Green funds will help make the benefits of clean energy a reality for India
Heading into 2018, India is part of a rarefied group-one of nine nations out of the top 25 emitters on track to meet its Paris climate targets. In fact, India has already reached 34% non-fossil electricity, and should reach its goal of 40% as early as 2022-eight years ahead of schedule. This is encouraging, but there is a long way to go. India needs more clean energy and efficiency to meet its climate goals while also lifting millions out of poverty and combating deadly air pollution, heat waves and flooding. Researchers estimate that India will need $834 billion in financing to achieve its Paris targets.
It is clear that public funding alone will not suffice, and private investment has been limited. A green fund could be the tool the Indian market needs to unlock financing and scale up clean energy growth. A green fund's mission is to promote the growth of a vibrant clean energy economy. A green fund has what private banks lack: a mission to expand clean energy, specialised underwriting expertise in clean technology and access to public capital that can be used strategically to attract private capital. And because green funds typically reinvest their income, effectively recycling public funds, they can create a bigger market impact than government subsidies or incentives alone.
A public institution such as the Indian Renewable Energy Development Agency may offer loans to clean energy projects, but that alone does not make it a green fund. Green funds do not compete with private or public banks for market share. Rather, they support private banks and other green investments through innovative financing interventions. Green fund investments demonstrate the viability of clean energy technologies or take some of the risk until the private sector is comfortable with the new technologies.
In addition to direct lending, a true green fund offers financial products that help make commercial banks more comfortable with financing clean energy projects. The Connecticut Green Bank in the United States, for example, extends a working capital line of credit to solar companies worth up to 50% of project costs, giving private lenders an extra boost of confidence to initiate these loans. Public institutions, such as IREDA, National Bank for Agricultural and Rural Development (NABARD), PTC Financial Services, among others, can maximise investments in green energy by developing green banking tools to leverage private capital.
Green funds are historically the trailblazers that allow private investors to become more comfortable with entering an emerging market. Green funds have successfully crowded private funding into clean energy projects in many countries and states around the world. For example, the UK Green Investment Bank was an early investor in offshore wind power in the country, which had a track record abroad but not domestically. Now the UK offshore wind market is the largest in the world, and the UK Green Investment Bank has been privatised after several successful financing projects.
Based on successful models like these, an Indian green fund can be developed to suit India's specific needs and market conditions. An Indian green fund could drive private investment from domestic banks as well as international sources of funding, such as the Green Climate Fund. Following on the success of rupee-denominated "masala" bonds, green banks can also issue green bonds, an attractive vehicle for long-term institutional investors, both domestic and international.
Small rooftop solar projects, microgrids and off-grid solar projects have the potential to transform India. Rooftop solar energy for financially-strapped small and medium enterprises or individual residences can provide clean energy to drive greater property. It can also power smaller commercial enterprise as well as give people light to do chores, schoolwork or business at night and avoid the extreme heat of the day, increasing productivity while reducing the need for kerosene and other polluting fuels. A green fund with a mission to expand clean energy can bundle small projects together to increase scale and reduce transaction costs, making them more attractive to private lenders.
India needs to meet its growing energy demand and protect millions who are most vulnerable to the impacts of climate change. Only clean energy can reduce pollution while expanding energy access, improving reliability and creating jobs. The members of the Green Bank Network, including institutions in New York, Connecticut, Britain, Australia, Japan and Malaysia, have mobilised $22-billion in private funding for clean energy.
Strong, effectively implemented government policies are the foundation to make India's nascent clean energy industry thrive. But financing solutions are critical to make these policies work. Supporting public institutions, such as IREDA, to create a green fund that can drive the investment is vital to reach India's clean energy goals.
Authored by Dr Frances Beinecke, Trustee, Natural Resources Defense Council Action Fund and Dr Ajay Mathur, Director General of TERI.