By Manish Chourasia
India set in motion its energy transition over the past decade, with the rise of solar and wind project installations in the power sector. Renewable installations grew over 22% annually between 2010 to 2022, driven by ambitious government targets, encouraging policies and cost-efficient projects. As a result, the sector attracted investments of about $70 billion. As of today, 25% of the total capacity mix in India comes from solar and wind with around 100 GW installations. As electricity accounts for over half of total emissions, it was natural for the country to target decarbonisation on this segment. It is now time for the country to accelerate its efforts by not only expanding the base of solar and wind but also developing other emerging sectors.
The ongoing decade is full of opportunities and will be crucial for India’s energy transition story. The country has already expanded the role of renewables with the COP26 target of 500 GW of non-fossil fuel capacity and aiming to achieve 50% share of renewable generation by 2030. Integrating such high quantum of renewables with the grid would require building of energy storage and transmission assets at the proportionate scale. The government is also devoting similar focus on other segments such as industries and transport which account for nearly one-third of the country’s carbon emissions. Emerging technologies in these segments have already started firing up with falling costs and supportive policies.
The government has set ambitious targets for emerging technologies. For instance, it wants to focus on having 30% penetration of electric vehicles in automobiles and 5 million tonnes of green hydrogen production by 2030. On the energy efficiency front, large industries have shown promising achievements while potential in small and medium industries and commercial complexes remain largely untapped. As per our estimates, India would need more than $1 trillion by 2030 to realise these ambitions. To put this into context, the investment requirement is close to 40% of the total assets of all commercial banks or around four times the total housing loans in India as of March 2021. Clearly, the investment inflow will have to steeply increase which is an achievable pursuit, but it will require three fundamental interventions.
First is the strengthening of the financial health of public institutions. In India, public utilities such as electricity distribution companies (discoms), municipalities, state transport agencies and urban local bodies form bulk of the off takers for the clean tech projects. Most of these utilities are reeling under massive financial burden due to legacy issues which often result in delayed invoice payments and in some instance even litigations out of contractual disputes. Continuous improvements in technologies tend to reduce the cost of future projects which making the contracts made with public utilities appear expensive. As a result, even though the investors have already paid for the contracts today with an expectation of secured payments, the risk of contract renegotiation or delay in payment remains. Robust contract enforcement and payment security mechanism along with strengthening of public utilities will go long way in attracting the investments into the cleantech sectors.
Second is the deepening of the capital markets in India. By design, largest bond subscribers such as insurance companies, pension funds and provident funds operate only in high quality AA+ and above rated assets. This rules out the large spectrum of cleantech project universe. Slight relaxation in norms specifically for cleantech projects from AA+ would pave way for unlocking the investment potential in the cleantech sector. Coupled with the first reform to ensure payment security and contract sanctity, the projects would have enhanced creditworthiness even if rating is below AA+.
Third is the deepening of the forex hedging market. Indian domestic markets alone will not be able fund $1 trillion investment requirement which is almost 15 times higher than the total investments that took place in the cleantech sector in the last decade in India. The sector will also have to rely on the abundant foreign capital, but shallow hedging market increases the landed cost of borrowings. Currently, long-term swap options are either not available or just too expensive. Though short-term swap options would look attractive, but it leaves the projects exposed to currency depreciation where the investments are made for long-term. As quantum of fund requirement is huge, it is prudent that policy measures are taken to ensure competitiveness of hedging market in line with long term currency depreciation rates. With the help of necessary interventions and healthy market fundamentals combined, India will be able to scale up its decarbonization efforts thereby becoming the role model in the global mission to mitigate climate change.
(The author is Managing director, Tata Cleantech Capital Limited. Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited)