India Needs $2.5 Trillion in Climate Financing by 2030: CEEW

The latest CEEW brief titled ‘Greening New Pastures for Green Investments’ released yesterday has tried to join the dots between the energy demand in the developing countries like India and the availability of finance as well as its affordability.

The brief gave a glimpse of demand for capital in emerging markets like India which is dependant on the current political economy and investment landscape. In its recommendations, the brief discusses evolving capital structures to plug the gaps in the emerging markets.

According to the report, the amount invested in renewable power capacity globally in 2018 (USD 289 billion) was three times as much as the investment in coal- and gas-fired power generation capacity (BNEF 2019). Despite the changing investor sentiment, the low-carbon investment required to meet the goals enshrined in the Paris Agreement would need to increase by 250 percent by 2030 (IPCC 2018).

Demand for capital in emerging economies

• Nearly 90 percent of energy investment in 2018 was concentrated in high- and upper-middle-income countries and regions. High-income countries, with just over 15 percent of the global population, accounted for more than 40 percent of energy investment in 2018.
• In contrast, lower-middle and low-income countries accounted for less than 15 percent of energy investment, despite housing well over 40 percent of the world’s population.
• In renewable energy investments (excluding large hydropower), of the total estimated global investment of USD 2.6 trillion from 2010-2019, only China, India, Brazil, Mexico and South Africa joined a group of developed countries, which had investments of more than USD 20 billion over the entire decade.
• The concentration of clean energy investment in a small group of nations is best captured by the total number of emerging markets recording investments in excess of USD 100 million in any one year. This number has stagnated at 27 countries annually, since 2010.
• Financing costs account for the largest component – between 50 and 65 percent – of present-day renewable energy tariffs in India, and even higher shares in other developing countries where the risk premium is higher.
• Renewable energy projects face Twin Challenges — both an availability and an affordability constraint. Several investors, especially those with limited risk appetites such as institutional investors, do not even consider investing in most developing economies.
• Risk perceptions are exacerbated by information asymmetry about progress made in clean energy. Accessible, reliable, and comprehensible data is necessary (but not sufficient) for creating deep markets and attracting investment.

Both government-backed entities and nonfinancial corporates have driven Indian green bond issuances

India scenario

• Meeting India’s clean energy commitments to the UNFCCC would require a tripling of investment flows. Investment flows in India have averaged around USD 10.3 billion over a five-year period ending 2018. India, alone, needs USD 2.5 trillion in climate financing by 2030.
• The capital structure of wind projects has remained stable with debt-to-equity ratios averaging 75:25. But the share of debt has risen for solar PV, with more 75:25 structures in recent years.
• Interest rate spreads over bank benchmark lending rates also fell between 75 to 125 basis points for both wind and solar PV in India between 2014 and 2018. Loan tenures increased during the same period as lenders became more comfortable in extending longer-term loans.
• Equity investors with access to favorable sources of finance have had more success in winning project capacity at competitive auctions. The share of the top 10 firms was around 80 percent in both wind and solar projects.

Other developing economies

• Multiple interests and the complex governing mechanisms have heightened risks for investors in Indonesia, thereby constraining the growth of renewable energy investments.
• Sustained policy uncertainty, project execution delays, and political upheaval from 2015 to mid-2018 resulted in a major slowdown in the renewable energy sector in South Africa.
• However, major domestic market interest in scaling up renewable energy supply in South Africa. The drivers include domestic currency financing, bankable power purchase agreements, and certainty over demand growth.

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