Framework for Catalytic Finance in India

 Co-authored with Poonam Sandhu

As India takes rapid strides on the road to clean energy access, catalytic finance is emerging as a major need to expand the clean energy market. The approach leverages limited public and donor capital to mobilize a larger volume of commercial investment.

Catalytic finance was one of the key themes that emerged in a workshop in New Delhi, organized by Natural Resources Defense Council (NRDC), along with co-hosts Indian Renewable Energy Agency and the Council for Energy Environment and Water. At the event, participants discussed the key findings of NRDC’s draft report Clean Energy for All: Framework for Catalytic Finance for Underserved Clean Energy Markets in India. The workshop included leading public and private financial institutions, government officials, renewable energy developers and clean energy experts. Stakeholders stressed on the creation of institutional solutions, such as green windows in existing financial institutions, which would increase focus on the unique needs of underserved segments of the clean energy market in India.

The key takeaways from the workshop discussion are summarized here:

1. There is a need for higher investment across the sector: Given the existing high exposure to conventional power, there is limited debt capacity in the financial system to fund the amount of new generation needed to meet renewables targets. Rising interest rates and a falling currency exchange rate further constrain the availability of capital at the right terms. Access to finance is especially challenging for underserved segments, such as rooftop solar, which have specific targets but are struggling to meet them. Financing is also scarce for emerging technologies, such as energy storage and electric vehicles, which need capital to scale. Analysts estimate that India needs to double the rate of current investment to achieve its 2022 goals of 175 GW of renewable energy.  

2. Catalytic finance can spur private investment: Catalytic finance leverages limited public and donor capital to attract private investment. Associated strategies include risk mitigation, aggregation of small projects to diversify risk and to scale, strategic public-private co-investments, and market development activities. Stakeholders in the workshop noted that managers of public funds should identify projects that are a priority of the government and that have the potential to scale up with the help of financial instruments such as guarantees and credit enhancement. Public financial institutions at the workshop gave examples of existing initiatives they have undertaken that grow the clean energy markets and conform to the concept of catalytic financing, but also recognized the need for institutional mechanisms to provide requisite focus and scale.    

3. Green windows can institutionalize catalytic finance: Green windows are platforms dedicated to developing and deploying catalytic financial instruments that are set up within or alongside of existing financial institutions, such as the Indian Renewable Energy Development Agency and the National Bank for Agricultural and Rural Development. The concept of setting up green windows was endorsed by participants who confirmed that the green windows would provide confidence to investors that their funds will be used for the intended purposes. Representatives of bilateral finance institutions and philanthropic funds expressed interest in supporting green windows and the catalytic solutions they would offer. Additionally, commercial financiers indicated that the availability of catalytic solutions would help them enter deeper into the clean energy markets.

India’s progress on renewable energy and actions to combat climate change have been remarkable (and will be the focus at the High-Level Forum at the 2018 Global Climate Action Summit). At the same time, sustaining this growth requires the use of catalytic finance to infuse capital where it is needed. Stakeholders believe that there is need, rationale and funds to operationalize green windows, and that the mechanism can be effective in bringing catalytic finance solutions to market and helping to achieve the true potential of clean energy in the country. NRDC and partners will continue to engage in this important discussion at the upcoming RE-Invest conference in October in New Delhi.