India needs to fix $1.5-tn green finance gap. Here’s how it plans to do it

In recent months, the Union ministry of new and renewable energy has discussed investments with state-run Power Finance Corp, Rural Electricity Corp. and Indian Renewable Energy Development Agency, along with other players, said the people quoted above on the condition of anonymity.

The ministry is looking at the feasibility of contract for difference or CfD for power-purchase agreements, which may be promoted instead of the conventional long-term pacts of up to 25 years, one of the two people quoted earlier said. Under Cfd, either party has to pay the difference between the contracted and the actual price. The ministry is also considering innovative models like mezzanine finance, which combines debt and equity, the person said.

Queries emailed to the ministry, Ireda, PFC and REC remained unanswered until press time.

India will require $1.5 trillion worth of investments by 2030 across key areas to address the climate challenge at scale, said a July report by Deloitte India. The investments will be driven by India’s efforts towards renewable energy, biofuels, decarbonization and sustainable infrastructure to combat climate change, it said. According to Union minister for new and renewable energy Pralhad Joshi, India has reached half of the targeted 500 GW green energy capacity. Non-fossil fuel energy accounts for about half of India’s overall power generation capacity.

“The ministry is looking at ways to promote financing and investments as the requirement would increase now. The initial part is done, and capacity installation is gaining pace. About half the targeted capacity has been installed,” said the second person quoted earlier. “Now, along with capacity growth, we also need to ensure that the commensurate transmission capacity is set up, as that is critical for a stable power supply. Transmission would require nearly the similar amount of funds required for capacity installation.”

The person said the government is also investigating how multilateral organizations can enhance their financing for green space, including emerging sectors like green hydrogen and renewable energy equipment manufacturing.

CfD, mezzanine finance pros

Among the different financing models being discussed, CfD is part of several large corporate power supply contracts. However, it has not been used in utility-scale projects, which mostly cater to retail consumers.

Since it takes care of the gap between the contracted price and the actual price, it ensures stable revenue for the buyer and seller, avoiding risks of price fluctuations. CfDs are increasingly being used with agreements to secure long-term stable pricing for energy projects, ensuring a company with low-carbon contracts can deliver on its net-zero commitments.

In the UK, CfD was introduced in 2014, aiming to support the deployment of large-scale renewable projects with a capacity of more than 5 MW each. CfD has been successfully adopted in several European countries. The UK, Germany, France, Italy and Spain have witnessed growth in renewable energy capacity addition backed by CfD-based contracts.

Power-purchase pacts offer predictability in revenue streams for energy producers, while providing energy buyers with a stable electricity supply at an agreed-upon price. But market volatility can impact the cost-effectiveness of these contracts, according to a report by Blackridge Research & Consulting. By integrating CfDs, stakeholders can mitigate financial risks associated with fluctuating energy prices, enhancing the appeal and stability of these agreements, it said.

Mezzanine finance, a hybrid form of funding, bridges the gap between senior debt (borrowings to be repaid first in the event of bankruptcy) and equity. This model provides lenders the potential to convert debt to equity, allowing flexibility of repayment terms, while offering higher returns.

Apart from these, the ministry of new and renewable energy is considering seeking the priority lending status for renewable energy funding and tax incentives for green bond buyers from the finance ministry, Mint reported earlier.

Last week, Joshi asked states to ensure procurement by accelerated signing of power sale and purchase agreements.

The new and energy ministry has already suggested that banks simplify financing for renewable energy projects, particularly rooftop solar panels, and called for the introduction of a renewable energy financing obligation to ensure dedicated funding for the sector, similar to renewable purchase obligations (RPO) for electricity distribution companies.

At a workshop on mobilizing finance for renewable energy in February, Joshi had said India secured commitments worth ₹34.5 trillion at the global renewable energy summit in Gandhinagar last year. He also urged financial institutions to streamline lending processes, ease compliance burdens, and adopt a more supportive approach to financing clean energy projects.