Financing India’s Renewable Energy Goals
Prime Minister Narendra Modi and his government have embarked on an ambitious mission to increase India’s renewable energy capacities by over five times by 2022. Taking it from the current 30GW (solar and wind combined) to a target of 175 GW.
To achieve its goals, India needs to find, among other important things, a way to source these significant capital needs — to the tune of $200 billion over the duration of the target.
While it would be hard to enumerate all the issues with financing, there are a few key concerns. A large scale solar or wind energy project gets a loan from Indian commercial banks with a high floating interest rate at about 12%. At the same time, the tenor of debt from these banks is not so long, it is only about 10-12 years. And when it comes to international financing, the higher costs of hedging can make the effective costs for international borrowing comparable to local sources.
As per a report from the Climate Policy Initiative (CPI), these financing barriers can raise the cost of renewable 
energy in India by 24% to 32% compared with similar projects in the US (with has better access to capital). The Indian government has attempted to bridge this gap in infrastructure investment through a number of initiatives, such as the creation of Infrastructure Debt Funds and the National Clean Energy Fund. But, these have not been able to mitigate all of the financing woes, and the sector is still looking for solutions.
Needless to say, Indian renewable energy market remains very optimistic and promising.
In fact, more than half of large Indian renewable energy projects are internationally funded. International investors have increased their market share in India, with investments in more than 78% of renewable energy capacity under development. The Asian Development Bank (ADB) has plans to increase its sovereign and non-sovereign lending to support India’s new initiatives from the present $7 billion to $9 billion in three years from 2015 to 2017 to $10 billion to $12 billion between 2016 and 2018 using ADB’s expanded lending capacity.
India is currently also receiving a growing demand from international funded actors in the renewable energy landscape. These include:
- US-based companies such as SunEdison and First Solar
- French-based Fonroche, Solaire Direct, EDF EN (through its subsidiary ACME Solar)
- SoftBank, Foxconn recently pledged $20 billion solar power investment in India
(More information can be found here, here and here.)
Besides international players, domestic companies have also scaled up their footprint in the Indian renewable energy sector, such as Welspun Energy, OGPL, Renew Power In what could become a game changer in years to come, the Reserve Bank of India (RBI) notified Renewable Energy under priority sector lending. By this, banks can now provide loans up to a limit of Rs 150 million to borrowers for renewable energy projects. This will help commercial local banks to raise infrastructure bonds which are exempt from priority sector lending, but still use the money to lend to renewable energy;
With the market providing a unique mix of untapped potential and priority, it is interesting to ponder over “what can be done” to fast track the development in this sector.
There hardly seems a need for a “revolution” — it is more important to keep building on what has been done up until now. Especially with both the central and state governments trying to harness the sun and the wind, it is important that the policies are in sync and long-term oriented, to boost the confidence of potential investors. Given the ambitious targets and limited capital resources available, there is a need to explore alternative modes of financing for renewable power projects, by leveraging existing resources effectively.
Some time back, India announced that it was busy working on a dollar denominated PPA — this solution can decrease the cost of financing especially for companies who borrow internationally (ie, from multilateral agencies), as they can now avoid hedging risk. In fact, the government is said to be looking at the cash pile in the National Clean Energy Fund to provide guarantees against hedging risk.
Beyond this, green bonds and yieldcos are yet to be tried out in India. Green bond remains sparsely known in India even though the Exim Bank of India launched India’s first dollar-denominated green bond issue in March 2015 ($500 million five-year bonds) and was subscribed by 3.2 times. The only other bank to have tested this is Yes Bank, which had tried its hand through a euro-denominated green bond.
Another option is yieldcos. Renewable energy projects face some uncertainty during the development stage but produce low-risk cash flows once they start operating. Yieldcos have the potential to unlock the value of these renewable assets. Yieldcos may attract new investors who may otherwise perceive unacceptable risk or lack the appropriate channels to invest capital in renewables.
This post has been co-authored by Rohan Singh, who is a project manager with Finergreen. Rohan holds a Master’s degree from University Paris Dauphine (Corporate Finance and Financial Engineering 225). Finergreen is a French advisory firm focused on clean energy, looking to expand its activities in India and Africa.
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