Will making banks obligated to invest in renewables help India’s energy transition?

India needs at least twice the amount of its current investment in clean energy, to meet its targets by 2030. Considering this, a parliamentary committee has recommended tools to facilitate financing for the sector.

To achieve its goal of 500 gigawatts (GW) of installed capacity of non-fossil-fuels-based energy projects by 2030, India requires about Rs. 1.5-2 lakh crore (Rs. 1.5-2 trillion) investment every year. But over the last few years, the annual investment in the renewable energy sector has been estimated to be at Rs. 75,000 crores (Rs. 750 billion).

Given the gap between the demand and supply of funds required for India’s energy transition over the next eight years, a committee of the Indian parliament has suggested to the federal government to consider imposing a “Renewable Finance Obligation for banks and financial institutions” to ensure they invest a specific percentage of their investment in the renewable energy sector. According to India’s Ministry of New and Renewable Energy (MNRE), an investment of about Rs. 17 lakh crore (Rs. 17 trillion) is required till 2030 which includes associated transmission cost.

The February 2022 report by the parliamentary standing committee on energy, led by Janata Dal (United) leader Rajiv Ranjan Singh, noted the “huge gap between the required and actual investment” while stating that it will be a “gargantuan task” to fill it and “requires an enabling framework to be created by the government”.

It suggested to the government to explore setting up “a green bank system” to address the “persisting finance-related challenges”. A green bank system refers to a public sector owned bank that focuses on ensuring low-cost capital for clean energy projects.

The committee asked the MNRE to “explore innovative financing mechanisms and alternative funding avenues such as Infrastructure Development Fund (IDF), Infrastructure Investment Trusts (InVITs), Alternate Investment Funds, Green/Masala Bonds, crowdfunding, etc.”

At present (till February 28, 2022), India’s total installed capacity is 395.6 GW and of that renewable accounts for 106.3 GW. By 2029-30, the total installed capacity is expected to be about 820 GW, and of that, renewable energy is expected to account for about 450 GW.

In India, there is already a specialised public sector financial institution, the Indian Renewable Energy Development Agency (IREDA), for financing renewable energy projects but it has not been enough. Till March 31, 2021, IREDA had financed more than 2,800 renewable energy projects across India with cumulative loan sanctions of Rs. 96,250 crores (Rs. 962.5 billion) and disbursement of Rs. 63,158 crores (Rs. 631.58 billion) “supporting green power capacity addition of more than 16.16 GW”.

The Indian government told the committee that IREDA is constrained in “meeting the financing requirement of large capacity projects mainly because of exposure norms and its low capital base” but IREDA has been planning “to come up with IPO to enable space for further financing”. The Committee recommended that IREDA should be given a “special window for borrowing from RBI (Reserve Bank of India) at repo rate in line with other specialised financial institutions to ensure availability of low-cost financial resources” for the renewable energy sector.

In fact, according to the Department of Promotion of Industry and Internal Trade, the “FDI (Foreign Direct Investment) equity inflow” in India’s non-conventional energy sector during the 10-year period between 2010-11 and 2019-20 has only been US $ 8.4 billion.

Over the years, the government of India has taken several measures to boost the investments in the renewable energy sector such as 100 percent FDI under the automatic route, fiscal incentives such as accelerated depreciation, Goods and Services Tax (GST) at lower rates, concessional custom duty, setting up of ultra-mega renewable energy parks to provide land and transmission on plug and play basis, and green energy corridor scheme for evacuation of renewable power.

Read more: How India’s public sector units can impact the clean energy transition

Parliamentary committee asks public sector banks to finance RE projects

The parliamentary committee’s report noted that, in India, only a “few financial institutions and limited number of banks have been providing financial assistance to the renewable energy sector as all financial institutions and banks do not understand the risks and returns of this sector” which then becomes a major challenge in the financing of such projects.

