January 4, 2016 Yes Institute

Taking ideas to drive investment in Green Growth in India – From talk to action

Idea concept with row of light bulbs and glowing bulb

Article: Dr. Gireesh Shrimali, Director of Climate Policy Initiative, India

As a part of the recent climate talks in Paris, India has committed to ambitious action on climate change – pledging renewable energy will be 40% of the country’s expected electricity generation capacity in 2030, along with a 35% reduction in carbon intensity by 2030 from 2005 levels.

In addition, India has one of the most ambitious renewable energy targets of all – 100GW of solar power by 2022. This is more than 20 times India’s current solar deployment. India has also set a wind power target of 60GW by 2022, up from 25GW currently.

Scaling up private investment will be the key to meeting these targets. Public finance and the right government policies which can facilitate finance are also essential. However, greatly scaling up investment from the private sector will be the only way to mobilise the full amount of capital needed for India’s green growth targets.

However, investment in green infrastructure in India suffers from a formidable barrier – unattractive terms of financing, particularly high cost of debt, short tenor, and variable interest rates, which deter investment and add up to 30% to the cost of renewable energy in India, compared to the EU and US.

Figure 1: Unattractive terms of financing in India can add up to 30% to the cost of renewable energy, compared to the US and EU

Figure 1: Unattractive terms of financing in India can add up to 30% to the cost of renewable energy, compared to the US and EU

In order to scale up enough private investment to meet its green growth targets, India needs finance instruments for renewable energy and other green infrastructure that can offer more attractive terms of financing, and are a better match with investors’ needs.

The India Innovation Lab for Green Finance – a new initiative that brings together public and private stakeholders, including YES BANK and the Ministry of New and Renewable Energy – aims to identify, develop, and accelerate new ideas for innovative finance instruments that can enable more private investment in green infrastructure in India.

The India Lab currently has an open call for ideas – seeking proposals for innovative financial instruments that have potential to manage barriers and scale up investment. Up to four winning ideas will receive advice and endorsement from expert lab members to develop and implement the ideas over the course of the next year. The period to submit ideas is open until January 8, 2016. Visit greenfinancelab.in/ideas to learn more.

There are multiple opportunities for new and better finance instruments to tackle investment barriers and scale up finance. Previous analysis by Climate Policy Initiative has examined two of these opportunities in depth.

First, one promising way to increase investment in renewable energy is institutional investors, who are well-matched with the profiles of renewable energy projects, which require longer term financing, with lower risks and lower returns. CPI shows that domestic institutional investors may have the capacity to finance $15 billion of operational renewable energy projects up to 2019.

However, institutional investors are restricted to investing in projects above a certain credit rating threshold, which is AA or above in the case of India. Most renewable energy projects fall below this threshold.

Enabling institutional investment will require financial instruments that can raise the credit rating of renewable energy projects, such as infrastructure debt funds or renewable energy bonds with partial credit guarantees.

A second promising source of investment that will require innovative finance instruments is foreign investors. Over the next five years, India expects over $160 billion of investment from international developers and banks to finance renewable energy projects. However, foreign investors are cautious of investing in infrastructure in India due to the risk of extreme and unexpected currency devaluation.

When a renewable energy project is financed by a foreign loan, it requires a currency hedge to protect against the risk of volatile currency devaluation. Currently, market-based currency hedging in India is so expensive that it makes foreign financing just as expensive as domestic financing. An innovative instrument that can reduce the currency hedging cost could mobilise more foreign investment for renewable energy in India.

These are just a few possibilities. There are lots of opportunities to drive renewable energy and green growth in India through better investment instruments, but first we need your ideas. The India Innovation Lab for Green Finance can help develop your instrument with expert guidance, connect it with the relevant stakeholders, and ultimately accelerate it from an idea to action.

Dr. Gireesh Shrimali is the Director of Climate Policy Initiative, India, which serves as the Lab Secretariat for the India Innovation Lab for Green Finance.