In our first part of the series on “Transforming India’s Climate Financial Landscape through Sector-specific Financial Institutions”, we explore the key roles of institutions such as Power Finance Corporation (PFC) and REC in promoting India’s transition to a sustainable energy future. The second part will explore potential financing opportunities and transition risks for these institutions.
According to CPI's green finance landscape in India, India will need INR 162.5 trillion (USD 2.5 trillion) by 2030 to meet its country-determined contributions (CPI, 2022). However, despite the gradual increase, tracked green financing flows still cover only about one-third of the requirements (CPI, 2024). Over the longer period of time, despite India’s ambitious Zero Zero commitments by 2070, there is still a $1 million (almost three times its current GDP) funding gap (ET, 2024).
Bridging this shortage presents challenges and opportunities, especially for financial institutions such as PFC and REC, which can expand their roles, especially in raising green and transitional technologies or decarbonization, decarbonizing the power sector and other difficult-to-invade industries.
Financing Opportunities
Understanding the CPI's green finance landscape in India, understanding green financing opportunities involves scope to expand investment needs, especially in the field of infrastructure. Infrastructure development is the main driver of India's economic growth and there is a great demand for investment. National Infrastructure Pipeline (NIP) focusing on sectors such as energy, roads, airports, ports and railways is expected to drive approximately 70% of capital expenditures of INR 111 million (USD 1.5 trillion) (DEA, 2020). The energy sector, especially renewable energy and support infrastructure, will continue to be an area of interest. This is in line with one of the key goals under the Central Electricity Agency (CEA) National Electricity Program – by 2032, the country's power generation capacity doubles the country's power generation capacity. 87% of the capacity is expected to come from non-fossil fuels, with an estimated investment of INR 31 trillion (USD 356 billion) (CEA, CEA, 20233).
In addition, it is necessary to understand the ways to invest in difficult-to-resistance sectors. In this case, transition financing refers to financing projects that are not entirely green but are reducing emissions, which is becoming increasingly important. Hard-soaked industries such as steel and cement manufacturing face significant challenges in reducing emissions. These challenges include high capital expenditures, the long lifespan of existing high-emission assets, and the lack of technological maturity and the high cost of new net zero technologies, which make these net zero technologies commercially unattractive. However, there are some mature, commercially viable technical solutions that can help greatly reduce emissions, but cannot reduce them to zero near zero. Since these technological solutions cannot be classified as green, their access to capital is often limited. Here, transition financing can help alleviate the burden of these challenges in the current high launch sector.
In addition to the potential to benefit from specific heavy industries, transition financial projects can diversify their portfolios and address transition risks.
In search of better financial resilience and responsiveness, PFC has diversified its portfolio in the infrastructure sector. It has committed to spend 30% of its outstanding loans on non-power infrastructure projects. In fiscal year 23 alone, the PFC approved INR 167 billion (USD 2 billion) for various non-force infrastructure programs. For example, it extends a loan of INR 6.3 billion (USD 73 million) to Smart to fund 5,000 passenger electric vehicles (PFC, 2024).
The REC also promises to diversify it into an infrastructure sector. The agency has established an annual loan cap for non-electric infrastructure projects and aims to increase its clean energy portfolio to 30% of its loan book by March 2030 (Rec, 2024). In fiscal year 2022-23, the REC approved INR 857.4 billion (USD 10 billion) for large-scale infrastructure projects and received debt funds from the renewable energy program, including INR 60.8 billion (USD 700 million) (USD 700 million) for 1,440 MW Greenko's pumped storage power project. In addition, REC actively supports government programs within the power distribution department by providing corresponding funds and project sanctions.
Cause challenges and transition risks
Based on the momentum of diversification, PFC and REC can enhance financial resilience by challenging challenges such as stranded asset risks, high-temperature plant flexibility, emerging alternative technologies, and transferring energy demand.
The risk of stranded assets is a major issue. As renewable energy costs continue to decline, the risks of fossil fuel assets are not commercially competitive. This change is particularly fast, as the solar tariffs were almost half cut at INR 4.63 per kWh (USD 0.05 per kWh) in 2015, while the recent solar tariffs were almost 2.36 per kWh (USD 0.033 kwh) of the latest INR 2.36 per kWh (IEEFA, 2020). With cheap renewable energy, distribution companies may renegotiate or abandon electricity procurement agreements related to fossil fuel assets, further strengthening PFC and REC's financial strategies.
