Securing finance for renewable energy projects is key to meeting India’s climate goals. The falling prices of renewables, aided by supportive government policies, and risk mitigation strategies have attracted major funds to India’s renewable energy sector. However, despite the availability of significant opportunities for investors and lenders, several hurdles relating to land acquisition, power evacuation, policy flip-flops and high cost of capital remain, limiting fund flows to the sector. Leading financiers discuss the current status of renewable energy financing, their approach to risk management, expectations of project returns and the future outlook. Edited excerpts…
How has renewable energy financing evolved over the years? Which are the key financial instruments for renewable energy projects?
Prasanna Desai, Managing Director and Chief Operating Officer, Eversource
India’s renewable energy sector has evolved from being policy-driven to market-driven, underpinned by diversified financing mechanisms that fuel its rapid expansion. Innovation in financial instruments, robust policy frameworks and increasing international capital flows have established the sector as a global leader in renewable energy. India is on track to achieve its target of 500 GW of non-fossil fuel capacity by 2030.
Over the past decade, the financing landscape for renewable energy projects in India has undergone a transformation. Initially reliant on government subsidies, grants and high-interest loans from public sector banks and agencies like the Indian Renewable Energy Development Agency, the sector had limited private investment and funding options. International development institutions such as the World Bank and the Asian Development Bank also played a crucial role in the early stages.
However, with consistent government backing, technological advancements and declining costs, a diverse range of financial instruments have emerged. This attracted an estimated Rs 7 trillion in investments over the past decade from international players (sovereign wealth funds, private equity, pension funds) and domestic sources (public/private banks and financial institutions).
Over the next five years, an additional Rs 32 trillion of financing will be required to continue the growth momentum. The sector’s strong fundamentals are set to support the mobilisation of low-cost capital through mechanisms such as debt, mezzanine financing, green bonds, structured equity and equity-based solutions. Renewable energy IPPs are now accessing lower interest rates, while financial terms for distributed renewable segments are improving rapidly. Corporate power purchase agreements (PPAs) have also become an attractive model, gaining increasing acceptance among financial institutions.
The sector has embraced complex financial modalities with notable success, including:
- Green bonds, with over $30 billion raised till date
- Infrastructure investment trusts (InvITs)
- Sustainable and environmental, social and governance-linked loans
- Securitisation of receivables
- These innovations have significantly expanded the pool of capital available to the sector, reducing costs and accelerating deployment.
Ankit Jain, Senior Vice President, SBI Capital Markets
The uptake of renewables over the past decade has been a remarkable story, with the sector growing at a mammoth pace. This has been fuelled by an increase in the overall volume of renewable capacity, confidence in technology, decline in tariffs and policy support. With the growth of the sector, financial innovations have also grown, providing multiple financing options for developers, which has made India one of the world’s largest markets for renewables.
During the initial phase, private and public banks and institutions provided funding for the sector’s requirements. As renewables gained traction, the options for commercial financing expanded to include funding from multilateral organisations like the World Bank and the Asian Development Bank, as well as green bonds and infrastructure investment trusts.
Renewable energy projects can be supported by a range of debt or equity funding options. Various types of innovative financial instruments have been used over the years, including rupee term loans or foreign currency term loans as senior debt, and equity finance instruments (through private equity funds, infrastructure funds and pension funds).
At the same time, the sector is witnessing tremendous activity in terms of mergers and acquisitions, refinancing and consolidation. This has fuelled the emergence of an entirely new class of financing instruments and solutions for the ever-growing sector. This deepening of the market is crucial, as it offers different types of investors an instrument of choice for participating in the renewables space.
Rishi Shukla, Investment Director, Edelweiss Alternatives
Renewable energy financing has evolved significantly over the years, driven by the growing recognition and awareness of climate change, the need for sustainable development and technological advancements in energy generation.
India’s installed renewable energy capacity has grown by 165 per cent in the past decade, reaching approximately 203 GW in 2024. This is further set to increase with India’s 2030 target of installing 500 GW of non-fossil fuel capacity. In the past, renewable financing came primarily from private non-banking financial companies (NBFCs), which initially built the frameworks for project financing, with public NBFCs and public sector banks joining in as the market evolved.
On the equity front, renewable energy has attracted various investors due to its positive socio-environmental impact and long-term contractual cash flows – with sovereign wealth funds, global pension funds, private equity players and various corporates having significant equity stakes in renewable projects across the country. International investors and development financial institutions have also contributed significantly to the equity and debt financing of renewable projects, with foreign banks and financial institutions providing approximately 50 per cent of the overall debt raised by Indian renewable developers from 2019 to 2021. Similar patterns have been observed in the rooftop solar space, with foreign institutions having large equity stakes
in projects.
The emergence of infrastructure investment trusts has helped channel domestic capital into operating renewable projects, unlocking capital for developers. Another key development in the Indian renewable market has been the growth in the bond market, both domestic and international. Companies such as Greenko, ReNew Power and Adani are among the largest issuers of green bonds in the country. The Indian green bond market was valued at upwards of $21 billion last year, with the majority of issuances coming from the private sector and a meagre 14 per cent coming from sovereign and government agencies. Many renewable companies and developers have taken the capital markets route and raised outside capital, with Waaree Energies’ initial public offering being the most recent example.
