India’s Renewable Energy Sector Faces a Rs 2 Trillion Challenge

Consider this: To build its targeted 500 GW of renewable energy capacity by 2030, India needs Rs 2 trillion in funding annually—that is half its entire 2023-24 Union budget. The stark reality, however, is that the sector attracts just Rs 75,000 crore per year, leaving a gaping hole of Rs 1.25 trillion.

More than a number on a balance sheet, the funding crunch looms as a major roadblock to India delivering on its climate commitments, undermining its position as a leader in the global green energy makeover. The question is urgent: Where will all this money come from?

That’s not an easy question to answer. However, regardless of where, the money must come. For, India’s failure to cut one billion tonnes in emissions by 2030, the country’s core climate commitment, could set off potentially disastrous consequences for the country, going way beyond loss of credibility on the global stage. It could trip up its energy security, derail its economy and unleash unforeseeable climate events, affecting the lives of millions.

Fossil fuel imports already drain the country’s resources to the tune of $160 billion annually—a figure that could balloon if renewables don’t scale up. “The 500 GW target isn’t just about sustainability,” says Jitendra Kumar, VP of Hero Future Energies. “It’s about ensuring energy independence and economic growth.” But achieving this goal hinges on bridging the funding gap.

Who’s Contributing—and Who Isn’t?

Collectively, public sector banks dominate the broader debt-funding landscape, writing out 60 per cent of all cheques across sectors. But their contribution to green energy projects remains minuscule, resulting in a massive gap that simply cannot be bridged by private equity and venture capital investments. Despite recent growth, these institutions are nowhere near picking up the slack. A 2023 analysis revealed that PSBs allocated more than 70 per cent of their energy-sector loans to coal and thermal power, compared to less than 20 per cent to renewables.

Currently, a raft of government initiatives, international grants, and private players account for a bulk of renewable energy funding. However, even combined, these sources fall far short of the Rs 2 trillion annual requirement. “India must urgently rethink its approach to financing renewable projects,” stresses Kumar. “Without substantial capital inflows, the 500 GW target remains out of reach.”

READ: India’s Renewable Energy Growth Faces Challenges Amid Rising Solar, Wind Investments

Why the Hesitation?

PSBs have typically steered clear of the renewable space, citing a range of challenges that make solar and wind energy spaces, in particular, unappealing compared to traditional sectors. Among them:

Risk Perception: Uncertainties in land acquisition, fluctuating tariffs, and project delays top the list of risk factors in the perception of PSBs, fuelled by failed or delayed renewable projects—such as stalled wind farms in Tamil Nadu.

Lack of Sector Expertise: The decisions of PSBs on loans are often skewed because of the absence of expertise to evaluate renewable energy projects effectively. “This leads to loans being delayed or denied,” says Kapil Garg, MD of Mufin Green Finance. “Data shows that renewable energy project approvals often take 30-40% longer than traditional infrastructure loans, a clear disadvantage for a sector that requires rapid scaling.”

Priority for Traditional Sectors: Fossil fuel plants and large-scale infrastructure projects continue to dominate PSBs’ lending portfolios despite the changing imperatives and the clear global swing in favour of renewables, shaped by binding commitments.

NPA Concerns: With non-performing assets (NPAs) already a burden, PSBs are wary of adding potentially risky renewable projects to their books. The numbers, however, indicate that the fears are probably exaggerated. At 3.5 per cent, NPAs in renewable loans are only a touch more than the average for traditional infrastructure projects. The anxiety, therefore, is probably based more on perception than on facts. However, new technology innovations are making renewable power plants more robust and reliable, a development that could calm the nerves of lenders in the future.

In the near term, however, India’s policymakers need to focus on correcting perceptions with effective communication and drive systemic reforms to make renewable energy projects attractive for funding.

Addressing Funding Constraints

Experts agree that addressing these barriers is critical to unlocking the sector’s potential. An immediate solution is to create dedicated business units within banks to focus exclusively on renewable energy projects. Such units could fast-track approvals and tailor financial products to the unique needs of the sector. “Creating a single-window system for approvals and financing would drastically reduce the bottlenecks,” says Kumar. “This could unlock faster capital flow and bring us closer to meeting the target.”

Robust payment security mechanisms, such as escrow accounts and letters of credit, which secure predictable revenue flows, could further assuage the fears of lenders. Beyond reforming traditional banking systems, India must help the industry tap alternative funding sources, such as green bonds, which have performed remarkable around the world, raising over $620 billion in 2022 alone. India could expand its green bond market to attract institutional investors.

READ: India’s Reliance on Imports May Threaten its Renewable Energy Goals

With tech giants such as Google and Microsoft investing big in renewable energy worldwide, India will do well to encourage collaborations that could not only bring in much-needed capital but also innovation to the sector. Also, worth tapping are international climate funds, including the Green Climate Fund, which remain largely unexplored. However, accessing these funds would require India to streamline its application processes and bring to the table bankable projects with clear returns.

The Road Ahead

The upcoming January meeting involving the government, industry leaders, and financial stakeholders could shape future pathways for India’s renewable sector. At this meeting, policymakers are expected to discuss strategies to promote innovative financial frameworks that address investor concerns and ensure the long-term viability of renewable energy projects. India’s renewable energy target is ambitious but achievable. By vaulting the Rs 2 trillion funding barrier, the nation can not only meet its climate goals but also secure its energy future. As Garg aptly puts it, “Renewables are the key to India’s sustainable growth. The question isn’t whether we can afford to invest in them—it’s whether we can afford not to.”

The clock is ticking and the stakes are high. But the rewards—energy independence, economic growth, and global leadership in sustainability—are clearly worth fighting for, whatever it takes.