Fast-track the financing of renewables

As the world’s third-largest emitter of greenhouse gases after China and the US, India has a critical role to play in the fight against climate change. The UN climate science body, the Intergovernmental Panel on Climate Change (IPCC), released a report in February noting among other things that more than 40 per cent of India’s population will face water scarcity by 2050, and coastal areas, including big cities like Mumbai, will be affected by rising sea levels.

India has the world’s second-largest population and its rapid growth rate and low per-capita energy consumption means an insatiable thirst for energy in the years ahead. GDP is expected to continue growing at 7.5 per cent this year and at 6.5-7 per cent until 2025, according to the World Bank. India’s increase in electricity consumption in recent decades has been fuelled primarily by coal.

This, even as it has pledged to reduce the emissions-intensity by as much as 35 per cent by 2030, compared to the 2005 level, and to meet half of its electricity requirements from renewable sources by the end of the decade. That would increase non-fossil energy capacity from 159 Gw to 500 Gw by 2030 and put India on the path to achieving net zero emissions by 2070, as pledged by Prime Minister Narendra Modi at the UN climate conference, COP26, in Glasgow.

The country has already made inroads into the transition towards green energy, with approximately 23 per cent of its total power generation last year coming from renewables. Today, with commitment to net zero, it has the chance to showcase its “green ambitions” as one of the most exciting renewable markets globally by doubling down on the growth momentum to date.

The current policy backdrop is adding to the favourable investment climate created by sectoral tailwinds in recent years. Between 2014 and 2020, Indian renewable energy attracted global investments of about $67 billion, according to the REN21 Renewables Global Status Report. Domestic and international strategic investors, sovereigns, pension funds and private equity have been providing the full breadth of capital solutions to the market.

Meanwhile, Indian corporates have tapped international equity and debt capital markets, resulting in a good diversification of capital sources. Renewables have also witnessed several success stories where international investors have backed greenfield and brownfield platforms. India has a conducive and evolving ecosystem for renewable energy with a transparent reverse auction mechanism to procure power, which has achieved a lower levelised cost of electricity than coal.

And the Indian government has been successful in creating a favourable regulatory and legal environment to promote energy transition through measures including a solid on-time payment track record with power purchase agreement counterparties such as Solar Energy Corporation of India Ltd.

Looking ahead, it is at the confluence of several exciting and emerging areas for investment, such as the adoption of dispatchable renewable energy — able to be used on demand — and harnessing wind-solar hybrid solutions. Additionally, the declining trajectory of battery prices globally will drive cost economics for adoption of renewable energy storage systems and also propel the electric mobility mission.

Finally, the green hydrogen revolution has significant potential in India. The country consumes about 6 million tonnes of hydrogen every year to produce ammonia and methanol in industrial sectors, including fertilisers and refineries. This could increase to about 28 million tonnes by 2050, with 80 per cent of it being green. Considering the nascent stage of the green hydrogen market, Indian companies may look to partner with global players with relevant capabilities and technology to gain an early-mover advantage in a big market.

As the energy transition accelerates, India’s macro environment and energy backdrop offer a compelling, multi-decade growth opportunity for green-leaning investors to deploy long-term capital.

The writer is global co-head of investment banking at Nomura