The total investment in the renewables space crossed $68 billion in 2023 and this number is only set to grow year on year, through both international and domestic avenues, to meet India’s 2030 target.
What is your approach to risk management in renewable energy investments?
Prasanna Desai
Despite its successes, the sector faces systemic challenges in land acquisition and transmission connectivity – critical bottlenecks for scaling projects. To overcome these hurdles, our strategy emphasises securing and developing renewable energy parks first, followed by customer onboarding and PPA agreements. This approach minimises project execution risks and ensures adherence to customer timelines.
The “park-first” model also provides precise technical data on generation capacity, enabling us to better price PPAs and achieve targeted high-teen project internal rates of return on a hold-to-maturity basis.
Ankit Jain
Renewable energy projects face risks similar to other sectors, including market, credit, operational and technological risks. In addition to these, the sector faces certain specific risks. Challenges like technological obsolescence and improper resource estimation can greatly impact the viability and profitability of renewable projects. As financiers, the first approach is to increase the rigour in the project appraisal process to arrive at a better estimate of the risk. Greater emphasis is placed on the credit profile of the offtaker to mitigate commercial risks. Stability of technology is another area of emphasis that provides greater comfort. The financial and managerial capabilities of the promoters/developers are also scrutinised in detail before arriving at a final decision. Additionally, diversification techniques are essential for spreading risk across various dimensions. For instance, geographic diversification involves investing in projects across different regions to reduce exposure to localised risks.
Rishi Shukla
India’s energy transition and adoption of renewables have progressed at an accelerated pace, which is only set to quicken every year. With renewable capacity crossing 200 GW in November this year, it now constitutes more than 46 per cent of the country’s installed capacity. However, it is important to remember that India is still a developing/emerging economy, which has its own set of risks and obstacles when it comes to investments and growth in this sector.
Various aspects, such as regulatory uncertainty, growing market competitiveness, variability of renewable resources, continuous technological improvements and land acquisition challenges, pose significant challenges to investment and the development of renewable projects. These can be addressed by conducting regular market studies, partnering with credible entities with robust track records, adopting adaptive tech-centric business models and ensuring contractual protections/insurance coverage. A robust risk management and control framework at the time of investment plays a critical role in ensuring the success of
such investments.
What are your expectations regarding project returns, and how do these expectations vary for different types of renewable energy projects or geographic locations?
Ankit Jain
The geographical location of the project, project size, financing costs and equipment costs are the primary variables that impact project returns. For project returns, the primary focus should be on the output generated by different sources of energy because the returns may vary based on the type of renewable energy project and its geographic location depending upon the source of energy. With growing competition and maturing of the sector, the returns are likely to remain moderate.
Further, foreign currency refinancing/bond refinancing, in-house engineering, procurement and construction, and revenues from carbon credit trading can increase project returns by approximately 3-4 per cent.
Rishi Shukla
Return expectations depend on the level of risk, which is based on the tariff levels, module type, irradiation levels, etc. These risks vary across different regions in the country. For example, the returns tend to be more attractive in higher solar resource regions like Rajasthan as compared to some of the southern states.
What are your long-term goals and vision for your involvement in the renewable energy sector? How do you see the industry evolving, and how do you plan to adapt to these changes?
Prasanna Desai
The evolution of India’s renewable sector is shifting towards firm power, combining wind, solar and battery energy storage systems. Our business is actively discussing these opportunities along with predictive analytics to diversify offerings to corporate energy needs. These solutions not only enhance energy reliability but also unlock better returns for stakeholders.
With a clear vision and innovative strategies, we are committed to supporting India’s energy transition while contributing to a sustainable, resilient future.
Ankit Jain
The renewables sector has a very exciting and significant future and we are keeping a very keen eye on the unfolding developments. With medium- and long-term targets for the sector having been laid out, a clear policy intent is already there. In line with this, there is a growing enthusiasm among investors and developers. In this regard, more funding opportunities are likely to emerge. At the same time, new challenges, both technological and commercial, are expected
to manifest.
The energy sector is currently undergoing a transition, gradually moving away from fossil fuels towards renewable energy sources. As a result, we have already been witnessing increased intermittency in the power supplied and a corresponding variability in prices. This is expected to drive the emergence of more round-the-clock and firm and despatchable renewable energy solutions in the future as compared to plain vanilla projects of the past. Moreover, the seamless integration of energy from different sources for offering bundled solutions is likely to become important. In this regard, IT and IT-enabled solutions are expected to play a key role.
Rishi Shukla
Initially, renewable projects were set up as vanilla solar or wind projects where the customer/grid owner had to balance the peaks and troughs in renewable generation during the day with other sources of electricity. The industry is now becoming more customer-centric, with a growing demand for firm renewable power. The demand for solar-wind hybrid systems, solar storage and solar-wind storage is expected to surpass the demand for standalone solar and wind projects.
(The views expressed by Mr Rishi Shukla are his personal views and do not represent those of his employer.)
