Funding reality check for India's dream to achieve net-zero by 2070

The Modi government could take a leaf out of Norway's playbook to meet its 2070 emission target instead of passing the buck to the private sector

India harbours a dream but lacks the capital to meet its net-zero carbon emissions target by 2070.

A sprint towards decarbonising its economy by 2050 for “Amrit Kaal” may cost as much as $12.1 trillion, reckons McKinsey. Investment, currently at $44 billion per annum, will likely need to increase 3.6 times by 2030 and 10 times by 2040. The question remains how Indian corporates will raise an amount equal to nearly four times the country’s GDP to finance solar farms, zero-emission vehicles, and scrub agriculture and industries clean.

The Narendra Modi government could take a leaf out of Norway’s playbook to meet its 2070 net-zero emission target instead of passing the buck to the private sector. Wiping away India’s smog is not a cost but a long-term business opportunity. When Oslo decided to become the carbon sink for Europe’s industrial emitters amid Covid-hit 2020, it announced Longship, the world’s biggest carbon capture and storage (CCS) scheme. The transport and storage part of the project will connect continental European CO2 emitters to offshore storage sites on the Norwegian Shelf. The first phase, expected by 2024, involves collecting 1.5 million tonnes (MT) of CO2 from industrial emitters, transporting, injecting and permanently storing carbon at 2,600 metres under the seabed; phase 2 will quadruple capacity. Oslo roped in state-run Equinor, Shell and Total to commit 27 per cent of the 14.2 billion kroner ($1.42 billion) project, with the Norwegian government covering the rest. In August, Equinor agreed with Germany, the largest CO2 emitter in Europe, to transport and store up to 40 MT CO2 a year by 2032. With help from Oslo, Equinor seeks to capture Europe’s carbon storage market.

ONGC shares similar ambitions, and sought out Equinor for a similar sized CCS project in India under the seabed off the coast of Gujarat — reports peg ONGC’s cost estimates at closer to $3 billion. Decarbonising Indian industry is complicated because of the lack of cost-competitive technology alternatives, which is why ONGC’s CCS could be viable, but with government grants. But New Delhi is silent on financially supporting any decarbonisation efforts, barring a Rs100-billion subsidy scheme for EVs, expiring March 2024; the outlay for the environment ministry in a country that houses some of the world’s most polluting cities led by Delhi is only Rs70 billion, 0.2 per cent of a total Rs39.4-trillion outlay.

India needs over $400 billion in capital annually to accelerate emissions reduction, much of which is risky because it involves new technologies, and requires state support, according to McKinsey. But funding has a long way to catch up. India’s renewable energy companies have raised only around $6.8 billion in debt from offshore capital markets since January 2021, less than 2 per cent of India’s annual decarbonising costs, according to Moody’s. Last year, the green bond issuance in India was a mere $750 million, and even India’s plans for a $2-billion sovereign green bond scheme for decarbonisation is a fraction of the requirements to meet the government’s ambitious targets.

The power generation sector, which accounts for a third of India’s total emissions, could achieve net zero by 2050 if it adds 1,000 Gw of renewable capacity by 2050, McKinsey said, with the transition needing an investment of around $7.5 trillion until 2050 including building storage, distribution and transmission infrastructure. That involves over $250 billion in annual investments — challenging, considering that in 2021 India’s renewable sector attracted only $12-$15 billion in investment, McKinsey said. Green hydrogen would likely require $430 billion in investment by 2050 from nil now.

“Access to low-cost, long-term and diversified capital will determine success in meeting 2030 renewable targets,” said Moody’s in a recent report. India will require $30 billion annually in investment over the next eight years to meet its 2030 targets of trebling renewable energy capacity to 500 Gw and doubling share of the electricity generation from non-fossil fuel sources. Accelerating investments from sovereign wealth funds like Singapore, UAE, Saudi Arabia and Canada — which typically have a low cost of funding and represent a more patient investor — is critical, Moody’s said.

Traditional domestic and foreign sources and debt capital markets will not be able to fund the massive investments needed and so access to foreign capital on concessional terms, and public finance, must play key roles, said Brajesh Singh, president, Arthur D Little India. The funding shortfall for net zero may be as high as $3.5 trillion, according to a study by the Centre for Energy Finance, requiring low-cost funding support of $1.4 trillion from developed economies. (The US and Europe have resisted any such financing obligations.) India can fund its decarbonisation efforts by shifting tax revenues from fossil fuel sales to emissions, implement a carbon pricing policy that ramps up direct taxes on emissions from nil to Rs6,000 a tonne by 2050, Singh said.

“It is imperative to mobilise capital for decarbonisation projects by including them in priority sector lending,” said a Tata Power official. “Liquidity has reduced in both international and domestic markets leading to rise in spreads after monetary policy tightening.” Currently, the RBI only allows loans up to Rs30 crore for small renewable players, and borrowings up to Rs10 lakh for households to invest in renewables. Funding costs are the largest expense for renewable projects and hence access to low-cost capital is important for India to meet its targets, Singh said. Foreign funding is turning very expensive after US repo rates more than doubled, said Pankaj Gupta, CEO of EV lender Mufin Green Finance.

Low-cost capital is key because companies that adopt low-carbon production processes will see a short- to mid-term increase in cost, ultimately placing them at an economic disadvantage in a competitive global commodities market, said Pragun Jindal Khaitan, MD, Jindal Aluminium. The company’s solar and wind projects have made it self-sufficient, and allow exports of 50 Mw of surplus energy to the grid annually, he added.

Renewable projects are an easier way for corporates to reach net zero, said Aditya Malpani, senior director at renewable energy developer Amp Energy India with a portfolio of 2 Gw across 15 states. But renewable developers catering to businesses need to put in their own risk capital into solar or wind projects before companies agree to sign power purchase agreements for banks to lend money, said Srinivasan Viswanathan, CEO, Vibrant Energy, a portfolio company of Macquarie’s green investment group. For instance, Vibrant’s 4.7 gigawatts of renewables pipeline may cost $3.3 billion based on Moody’s estimates. Viswanathan said that developers need to inject at least 10 per cent as risk capital before corporates and banks come on board. That works out to $330 million, which a well-funded Vibrant or Amp can afford but not smaller developers. The RBI provides less than $4 million under a priority sector lending programme for small developers.

Also, India’s state-run banks are reluctant to get on to the decarbonisation wagon. For instance, India’s biggest bank, SBI, rarely funds commercial and industrial renewable projects, insisting on AAA guarantees, an industry official said. The perception of risk has to change for Indian banks, Viswanathan said, because all projects cannot be rolled into an AAA blanket. SBI has nearly Rs1.95 trillion in loans outstanding to the power sector as of September 30 but only a fifth is deployed in wind, solar, biomass and waste-to-energy — the majority funding thermal generators, according to a company presentation, which givers details on planting 13 lakh trees this fiscal but reveals little on targets to fund emission reduction projects.

The Modi government had loosened its purse strings to drive India’s fossil fuel businesses in natural gas and LPG. It needs to do the same to clean up the economy.