Make India a hub for sustainable finance
One of the focus areas is the deepening of the debt market for green investments through subsidized credit enhancement.
By Arunabha Ghosh and Nandini Harihar
There are two fuels for any economy: energy and finance. The energy transition to which India is committed will not be possible without commensurate capital flows on an unprecedented scale and pace. Changes will be needed in the financial ecosystem, in the way projects are valued, how green finance is certified, and in the policy framework to make investments in new energy sectors attractive. In the process, India could aim to become a sustainable finance hub for emerging economies.
The scale of the investments required is staggering. During this decade, at least $ 221 billion will be needed to invest in new renewable energy capacity. The transition of electric mobility (102 million EV by 2030) offers another investment opportunity, of 206 billion dollars. Converting every million tonnes of hydrogen to green hydrogen will require $ 0 billion to $ 40 billion (numbers vary due to falling costs). This translates into another $ 168-224 billion to convert the current demand for hydrogen in India. In addition, other clean energy investments will include grid upgrades, battery storage, etc.
It should be noted that the exposure of banks and NBFCs to the power sector is only $ 160 billion. The energy transition will therefore require volumes of capital that are many multiples of what the financial system has been able to provide so far. On the road to net zero by 2070, clean energy, carbon-free transport and green hydrogen for industrial energy will require investments of $ 10.1 trillion (at 2020 prices).
The current investment landscape, however, paints a different picture. In 2020, India received only 2% of the overall investment in renewable energy capacities, compared to 27.5%, 22.9% and 16.2% respectively for China, the EU and United States. Due to the COVID-19 pandemic, investments in renewable energy in 2020 were less than $ 10 billion. Overall the picture was not much different. Between January 2020 and April 2021, the stimulus plans allocated $ 53.1 billion in direct support to renewable energies. But that was almost six times lower than predicted for fossil fuels.
The latest analysis from the CEEW Center for Energy Finance and the International Energy Agency reveals that solar and wind power tariffs in India have fallen by over 80% and 60%, respectively, since 2014, up to Rs 1.99 / kWh ($ 0.026 / kWh) for solar photovoltaic energy. by December 2020. Aggressive bids from central public sector companies and international power producers have resulted in further compression of equity returns: in the United States. Opportunities for scale still abound. Acquisitions of renewable energy companies soared in 2021 to $ 6 billion.
But international funding – investments, concessional loans or grants – for climate action is insufficient. At COP-26, the Glasgow Financial Alliance for Net Zero, a group of private sector financial players with assets totaling $ 130 trillion, signed a pledge to decarbon their portfolios by 2050. But no plan , maturity or short-term commitment has not been announced. Developing countries have asked for $ 1.3 trillion in investment, but nothing concrete has been promised. While the UK COP Presidency’s climate finance plan suggested $ 100 billion would be disbursed by 2023, even that was not explicitly mentioned in the COP results.
India and other emerging markets are in a chicken-and-egg situation. International investors continue to insist that there are not enough investment projects. Yet increasing ambition does not translate into automatic deal flows. Four interventions are needed to catalyze the clean investment market.
First, debt markets must deepen. India faces a threefold challenge: insufficient credit flow in the market, poorly rated projects, and high credit-enhanced bond costs. The answer is a subsidized credit enhancement, serving as a first loss guarantee in the event that bond issuers are unable to pay the coupon or principal. CEEW-CEF calculates that a grant of Rs 4,543 crore ($ 649 million), spread over a defined period of five years, could raise loan capital of up to Rs 75,984 crore.
Second, a green taxonomy would increase awareness of green sectors and reduce greenwashing. Equity investors are interested in the maturity of the markets, so they can guarantee the alpha of the investments. Currently, investors are interested in âESG compliantâ companies, but in many cases these projects do not turn out to be real. A revised taxonomy (beyond renewables) should also provide a better framework for equity investors to measure impact in other sectors, such as agriculture, construction and mobility.
Third, transition financing is needed in emerging markets to accelerate the gradual downsizing of fossil fuel infrastructure. With the exception of China, demand for fossil fuels for electricity has already peaked or plateaued in emerging markets accounting for 63% of total demand. So while the bulk of the growth (88%) in electricity demand through 2040 will come from emerging markets, they have yet to move away from existing fossil fuel capacity. It requires innovative financing to reduce equity, pay down debt, and create a viable package for workers.
At COP-26, France, Germany, UK and US pledged to reach an $ 8.5 billion deal to help South Africa dismantle 34 GW of capacity by 2030. Negotiating such agreements country by country could take forever. Instead, bridging obligations could be lifted as a sub-category of a green taxonomy, to help utilities shift their portfolios to more efficient thermal power or help owners of thermal assets dismantle ones. older and inefficient plants.
Fourth, a risk reduction facility is needed for emerging markets. The largest share of the Discounted Electricity Cost (LCOE) of clean energy projects in developing countries is the cost of financing. India could host a Global Clean Investment Risk Mitigation Mechanism (GCI-RMM). Operating on the principle of pooling risks between projects and countries, it could help facilitate capital flows and access to non-project risk management tools – reducing transaction costs in emerging markets.
For the seven quarters until India hosts the G-20 summit in 2023, a roadmap could be established to showcase these innovations. These could include a green taxonomy tailored to India’s needs, a subsidized credit enhancement product, the issuance of bridging bonds, a warehouse for rooftop solar projects (to offer a broader portfolio investors), mutual funds for a steel pilot project and the political signal to house a global risk mitigation mechanism.
Once these innovations emerge, India could begin channeling deals for other developing countries through its financial institutions. Rather than focusing only on definitions of climate finance during annual negotiations, Indian regulators and market players can begin to work on building a green finance architecture for India and the emerging world.
Respectively, CEO and Research Analyst, Council on Energy, Environment and Water
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