Energy policy in India over the past decade has focused on creating enabling conditions to deliver renewable energy technologies onto market and to bring down their costs.

The result has been a spectacular drop in prices for renewable energy solutions like solar photovoltaic (PV) and on-shore wind, where the cost of renewables in India is now less expensive than new coal-fired power and even much of existing coal-fired generation (TERI, 2019).

Current state of progress

India has seen impressive growth in renewable electricity additions over the last decade, with more than 94 gigawatts (GW) of grid-connected renewable electricity capacity (excluding large hydro) installed as of April 2021 (Invest India, 2020).

When accounting for large hydro (around 46 GW), recently considered as renewable by the Government, total installed renewable energy sources in India account for over 36% of generation capacity (Ministry of Power, 2021).

Renewable energy ambitions

The Government of India has set ambitious targets of 227 GW of renewable power capacity (excluding large hydro) by 2022 (ET Energy, 2019).

In 2019, Prime Minister Modi announced further ambitions to achieve 450 GW by 2030 (India Today, 2019).

Achieving these ambitions requires steep growth in capacity additions – as well as the underlying investment – over the coming decade and beyond (NRDC-CEEW-IREDA, 2020).

Implications for investment

As much as USD 300 billion, or about USD 30-33 billion per year, is needed over the coming decade to finance India’s 2030 targets (Government of India, 2019; CEEW, 2019).

By comparison, renewable energy investment over the last five years was around USD 6-10 billion per annum on average (NRDC-CEEW-IREDA, 2018).

Scaling up this investment level is feasible, but it will require new channels beyond domestic financiers, who provide the bulk of renewable energy finance today and who realistically cannot double or triple their current lending levels to those projects.

Renewable energy finance today

Renewable energy financing in India is provided primarily through term loans by domestic financial institutions (CBI, 2019).

Their lending capacity for long-lived assets like renewables is limited, due to power sector credit exposure ceilings (generally 15-20%) and bank liability profiles (IEA-CEEW, 2019). Microfinance institutions (MFIs), such as BFIL and SEWA, are similarly constrained by credit exposure limits.

In late 2020, the Reserve Bank of India (RBI) doubled the loan limit to Rs 30 crore (about USD 4 million) for individual renewable energy projects as priority sector lending. However, this may still not address limits with large-scale renewable lending (Business Standard, 2020).

Banks and non-banking financial companies (NBFCs) such PFC, REC, IIFCL and IREDA also face the problem of rising stressed assets, which constrains their ability to extend fresh credit. While this issue pre-dates Covid-19 (Kaur, 2019), it has since been exacerbated by the global health pandemic (Dutt, 2021; Economic Times, 2021).

Challenges to growing renewable energy finance

Beyond exposure limits, it can be challenging for domestic financiers to provide long-term, fixed price loans (e.g. for 15 to 18 years), as their primary source of capital is short-term deposits (i.e. 3-5 years) (NRDC-CEEW-IREDA, 2018).

Scaling up finance for smaller transaction sizes (e.g. for solar irrigation pumps and rooftop PV) can also be a challenge, given the lack of a standardised framework to assess the creditworthiness of those smaller borrowers (CBI, 2019).

Smaller borrowers also often lack credit histories or can have poor creditworthiness, adding a further challenge to scaling-up loans to small businesses and residential consumers.

The lack of financial performance track records for some clean energy technologies can also constrain lending.

Need for lower financing costs

The cost of debt, particularly for smaller-scale and distributed renewable energy projects, is another challenge to meeting India’s ambitious targets.

The high cost of finance in India, including high variable interest rates, has fallen in recent years but can still add as much as 30% to 50% to the cost of renewable energy tariffs (ADB, 2020).

High cost of finance equally affects private sector spending on renewable energy. For instance, Indian corporates looking to issue bonds typically pay high coupons, as rates of the basic government security are equally high (CBI, 2019).