Encouraging India's plan for renewable energy development (1)
India, the world's most populous country and the third-largest consumer of energy, is making significant strides in transitioning its energy economy towards renewable sources. The Indian government aims to attain at least 50% (around 500 gigawatts (GW)) of cumulative electric power installed capacity from non-fossil fuel-based sources by 2030.
The value chain of renewable energy projects in India is considered quite robust, with various financing products available at each stage. Power purchase agreements (PPAs) signed between power producers and offtakers during the development stage provide the power producer with stable cash flows, while the tender bidding process determines the cost at which each unit of power will be sold during operation.
Renewable energy project financing products include bid bond guarantees, bank guarantees, letters of credit, term loans, and long-term project finance. During the construction stage, bridge funding is secured to execute the project according to the timeline. Banks such as Deutsche Bank provide credit limits for bank guarantees, letters of credit, and term loans.
Upon completion of the construction and technical feasibility assessment, the operations stage begins, and long-term project finance is raised to pay out the pre-construction loan. This financing is repaid over a 25-year timeline.
The Indian government's involvement in each step of the value chain aims to absorb risk and encourage private power producers to participate in the renewable energy market with reduced risk. Lenders assess various risks during the renewable energy project value chain, including failure to obtain necessary approvals, delays, cost overruns, technological or design faults, geopolitical risk, regulatory risk, and debt tie-up and credit risk of off-takers.
One institution playing a key role in financing renewable energy projects in India is Nuveen, which raised $1.3 billion for its Energy & Power Infrastructure Credit Fund II (EPIC II) to provide private credit solutions for energy infrastructure, including renewable energy.
As of October 2024, renewable energy-based electricity generation capacity in India stands at 203.18GW, accounting for more than 46.3% of the country's total installed capacity. The Ministry of New and Renewable Energy (MNRE) anticipates most ongoing investment to come in the solar and wind sectors, with India's potential for solar energy estimated at around 748GW.
India aims to transition from a thermal energy-based economy to one centered around renewable energy, with the goal of achieving net zero by 2070. Figure 1 shows the stages of a renewable energy project alongside the financing products used at each stage, sourced from Deutsche Bank.
However, the Indian renewable energy sector faces challenges such as intermittency and grid stability, transmission and distribution infrastructure issues, land acquisition and environmental concerns, technological challenges, energy storage limitations, and high costs.
This article provides an overview of the financing of renewable energy projects in India and refers to a second article for more detailed information. For further insights, you can refer to resources such as pib.gov.in, powermin.gov.in, seci.co.in, recindia.nic.in, and the figures sourced from Deutsche Bank.
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