A coherent strategy for financing India’s climate goals
Gireesh Shrimali, PhD; Precourt Scholar, Stanford University; Research Fellow, Imperial College
India has committed to sustainable development and climate change mitigation
India is the 3rd largest emitter of greenhouse gases today, despite having one of the lowest per capita emissions in the world. The latter is an indicator of India’s development status, which prompts many to push for development as a priority. However, India is also cognizant of the negative impact of environmentally harmful technologies, such as coal power plants and internal combustion engines.
Having recognized the need for both development and sustainability, India has embraced climate change action as a priority. This is evident from the National Action Plan for Climate Change (NAPCC), which lays out India’s plans for not only reducing greenhouse gas emissions but also for adapting to the now very real threat of some climate change. This also has strategic value in terms of reducing dependence on fossil fuel imports and promoting domestic manufacturing.
While the NAPCC is an internal commitment, India has also show leadership in the global arena by signed up for moderate Nationally Determined Contributions (NDC). These include, by 2030, the following: Lower emission intensity by 33-35% compared to 2005 levels; 40% of power generation capacity by renewable sources; and additional carbon sink of 2.5-3 billion tons via increasing forest cover.
In this context, an additional ambition has emerged – 100% electrification of transportation by 2030. While this is yet to be official policy, there is already a lot of action on ground towards this goal. Combining this goal with the fossil-free power generation commitment provides a realistic path towards reducing the carbon intensity of the transportation sector as well.
India has made progress towards reaching its sustainable development goals
India has made significant progress towards meeting its goals. For example, as of June 2019, India has installed 80GW of renewable power generation capacity towards an intermediate 2022 target of 175GW. While wind energy capacity has risen steadily to 36GW, solar energy has seen recent fast growth, and has reached 30GW of installed capacity. There has been significant progress on energy efficiency as well, as evident by the early success of the Performance, Achieve and Trade (PAT) program; and, by the forward movement on various initiatives, including the Energy Conservation Building Code (ECBC) and the Appliance Star Labeling System.
However, on the other hand, India still has a long way to go. For example, India is still approximately 100GWaway from its 2022 renewable energy targets. This gap increases to 300GW when compared to the 2030 targets implicit in India’s NDCs. Further, it is not clear as to what the impact of various energy efficiency related programs has been on the 33-35% carbon intensity reduction target for 2030. Finally, the electric transportation revolution is just starting.
A lot more investment is needed to meet these targets
While these are positive goals, and there have been strong steps forward to meet them – especially taking advantage of least-cost opportunities – it should be noted that India’s investment needs to reach these goals are massive. According to the International Finance Corporation (IFC), India offers climate investment opportunities worth $3.1 trillion through 2030. The sectors under consideration include renewable energy, green buildings, climate-smart agriculture, electric vehicles, etc.
Given the limited availability of development capital and the tremendous investment requirements, leveraging development and public capital to crowd-in commercial capital is the need of the hour. In fact, this is reflected in World Bank’s “Billions to Trillions” approach, whereby billions of dollars in official assistance should mobilize trillions of dollars in total financing.
In India, this public-private collaboration will be essential to raising the requisite finance for country’s cleaner growth. While the right domestic policies will be key to facilitating finance, greatly scaling up investment from the private sector will be the only way to mobilize the full amount of capital needed to meet India’s ambitious targets. Given the massive investment requirements, public capital needs to be deployed in the most effective manner.
A synchronized effort is required, using policy and financial interventions
According to the International Renewable Energy Agency (IRENA), there are several reasons why investments in low-carbon technologies and business models may not scale-up at the required pace. These reasons may be categorized into one or more among the following: First, a policy framework that is not conducive to the growth of the sector; second, a lack of adequate risk mitigation mechanisms that address barriers preventing mobilization of commercial capital; and third, a lack of structured finance tools that can attract large scale funding from capital markets.
These three elements usually occur sequentially, in the order listed. For instance, even if the government has been supportive of the sector and formulated an actively evolving policy, private investment might still be limited due to high perceived risk.
For example, several barriers threaten scale up of distributed renewable energy investment in India. These may include: Concerns around bankability of projects; high transaction costs for smaller-sized projects; high or unknown consumer credit risk; limited historical information on development impact; logistic and informational problems around managing remote assets; lack of strong sponsor balance sheets to meet debt service covenants; uncertainty around feasibility of technology; etc.
In this example, to assuage investor concerns and mobilize private capital at scale, adequate risk mitigation mechanisms and structured finance tools need to be developed. Potential catalytic interventions to overcome these constraints include developing risk sharing and mitigation structures, such as a currency hedging facility to induce more foreign capital; developing guarantee structures to offer downside protection to investors; creating financial intermediary and aggregation platforms such as a warehousing and securitization vehicles; developing blended finance structures so that public capital takes on higher risk; and using technology to reduce transaction costs of small-scale financing deals and provide better credit information. Once developed and refined, these interventions must also be supported into implementation and, ultimately scale.
We need an effective approach for enabling required investments
At a high-level, this process of first analyzing market conditions and barriers in a specific sector, then developing catalytic finance interventions, and finally, enabling their implantation, forms an implicit value chain approach to scaling promising technologies. This approach can be applied to various sectors of the green economy – renewable energy, sustainable transit, climate resilience, etc. – and when taken together, across all high-needs sectors, is a comprehensive strategy for economic transformation.
I therefore propose a three-pronged set of interventions that together take a comprehensive approach to ensuring India’s low-carbon goals receive requisite investments.
The first step would involve systematically identifying and prioritizing barriers to investment across sectors, both from project finance and capital markets perspectives. For example, while such knowledge exists for project finance in renewable energy, we are just starting to scratch the surface on electric vehicles. This would address the key issue that information on barriers hindering flow of capital is either missing or limited. These barriers could manifest in the form of ineffective policy formulation, high sectoral risks, lack of financing vehicles, lack of information, among others. Further, in the case where information is available, there is very little understanding of the priority of barriers and risks; so, prioritization of barriers and solutions would be necessary to ensure effective implementation.
The second step would involve identifying and prioritizing not only supporting policies but also catalytic finance solutions to overcome these barriers. There is a need to develop theoretical constructs of catalytic interventions (e.g., a currency hedging facility) and blended finance structures (e.g., an infrastructure investment trust) to address prioritized barriers. This includes financial modeling, stakeholder analysis, market research, and other scoping to ensure interventions can meet the needs of the various stakeholders. Some existing example initiatives include the India Innovation Lab for Green Finance, the US-India Clean Energy Finance Initiative, and the US-India Catalytic Finance Program, all of which I had the honor of setting up as the Director of Climate Policy Initiative.
Finally, the third step would involve enabling implementation and scaling up solutions on ground. A specialized well-funded entity is required to bridge the gap between the theoretical constructs of catalytic interventions and the final implementable versions, including making connections to appropriate implementers and stakeholders. In short, there is a requirement for enabler of implementation, something akin to the well-known Green Bank concept used elsewhere, such as the UK and the US. In the context of renewable energy, the India Renewable Energy Development Agency (IREDA) can play this role, but IREDA would need to step up as a catalyzer of private capital.
This comprehensive approach, if followed, would address the following challenges, and set India on the path to enabling financing of its ambitious climate targets.