India made noteworthy progress in the generation of renewable & non-fossil fuel energy in the last few years. As of 31 December 2021, the government announced that India has achieved its NDC’s target as committed at COP21. However, as highlighted by the parliamentary standing committee recently, financial constraints remain a challenge in India achieving ‘Clean Energy’ targets set for 2030.
India had made a pledge that 40% of the country’s installed electricity generation capacity shall be from clean energy sources by the year 2030. As of 31 December 2021, the Government of India announced that India has achieved its NDC’s (Nationally Determined Contribution) target with a total non-fossil-based installed energy capacity of 157.32 Giga Watts (GW) which is 40% of the total installed electricity capacity as committed at COP21.
In 2015, India had decided that by 2022, 175 GW of renewable energy capacity would be installed in the country, including 100 GW from solar energy, 60 GW from wind energy, 10 GW from biomass, and the remaining 5 GW from small hydropower. Later, in 2019, Prime Minister Narendra Modi stated that India’s renewable energy capacity would be increased to much beyond 175 GW and eventually to 450 GW. In the recently concluded COP26, he announced that the government is committed to achieving 500 GW of installed electricity capacity from non-fossil fuel sources by the year 2030.
Recently, the parliamentary standing committee on energy, which looks at the Ministry of New and Renewable Energy (MNRE) tabled a report on the ‘Financial Constraints in Renewable Energy Sector‘ in which the committee has put forth a list of recommendations for the government to explore innovative ways to deal with the issue of financial constraints in the sector.
India is on track to achieve the 2022 targets
As of 31 January 2022, with about 11 months left to achieve the target of 175 GW renewable energy capacity by 2022, 105.42 GW has been achieved. That is, about 60% of the target has been achieved. However, going by the segment-wise targets, the target of 10 GW set for bioenergy has been achieved while almost 97% of the target of 5 GW for small hydropower has been achieved. In the case of wind energy, only two-thirds of the 60 GW has been achieved while just about 50% has been achieved in the case of solar energy.
Significant progress in the renewable energy sector over the last few years
According to Invest India, the country’s investment promotion agency, India was ranked 3rd in the renewable energy country attractive index in 2021. The country’s installed renewable energy capacity stood at more than 151.4 GW (including large Hydro), accounting for 39% of the country’s total capacity, as of 31 December 2021. Furthermore, the increase in installed solar energy capacity has been by 17 times in the last 7 years and reached 50 GW. Overall, India’s installed renewable energy capacity, including large hydro, has increased from 76.4 GW in March 2014 to 151.4 GW in December 2021, recording an increase of around 98%. As noted earlier, India has achieved its Nationally Determined Contributions (NDC) target of 40% electricity generation through clean energy sources by 2022.
Financial constraints for the sector have been highlighted by MNRE
While the progress in the last few years has been noteworthy, the country has set ambitious targets for renewable energy installation to be achieved by 2022, and by 2030 which have a very large financing requirement, as stated by the MNRE during the committee meetings. To meet the long-term commitments, India would need an annual investment of Rs. 1.5 to 2 lakh crores. Despite this, the estimated investments for the last few years have been in the range of only Rs. 75,000 crores, thereby leaving a large gap between the required and actual investments. To achieve the target of 450 GW installed capacity by 2030, the Ministry has envisaged a total additional investment of Rs. 17,00,000 crore including transmission cost based on certain assumptions.
The committee noted that filling this huge gap between required and actual investment will be a gargantuan task. Noting the large overall debt requirement and the need to reduce the cost of financing to the renewable energy developers, the committee recommended the ministry to explore the following:
- Innovative financing mechanisms and alternative funding avenues such as Infrastructure Development Fund (IDF), Infrastructure Investment Trusts (InVITs), Alternate Investment Funds, Green/Masala Bonds, crowdfunding, etc.
- Prescription of Renewable Finance Obligation on the lines of Renewable Purchase Obligation (RPO) for banks and financial institutions.
