Clean Energy for All: Framework for Catalytic Finance for Underserved Clean Energy Markets in India

Through robust policies and initiatives, India’s Ministry of New and Renewable Energy (MNRE) has laid the foundation for a clean energy expansion. For example, the National Solar Mission has boosted India’s large-scale solar energy market from a mere 17 megawatts (MW) in 2010 to more than 20 gigawatts (GW) in 2018. To achieve this growth, several public financial institutions, along with private banks and non-banking financial companies (NBFCs), provided debt to the utility-scale renewable energy sector. These factors, combined with declining equipment costs, have resulted in impressive growth in investment and deployment in utility-scale renewable energy, especially over the past three years.

Still, financing remains a key barrier in scaling clean energy markets. This is especially true for smaller-scale clean energy projects in underserved markets such as off-grid and rooftop solar. Rooftop solar, for instance, has reached only 1.2 GW of installed capacity as of 2018, well below the 40 GW by 2022 target.

Stakeholders agree that this gap is at least partially due to lack of access to long-term, reasonably priced loans. Similarly, the next generation of clean energy solutions such as battery storage, electric vehicles, and solar-wind hybrid technologies also need policy focus to establish local “bankability” to increase comfort for lenders. Without policy initiatives especially that addresses risk perceptions of investors, financing may not keep pace with government targets and consumer demand. Stakeholders also warn that rising domestic interest rates threaten the viability of existing utility-scale clean energy projects, most of which take on variable rate domestic loans but receive cash flows from long-term power purchase agreements, usually at a fixed tariff. These loans get riskier if rates rise, and some may turn into “stressed” assets for banks, deterring further lending to the sector.

Given that banks already have high exposure to the power sector, there is limited debt capacity to fund the amount of new generation needed to meet renewables targets, including India’s target of 100 GW of solar energy by 2022. An active domestic debt capital market would allow banks and NBFCs to fund new loans, refinance existing loans, and recycle their capital. It would also help developers raise debt by issuing bonds. Raising foreign debt has challenges since foreign currency risks need to be assumed by local players, given the widespread unavailability of long-term currency hedging products.

Around the world, catalytic financing is emerging as a solution in the clean energy sector. Catalytic finance leverages limited public and donor (e.g., multilateral and impact investment) capital to attract private investment. Because this approach positions public finance as an activator of greater private investment, it is termed “catalytic”. Catalytic finance strategies include risk mitigation, aggregation of small projects to diversify risk and to scale, strategic public-private co-investments, and market development activities. A characteristic of catalytic finance is that each public or donor unit of investment should be dedicated to mobilizing multiples in private investment. This way, public finance activates—or catalyzes—greater commercial investments to the “underserved” segments of the clean energy markets in India. This report presents a framework for implementing catalytic finance solutions through green windows or a green fund as developed through stakeholder discussions in India.