India stands at a crossroads of change and has an ambitious vision to move towards a sustainable and low carbon energy future. By 2070, the country's population is expected to increase by 500 million people and rapidly grow from US$3 trillion (2023) to approximately US$27 trillion (2070), with strong growth in gross domestic product (GDP). Masu. Although current per capita energy consumption is only one-third of the world average, the country's energy demand is likely to increase significantly as the economy expands.
Recognizing the importance of combating climate change, India has set a goal to reach net zero by 2070. On the way to this goal, ambitious goals for 2030 include:
• Meet 50% of energy requirements with renewable energy
• Non-fossil fuel power generation capacity reaches 500GW
• Reduce carbon dioxide emissions by 1 billion tons
• Reduce carbon intensity by 45% from 2005 levels.
Climate change financing needs
The massive energy transition that India envisions will cost a lot of money. This includes scaling up renewable energy installations, modernizing infrastructure and improving energy efficiency across the sector. To meet its ambitious renewable energy goals, India requires significant capital investment in solar, wind, hydropower, and other technologies that support clean energy. India's original nationally determined contributions estimated that the country would need US$2.5 trillion from 2015 to 2030, or about US$170 billion annually, to combat climate change. For India to significantly accelerate climate change and achieve net-zero emissions by 2070, it will require cumulative investments of USD 10.1 trillion. This has increased the need for innovative financial solutions. India's sector-specific financial institutions (FIs) will be critical in facilitating the green finance flows needed to enable a 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 $44 billion was raised, an increase of 150% compared to 2017-18. While these advances are laudable, they are insufficient. Current investments represent approximately 25% of the total investment required in each sector to meet the country's NDC. Climate-related foreign direct investment (FDI) increased significantly, reaching USD 1.2 billion in 2020, but this was only about 3% of total FDI in the year.
To close the climate finance gap, India needs to tap into the rapidly growing global green capital from sovereign wealth funds, global pensions, private equity and infrastructure funds. Ways to do this include addressing barriers to investment in transition projects, fostering a sustainable financial ecosystem, and diversifying funding sources.
Mobilizing large amounts of capital from traditional sources presents multifaceted challenges. One key obstacle is the perceived risks associated with low-carbon projects, especially in emerging economies. Investors may view such projects as uncharted territory, characterized by uncertainties that may limit returns, and may be reluctant to commit significant capital .
Additionally, the capital-intensive nature of such projects, combined with long conception periods and evolving regulatory frameworks, can cause mismatches between investor expectations and project schedules. According to CPI analysis, global capital flows to developing countries are hampered by high costs of capital. Risk-adjusted returns on capital can be up to seven times higher than in developed countries. Ensuring a viable return on investment within a reasonable period of time is a delicate balance that requires innovative financial structures and risk mitigation mechanisms.
Role of financial institutions by sector
Sector-specific financial institutions play an important role in the challenge of scaling up green finance. Institutions such as his REC Limited (REC) and Power Finance Corporation (PFC), public financial institutions focused on the power sector, have unique advantages. REC was one of the first Indian public sector undertakings (PSUs) to raise a total of USD 450 million from international markets through green bonds. These have been used to finance solar, wind, and renewable energy purchase obligations, including refinancing eligible projects. PFC also issued a US dollar-denominated green bond in December 2017, raising US$400 million. Furthermore, in September 2021, PFC issued its first euro-denominated green bonds totaling EUR 300 million to finance renewable energy projects. These bonds feature moderate coupon rates and provide an important means of accessing cost-effective capital.
PFC and REC can help mobilize green finance as India transitions to low-carbon energy to meet its environmental goals. Our expertise in India's power ecosystem allows us to create innovative financial products tailored to the unique requirements of your transition project. By directing investment to green initiatives, these institutions will drive the transition to cleaner energy, contributing not only to reduced carbon emissions but also to a more sustainable and resilient energy future. I can.
One of the key ways PFC and REC promote green finance is through regulatory frameworks and market development. These financial institutions can design innovative financing vehicles that align with the evolving regulatory landscape and market trends. By creating products tailored to low-carbon projects, we can attract retail investors who may be hesitant due to the risks involved. This not only increases investor confidence but also contributes to the expansion of the green energy market.
Additionally, PFC and REC's expertise in risk assessment and mitigation is essential to advancing green finance. Low-carbon projects often come with distinct risks, from technical uncertainties to regulatory changes. PFC and REC's deep understanding of this area allows us to comprehensively assess these risks and design financial products that effectively address them. Such risk mitigation not only facilitates investment in renewable energy, but also strengthens the resilience of the sector as a whole.
Additionally, PFC and REC capacity building efforts add a valuable dimension to efforts to promote green finance. These financial institutions will strengthen the feasibility and implementation of low-carbon transition initiatives by providing technical assistance, training, and capacity-building support to project developers. This not only ensures reliable implementation of projects, but also encourages private sector involvement by minimizing uncertainty and increasing confidence among potential investors.
Partnerships form another key aspect of how sector-specific financial institutions like PFC and REC accelerate the mobilization of green finance. Collaboration between these financial institutions, development banks and international investors creates synergies that leverage expertise and resources. By pooling knowledge and capital, these partnerships increase the overall effectiveness of green finance initiatives and also amplify the impact of low-carbon projects, creating a more sustainable energy environment.
Sector-specific financial institutions will be of paramount importance as India progresses through its energy transition. Beyond their role as financial institutions, PFC and REC are contributing to enabling green finance and accelerating India's transition to sustainable energy sources. Their ability to innovate, collaborate, and expertly assess and mitigate risk positions them as essential catalysts. With our expertise and commitment to sustainable development, PFC and REC can lead India to a more resilient and clean energy future. As these institutions redefine the financial landscape through innovation and collaboration, India's pursuit of sustainability will be a collective effort that promises a greener and more prosperous tomorrow.
(This blog is part 1 of a 3-part series on 'Transforming India's climate finance through sector-specific financial institutions'. Part 2 explores the potential financing opportunities and We explore transition risks and, in the third part, introduce a framework to facilitate the flow of global green capital in India through these sector-specific organizations.)