- Setting up a green bank system that can address the persisting finance-related challenges being faced by the sector
USD 8407 million FDI inflow into the sector in 10 years
Between 2010-11 and 2019-20, the Ministry stated that there was a total FDI equity inflow of USD 8,407.38 million in the non-conventional energy sector. 100% FDI under automatic route has been permitted in the renewable energy sector. This is one of the measures taken by the Government to boost investments in the sector along with other measures such as rolling out fiscal incentives like accelerated depreciation, GST at lower rates, concessional custom duty, etc., Payment Security Mechanism for SECI bided projects, setting up of Dispute Resolution Committee to deal with disputes between solar/wind power developers and SECI/NTPC beyond the contractual agreement, setting up of Renewable Energy Industry Promotion & Facilitation Board, Ultra Mega Renewable Energy Parks to provide land and transmission on plug and play basis, Green Energy Corridor Scheme, etc.
IREDA should be given a special window for borrowing from RBI at the repo rate
The Indian Renewable Energy Development Agency (IREDA) is the only dedicated public sector financial institution for financing renewable energy projects in India. As of 31 March 2021, IREDA had financed 2800 renewable energy projects with cumulative loan sanctions of Rs. 96,250 crores and disbursement of Rs. 63,158 crores supporting green power capacity addition of more than 16,165 MW. The committee noted that as per RBI’s guidelines, IREDA had to maintain a minimum capital-to-risk weighted assets ratio (CRAR) of 15%. But, its CRAR had dropped from 23.1% in 2014-15 to 14.3% in 2019-20 limiting the window for borrowings. There was a slight improvement to 17.1% in 2020-21. Additionally, IREDA has planned to come up with an IPO for enabling more financing. Noting the pivotal role of IREDA, the committee suggested that IREDA should be given a special window for borrowing from RBI at a repo rate in line with other specialized financial institutions like NHB, SIDBI, and NABARD, to ensure the availability of low-cost financial resources for the sector.
The committee asked the Ministry to explore the possibility of exempting PFC Ltd, REC Ltd, and IREDA from payment of guarantee fees for raising funds from international multilateral agencies like KfW, JICA and ADB. Alternatively, it suggested a guarantee fee at a concessional rate like in the case of the National Bank for Financing Infrastructure and Development (NABARD).
The committee asked banks to restructure loans such that EMI is higher in the peak season of revenue generation and lower in the off-season to ward off the risk of renewable energy projects from becoming NPAs. Further, it recommended that the ministry actively engages with the state governments to avoid any unilateral cancellation/renegotiation of power purchase agreements (PPAs) as it causes uncertainty and negatively affects the investment in the renewable energy sector.
Ministry has been asked to pursue DISCOMS and states to clear dues
To avoid delay in disposal of tariff adoption applications by the electricity regulatory commissions, the committee suggested that amendments be made in the Electricity Act to fix a maximum period for according approvals/disposing of petitions by the State Electricity Regulatory Commissions. Furthermore, it called for proper implementation of the Electricity (Late Payment Surcharge) Rules, 2021 so that the developers get compensated for delays caused by Distribution Companies (DISCOMs) in payment of dues.
It also called for providing payment security instruments in every PPA signed by renewable energy developers with DISCOMs. The Ministry was asked to pursue states and DISCOMs to clear dues on a ‘first in – first out’ basis so that the oldest dues are paid first. The Ministry was also asked to pursue the matter of banks’ reluctance to lend with the local banks and ensure the availability of funds for the installation of renewable power capacity under schemes like rooftop solar and KUSUM. Furthermore, it called for increasing the limit of loans in the sector.
The government is promoting PLI Scheme to reduce dependence on China for solar PV Modules
Through the Production Linked Incentive (PLI) Schemes, the government aims to incentivize foreign investors to set up manufacturing units in India and push local manufacturers to expand their units which would also boost employment. In the renewable energy sector, the Cabinet in 2021 approved a PLI ‘National Programme on High-Efficiency Solar PV Modules’, with an outlay of Rs. 4,500 crores to promote manufacturing of high-efficiency solar PV modules in India and in turn reduce import dependence in the Renewable Energy sector. An additional allocation of Rs. 19,500 crores were announced by the Finance Ministry in the 2022-23 Budget to achieve the targets of 280 GW of installed solar capacity and increase the non-fossil energy capacity to 500 GW by the year 2030.
Featured Image: Clean Energy targets
