Catalytic Green Finance for Clean Energy Transition in India

Co-authored with Poonam Sandhu

This week at the CEEW Renewable Energy Dialogue in Delhi, NRDC and partner Council on Energy Environment and Water are discussing key policy issues and market mechanisms to help unlock private investment to finance the Indian economy’s transition to a clean energy future.

India, one of the top three nations leading global renewable energy growth, has doubled its installed renewable energy capacity from 36 GW in 2015 to over 71 GW as of May 2018. To meet its goal of 175 GW of installed capacity by 2022, India needs to again double the current capacity in the next four years, which, experts and stakeholders caution, is going to be a lot more difficult. Sustaining this momentum in clean energy market growth will require a focus on underserved markets such as distributed generation, investment in emerging opportunities, and the strategic use of scarce public capital to catalyse private investment.

Underserved Distributed Generation Market

A combination of government incentives, policy focus, and falling equipment prices have been instrumental in realizing the deployment of 22 GW of solar power across the country. However, about 95% of India’s solar capacity, or approximately 21 out of 22 GW, is in the form of large-scale ground mounted projects. While the government has plans to deploy 60 GW of large-scale solar, including 40 GW from ultra-mega solar power projects (i.e. solar parks), distributed generation such as through rooftop solar on homes and commercial buildings offers several benefits. Unlike land intensive solar parks, rooftop solar primarily adds capacity using existing space; generates power close to consumption, thus cutting down on transmission and distribution losses; and can be a powerful vehicle for taking the solar revolution to remote, rural consumers without access to modern energy.

Our engagement with market participants shows that access to financing – especially for smaller developers, that lack the top-credit quality required by banks - is still a key issue to scaling up rooftop solar and distributed generation market in India. Experts from financial institutions have indicated that solutions to aggregate these projects into an economical deal size, and availability of credit enhancement, such as guarantees, would enable them to increase their clean energy lending.           

Emerging Opportunities

In addition to increasing capital flow to underserved markets, a strategic investment is required in opportunities such as battery storage, improving the power grid for integrating a higher share of renewables, and leading-edge technologies such as off-shore wind farms. These technologies, while commercialized in some parts of the world, are still new in India and perceived as high-risk by lenders. Transitioning to electric vehicles could add significant electricity demand in India and, together with a green grid and smart charging infrastructure, can deepen decarbonization while improving air quality in Indian cities. However, investors need financial structures that reassign and reduce risk to increase private capital flow in these emerging market opportunities.  

Catalytic Finance for Unlocking Private Capital

In most developing economies, including India, public funds are limited and compete with other socio-economic priorities of the government. An emerging solution is to use catalytic financing - an approach for leveraging public funds to attract private capital, including from new sources of finance such as institutional and international investors, into critical underserved subsectors and emerging opportunities. Catalytic finance approaches include establishing specialized teams with deep knowledge of renewable energy financing to use public funds to deploy risk mitigation products, make co-investments, create aggregation vehicles and finance demonstration projects. These teams can play an important role in reducing perceived risk and transaction costs by educating investors about the risks and opportunities presented by the sector.

NRDC is working together with our partners in evaluating institutional mechanisms, such as green windows and a green fund, for catalytic finance for clean energy investment in India. We look forward to discussions at the CEEW Renewable Energy Dialogue and engagement with key stakeholders in developing this concept further.