As of 2020, about 15% of India’s population still doesn’t have access to electricity. Less than 50% of India’s rural households receive electricity for more than 12 hours a day. India’s average per capita energy consumption is 1181 kWh. It is one of the lowest figures in the world and we can safely say there is much left to explore.
To fully understand the need for financing India’s renewables projects, we need to understand the scale and urgency of the energy transition in India. The country has been part of the Paris Agreement since 2016. Since then, India is making massive progress towards clean and sustainable energy sources.
The 2 key priorities for India now are:
- Ensuring energy security
- Keeping carbon emissions low
India aims to achieve both by reducing the dependence on hydrocarbons.
India has set a target of 175 GW of renewable energy for 2022. This includes 100 GW of Solar energy, 60 GW from wind, 10 GW from Bio-power, and 5GW from small hydropower. The total investment required is 150-200 Billion USD. As of 30th June 2019, India has achieved only 34% of the target in about 75% of the proposed timeline. By the end of 2019, India has only installed 85.9 GW of total renewable energy. The broad gap between the actual and target capacity can be attributed to a number of factors. The safeguard duty, low tariffs, depreciating rupee, high taxation and interest rates, and uncertain regulations have lulled the anticipated growth. High capital costs and inadequate debt financing are also major concerns.
Types of Renewable energy funding:
Funding based on Risk Profile:
Traditionally, the Government has always backed hydrocarbon-based energy projects, while the private equity went to renewable energy investing. This meant private firms had to mobilize capital in a financially viable manner. This would sustain them in the long run. The renewable energy sector’s higher risk profile also attracted more debt financing up to 70%, with 30% equity investment.
Emergence of Lenders:
India’s renewable energy sector is attracting interest and concessional loans from agencies like the World Bank and the Asian Development Bank. There are other banking and non-banking institutions whose financial commitment to renewables in India is growing. In 2017, nearly 60% of the renewable energy funding came from non-banking institutions.
The government has initiated the National Clean Energy Fund, now known as the National Clean Energy & Environmental Fund (NCEEF). The Indian Renewable Energy Development Agency (IREDA) lends a part of the NCEEF to banks at a 2% interest rate. The banks in turn loan out this money for renewable energy projects at a concessional interest. The IREDA also received funds from the World Bank and lends the same to developers of renewable energy projects. It also offers capital subsidies for solar water heater systems, and generation-based incentives for solar and wind projects.
Again, it is the IREDA that came up with Green Bonds. Green Bonds are bonds issued outside India, but are in Rupees, and are issued specifically for green energy projects. They show much promise and India is now among the top 10 countries issuing green bonds. As of August 2019, India has issued about 8.6 Billion USD worth of them, over 80% of which was invested back into the country.
Challenges in renewable energy financing
Despite the financing options mentioned above, there are several shortcomings to them. The sector itself is plagued by risks brought by policy frameworks. Domestic manufacturers simply do not have the capacity to meet the demand. Almost 90% of India’s Solar panels are imported. There are also falling tariffs due to the dropping prices in solar technology. Low tariffs seem lucrative at the first glance but are actually less viable for the developers.
In the bid to promote domestic manufacturing, imports have become more expensive. The government would do better to prioritize panel imports over this, at least until the planned capacity has been achieved.
The GST reform also brought a dual tax structure for Solar-powered projects set up under installers. 70% of the installation contract value would be taxed at 5%, and the rest 30% would be taxed at 18%. This resulted in an overall tax of 8-9%, leading to an increase in capital costs. This has made investors hesitant to add Solar assets to their portfolios.
Lastly, most of the funding in the market only serves large consumers such as governments and large private commercial and industrial organizations. The market, so far, has done little to fund smaller consumers.
Journeying towards a sustainable energy ecosystem
Large-scale investment is necessary to bring effective transition in emerging markets like India. This scaling up will also bring down capital costs and secure better margins. The need here is to reduce reliance on debt-equity models of financing and explore more feasible financial models. In the best interests of the country, the government could subsidize domestically manufactured panels, instead of making imports more expensive. Competitive interest rates, risk-sharing models, and longer capital tenure will additionally ensure investor retention.
The renewable energy sector’s financing structure in India needs major reforms. There needs to be a consistent flow of capital to meet the proposed capacity for 2022. The key is developing better investment models, with government-supported financial institutions. This will uncover the investment potential in sectors with a comparable risk profile. A stable regulatory framework, coordinated communication between stakeholders, and healthy demand growth, all need to be supported through a robust financial system.
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