Clean Energy is directly (SDG7: affordable & clean energy, and SDG11: sustainable cities & communities) and indirectly (SDG3: good health & well-being, SDG13: climate action, SDG14: life below water, and SDG15: life in land) linked to various SDGs, yet the pace and quantum of investment in clean energy is not so much in line with these goals. Investment levels in clean energy remain far short of what would be required to put the world on a more sustainable pathway, highlighted the World Energy Investment Report 2020. In the International Energy Agency (IEA)’s Sustainable Development Scenario, for example, spending on renewable power would need to double by the late 2020s. Sadly, private finance faces various impediments while public finance is insufficient. Therefore, we need a mix to achieve the transition.
India’s energy sector is experiencing a transition with increasing penetration of renewable energy within the energy mix. The country has set ambitious renewable energy (RE) targets – 175 GW by 2022 and 450 GW by 2030. At a recent summit organized by the International Solar Alliance (ISA), Prime Minister Modi expressed his confidence about India surpassing its RE target for 2022, going beyond 175 GW to reach 220 GW capacity by 2022. However, achieving this requires capacity installation of 36GW annually, as per Institute for Energy Economics and Financial Analysis. This in turn requires further capital flow from both Indian and international investors. Even though India’s achievements in the last decade in accelerating renewable capacity addition have been remarkable, financing of clean energy in India continues to face multiple conundrums such as-
Lack of policy stability: International investors seek policy certainty. India has seen too much policy inconsistency and change, as well as state-centre conflicts. The government needs to ensure policy certainty, better centre-state coordination on renewable energy development, and explore innovative financial solutions to attract more funds.
Lack of long-term financing: For RE projects, we need to have long term financing as short-term financing is not suitable for infrastructural projects. Shortage of long-term finance blunts low-carbon development progress. Asian economies are still bank dominated and there are constraints in banking sector for long-term finance. In order to have sustainable finance, we need to have such organisations that hold long-term money such as pension funds, insurance companies.
Various risks associated with low-carbon projects: Technology risk as most of these technologies are relatively new, leading to investors postponing their investments in the expectation of cost going down further. Then, there is feasibility risk owing to lower rate of return. Exchange rate risk as manufacturing low-carbon technologies is dependent on cross-country supply chain and is heavily depending on trade, hence exchange rate risk is high. There are also other risks such as political risk, operational risk, etc. The World Bank found that in the 2011-17 period, institutional investors had not financed a single infrastructure project in South Asia, primarily because investing in emerging market infrastructure is perceived as high risk.
Lower rate of return in low-carbon projects: Clean energy technologies are often earlier in the development stage and not always commercially viable compared to conventional technologies. This makes these technologies more expensive and riskier ventures. Even though SDGs are important, rate of return matters the most to investors.
Lack of capacity in market actors: Investment in low-carbon projects are also undermined by lack of familiarity, limited information and knowledge, and limited expertise about green infrastructure among investors.
Apart from these constraints, there is also an unwillingness to act that emanates from cognitive biases, which make it difficult to deal with complex, long-term challenges that threaten our existence, like global climate change, as per political psychologist Conor Seyle. This bias, commonly referred to as present bias, refers to the greater weight people place on payoffs that are closer to this moment, as compared to those within the future.
India’s climate commitments require a significant infusion of capital. Critical and long-term investments are required to upgrade existing energy systems, retrofit existing carbon intensive infrastructure, and develop new low-carbon infrastructure. The scale of the financing needed to realize the aspirational goal of transitioning to clean energy requires the infusion of significant finance at more attractive terms and therefore, calls for concerted efforts of stakeholders and supportive policy framework that must address the investment risks perceived by financiers and developers.
India’s climate commitments require a significant infusion of capital. Critical and long-term investments are required to upgrade existing energy systems, retrofit existing carbon intensive infrastructure, and develop new low-carbon infrastructure
There is also a requirement to deal with the structural issues that are holding back the further penetration of RE. Moreover, mature technologies, such as RE, can rely on private finance in a low-interest-rate environment and mainly need a favorable regulatory environment, not necessarily more public money. In contrast, public spending is important for nascent clean energy technologies that still lack the scale required for enormous cost reduction. To finance new technologies at scale, using green state investment banks and multilaterals would also allow leveraging existing expertise in the way to bring promising technologies to the market in an efficient manner, catalyzing private capital.