<b>Arunabha Ghosh:</b> Wanted! Clean energy investors

The biggest challenge for the renewable energy sector in India today is the absence of a financial ecosystem fit to purpose and fit to scale.

Even as India has aggressively scaled up its renewable energy targets, the financial commitments have not kept pace. To be sure, renewable energy investments have been rising ($10.9 billion, or Rs 72,600 crore, in 2015, according to Bloomberg New Energy Finance, as opposed to an average of $8 billion, or Rs 52,800 crore, in the previous three years). But even at this rate, we would be nowhere near the more than $200 billion (Rs 13 lakh crore) needed to get to 175 gigawatts of renewable energy capacity.

Hesitation among investors stems from many reasons: need for large upfront capital and long-term debt; worries about the credibility of contracts; project delays; uncertainty about revenue flows; foreign exchange risk; and technology and product efficiency concerns.

But there are at least three bigger reasons why India seems to be struggling. First, there is no single pathway to achieving the targets, particularly vis-a-vis solar and biomass-based energy. Projects could be utility scale, or even larger, when part of a mega-solar project, or completely off the grid (home systems, microgrids), or decentralised systems hoping to be connected to the grid one day, or those offering productive energy in, say, agriculture. Each pathway requires different financial models. Much focus has been on trying to secure commitments for grid-scale projects (investments were up 80 per cent in 2015). But the Indian financial system has not innovated enough to move the needle on smaller scale and decentralised energy projects.

Secondly, renewable energy is often conflated with solar power. Solar photovoltaic investments have now surpassed wind, where not much growth is visible. The big push for solar is certainly exciting. But there is also the risk of crowding out innovative (but riskier) financing for, say, small hydropower or biomass-to-energy projects. Solutions for solar financing will not, automatically, increase investments in wind or other renewal energy (RE) sectors.

Thirdly, renewable energy is mistakenly restricted to electricity. The imperative of energy access has clearly driven a number of policy announcements from the current government: 24/7 power for all by 2019, 100 per cent villages electrified by 2018, direct benefit transfer for LPG distribution, and most recently the plan to provide LPG cylinders to millions more households. That said, the financing schemes are directed largely to RE-based electricity whereas for cooking energy, much of the focus has been on rationalising government subsidies. Moreover, other applications - heating, cooling, and productive and mechanical power - have received less attention than lighting.

For these reasons, renewable energy financing in India has a large (potential) canvas, but parts of which remain unpainted for now. Different types of financial institutions (banks, non-bank financial companies, multilateral institutions, bilateral funding agencies, institutional investors) must envision their functional roles for different purposes - at a strategic level (priority sector lending, loan guarantees), project level (credit enhancement, private equity), and for ancillary support (evacuation infrastructure, skills, R&D).

But this is not the government's task alone. Strategic investors should ask themselves if they wish to "hand hold" government initiatives or try something completely new. Some private banks and multilateral institutions have begun issuing green bonds, regulatory guidelines have been issued for green bonds, and at least one major public agency is thinking about restructuring itself as a green bank. New innovation labs are inviting ideas for RE finance. Could similar efforts be scaled down to a sub-national level to support some key state governments?

Extending beyond large-scale projects, how could RE finance turn attention to rooftop (not necessarily off-grid) projects? The best global experiences have to bear upon this nascent sub-sector. Projects have to be aggregated to create investible portfolios for institutional investors. Yet, the regulatory uncertainties in the rooftop space are greater. On what terms would these systems integrate when the centralised grid extends its reach? There is also the need to find balance between rural projects (with likely more development co-benefits) and urban sites (where commercial opportunities to scale might be greater).

Moreover, should venture capitalists or "patient" capitalists (those willing to try new things and wait awhile for returns) kick-start new pilot projects? Or does India now have enough experience to begin exiting pilots and, instead, scaling a few interventions? This is particularly relevant for the decentralised clean energy sector, where hundreds of small firms operate. Several venture philanthropic initiatives have emerged in recent years. At a bilateral level, the latest example is the India-US PACEsetter Fund. But we need clearer metrics of success to consolidate the lessons of the past and determine which processes and innovations could be replicated across India.

This week, in New York, India will formally sign the Paris Agreement on Climate Change, even though it has a weak financial mechanism. On the same day, the International Solar Alliance, which India has spearheaded, will outline plans to facilitate access to lower cost and additional finance. Despite our domestic financial challenges, there is no dearth of India's international political commitment - and leadership. It's time the investors stepped up.

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The writer is chief executive, Council on Energy, Enviroment and Water (http://ceew.in). He is, most recently, co-author of Energizing India (SAGE) and Human Development and Global Institutions (Routledge)
Twitter: @GhoshArunabha