Over the past few years, the government of India has set ambitious targets for wind and solar energy: current targets would see wind and solar capacity grow by 600 percent through 2022, to 60 GW and 100 GW of energy, respectively, from current cumulative installed capacity of about 25 GW. To put those numbers in perspective, 1 GW provides power for 700,000 modern homes; 160 GW would power a sizeable portion of India’s energy needs.
These targets are good for both India’s energy supply and for economic growth – a theme emphasised by US President Barack Obama and Indian Prime Minister Narendra Modi recently in announcing their joint commitment to increasing investment in clean energy and low-carbon economic growth.
However, this task is made difficult by the government’s limited budget, which is constrained by a large fiscal deficit and multiple development priorities.
Further, markets will not provide finance to meet these targets alone. In fact, our analysis shows that the single biggest challenge to scaling up renewable energy is the cost of finance – in particular to debt. Unfavourable debt terms add 24-32 percent to the cost of renewable energy in India, compared to similar projects in the US. Domestic debt is expensive due to unfavourable macroeconomic conditions as well as underdeveloped capital markets, and foreign debt becomes expensive once hedging costs are added.
The good news is that India can address this situation in a way that also saves money for taxpayers, electricity customers, and scales up renewable energy.
In our work to support the Ministry of Finance and the Ministry of New and Renewable Energy over the past years, we have identified three steps to finance renewable energy more cost-effectively.
First, a policy shift to provision of low-cost, long-term debt as a federal policy could reduce the cost of renewable energy by up to 78 percent compared to current federal polices such as viability gap funding, accelerated depreciation, and generation based incentive.
Second, in parallel, the government can choose to facilitate low-cost, long-term debt from domestic capital markets as well as foreign sources, in the process reducing the cost of renewable energy by up to 25 percent.
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We are currently exploring some of these promising instruments – for example, renewable energy bonds with credit enhancement as well as exchange rate liquidity facilities – in our research.
Third, given that the government is focused on economic development as well as climate change, an additional question is how to balance the growth of renewable energy sources with the development of fossil fuel-based energy, in particular coal.
Our analysis indicates that transitioning to a low-carbon electricity system – that is, from fossil fuel-based energy to renewable energy – could not only support both goals simultaneously but also bring financial savings. Renewable energy enjoys significantly reduced operational costs compared to fossil fuel-powered electricity, which pays high (and volatile) costs for coal and gas extraction and transportation. These savings, when coupled with a reduction in India’s high financing costs, can provide India with additional financial capacity to meet its economic and development goals.
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Renewable energy is a clear win for India. With these steps, India can make its ambition for a wind and solar-fueled energy supply not just a dream, but also reality.
A version of this blog first appeared in Business Today.