Financing, without a doubt, is the most critical aspect of any project, especially in the renewable space. Keeping in mind their long gestation period and capital-intensive nature, there's no chance in heaven for green projects to reach fruition without getting the money aspects properly worked out. And yet, despite the challenges, it is also one of the most underrated and least addressed aspects.
In all the euphoria and excitement for the uptake of green in India, be it renewable energy or green buildings, financing has escaped notice in both the public and private sectors. While there have been some policy pronouncements that talk about encouraging green investments, they have been too few and far between.
The scenario has been exacerbated, with the financial system in a disarray, and banks wary of NPAs, curbing the flow of capital. The stress in the renewable sector, falling tariffs, and the financial health of DISCOMs are also muddling matters for financing.
The situation has reached such a state that the union minister of power, RK Singh, recently decided to convene a meeting of various stakeholders to arrive at an amenable solution.
In a letter addressed to various stakeholders, the problem was laid threadbare. "Many stakeholders, of late, have expressed concerns that Indian banking institutions are not willing to support projects in the renewable energy sector,” the letter said. “It is also imperative to plan the flow of capital both in terms of equity and debt in a timely manner.”
Trouble is, banks and non-banking financial companies have been the primary source of credit for green projects. Banks such as SBI and Yes Bank have been driving investments in the sector through a variety of favourable loans, but then, they do not have the necessary expertise or the appetite for the long term.
Given the fact that the payback period for green projects is pretty long-drawn, financial institutions are wary of making a commitment for the future.
From Solar to Sustainable
To deal with such financing issues, the government had created the Indian Renewable Energy Development Agency (IREDA), a non-banking financial institution under the administrative control of the ministry of new and renewable energy, for providing term loans for renewable energy and energy efficiency projects.
With a primary focus on renewable energy, IREDA finances up to 75 percent of the cost of a solar project venture. In fact, the agency conducts credit rating for all grid-associated projects and provides grading in a band of 4 grades, with the interest rates being connected with the grades. So, the lending rates can vary from 9.75 percent to 11.50 percent pa depending on the project and the promoter.
There are also foreign lenders who can be tapped for finance like the International Finance Corporation (IFC), which is the financing division of the World Bank, the European Investment Bank (EIB), which has partnered with SBI, and the Exim Bank, which was the first foreign financing foundation to sanction solar power projects under India’s Jawaharlal Nehru National Solar Mission.
But then, getting the funds from these agencies can be difficult, primarily because of the time taken (6-9 months) and the high cost of due diligence and other requirements. As a result, not many corporates or small entities go in for institutional funding, which mostly only attracts big projects like solar or wind farms.
The proverbial buck for all this rests with the government. So far, there has not been much push on the policy front for private financing. Given the scale of ambitions, one would have thought that private lenders and non-banking financial companies would be readily courted on various projects. However, governmental agencies have only recently started talking about encouraging private financing for green projects.
Need for Acceleration
It was in late 2015 that India had ratified the Paris agreement, which mandated us to make a commitment towards achieving 40 percent non-fossil-based power capacity by 2030.
Given the fact that around 30 percent of our energy is already no-fossil based (like hydropower and renewable), India is one of the rare countries that is likely to achieve those numbers.
In fact, according to reports in the media, India has already reached 34 percent non-fossil electricity, and should reach its goal of 40 percent as early as 2022 — eight years ahead of schedule. While this might seem like a good omen, the fact remains that India needs to up the ante on green infrastructure, right from agriculture to transport.
A McKinsey study had stated that a projected increase in emissions to 5–6.5 billion MT of carbon dioxide equivalent in India could be lowered by 30 percent to 50 percent by 2030, by investing in energy-efficient technologies in road transport, power, buildings, and appliances.
The report suggests that incremental capital of about $874 billion to $1.1 trillion would be needed between 2010 and 2030, even after accounting for steep declines in the cost of emerging technologies such as solar power.
In fact, according to another report, the country needs about $4.5 trillion in infrastructure funding by 2040, with $200 billion for renewable energy, $7.7 billion for rail networks and $667 billion for electric vehicle programs.
All this massive funding cannot be provided by the government alone. One of the untapped resources has been the green bonds market. The country’s first green bonds were issued as recently as 2015.
Cumulatively, India has raised over $6 billion via green bonds, of which one third were issued in 2017, which is just a pittance when you compare the money that is raised abroad. For the same to happen, we need reform on the policy and regulatory side. The government needs to ease the complex framework to enable players to tap the market.In addition, there are some aspects of financing that need to be addressed on a broader level:
Traditionally, investments in renewable power such as solar or wind are designated as green investments, but we need to move beyond that. Things like electric vehicles, waste management, green buildings, pollution control and green transport also come under the umbrella of green and must be designated so. Just like the IREDA has done on the solar front, we need to create a green finance agency for other segments ranging from EVs to organic agriculture. This agency could play the role of a partner for the industry, and also bring out a report and studies on the subject The government needs to create a simple template for documentation that can be used by the financial agencies. Running from pillar to post to get the documents right can be very taxing The micro-finance revolution in India has been quite heartening, with a plethora of players funding small entrepreneurs in every corner of India. We need a similar movement in the renewable space, promoting micro-entrepreneurs through small and innovatively designed structural loans.
The usage of Financial Technologies in the consumer lending sector has truly energised the sector. Given the ease and transparency that FinTech brings to the table, it can be a catalyst for the uptake of loans.
In the end, for sustainable and green projects to be successful and broad-based, we need the inflow of capital from the private sector. With ambitious targets, one also needs an ambitious means to achieve them. The time is ripe to bring in such reforms and measures.
Shashwat DC is Features Editor at CNBC-TV18. He is closet-activist for sustainability and CSR, when not pondering over the future of humanity or contemplating the launch of the new Android phone.