India's headlong rush to boost renewable energy in keeping with the spirit of the Paris climate summit has been tempered with the difficulties project developers are facing to secure inexpensive finance. This issue can be best solved by establishing a green bank to strengthen the rapidly expanding clean energy market, a recent report has recommended.
"To achieve India's clean energy and climate goals, an innovative financial institution like a green bank can leverage limited public funds to reduce capital costs and risk -- unlocking broader private investment in clean energy projects to scale up the market," according to the report titled "Greening India's Financial Market: Opportunities for a Green Bank in India".
"Green banks can provide lower interest rates and longer terms of financing to match the payback period and enable more projects to be built," says the report.
The renewable energy space has mushroomed in India in the past two years, adding capacity at an unprecedented rate. For instance, India expects to add as much as 5.4GW of solar capacity in 2016, making it the fourth largest solar market globally. This compares with the current total capacity of 7.8GW solar.
The country added 7.1 GW of renewable energy capacity in the year ended March 2016. Its total installed capacity of renewable energy stood at 42.8GW at the end of April, according to the Central Electricity Authority, out of the country's total capacity of about 300GW.
The country will require a massive amount of money if it wants to reach the target of 170GW of renewable energy in 2022, six years from now. India will be require over ₹11 trillion (US$ 160 billion) to achieve its aims, according to Anjali Jaiswal, director of India Initiative at US-based Natural Resources Defense Council (NRDC) and lead author of the report released last week.
"The UK Green Investment Bank, New York Green Bank and several others are examples of how countries around the world are accelerating financing to clean energy development," Jaiswal told indiaclimatedialogue.net.
The report comes two months after a key government agency announced a likely move to establish a green bank. The Indian Renewable Energy Development Agency (IREDA), a non-banking finance company (NBFC) administered by the Ministry of New and Renewable Energy, may soon become a green bank, chairman and managing director K. S. Popli said in a statement on 4 May.
Since the state-run agency IREDA has a license from the Reserve Bank of India to operate as an NBFC, it doesn't have to change its basic structure to convert into a green bank, which will enable it to access funding from overseas banks that do not currently support funding in the solar and wind energy sectors.
"IREDA would be able to rapidly attract more private and international capital through innovative financing tools, such as credit enhancements, risk mitigation, market development and low-cost and long-term loans for underserved technologies, such as rooftop solar," Jaiswal said.
The strong policy push to renewable energy in the last two years has acted as a strong signal to financiers about the government's commitment...
"Most green bank functions are already covered by IREDA, but they need to be advanced further to create an ecosystem that mobilises private finance for clean energy projects," Kanika Chawla, co-author and senior programme lead at Council on Energy, Environment and Water (CEEW), a think tank, told indiaclimatedialogue.net.
Access to capital and its cost has become the most important differentiating factor for project developers, Bridge to India, a cleantech consultancy, said in its market update this month. Domestic Indian banks typically offer higher interest rates and shorter terms than payback of clean energy projects allow. Unless a developer has deep pockets, solar and wind projects are difficult to finance.
"Green banks can provide lower interest rates and longer terms of financing to match the payback period and enable more projects to be built -- a critical role as India scales its clean energy market," said the report, which has been jointly prepared by NRDC and CEEW after extensive consultations with India's energy minister Piyush Goyal.
The growing interest in clean energy is not entirely organic, noted Chawla. "The strong policy push to renewable energy in the last two years has acted as a strong signal to financiers about the government's commitment to renewable energy," she said. The central government led by Prime Minister Narendra Modi has been extremely proactive in promoting solar and wind energy, which is evident in the steep expansion achieved by the sector in the past two years.
Another encouraging sign is that an ecosystem seems to be emerging for renewables' financing. Private lenders such as Yes Bank and Axis Bank have issued green bonds, the proceeds of which will go towards clean energy projects. "Yet, much greater investment is needed to achieve the huge amount of funding," said Jaiswal.
The availability of finance for renewable energy projects has not kept pace with the optimistic commitments being made by both the government and project developers.
Chawla said that the availability of finance for renewable energy projects has not kept pace with the optimistic commitments being made by both the government and project developers. There are multiple risks that plague the flow of investments, including offtake risk, which is a function of the health of India's beleaguered power distribution companies, foreign exchange risk on non-rupee-denominated investment and evacuation infrastructure risk that depends on the stability of the electricity grid and associated infrastructure, according to Chawla.
"There is a need for innovative finance to reach India's clean energy targets from a broader base of funding sources," said Jaiswal. "Green banks and green bonds can work together to help raise capital."
This report was first published at India Climate Dialogue.