Forced surrender to regulatory policies that promote renewable energy integration in thermal power plants also creates a significant capital burden for renovation and modernization. What the CEA requires is that coal thermal power plants will increase by 1%-2% per minute, which will soon increase to 3% (CEA, 2022) (CEA, 2023). In addition, the current technological minimum load requirement for the current thermal power plant is approximately 55% of its rated capacity, and is expected to decrease to 40% as renewable permeability increases to enhance grid stability (CEA, 2023). Capital requirements for transformation range from relatively new units of approximately INR 600-700 million (USD 69-08 million) to very old units that have not yet been upgraded to their factory control and instrumentation systems (Powerline, 2023). Compliance is particularly challenging for older units (often called old-fashioned thermal plants) due to technical limitations and cost considerations, which makes them vulnerable to storage or decommissioning, affecting the financial returns of stakeholders such as PFC and REC.
Technology advances in energy storage have further increased risks. Battery storage prices fell sharply, from $1,100 per kilowatt-hour in 2010 to $139 per kilowatt-hour in 2023 (PV Magazine, 2023). This reduction enhances the viability of renewable energy, thus enabling greater integration and reducing reliance on fossil-based power generation. As storage solutions become more common and affordable, demand for traditional heat may decrease, resulting in further revenue uncertainty for financing institutions associated with legacy assets.
In addition, transferring energy demand models and integrating distributed energy resources present another set of challenges. Government initiatives that promote rooftop solar and decentralized energy solutions are reshaping consumer behavior, supported by subsidies and favorable net metrology policies. These trends undermine traditional centralized power generation models and require strategic hubs of PFC and REC to fund adaptive and distributed solutions to remain competitive.
Create a support environment
Supportive policy and regulatory environments are essential to successfully challenge challenges and take advantage of opportunities. India creates favorable landscapes for climate-centric financing through initiatives such as the National Climate Change Plan (NAPCC) and Green Energy Corridor Projects, such as the National Action Plan (NAPS) Action Plan (NAP) Program. However, enhanced functionality can further promote adequate financing, focusing on climate change resistance.
Developing a comprehensive green finance taxonomy will provide consistent guidelines for identifying and classifying green investments to ensure that funds can be used for projects that help mitigate climate change. Strengthening incentives for such investments, such as tax relief from financial institutions that prioritize green projects, can accelerate capital flows into target areas. In addition, regulatory support for transitional PFC and REC can be very beneficial. This shift could enable institutions to provide a wider range of innovative financing solutions tailored to low-carbon projects. Encouraging public-private partnerships will also significantly impact financial availability and use private capital for large-scale renewable energy and climate adaptation projects.
Looking ahead, the future of PFC and REC in a climate-focused financial landscape seems promising. As India's economy grows, so will the demand for sustainable energy solutions. PFC and REC can make a significant contribution to the achievement of India’s climate goals by expanding investment and expanding their mandates.
Green Bonds and Future Paths
These institutions have grown impressively in recent years. For example, PFC's renewable energy portfolio has expanded six times over the past six years to INR 482 billion (USD 6 billion). However, by leveraging innovative financing mechanisms, PFC and REC can play a greater role in supporting India's energy transition.
Such a pathway could be to increase the issuance of green bonds, a key source of funding for renewable energy programs. Both PFC and REC have made great progress in this field. PFC issued its first green bond (USD 400 million) in December 2017 and issued euro green bonds for 300 million euros (USD 315 million) (USD 315 million) in September 2021, both listed on major exchanges. As of March 31, 2024, its green bond portfolio has funded 13,492 MW of solar and wind projects, which are worth more than the amount raised through green bonds. Rec raised $750 million through green bonds in April 2023, marking the largest green bond approval ever by South and Southeast Asian issuers. In January 2024, it issued $61.1 billion ($416 million) on the yen green bond (the largest euro issuance date for euro bonds), attracting strong international investors. Bonds linked to sustainability are another promising option because they can link capital costs to achieving specific sustainability goals, thereby incentivizing projects to meet appropriate and strict standards.
In addition, both institutions can explore international international financial mechanisms similar to the Green Climate Fund (GCF) and Global Environmental Facilities (GEF), which provide a large amount of resources for large-scale renewable energy projects and infrastructure improvements. Strengthening relations with international financial organizations will promote capital flows for large projects. Establishing a dedicated climate-centric finance department in the PFC and REC can help identify funding opportunities, establish partnerships with global financial institutions, and simplify access to the International Climate Fund.
Now, public announcements and disclosures are crucial in mapping current strategies for PFC and REC, highlighting their gradual role in advancing sustainable development. These institutions are actively reshaping their financial approaches, prioritizing decarbonization and diversifying their portfolios to support a low-carbon future. With strategic initiatives and commitment to innovative financing mechanisms, PFC and REC are uniquely positioned in their journey towards a resilient and sustainable economy, laying the foundation for the long-term environmental and economic interests of all.
The three-part series will delve into “changing climate financing in India through sector-specific financial institutions”. The third and final part will propose frameworks and tools to promote the flow of global green capital in India through these specific sectors and specific entities.
