India has ambitious targets for Renewable Energy (RE) – 175 GW of RE by 2022, of which ~80 GW is meant to be growth of large-scale solar and wind.  Financing this is a key requirement for achieving these targets.  Is finance a bottleneck? What can be done to improve the financing of clean energy?

Brookings India, in collaboration with the Clean Energy Finance Forum (CEFF), hosted Brian Deese, Senior Advisor to the President of the United States, for a by-invitation roundtable on Renewable Energy Finance in India.  Brian Deese was joined by his team and industry leaders through the U.S.-India Business Council, as well as Indian industry leaders from the financial/banking sectors and project developers.  The discussion was moderated by Rahul Tongia, Fellow at Brookings India. The discussions were under Chatham House Rules (non-attribution).

While India is ambitiously looking forward to achieving the target of generating 175 GW renewable capacity, financing of the almost four-fold growth from current renewable capacity is a critical problem. The deliberations identified ways in which the Governments of India and the United States could support the scaling up of renewables in India. In the past, CEFF has raised many questions in the similar context on bottlenecks and possible solutions for practical problems at the ground level. CEFF and Brookings India can work together to suggest policy recommendations that can help in resolving problems associated with Renewable Energy Finance in India.

Key discussion points

• How real are changes on the ground (both appetite for and ability to manage RE, as well as DisCom [utility] viability)? Will the UDAY scheme work, rather, be enough?
• Are there better ratings of DisCom finances and risk available? Developers and Banks have separate ratings, and there can be a slight disconnect between these. Can we consider the creation of a “Risk Register” (to use corporate parlance) for DisComs?
• What else can be done at the governmental level, both India and US (representing global capital)? The US is interested in India’s RE success not merely as a possible market, but also to reinforce global commitment towards reducing carbon emissions.

Discussion details (select)

Finance in Power sector: While the tariff for solar power has come down dramatically in the last few years, the cost of debt has stayed roughly the same, financially affecting renewable project developers and leaving the industry financially unstable. While most of the domestic investment comes from the banking sector, foreign investment can only happen after the projects have regulatory support. Officials and senior leaders on both sides should come together to ensure that developers get banking (financial) as well as regulatory support. It has been observed in the last 3-4 months that the aggressiveness of renewable growth has tapered and large developers are worried about associated financial risks.

While India is considering marching towards low carbon environment, a significant amount of finance is required to achieve the capacity target within predicted time frame. Infrastructure-centric institutions could be developed which can take a look at finance related matters for clean energy.

UDAY scheme – Too soon for impact (esp. for RE)?: The UDAY (discom revitalization) scheme has seen a positive trajectory in many states and efforts should be made so that other states can benefit from the positive directions.  There needs to be more sharing of what works (and what doesn’t).  There is also the belief that that some states which are already ahead in the renewables sector will reject more growth of renewable capacities.

Better market structure, availability of ancillary services and incentivizing successes in the positive direction will make sure that states work towards the goals of the DisCom viability with high RE.

Real vs. Assumed risks: Risk perception by developers and financial bodies is sometimes more than the reality which keeps them on the back foot. Or, in some cases, there may be a lag in changes in equilibrium.   Eventually, the markets should figure out which states are ripe for more RE funding, and which are not.  But in the absence of proper information, the market assumes too many risks which need to be governed.  Risk management and assessment models by experts should be made publically available. The study should use raw data and should include all the risks like market, EPC, counterparty, etc.

How confident are the banks? The banks/ financing organizations in India are reluctant to put in big money due to risks involved such as credibility of the companies involved and the socio-economic position of the states in question. For example, States with low ratings (per the ICRA ratings) are not a first choice of developers or bankers but neither are some highly ranked states like Gujarat and Karnataka as they already have significant RE, raising challenges of grid integration and payments.  .

Hedging risks should be reduced as it will reduce the cost of global capital. Options include a dedicated fund for this, as well as secondary risk reduction capital (pooling).  Other finance suggestions relate to warehousing facilities, and improved PPAs.

The banking/rating system in India needs to review their credit methodology and make some more data on DisComs more transparent. Ratings should also be more periodic and dynamic – 2 years is a very long time period.

Indo-US collaboration:  While many countries operate high RE, notably in Western Europe, learning from the US is important for India both because of its size as well as federal structure.  The US can help India improve its grid operations and management including the creation of systems if not markets for ancillary services and the like (to handle grid stability and balancing).  India also needs to work on its peaking generation capacity since the primary available Indian peakers are a modest amount of hydropower plants, but growth of hydropower is expected to be lower than overall system growth (for multiple reasons).

CEFF in the past has focused on policy recommendations and brought to light practical aspects of financial issues. Some of its earlier (and draft) recommendations have found traction, but more can be done to leverage the recommendations and improve their visibility.  There was consensus that there was strong value to a multi-stakeholder effort like CEFF to both highlight issues and suggest recommendations for implementation.

Further Reading:

• A volume covering a holistic and nuanced look at RE in India, Blowing Hard or Shining Bright? Making Renewable Power Sustainable in India (2015), available for download at: https://www.brookings.in/blowing-hard-or-shining-bright-making-renewable-power-sustainable-in-india/
• A Discussion Note on suggestions to improve DisCom ratings:

https://www.brookings.in/rating-of-distribution-utilities-in-india-linking-the-financial-with-operational-with-granularity/

Like other products of the Brookings Institution India Center, this report is intended to contribute to discussion and stimulate debate on important issues. Brookings India does not hold any institutional views.