Renewable Energy Outlook and the Need for Climate Finance in India

India’s renewable energy-based electricity generation capacity crossed the significant milestone of 200 gigawatt (GW) at the end of 2024. The country has set an ambitious target of achieving 500 GW of renewable energy capacity by 2030. This may look achievable but requires a huge leap forward given the country’s industrial composition, carbon footprint, and asymmetry in green financing.

Currently, over 65% of the installed capacity in the country belongs to conventional sources (which are fossil fuels, mainly coal). The remaining installed capacity belongs to renewable sources such as solar (majorly), wind, hydroelectric, and others.

Notably, India’s adoption rate of renewable energy (by installed capacity) is higher than many other regions while the flow of investments into the country is significantly lower compared to them. For instance, the share of renewable energy in installed electricity capacity in Africa and the Middle East is ~24% and ~10% compared to ~34% in India while the investments made in the renewable sector in the countries are nearly double (US$22.5 billion) that of India (US$12.4 billion). This creates a concern giving rise to a critical need for transition to renewable energy in India.

The need for climate finance in India

Climate finance, which refers to financial resources and instruments, is critical to address climate change via large-scale investments. India presents a unique case for transition finance due to several factors. The primary factor is its industrial composition and high carbon intensity. The high carbon intensity is led by a high concentration of energy-intensive industries such as cement, chemicals, iron and steel, etc. India is the second largest cement producer in the world and the industry contributes roughly 8% of the world’s total CO2 emissions. The iron and steel industry, on the other hand, has a similar share in global emissions due to its energy intensity and high reliance on carbon-based fuels. Together, the energy-intensive industries contribute to more than 30% of India’s total emissions. Hence, shifting these industries to renewable energy sources, such as solar, wind, and bioenergy, could drastically reduce emissions while improving operational efficiencies.

In 2023, India surpassed Europe in total CO2 emissions to become the third-largest source of global emissions. The country’s energy-intensive economic growth compounded by unfavorable weather, elevated emissions by 190 million tonnes (MT) to reach 2.8 billion tonnes (GtCo2). Moreover, in terms of the carbon intensity of electricity generation by countries in 2023, India ranked fourth with 713 gCO₂/kWh, which is much higher than the entire continent like Africa (481 gCO₂/kWh) and Europe (242 gCO₂/kWh) (Carbon Intensity of Electricity Generation, 2023, Our World Data).

Secondly, India is the world’s fastest-growing economy with steady growth projected at 6.7% over the next two fiscal years (PIB). This creates an even stronger case for climate finance flows to India compared to other nations because, with the fastest economic growth, the transition finance to mitigate the impact of higher carbon intensity (compared to other regions) is expected to have a multiplier effect on global emission reductions.

The quantum of transition finance

According to a bottom-up analysis conducted by the Asian Development Bank (ADB) and based on the Nationally Determined Contributions (NDCs) committed by the Indian government, India would need an annual investment of US$250 billion from 2023 to achieve the climate goals by 2030.

Additionally, the report analyzed the climate finance requirements for other South Asian and Southeast Asian countries, all of which are part of the ADB developing countries. The cumulative climate finance required for these developing South Asian and Southeast Asian countries amounted to an annual requirement of ~US$31 billion, underscoring India's significance in the Asia Pacific region for addressing climate change (Asian Development Bank: Climate Finance Landscape of Asia and The Pacific (2023)).  

How India Inc. is aligned

India Inc. has realised that the transition to renewable energy makes significant economic sense besides being sustainable due to the compelling cost advantage it offers. For instance, the commercial and industrial segment, which includes manufacturing plants, warehouses, and large-scale operations, are energy-intensive and increasingly adopting renewable energy solutions like rooftop solar to reduce costs. They can access electricity at a tariff as low as INR 3.5/unit (US$0.040/unit) through bilaterally negotiated open access projects, which allow them to directly buy electricity from power producers or generators, bypassing the traditional distribution system. This is significantly more economical compared to INR 7.5+/unit (US$0.087+/unit) typically charged by discoms for conventional coal-powered electricity produced in most states, making renewable a highly cost-effective alternative for businesses.

Leading Indian corporations are increasingly integrating renewable energy into their operations to enhance sustainability and achieve cost efficiencies. Large corporates such as JSW Steel, Hindustan Zinc Limited, ACC Limited, and Ambuja Cements are at the forefront of this transition, setting ambitious targets and implementing strategic initiatives.

