This is the third and final blog in our series, which covers “Climate Financial Environment in India through sector-specific financial institutions”. Previous blogs examined the key roles of financing institutions focusing on the power sector, especially the Electricity Financing Corporation (PFC) and REC Limited (REC), in promoting the energy transition in India and analyzing relevant financing opportunities and risks.
Recognizing the growing demand for targeted financial solutions, the blog explores the Green and Transitional Finance (GTF) windows of PFC and REC to improve sustainable financing flows.
With economies growing around the world, green and transitional financing has become a key pillar centered on sustainability. Although these two terms are interrelated, they usually have different purposes. Green finance focuses specifically on near-zero or zero emission plans that are consistent with the Paris Agreement. It ensures a sustainable economy by funding clean energy projects, sustainable transportation and climate-resilient infrastructure.
Transitional financing, on the other hand, is a bridge for industries and sectors that are not yet fully green but need support to reduce emissions. The idea is to make sure that perfection does not become the enemy of goodness. This is especially important with difficult-to-soak sectors such as steel, cement, chemicals and energy-intensive industries. While these industries may not qualify for green finance today, their transformation will be crucial to achieving zero emissions in the long run. Green and transitional financing together create an integrated pathway to decarbonization.
Green and transitional financial landscape
Despite a lot of progress in green financing, the flow rate is below the required level. According to environmental finance data, the global green finance market is worth US$42 trillion in 2024. Meanwhile, India's green financing flows are $50 billion in 2021-22, as India's CPI's Green Finance Landscape Report only covers 30% of the investments needed to meet the national NDC targets.
Similarly, global transition financing reached US$3.5 trillion in 2024. Limited financing is more towards green finance financing than transitional finance. For example, clean energy projects account for 47% of all climate financing, followed by 35% energy efficiency, with clean transport in the country at 18%. By comparison, Transitional activities (e.g., flexibility of thermal power plants and adoption of transition technologies) are difficult to attract investment due to the lack of dedicated transition financing mechanisms.
Green and Transitional Finance (GTF) window
PFC and REC are the centers of financing for India's electricity sector, with a collective portfolio of over £9 trillion ($1006 billion)[1] Plays a key role in funding power generation, transmission and issuance. However, due to India's ambitious decarbonization goals, its mission is to include non-force infrastructure, including heavy manufacturing, transportation and energy-intensive industries. By expanding their portfolio, PFC and REC can leverage their domain expertise to create customized financial products to address sectoral challenges in green and transitional financing.
A dedicated green and transitional financing window (GTF window) in PFC and REC will enable structured ways to reduce emissions and absorb green alternatives before commercial. This window will be a large pool of funds under the management of experienced teams to achieve targeted financing for projects that are not available for private financing due to risks. By mobilizing private capital, the GTF window will enhance India’s ability to play its net zero commitment while reaffirming the leadership of PFC and REC in the field of green transition.
The introduction of GTF windows will address the significant financial hurdles currently limiting the growth of transition financing. While clean energy projects have received considerable investment, the flexibility of thermal power plants, industrial transformation and the introduction of transition technologies have not yet been funded. By providing dedicated funding to green and transition projects, the GTF window can fill this gap and make climate financing more balanced. Given the scope of each department and project, it will be impossible to conduct a financing model. Instead, financing structures based on sectoral issues and emerging opportunities will be necessary.
Value Proposition of GTF Window
One of the important advantages of GTF windows is that it will help attract International Capital. Foreign investors see the Indian market as a risk due to policy uncertainty and financial obstacles. However, with the financial strength of the REC and PFC and the explicit use of the fund framework, the GTF window could make India a viable destination for climate financing. The platform utilizes investment-friendly tools, such as those provided by the Gift City IFSC regime, to make cross-border investments in India’s transition and green projects.
The GTF window will play a key role in market development by summarizing smaller projects Risk recovery enhancementand unleash the commercial viability of new technologies. Some areas that can achieve funding goals include carbon capture, elastic fuel, support projects, green hydrogen, battery storage and industrial decarbonization. A phased approach would be ideal, with the initial focus on smaller players, such as SMEs and local infrastructure projects, to test the financing model before expanding larger investments.
The lack of a bankable project pipeline is a key bottleneck in expanding green and transitional financing. The GTF window can also be considered to create a Pipeline facilities Provide technical assistance and structural support to achieve financial closures by developing and aggregating viable projects. Prioritize infrastructure projects through clear revenue models and evaluate their broader economic and social benefits, such as job creation and community benefits, to enhance investor confidence and scalability.
GTF window can be passed Market development Serve. Limited information on viable investment opportunities, financial structures and available technologies often prevent capital from flowing into the transition sector. The GTF window will provide technical assistance, risk assessment and financial advisory services by closing such gaps and ensuring open and good market conditions. These operations do catalyze capital inflows into critical transition sectors.
Financial products and mechanisms
PFC and REC can raise funds through the GTF window using financial instruments such as green bonds, transition bonds and sustainability and financial instruments. Partnering with Multilateral Development Banks (MDBs), sovereign funds, and Impact investors can help get rid of risk projects and mobilize hybrid financial solutions.
While PFC and REC can use existing tools to raise green and transitional financing, they can also explore new financing tools to enhance capital mobilization. One such approach is to mobilize private capital by enhancing the risk-reward profile of the project using credit enhancement tools such as loan guarantees. Another option is the co-financing model, where PFC and REC provide senior or subordinate debt, which can better allocate risks and encourage private lenders to participate. In addition, warehousing and securitization structures can be adopted to promote capital recovery, thereby expanding financing of distributed decarbonization technologies. Asset-based financing is another potential mechanism that can mortgage loans onto physical green infrastructure, thereby reducing project-related risks and enhancing capital flows.
Measuring success
Over time, it is necessary to measure the success of GTF Window to track progress and improve the financing model. Indicators include the amount of mobilized capital, the extent of added low carbon capacity, and the wider socio-economic benefits generated. Avoiding greenhouse gas (GHG) emissions, creating jobs and increasing regulatory certainty will define the impact of the program. Clarifying income models and ensuring a stable policy environment will also enhance investor confidence and long-term viability.
The way forward
Green and transitional financing are not competitive methods, but complementary concepts that jointly accelerate decarbonization. A strong green and transitional financial ecosystem is crucial as India is to achieve its net zero goal by 2070. Institutional players such as PFC and REC can now make themselves more important than traditional lenders and become promoters of strategic investments committed by India in 2070. This is very consistent with their role as an institution of national strategic importance. As conceptually, the green and transition financing window will serve as a facilitator for unlocking global capital, devalue critical decarbonization projects and ensuring a fair and inclusive transition. This ends our series on green and transitional financing, highlighting the key role of financial institutions in accelerating the clean energy transition in India.
[1] 1 USD = 85 INR
