recent years and could fall further due to payment delays, generation underperformance and cost pressures. Rupee depreciation is an added risk for projects with foreign currency debt exposure.
On the debt financing side, banks face sectoral exposure limits and provisioning norms for non-performing assets that constrain lending to renewables, which are often clubbed together with conventional power. The rising interest rates in India could further increase costs.
Solutions for mobilising capital
To crowd in the significant financing needs, India should introduce a range of financial solutions and policy enablers. One, improving the financial health of discoms is crucial, as they are key offtakers of renewable energy. Two, bottlenecks around land acquisition and transmission infrastructure need to be resolved to avoid delays. Using government land parcels and providing single-window clearances could help.
Three, deepening India’s corporate bond markets can open up new financing avenues and lower costs compared to bank loans. Currently, most Indian renewable companies rely on more expensive foreign currency bonds. Four, risk mitigation solutions such as partial credit guarantees and blended finance from development banks can help attract private capital for newer technologies such as energy storage, and to the underserved segments such as rooftop solar. Dedicated financing vehicles from domestic entities such as green banks and strategic funds can also help channel more domestic capital to renewable projects and lower the cost of capital for developers.
Additionally, creating an enabling environment for foreign capital inflows through more flexible external commercial borrowing norms and clearer hedging guidelines could help tap more global capital pools. Innovative instruments and regulations around them need to be further developed. For instance, infrastructure investment trusts are an emerging avenue to help developers recycle capital from operational projects, but clearer norms are needed.
Net, net, India has made impressive progress in renewable energy, but achieving the ambitious 2030 targets requires a step change in the pace and scale of financing. While the renewable financing ecosystem has evolved considerably, with diverse players and innovative instruments, several challenges persist. Issues such as inadequate infrastructure, financial stress in power distribution and macroeconomic risks need to be addressed to achieve the country’s climate targets.