The parliamentary committee noted that they were also informed that there is no ‘green’ element in India’s financial system framework and thus “renewable energy projects are treated as any other project, since the indirect advantages of renewable energy to environment and society at large are often not considered at the time of investment.” The Committee observed that in such a scenario where the banking sector has a reluctant attitude to finance the renewable energy sector, “public sector lending institutions need to take up the extra responsibility of providing funds to renewable energy sector”.

Suresh Kozhikote, who is the Managing Director and Chief Executive Officer at the SBICAP Ventures Limited (SVL), said that they the interest of investors in green projects including renewable energy projects has “certainly increased over the last five years”.

“Right now we are in the process of raising around Rs. 2,000 crores under the SVL-SME (NEEV-II) Fund from international and domestic institutional investors (not retail investors). This fund is being raised for green projects which include projects related to waste management, pollution control, renewable energy, and others. We started with a target of raising Rs. 400 crores but we received decent traction and we are confident of raising Rs. 2,000 crores by the end of FY 2023. This fund is expected to be invested in green projects over a period of next five years,” Kozhikote told Mongabay-India.

According to a recent analysis by the Centre for Financial Accountability (CFA) and Climate Trends about the financing of energy projects in India, the State Bank of India was the leading financier of renewable energy projects in 2020, and Power Finance Corporation (PFC), and its subsidiary Rural Electrification Corporation (REC), are the sole state-owned financial institutions that provided project financing to coal power projects in 2020.

The committee, meanwhile, also noted that there is a need to facilitate and encourage government-owned sector-specific lenders such as “PFC limited, REC Limited and IREDA through supportive policy initiatives, exemptions, concessions, etc in order to reduce the cost of funds.”

Vibhuti Garg, Energy Economist, Lead India at Institute for Energy Economics and Financial Analysis (IEEFA) said that according to the International Energy Agency’s (IEA) India Energy Outlook 2021, “India would need US$110 billion annually for the deployment of renewable energy, battery storage, electric vehicles and network expansion and modernisation of the grid under the Sustainable Development Scenario (SDS) … which is three times the current annual investment (US$40 billion) in these sectors.”

“At COP26 (Glasgow Climate Summit), Prime Minister Modi demanded that rich countries provide as much as US$1 trillion in climate finance just for India over the next decade – far more than the US$100 billion a year for all developing countries sought under previous deals. IEEFA notes India has been successful in raising private global capital, but it is key that concessional public capital pivots from ongoing capital subsidies for yet more fossil fuel import projects to catalysing deployment of proven new zero-emissions technologies at scale in the domestic context,” Garg told Mongabay-India.

Read more: India’s renewable energy industry is up against financial challenges

Realities of renewable energy should be understood

The parliamentary standing committee report noted that “peculiar realities” of the renewable energy sector “have not been taken into account while formulating the regulatory policies relating to financing and investments” due to which there is a “heightened risk of renewable energy projects becoming NPAs in compliance of RBI’s regulations and guidelines since revenue generation from renewable power is not uniform throughout the year because of its high seasonality and intermittency”.

The committee asked the MNRE to pursue banks that provide funds to the renewable energy sector to “restructure the loans in such a way that EMI is kept higher in peak season of revenue generation and lower in the off-season.” It also asked the ministry to engage with the state governments to “avoid any unilateral cancellation/renegotiation of PPA as it causes uncertainty and negatively affects the investment in the renewable energy sector.”

The parliamentary committee also noted that the RBI has categorised renewable energy sector under priority sector lending for loans up to a limit of Rs. 30 crores (Rs. 300 million) which the MNRE said “is not sufficient as it can take care of small-sized renewable energy projects only” and “there is a need to increase this limit”.

The MNRE, in fact, told the panel many banks that are not conversant with renewable energy projects, “may not offer even this small financial assistance and may cover their priority sector lending obligations with projects from other sectors.” On this, the committee called for increasing the limit of the loans for the renewable energy sector under priority sector lending and asked the MNRE to pursue this with the union finance ministry and the RBI.

Banner image: India is bullish about solar power projects but factors such as lack of easy finance are hampering the growth. Photo by Jaipursharma/Wikimedia Commons.