India is at the crossroads of change, with an ambitious vision to transition to a sustainable and low-carbon energy future. By 2070, the country's population is expected to surge by 250 million, and its gross domestic product (GDP) will also grow significantly, soaring from US$3 trillion (2023) to approximately US$27 trillion (2070). Although current per capita energy consumption is only one-third of the global average, the country's energy needs are likely to increase significantly as the economy expands.
Given the importance of combating climate change, India has set a target of achieving net-zero emissions by 2070.
• Meet 50% of energy needs from renewable sources
• 500 GW of non-fossil fuel installation capacity
• Reduce carbon emissions by 1 billion tons
• Carbon intensity reduced by 45% compared to 2005
climate finance needs
The major energy transition India envisages will be costly. It will involve expanding renewable energy installations, modernizing infrastructure and improving energy efficiency across sectors. To achieve its ambitious renewable energy goals, India will need significant capital investments in solar, wind, hydro and other clean energy support technologies. India's initial Nationally Determined Contribution projected that the country's climate action would require $2.5 trillion from 2015 to 2030, or about $170 billion per year. India will need a cumulative investment of $10.1 trillion to significantly scale up its climate transition and achieve net-zero emissions by 2070. India’s industry-specific financial institutions (FIs) will play a key role in facilitating the necessary green financial flows to enable the low-carbon transition.
Despite the challenges, India has made commendable progress in attracting green finance. According to CPI estimates for 2019-20, a total of US$44 billion was raised, a 150% increase from 2017-18. These improvements are laudable, but not enough. The current investment accounts for about 25% of the total investment required by various industries to meet the country's nationally determined contributions. Although climate-related foreign direct investment (FDI) has grown significantly, reaching $1.2 billion in fiscal 2020, this only accounted for about 3% of total FDI that year.
To bridge the climate finance gap, India needs to tap into the rapidly growing pool of global green capital from sovereign wealth funds, global pension funds, private equity and infrastructure funds. Ways to achieve this include addressing investment barriers to transformational projects, fostering a sustainable financial ecosystem and diversifying funding sources.
The challenges of mobilizing large amounts of capital from traditional sources are manifold. A major obstacle is the known risks associated with low-carbon projects, especially in emerging economies. Investors may view such projects as uncharted territory, characterized by uncertainty that may limit returns, and be reluctant to invest large amounts of capital.
In addition, the capital-intensive nature of such projects, coupled with lengthy gestation periods and changing regulatory frameworks, may create misalignments between investor expectations and project timelines. According to CPI analysis, global capital flows to developing countries are hindered by high capital costs; the risk-adjusted return on capital can be seven times higher than that of developed economies. Ensuring viable investment returns within a reasonable time frame is a delicate balance that requires innovative financial structures and risk mitigation mechanisms.
The role of industry-specific financial institutions
In the challenge of scaling up green finance, industry-specific financial institutions are key players. Institutions such as REC Limited (REC) and Power Finance Corporation (PFC) are public financial institutions focusing on the power industry and have unique advantages. REC is one of the first Indian public sector undertakings (PSUs) to raise funds from international markets through green bonds, raising US$450 million. The funds have been used to finance solar, wind and renewable energy purchase obligations, including refinancing of qualified projects. PFC also issued a US dollar green bond in December 2017, raising US$400 million. In addition, in September 2021, PFC issued its first euro-denominated green bond with an amount of 300 million euros to provide financing for renewable energy projects. These bonds carry moderate coupon rates and provide important access to cost-effective funding.
As India shifts to low-carbon energy to meet its environmental goals, PFCs and RECs can help mobilize green finance. Their expertise in the Indian power ecosystem enables them to create innovative financial products tailored to the unique requirements of transformation projects. By channeling investment into green initiatives, these institutions can drive the transition to clean energy, helping not only reduce carbon emissions but also help achieve a more sustainable and resilient energy future.
One of the key ways in which PFCs and RECs promote green finance is through regulatory frameworks and market development. These financial institutions can design innovative financing instruments that are consistent with the changing regulatory environment and market dynamics. By creating products suitable for low-carbon projects, they can attract private investors who may otherwise be hesitant due to perceived risks. This not only enhances investor confidence but also helps expand the green energy market.
In addition, PFC and REC’s expertise in risk assessment and mitigation is critical to advancing green finance. Low-carbon projects often carry significant risks, ranging from technological uncertainty to regulatory changes. PFC and REC's in-depth understanding of the industry enables them to comprehensively assess these risks and design financial products that effectively address them. This risk mitigation not only encourages investment in renewable energy but also enhances the overall resilience of the industry.
Furthermore, PFC and REC's commitment to capacity building adds a valuable dimension to their efforts to promote green finance. By providing technical assistance, training and capacity-building support to project developers, these financial institutions improve the feasibility and execution of low-carbon transition measures. This not only ensures the successful implementation of the program, but also encourages private sector participation by minimizing uncertainty and increasing the confidence of potential investors.
Partnerships are another important aspect for sector-specific financial institutions such as PFC and REC to accelerate green capital mobilization. Collaborations between these financial institutions, development banks and international investors create synergies that leverage expertise and resources. By pooling knowledge and capital, these partnerships improve the overall effectiveness of green finance measures and expand the impact of low-carbon projects, creating a more sustainable energy landscape.
As India embarks on its energy transition, industry-specific financial institutions will become critical. In addition to their role as financial entities, PFCs and RECs also play an important role in promoting green finance and accelerating India's transition to sustainable energy. Their innovation, collaboration, and ability to expertly assess and mitigate risk make them indispensable catalysts. With expertise and commitment to sustainability, PFC and REC can guide India towards a more resilient and cleaner energy future. As these institutions redefine the financial landscape through innovation and collaboration, India's pursuit of sustainability becomes a collective effort and promises a greener, more prosperous tomorrow.
(This blog is the first in a series on “Transforming climate finance in India through sector-specific financial institutions.” The second blog will explore the potential financing opportunities and transformation risks of these institutions, and the third blog will propose a facilitation The framework for financial flows attracts global green capital in India through these sector-specific entities.
