Financing instruments can reduce the cost of renewable energy electricity in India by up to 25%
April 21, 2014
Mohali, India – Financing instruments that reduce the cost of loans and extend their tenor can cut the cost of renewable energy in India by up to 25%, according to a new study from Climate Policy Initiative (CPI) and the Bharti Institute at the Indian School of Business (ISB). This cost reduction can help the government of India towards its goal of doubling the renewable energy capacity installed in the country, from 25 GW in 2012 to 55 GW in 2017, a challenging goal given renewable energy is still more than 50 to 125% more expensive than conventional power.
In “Solving India’s Renewable Energy Financing Challenge: Instruments to Provide Low-Cost, Long-Term Debt,” CPI and ISB examined a variety of financing instruments, including government bonds, infrastructure debt funds, partial credit guarantees, partial risk guarantees, and loan support to mitigate exchange rate fluctuations, for their potential to reduce the cost of renewable energy as well as to meet investor and policy needs. These policies can reduce the cost of renewable energy:
- Direct government loans through government bonds, which offer the lowest rate of interest, offer the maximum possible reduction in the cost of renewable energy, up to 25%. The use of government credit for supporting renewable energy has been used successfully in other developing economies, such as Brazil.
- Raising finance for renewable energy projects through infrastructure debt funds rather than bank loans can decrease the cost of renewable energy by 14.5%. The feasibility of implementation is high, given these funds are already established in India and approved by regulatory bodies.
- Partial credit guarantees, which enhance the credit rating of a project and reduce the cost of financing, can result in up to 10.5% reduction in the cost of renewable energy.
- Partial risk guarantees and loan support to mitigate political and exchange rate risks, which facilitate access to foreign capital, can reduce the cost of renewable energy by up to 12.7% and 11.2%, respectively.
The report noted that there are tradeoffs among policy goals: the most cost-effective policies may not meet other goals such as attracting private capital. For example, government bonds would have to be designed carefully to avoid crowding out financing from banks and other financial institutions.
“Many of these instruments offer significant potential to reduce the cost of financing renewable energy and thus the cost of clean electricity,” said David Nelson, senior director of research and programs at Climate Policy Initiative. “Ultimately, the selection of the most appropriate instruments for solving India’s renewable energy financing challenge depends on policy priorities and implementation feasibility.”
The report is part of a series on renewable energy financing in India; a CPI-ISB report which reviews the effectiveness of current federal policies and alternative policies in meeting a variety of renewable energy policy goals, was published on March 24. An earlier CPI report, “Finance Mechanisms for Lowering the Cost of Renewable Energy in Rapidly Developing Countries,” examined the challenge of financing renewable energy in emerging economies.
Climate Policy Initiative (CPI) is a team of analysts and advisors that works to improve the most important energy and land use policies around the world, with a particular focus on finance. CPI works in places that provide the most potential for policy impact including Brazil, China, Europe, India, Indonesia, and the United States.
The Indian School of Business (ISB) was established in 2001 with an aspiration to put India on the global map of management education. In less than a decade since its inception, the ISB has successfully pioneered several new trends in management education in India, and firmly established itself as a world-class management institution.