With climate change as a major focus during the recent G20 Summit, India emphasized its commitment to implementing the Paris Agreement. The World Bank recently recognized India as a “front runner in the global fight against climate change” with its massive expansion of solar energy. Although the investment in clean energy is growing in India, the scale of investment does not yet match the over $100 billion needed to achieve India’s clean targets. One promising solution is to create a dedicated green fund for accelerating clean energy investment.
During a BRICS meeting with Brazil, Russia, China and South Africa, Prime Minister Narendra Modi highlighted that “India will implement the agreement in letter and spirit,” stressing the need for global action despite the Trump Administration’s announcement to withdraw from the agreement. The World Bank also acknowledged the strong progress on climate in its piece “Solar Powers India Clean Energy Revolution”, focusing on India’s “sweeping commitment to solar power, innovative solutions and energy efficiency initiatives to supply its people with 24×7 electricity by 2030.”
Motivated by a desire to continue economic growth, create jobs and lift millions out of poverty, while simultaneously combating the threats of energy insecurity and climate change, the Indian government has set an ambitious renewable energy goal of 175 gigawatts by 2022. This year the Indian market has already seen record-low solar (2.44 Rs/$.04 per kWh) and wind (3.46 Rs/$.05 per kWh) tariffs. India has installed over 12 gigawatts of total solar power capacity, with a 370 percent increase in the past three years. This stunning growth in both solar and wind energy has prompted several Indian states to scrap plans to build new coal-fired power plants and announce the cancellation of coal mining projects.
However, according to estimates by the Ministry of New and Renewable Energy, meeting India’s clean energy goals would also require more than $100 billion in investment over the next six years. Where will this money come from? Prime Minister Modi has launched an International Solar Alliance to help drive funding and innovation into solar energy. But public funding alone is insufficient, and private investment has so far been limited to a few highly creditworthy players. A green investment fund, also known as a green bank, can be a key solution to accelerate clean energy growth.
Green investment funds are publicly funded, specialized institutions that finance clean energy projects in partnership with private lenders, both domestic and international. A green investment fund has what private banks lack: a mission to expand clean energy, specialized underwriting expertise in clean technology and access to low-cost public capital. And because green investment funds typically reinvest their income, effectively recycling public funds, they can create a bigger market impact than government subsidies or incentives alone. Green investment banks are expanding around the world and have been effective in the including institutions in New York, Connecticut, UK, Australia, Japan and Malaysia.
NRDC and our partner the Council on Energy, Environment and Water, have been conducting extensive research and analysis on opportunities for a green investment fund in India. Based on in-depth discussion with government officials, financiers, developers and thought-leaders, the need for a green investment fund is clear.
Three Key Findings
In the Indian context, our research shows three key finding based on board stakeholder discussions and market analysis.
Lowering the Cost of Capital – A dedicated, ring-fenced, pool of capital in the form of a green investment fund can be effective in lowering the cost of capital for clean energy projects in India. Financiers and developers in India emphasize that clean energy projects often struggle to get favorable lending terms from commercial banks, which typically view these projects as high risk, due to a lack of familiarity with the market. Since the green investment fund specializes in clean energy, and has access to low-cost public funds, it can assume higher risk and offer lending rates and terms that better match clean energy’s requirements.
Leverage Limited Public Funds to Increase Private Investment– A green investment fund in India can help steer private capital into clean energy from both domestic banks to international institutions, like the global Green Climate Fund. Government leaders and financiers in India highlight that an Indian green investment fund can drive market transformation by leading in investment that allows private investors to become more comfortable with entering an emerging market. For example, the UK Green Investment Bank was an early investor in offshore wind power in the UK, which is now the largest offshore wind market in the world.
Finance Underserved and Small-Scale Projects – Experts, including in the government and civil society, emphasized that a green investment fund can help finance critical but underserved small-scale projects in India. Small rooftop solar projects, microgrids and off-grid solar projects have the potential to transform lives of millions – from providing light for schoolwork to reducing the need for fossil fuels. One key solution the green investment fund can develop is by bundling small projects together to increase scale and reduce transaction costs, making them more attractive to private lenders.
As NRDC and CEEW research have examined, public institutions, such as the Indian Renewable Energy Development Authority (IREDA) have a green mission, yet offer loans at higher interest and shorter paybacks than the market needs. Indian stakeholders agree that the clean energy market needs a government fund with more patient capital and deeper clean energy finance expertise that leads market transformation. In addition to direct lending at lower rates, the green investment fund can offer financial products that help make commercial banks more comfortable with financing clean energy projects, such as partial credit guarantees or credit insurance.
As Prime Minister Modi and key leaders highlight, India is acting on climate change based on domestic interests. India needs to meet growing energy demand and protect millions who are most vulnerable to the impacts of climate change. Only clean energy can reduce pollution while expanding energy access, improving resilience and creating jobs.
Strong, effectively implemented government policies can help India’s nascent clean energy industry thrive. But financing solutions are critical to making these policies work. A green investment fund can help bridge the gap between the goals of private finance and public funding. Ramping up clean energy investment is critical to help build a more sustainable, prosperous low-carbon economy that achieves the country’s Paris targets and makes India a true front runner on climate change.