India’s pursuit of a low-carbon future has positioned compressed biogas (CBG) as a key pillar in its renewable energy strategy. While enthusiasm due to several policy announcements led to an initial increase in project announcements and investor interest, the financing landscape today reflects a more cautious and evolved outlook. Lending institutions are reassessing risk, developers are confronting operational bottlenecks and capital structuring is becoming increasingly nuanced.
A look at the current trends, key opportunities and challenges shaping the financing ecosystem for CBG in India…
Early momentum
In the early phase of CBG project development, the capital cost was estimated at around Rs 50 million-Rs 60 million per tonne of gas production capacity, even for smaller-scale projects. However, over time, costs have escalated, and current large-scale projects are being developed at approximately Rs 80 million-Rs 90 million per tonne of gas capacity. Small-scale plants continue to face viability challenges due to thin margins and higher per-unit costs. Projects with a capacity of 20-24 tonnes per day (tpd) are now considered more financially sustainable.
The inclusion of CBG under the Reserve Bank of India’s (RBI) priority sector lending norms was a crucial catalyst in the initial growth phase. Initial projects were heavily financed by debt and had a high debt-equity ratio. Some projects with long-term offtake contracts from oil marketing companies received as little as 5 per cent equity infusion, while the remaining 95 per cent was financed as debt. Lenders viewed these offtake agreements as a de-risking instrument and were keen to support projects that aligned with national sustainability goals.
However, the optimism of early-stage lending was soon replaced with caution. As operational realities began to surface, several projects struggled to meet their projected returns. Over 70 per cent of early installations failed to meet financial forecasts and remained only marginally earnings before interest, taxes, depreciation and amortisation (EBITDA)-positive. Banks subsequently tightened their terms, demanding up to 25 per cent equity and 20 per cent collateral in many cases. This shift marked the beginning of a more risk-aware phase in CBG financing, driven by lessons learned from underperforming assets and implementation delays.
A core concern for financiers has been the mismatch between projected and actual project timelines. Many developers assumed that plants would commence within 12-15 months, but found themselves dealing with delays of up to two years. These delays had significant implications for debt servicing. Interest liability during construction increased substantially, while the absence of commercial operations within the RBI’s stipulated timeline for the date of commencement of commercial operations classification led to the classification of projects as non-performing assets (NPAs). Even in cases where developers were ready to service interest from external sources, the technical definition of NPA created complications in lender relationships.
Feedstock pricing has emerged as the most disruptive variable in the financial structure of CBG projects. Early financial models often treated agricultural waste such as rice husk or press mud as freely available and priced nominally at Rs 15-Rs 16 per kg. Once plants began operations, suppliers and farmers recognised the commercial value of biomass, which drove prices to as high as Rs 25 per kg. This increase significantly altered the operating cost structure, particularly when availability was subject to competitive demand from other users. Aggregating feedstock across a radius of an 80-90 km added further costs, and developers had limited tools to manage price volatility, resulting in cash flow strain.
Operational inefficiencies further aggravate the situation. Several plants operate at less than 50 per cent capacity due to unreliable feedstock supply or challenges in digestate offtake. The inability to monetise fermented organic manure (FOM) often makes projects unviable, undermining both plant load factor and debt service coverage ratios.
Need for scale and technical standardisation in CBG Sector
Experiences from past years have made it clear that only projects with adequate scale and sustained utilisation levels can achieve financial viability. Plants with daily capacities of 8-10 tonnes or more, and utilisation levels exceeding 80 per cent, have demonstrated the potential to generate consistent cash flows. Smaller installations face persistent challenges due to limited economies of scale and thin margins.
A recurring problem has been the wide variation in capex for similarl-sized projects. For example, depending on the technology adopted, a 10 tpd plant may be set up at a cost ranging from Rs 400 million to Rs 800 million. This variation has created uncertainty for lenders and hampered efforts to standardise due diligence. CBG projects comprise three broad components − pre-processing, digestion and upgradation. Among these, the digestion unit represents the most significant cost component and the greatest variability in performance.
Technology selection plays a critical role in plant efficiency. India’s current landscape is dominated by continuous stirred tank reactor-based systems, but digestion performance depends heavily on microbial activity, water chemistry and feedstock type. As a result, the same technology may yield different results in different states. This has prompted lenders to move from generic project evaluations to more location-specific assessments. The assumption that biogas is a plug-and-play solution is no longer valid. Each project is a living system, and its performance is shaped by multiple local factors that must be incorporated into financial models.
Collateral and credit guarantees
Collateral has been a significant barrier to scaling up financing in the sector. First-time entrepreneurs were often required to furnish 50 per cent of the loan value as security due to their limited track record. As the sector evolves, however, institutional lenders are beginning to acknowledge the entry of stronger promoters with better credit profiles, including AAA-rated entities and PSUs. This shift is gradually reducing the collateral burden and making it easier for credible developers to raise capital.
In parallel, risk mitigation has expanded to include first-loss default guarantees and catalytic finance instruments. These tools are being explored to encourage banks to lend without demanding excessive collateral. Development finance institutions and multilateral agencies are actively working with stakeholders such as the National Bank for Agriculture and Rural Development (NABARD) and Asian Development Bank (ADB) to create financing facilities that can absorb early-stage risk. Previous attempts to operationalise such guarantees encountered procedural challenges, but new initiatives are expected to become functional in the coming years.
