OPINION: Leveraging international capital flows for India’s green recovery and clean energy transition
The finance sector needs to better integrate long-term climate risks into investment decisions, and work with governments and development partners to design suitable financing vehicles to help scale private capital flows for clean energy
New Delhi: COVID-19 induced economic recession in India has created an urgent need to ramp up investments and create much-needed jobs. As the country looks to enhance economic activity, investing in green projects can support India’s move to a low-carbon pathway. But, can green investments help economic recovery and create more
jobs? And, where will the financing for these projects come from?
A clean energy transition in India is a massive investment opportunity that can spur a green recovery and fight climate change. Achieving India’s climate targets will need a whopping $834 billion in investment. Multi-country studies show that investments in clean energy and connectivity infrastructure will have not just high positive impact on climate but also have a high multiplier impact on economic growth. Initially, clean energy infrastructure (like building retrofits and building wind turbines, restoring wetlands) is labor-intensive. Consequently, they impart high short-run economic multipliers. As the operation and maintenance of more productive renewable technologies becomes less labor intensive, productivity rises and energy cost savings are passed to the wider economy, it gives high long-run multipliers.
At times, the higher initial investment compared to traditional projects may tilt the scale against green projects. However, long-term economic and climate benefits of green projects more than compensate for the lower initial costs of environmentally unsustainable projects. Green investments will also reduce the risks of stranded assets, negative environmental and health impacts, and the reduce the massive environmental clean-up costs in the future. Investors are increasingly acknowledging these benefits and globally more than $1 trillion capital is committed to responsible investing. India needs to attract a larger proportion of this capital to supplement domestic capital in a green recovery.
Moving to a Green Future
What do we need to ramp up the current level of investments? Liquidity is not the challenge. In fact, various sources confirm sufficient liquidity with investors. Globally investors are looking for an investible pipeline of green projects. India has one of the most vibrant renewable energy markets with successful implementation of wind and solar projects. Policies aim to be supportive for accelerating growth of renewable energy in India, implementing industrial and building energy efficiency, electric mobility, and reduction in harmful emissions. However, often smaller project promoters lack capacities to prepare investment proposals or investors perceive risks to be higher with new and untested green technologies and unfamiliar business models. Hence sometimes even viable projects fail to attract investments.
Role of International Collaboration and Development Assistance for a Green and Sustainable Recovery
While OECD countries have so far announced stimulus programs worth about $11 trillion, economic recovery packages in non-OECD countries represent only a small fraction of this value. Countries such as France and Germany have designed green recovery packages with support for clean energy at the heart of their programs. Such a strategy unfortunately is beyond the means of most emerging and developing countries with much lower public revenues and capacity to raise debt.
In the short-term, there is a risk that international development assistance may prioritize funding for health to help countries address the global health emergency. This may lead to a drop-in funding for clean energy transition. Hence, development assistance programs should focus the limited clean energy funds to mobilize and scale up private finance. Blended finance mechanisms can support market creation as they de-risk projects and leverage private capital, have a larger multiplier effect than direct funding of projects.
Technical assistance aimed at supporting policy frameworks, building capacity to develop and structure clean energy projects, financial innovation, and new business models should be prioritized. Such solutions do not require the same scale of funding as direct finance for projects. Philanthropic donors can also be mobilized to help fill the funding gap and their more flexible operations can complement the support provided by official development assistance.
Scaling Up Private Finance for Clean Energy
There is a strong case for greater participation by domestic commercial capital in addition to attracting more overseas capital. India’s economic recovery package channels funds into the economy mainly through its banking system. The time has come for banks and other investors to recognize the value of green investments. Considerable evidence is emerging regarding the better performance of ‘green’ investments over ‘brown’ ones. Morningstar examined the performance of nearly 4,900 European funds, including 745 sustainable funds over a period of 10 years, and found that sustainable funds have largely outperformed traditional funds. Even in India, Solar RE listed stocks, Adani Green Energy and Azure Power have outperformed the index over the COVID-19 period.
Although evidence of performance is emerging in India for the established clean energy segments such as utility scale solar and wind, there are yet data gaps for smaller clean energy projects and newer green technologies and business models. These projects will still need de-risking to attract commercial investors. Blended finance facilities with access to concessionary public funds and risk mitigation instruments can help lower risks for commercial lenders.
An Indian institutional blended finance facility with access to concessionary Indian Government and international funds is the need of the hour for India. The ‘Green Window’, being developed at IREDA, can help mobilize development assistance funds and channel them into ‘underserved’ clean energy markets such as distributed renewable energy and battery storage. Greater attention by policy makers in India will help incentivize and facilitate the creation of such facilities to effectively use the limited concessionary public funds to ramp up green investments. This along with blended finance options offered by specific development assistance programs can help in stimulating the Indian economy.
With the possibility of shrinking development funds for climate finance, development assistance programs need to be strategic and maximize the leverage of private capital. Funding innovative financing mechanisms that can de-risk projects and drive down the cost of private capital are critical as they support market creation. Governments in emerging economies need to re-evaluate their policy frameworks to ensure that they are compatible with risk return requirements of international and domestic private and commercial capital. The finance sector needs to better integrate long-term climate risks into investment decisions, and work with governments and development partners to design suitable financing vehicles to help scale private capital flows for clean energy. This will help in financing a greener recovery that saves lives, mitigates impacts on climate change, and creates jobs.
[Poonam Sandhu is Financial Sector Specialist and India Team Lead, Natural Resources Defense Council. Cecilia Tam is Head of Programmes, Clean Energy Finance and Investment Mobilisation, Organisation of Economic Co-operation and Development]
[Disclaimer: The views expressed are solely of the author and ETEnergyworld.com does not necessarily subscribe to it. ETEnergyworld.com shall not be responsible for any damage caused to any person/organisation directly or indirectly]