The international climate agreement that emerged from the Paris negotiations this past weekend marks a historical turning point for the whole world, but particularly for India.
As a part of the global climate deal, national governments have shared plans for their countries’ action on climate change, and India’s contribution is ambitious — promising that renewable energy will be 40% of the country’s expected electricity generation capacity in 2030, along with a 35% reduction in carbon intensity by 2030 from 2005 levels.
India has also set one of the most ambitious renewable energy targets of all ¬- 100GW of solar power by 2022. This is more than half of the amount of solar power deployed worldwide at the end of 2014, and more than 20 times India’s current solar deployment. Additionally, India has also set a wind power target of 60GW by 2022, up from 25GW currently.
At the same time, Prime Minister Modi’s administration is likely to significantly increase the production of domestic coal. This is because one of the nation’s top priorities is to rapidly deploy energy in order to meet the needs of its growing economy and to provide electricity to the 400 million Indians who currently lack it.
Recognising the harmful air pollution and greenhouse gas emissions that an increase in coal production will bring, Prime Minister Modi stated during the Paris negotiations a willingness to further move away from coal if there were more finances available for renewable energy.
However, India faces two key challenges around funding for renewable energy and other green infrastructure: a shortage of available financing, and financing at unattractive terms — such as high cost of debt, short tenor and variable interest rates — which can add up to 30% to the cost of renewable energy in India, compared to the US or EU.
Public-private collaboration will be essential to raising the finance needed for India’s cleaner growth. While the right domestic policies will be key to facilitating finance, greatly scaling up investment from the private sector will be the only way to mobilise the full amount of capital needed to meet India’s renewable energy targets.
In order to scale up private investment, India needs financial instruments for renewable energy and other green infrastructure that are a better match with investors’ needs.
For example, one source of investment that has great potential but requires innovative finance instruments to facilitate it is foreign investment. Over the next five years, India expects over $160 billion of investment from international developers and banks to finance renewable energy projects. However, foreign investors are wary of investing in infrastructure in India due to the risk of extreme and unexpected currency devaluation.
Because currency exchange rates can be volatile, when a renewable energy project is financed by a foreign loan, it requires a currency hedge to protect against the risk of currency devaluation. Currently, market-based currency hedging in India is too expensive, making foreign financing just as expensive as domestic financing. An innovative instrument that can reduce the currency hedging cost could mobilise more foreign capital and spur investment in renewable energy.
A new public-private initiative in India, the India Innovation Lab for Green Finance, aims to identify, develop, and accelerate these innovative solutions to drive more investment for green growth in India.
The India Lab brings together experts (from the government, financial institutions, renewable energy, and infrastructure development) to select and help launch this next wave of cutting-edge finance instruments. Since its launch on 12 November, the India Lab has received the endorsement of the Ministry of New and Renewable Energy, and was supported in a joint announcement on energy and climate by Prime Minister Modi and UK Prime Minister David Cameron, during Prime Minister Modi’s visit to the UK in November.
The India Lab is currently seeking ideas for innovative finance instruments for renewable energy (including utility scale, distributed, and off-grid), energy efficiency, urbanisation, and other channels for green growth that can overcome barriers and risks and scale up more capital from new investors. Interested parties can visit www.greenfinancelab.in/ideas to learn more.
The new global climate agreement represents a moment of opportunity, for both India and the rest of the world, to capture the momentum and excitement that has come with the hope for a more climate-resilient future, and channel it into real work and real action.
There has never been a better, or more important, time to scale up finance for renewable energy projects and other green infrastructure that can support cleaner economic growth in India.
The India Innovation Lab for Green Finance can help India achieve its vision for a cleaner and more prosperous future by driving needed private investment to its green infrastructure targets. Let’s get to work — now.
A version of this first appeared in the Huffington Post.
