India is firmly on the path of a revolutionary transition towards renewable energy, courtesy a range of initiatives introduced by the Government of India (“GoI”) in recent years. As of October 2021, India is ranked third in EY's Renewable Energy Country Attractive Index, which evaluates the world's top 40 markets on the attractiveness of their renewable energy investment and deployment opportunities. India has also expressed a keen interest in scaling up green hydrogen and mandating its use in industries like petroleum refineries and fertilizers. This deep decarbonisation push will lead to investments across the renewable energy sector, and also into R&D for energy efficiency, and encourage new and alternative forms of energy like green hydrogen and biofuels.
With such drastic changes in policy at the national level, it is imperative for financial institutions in India to proactively boost the market appetite for investments in renewable energy, in order to promote a gradual transition to green energy. Keeping that in mind, the Parliamentary Standing Committee on Energy in its 21st report1 tabled before the Parliament had asked the GOI to explore innovative financing tools like green banks, and to introduce renewable energy financing obligations for financial institutions to boost investments in this sector.
WHAT ARE GREEN BANKS?
A green bank is a governmental or quasi-public financial entity that collaborates with the private sector, to apply novel financing approaches and market instruments to expedite the implementation of sustainable energy technologies. Green banks help secure low-cost capital for clean energy projects at favorable rates and terms.
The purpose of green banks is to focus on funding green energy projects as an investment, and not on providing grants – hence capital loaned for projects is expected to be returned or repaid at some point. For this business model to work, green banks must concentrate on markets with high-profit potential – meaning projects that have been proven to be technically and commercially viable and are no longer in the research and development stage.
The role of green banks in financing the transition to a green economy is crucial to the mobilisation of private investments in green projects – by intervening and mitigating risks, providing innovative financial structures, and focusing on cost-effectiveness and implementation of projects. Green banks can structure their investment schemes based on the requirement of the GoI and their goals include meeting emission targets that they have committed to, to the GoI, lowering the cost of capital, and developing green technology markets.
GREEN BANKS IN INDIA
With new energy sources and players proliferating in the energy sector every quarter, the global power sector is undergoing a major, and constant, transformation. Along with this, there arises a need to establish financial institutions that are dedicated solely to financing and understanding the renewable energy sector. India currently has two dedicated clean energy finance institutions – the Indian Renewable Energy Development Agency (“IREDA”) and the Tata Cleantech Capital Limited (“TCCL”).
The major goal of the Indian Renewable Energy Development Agency is to provide financial assistance or loans to specific projects and schemes that generate electricity or energy from new and renewable sources, as well as to fund energy efficiency and conservation efforts. In December 2019, IREDA announced their plans of starting a ‘green window' dedicated to financing both green energy, as well as financially under-served projects.
The Parliamentary Standing Committee on Energy also suggested that the IREDA should be given a special window for borrowing money from the RBI – for example, at the repo rate in line with other specialised financial institutions like the National Bank of Agricultural and Rural Development, Small Industries Development Bank of India, and National Housing Bank. This would expedite the implementation of green windows across the sector, and consequently boost financing capacity in the market for green energy projects.
In contrast, Tata Cleantech Capital Limited is a non-banking financial business categorised by the RBI as an ‘infrastructure finance company' and is one of India's largest renewable energy financiers. TCCL is a joint venture between Tata Capital Limited and the International Finance Corporation and has helped promote sustainable development by investing in more than 5.2 GW aggregate capacity of renewable energy projects. It is also the first private sector company in India to collaborate with the Green Climate Fund on rooftop solar development and has funded over 150 projects in the clean technology sector, since its inception in 2011.
With dedicated financial institutions focusing on green energy projects, it becomes beneficial for private industry players to access capital, promote green energy, and build financially viable projects to meet India's ambitious emission targets.
THE WAY FORWARD
In the 26th session of the UN's Conference of Parties (COP26) of the United Nations Framework Convention on Climate Change (UNFCCC), India has committed to increasing non-fossil-based energy capacity to 500 GW and to fulfilling 50% of the country's energy requirements through renewable energy, by 2030. Given the government's plethora of clean and green energy initiatives, and the international commitments we have made in global forums such as at the COP26, green banks and financial institutions in India have an important role to play, in funding and advancing sustainable and alternative energies. We also foresee an increase in investments by other private investors, to accelerate the achievement of milestones set by the GoI to meet the capital requirements in the alternate energy industry.
Keeping in mind India's target of achieving net-zero emissions by 2070, the Council on Energy, Environment, and Water has estimated an investment requirement of more than $10 trillion in this sector2. To achieve such ambitious targets, India needs more dedicated institutions like the IREDA and TCCL – which will not only provide funding, but also focus specifically on assessing and identifying financially viable projects in the renewable energy space.
1. Twenty-First Report of Standing Committee on Energy (17th Lok Sabha) on ‘Financial Constraints in Renewable Energy Sector' pertaining to the Ministry of New and Renewable Energy, available at https://eparlib.nic.in/bitstream/123456789/835464/1/17_Energy_21.pdf
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