Broadly, CBG projects receive loans at interest rates of around 9 per cent, with banks expecting internal rates of return of 15 per cent considered sufficient for long-term viability. NABARD is also in talks with international partners to operationalise risk-sharing instruments and reduce the exposure of conventional lenders to project-level uncertainties.
Unlocking secondary revenue viability
Beyond the sale of gas, developers are increasingly exploring the monetisation of secondary products to enhance revenue streams. The sale of FOM accounts for roughly 10-15 per cent of project income in most financial models. However, the current market is price-sensitive. While FOM is priced at Rs 3.50 per kg, conventional compost sells for Rs 1.50 per kg, leading to weak demand. Developers report that FOM prices in state tenders have dropped to as low as Rs 2.30 per kg, making sales commercially unattractive. In some cases, developers have opted to distribute FOM free of cost rather than bear the storage expense of unsold inventory.
To increase value realisation, some players are transitioning to phosphate-rich organic manure (PROM). While PROM fetches better prices, it requires additional inputs such as phosphorus pentoxide and bentonite. These inputs are not only expensive but also sourced from limited suppliers, further complicating project logistics and costing. A more structured fertiliser policy, with guaranteed offtake or inclusion of CBG by-products in procurement mandates, could help stabilise this revenue stream.
Working capital requirements are another area of concern. Initial financial models often underestimated the need for short-term liquidity, especially during periods of underperformance. Developers are now advocating for the creation of service reserve accounts to cover two to three quarters of loan obligations during low cash flow periods. In the absence of structured working capital support, projects remain vulnerable to liquidity shocks and revenue mismatches.
Carbon credits are emerging as a supplementary revenue stream. India’s carbon credit registry offers an avenue for eligible projects to earn credits based on greenhouse gas reductions. However, the registration and verification process is complex and costly, particularly for small developers. Stakeholders are calling for pooled registration models, where multiple small projects can be aggregated into a single portfolio to reduce transaction costs and streamline compliance.
Challenges and the way forward
The CBG sector in India has significant potential but continues to face several persistent challenges, hindering its large-scale uptake. While the policy groundwork has been laid and early capital has been injected into the segment, developers and financiers are still navigating several roadblocks. Feedstock supply remains fragmented and unreliable, with prices fluctuating sharply depending on regional demand and availability. This has made it difficult for developers to secure long-term supply at predictable costs, undermining project stability.
Technology-related concerns have added another layer of complexity. Despite the availability of established digestion technologies globally, their performance in India has been inconsistent due to variations in feedstock composition, water quality and climatic conditions. The absence of a standardised, region-specific approach to plant design and operation continues to affect project outcomes. Lenders have also become more cautious, with financial closures increasingly requiring higher equity contributions, significant collateral and strong promoter backgrounds. Many developers are still unable to operate their plants at optimal capacity, and profitability often hinges on assumptions around revenue from fertiliser by-products or access to carbon credit income, both of which remain uncertain.
Despite these limitations, there is growing optimism that the sector is moving towards a more stable phase. Over the next two years, several initiatives are expected to address key gaps and improve the investment climate. Risk-sharing mechanisms being developed by NAB ARD in collaboration with multilateral institutions are expected to bring greater confidence to the banking system. Dedicated green credit lines backed by development finance institutions could help ease liquidity constraints and support larger-scale deployment. The government’s continued push for the integration of CBG with city gas distribution (CGD) networks and ongoing work to streamline carbon credit aggregation processes are also likely to enhance the overall bankability of projects.
At the state level, timely interventions can play a catalytic role. The mapping of biomass catchment areas, better visibility into CGD infrastructure and simplified permitting processes through single-window clearances can significantly reduce risk and improve project planning. These steps would enable developers to make more informed investment decisions while also giving lenders greater clarity and confidence in project fundamentals.
As the sector progresses, the financing approach must also evolve. Lenders are expected to move beyond generic appraisal templates and adopt a more tailored assessment framework that considers feedstock assurance, technology suitability and phased commissioning timelines. Over time, these refinements in financial evaluation, coupled with a more robust, enabling ecosystem, can help shift the sector from isolated financing decisions to a more programmatic flow of capital.
That said, the sector’s long-term success will depend on its ability to resolve foundational issues. Policy clarity, predictable access to biomass and the standardisation of technology will remain central to building confidence among investors and lenders. Until these elements are addressed in a comprehensive and coordinated manner, the CBG sector is likely to continue attracting capital selectively rather than evolving into a mature, scalable and bankable clean energy sector. n
Based on a panel discussion between Jyoti Prakash Gadia, Managing Director, Resurgent India; Ankur Kathuria, Partner – Climate & Agriculture, Intellecap Advisory Services; Manish Kumar, Deputy General Manager, NABARD; Nikhil Moghe, Partner –Oil & Gas, KPMG in India; Deepak Pandey, Manager Biofuels, ICF; Shrvan Yadav, Vice President, SBI Capital Markets, at Renewable Watch’s second edition of Compressed Biogas in India conference