Government support and other growth drivers

India’s renewable sector has a significant potential to grow to be a global leader in sustainable energy development based on the below drivers:

Govt. Policies: The Indian government has implemented several initiatives to promote renewable energy, including the National Solar Mission, National Wind-Solar Hybrid Policy, and Production Linked Incentive (PLI) schemes for incentivizing domestic manufacturing of solar modules and batteries. State-level policies, such as the availability of land at concessional rates for solar and wind farms, and Renewable Energy Purchase Obligations mandating utilities to procure a percentage of their energy from renewables have also enabled growth. These policies aim to achieve 500 GW of renewable energy capacity by 2030, aligning with India's commitment to the Paris Agreement.

FDI Equity Inflows: There has been a strong momentum in capital flow to India’s energy sector away from coal and coal-fired power generation in the last more than two decades. From April 2000 to June 2024, total FDI equity inflows into India’s non-conventional energy sector stood at US$18.93 billion, accounting for ~3% of total inflows. FDI equity inflows in India's non-conventional energy sector jumped 51% year-on-year to US$3.76 billion in FY24. In Q1FY25, FDI inflows surged 35% year-on-year to US$1.04 billion.

The steady increase in FDI inflow is driven by growing commitments to meet clean energy targets under the Paris Agreement and an increasing pool of Impact Investors, who are keen on aligning their investment goals to UN Sustainable Development Goals by 2030.

Technological Advancements: The adoption of advanced technologies, such as battery energy storage systems (BESS) and hybrid renewable energy projects, has enhanced the efficiency and reliability of renewable energy sources. Energy storage systems are critical to managing the variation in renewable electricity generation and ensuring grid stability. The Centre has launched a viability gap funding program of INR 3,760 crore (US$0.44 billion) to support the installation of 4 GWh of BESS by FY26.

Manufacturing Ecosystem: India has been strengthening its domestic manufacturing capabilities for solar modules and wind turbines. By December 2024, the country’s solar module manufacturing capacity reached 63 GW of installed capacity while its total installed wind power capacity reached 48.16 GW.

Climate finance for Small and Medium Enterprises (SMEs)

There are over 63 million small and medium enterprises (SMEs) in India that contribute ~30% of GDP. However, these enterprises are Greenhouse Gas (GHG) intensive as they are mostly using outdated technologies and processes (Biennial Update Report of India), highly rely on fossil-based fuels, and are unorganized in nature. The projected energy consumption of the sector by 2030 is expected to be equivalent to more than 72 million metric tonnes of CO2. Apart from being notable contributors, SMEs are also disproportionately vulnerable to risks posed by climate impacts (TERI Report on Financing Low Carbon Transition, IEA World Energy Outlook 2024). As a result, transitioning these sectors to renewable energy is vital not only for achieving India's net-zero goal by 2070 but also for aligning with global decarbonization targets.

However, the majority of SMEs lack access to finance, institutional or non-institutional. Less than 20% of the sector has access to formal banking finance. The remaining struggle to get access to traditional finance in India for their capex, let alone access to climate finance. Traditional lenders such as banks and NBFCs remain cautious in lending them, restricting their financing to working capital or non-fund-based uses with stringent security requirements.

Several challenges like their emerging nature, limited track record, lack of technical capacity, unawareness of existing formal financing instruments, and misconceptions about low-carbon pathways lie in bridging demand gaps towards their transition to an energy-efficient system.

Presently, the key institutions responsible for providing climate finance to SMEs include the Small Industries Development Bank of India (SIDBI), the National Bank for Agriculture and Rural Development (NABARD), and the Indian Renewable Energy Development Agency (IREDA) Limited. They are primarily focusing on direct financing or refinancing of loans to NBFCs and other financial institutions catering to SMEs. However, the size of their funding is quite insufficient considering the total credit requirement of SMEs.

Addressing these challenges through technical assistance and risk mitigation is essential while the financing gap needs to be met by bespoke debt solutions. It will not only make renewable energy accessible to SMEs, but it will also ensure that India remains competitive in a decarbonizing global economy while achieving sustainable growth.

Disclaimer:

The information provided in this article is for general informational purposes only and is not an investment, financial, legal or tax advice. While every effort has been made to ensure the accuracy and reliability of the content, the author or publisher does not guarantee the completeness, accuracy, or timeliness of the information. Readers are advised to verify any information before making decisions based on it. The opinions expressed are solely those of the author and do not necessarily reflect the views or opinions of any organization or entity mentioned.