Indian developers need to tap the large growing ESG pool of capital and access to the international bond market
Speaking with Moulin Oza for ET EDGE INSIGHTS, Vibhuti Garg, Director, South Asia at the Institute of Energy Economics and Financial Analysis (IEEFA), affirmed that achieving India’s net-zero objectives requires investments ranging from $7.2 to $12.1 trillion by 2050. To secure funding for this ambitious goal, a combination of domestic and offshore sources is essential, with a leaning towards the latter given India’s burgeoning economy and competing developmental priorities.
You recently discussed the necessity for substantial investment to expedite India’s net-zero goal. Could you elaborate on the types of investments that have been made so far? Additionally, what investment mechanisms do you believe will meet the future requirements for this initiative?
The India renewable energy sector has attracted US$11.2 billion of investments (till November) in 2023, which is 22% lower than the investment in 2022 for the same period. The investments were more in the form of equity infusions from sovereign wealth funds, infrastructure investment banks and intermediate capital groups, venture capitalists, etc., and acquisitions. Also, Brookfield and banks like the State Bank of India have infused debt capital. However, given the rising interest rate in other markets like the US and the impact of IRA, India has witnessed less flow of international capital.
In the future, Indian developers need to tap the large growing ESG pool of capital and access to the international bond market. The market for ESG financing can be a viable source for Indian entities to finance their transition. It stood at US$ 1.5 trillion in issuance in CY 2022. However Indian entities have only raised US$ 8.8 billion during the same period. Green bonds or sustainability-linked bonds can be another source of capital that needs to be tapped into. The government can raise these either at a sovereign state or municipal level and meet its energy transition goals or developers individually can do it. Domestic institutional investors and banks also need to increase their exposure to low-carbon technologies.
Further, INVITs will be useful to recycle capital from one set of investors to the next set (usually more long-term risk-averse investors).
For nascent technologies, blended finance mechanisms can be useful to crowd in private capital to all kinds of assets. For this MDBs, domestic commercial financiers, public capital (subsidies, etc.), promoter equity, and philanthropic capital all need to come together to create workable mechanisms that align with the requirements of all.
You pointed out that despite the current growth in India’s renewable energy landscape, relying solely on domestic funding won’t be adequate in the long run. Why is climate finance still a major area of concern? Could you delve into the financing models capable of bridging the deficit, and provide an insight into the current progress in this realm?
Achieving India’s net-zero goals requires new investments in the range of $7.2 trillion to $12.1 trillion by 2050. The Reserve Bank of India estimates India should seek to deploy green financing equalling at least 2.5% of gross domestic product each year until 2030 to achieve near-term goals. This financing must come from both domestic and offshore sources, with more focus on the latter given the other development priorities an emerging economy such as India has. India needs to spend its limited domestic resources on infrastructure development, education, health, and other economic and social goals of the growing population.
While there is no dearth of capital, however, there are higher risks with new technologies like offshore wind, battery storage, green hydrogen, etc. There are perceived technology risks and high upfront capital requirements. Blended financing or co-lending facilities or government support through fiscal measures like subsidies or viability gap funding can unlock a lot of private capital.
MDB reforms are already in the offing and even a lot of philanthropic money is also being invested into pilot projects to improve the commercial viability and make these projects scalable. Further, the government is offering sops in the forms of subsidies, Production Linked Incentive Scheme, and Viability Gap funding to improve the viability of the projects.
How might the recent pledge of $85 billion by nations during COP28 accelerate global green initiatives toward achieving a net-zero transition? What potential opportunities and challenges do you foresee for net-zero transition because of this substantial financial commitment?
As previously stated, the investment requirements are huge. Such money can only act as a catalytic capital but countries like India have much higher financing needs. The experience tells that while earlier developed countries committed to US$100 billion in finance by 2020 it is only now in 2023 that commitment is likely to be fulfilled. Moreover, the developing countries need concessional finance and that is still a challenge as the money usually provided by developing countries even in the JETP framework is less of grants or concessional money but at market rates. Thus, as highlighted above India would need to look at other pools of domestic and international capital to meet its climate financing needs.
The COP28 historic consensus recognizes the need to significantly scale up adaptation finance beyond the doubling to meet urgent and evolving needs. However, the adaptation draft misses the key issue of climate finance. In your view, what kind of results will this consensus accomplish going forward?
Several studies have estimated the economic cost of loss and damage, with one study projecting it to be US$400 billion by 2030 and between US$290-580 billion in another in developing countries alone. By 2050 the economic cost of loss and damage in developing countries is estimated to be between USD 1 to 1.8 trillion.
At COP this year, the announcement of the Loss and Damage fund on the first day was a big breakthrough that galvanized amounts totalling more than US$720 million to date. However, this is just a drop in the ocean as far as requirements are concerned. Countries in Europe have been forthcoming but other developed nations like the US have not added substantial kitty to this corpus.
Going forward, we need more commitment to this corpus and more directed to the vulnerable countries and small island nations who have been more at the receiving end of climate change without contributing to the problem.
What role do you anticipate India playing in advancing the global goal of increasing renewable energy usage for a sustainable future? What specific policy interventions aimed at accelerating financing do you think will be vital for India’s contribution in this direction?
India has set a target of 500 gigawatts (GW) of generation capacity from non-fossil fuel sources and reducing emissions intensity by 45% by 2030. It targets achieving net zero by 2070. This goal is synonymous with tripling of renewable energy and doubling of energy efficiency, which was also included in the G20 Leader’s document. So India is very much on board for this target.
However, this would need accelerating financing. The country needs access to both domestic and international capital to meet its energy transition goals. Capital infusion from institutional investors like equity and pension funds who to date have little exposure to low-carbon technologies can provide the much-needed capital. Also, for matured technologies, the use of infrastructure investment trusts (InvITs) will be useful to recycle capital from one set of investors to the next set.
However, for investments into nascent technologies, the micro, small, and medium enterprise (MSME) sector, or to help impacted communities and stakeholders in the energy transition process, private capital alone will not bet its money given the difference in return expectations because of the high risks.
Multilateral Development Banks can play the role of catalytic capital along with public funds and philanthropic capital to crowd in private capital in the global south. Blended finance mechanisms will be helpful in this context.
Also, to tap a large pool of growing environment, social, and governance (ESG) financing and capital from the international bond market. In the developing country context, more weightage is to be given to social indicators in ESG financing. Further, thematic bond issuances and sustainability-linked bonds can help India use funds to ensure energy transition in a just and equitable manner.
The Indian government also needs to promote the start-up culture. Based on the Technology Readiness Levels (TRL), the government should encourage and support the development of incubation partnerships with educational institutions for early-stage startups, and for more mature startups enhancing bankability and offtake guarantees.
How crucial is the incorporation of public finance within the net-zero financial framework to propel efforts toward achieving a net-zero transition? What interventions will be essential to facilitate and empower such financial mechanisms?
Public finance can play a big role in helping India achieve its net zero target. However, most of the public sector banks have crossed their lending limit to the energy sector and thus are constrained in terms of lending to renewable energy plants. While renewable energy is under the priority sector lending, the limit needs to be increased.
A separate limit to fund clean energy projects can increase the money available to public financing institutions. Also, other public sector NBFCs can play a big role in making investment available for renewable energy infrastructure expansion.
What factors contributed to India and China’s decision to abstain from committing to tripling the world’s renewable energy capacity by 2030? How might this choice impact their respective endeavors toward achieving a net-zero transition?
India and China initially abstained from signing the pledge as it included the inclusion of phase-out of coal and a suggestion to end fresh investments in coal. Because of growing energy demand and on account of energy security reasons, the countries didn’t agree to coal phase out while at the same time, other developed nations are continuing to use other fossil fuels like gas.
India and China especially are going all about adding renewable energy. So the tripling of renewable energy was never an issue and is therefore included in the final text. Both countries are progressing in their energy transition goals, however, in the short term they see the use of new coal as well.
India in particular however needs to accelerate deployment of renewable energy if we have to achieve our 2030 targets as 2023 witnessed a slowdown. Renewable energy is already competitive and with large storage tenders, prices of storage are also on a downward trend. We expect firm and dispatchable storage tender in the future and that will improve the reliability of renewable energy. The cost economics, which is already favourable, will turn even more favourable for RE + storage and investment into any fossil fuel assets which are inflationary, the demand for it will die down on its own.
