Climate Financing Target
The UN has identified financial resources and investments as keys to addressing climate change issues that range from emissions reduction, adaptation to the already occurring impacts, and building resilience. At the COP15 in 2009, the developed countries committed to providing $100 billion in assistance per year to developing countries for climate reforms by 2020. The funding was supposed to be drawn from public, private, and alternative sources of financing. However, wealthy nations have failed to reach their targets. For instance, Asia received only ~25% of global climate finance despite being home to ~60% of the world’s population. The question arises is $100 billion per year enough to act on the climate action pledges?
As per a report by the New Climate Economy — a flagship project of the Global Commission on the Economy and Climate — effective climate actions can result in $26 trillion worth of economic benefits for the globe by 2030. However, the benefits of that gigantic size cannot be achieved with an annual investment of $100 billion. The report by the United Nations Environment Programme stated that developing countries need annual adaptation (refers to adjustments in ecological, social, or economic systems in response to climate change impacts) support of $160 billion to $340 billion by 2030 and $315 billion to $565 billion by 2050.
Taking account of these factors, developing countries including India have asked for a new global climate finance target by 2024, known as the new collective quantified goal (NCGQ). As per estimates, the Global South/less-developed nations are spending 5x more on debt repayments than on climate change spending. Hence, in NCGQ, which is expected to be finalized by 2024, developing nations are seeking funding in trillions to implement the Paris Agreement. At the same time, they are looking at alternative sources of financing beyond conventional sources of loans and grants.
India’s stance and the significance of alternative sources of financing
The government of India set a target to achieve renewable energy (RE) capacity of 175 GW in India (excluding large hydro projects), which would include 100 GW of solar energy, 60 GW of wind energy, and 15 GW via small hydro projects, biomass projects and other renewable technologies by Dec 2022. Till Jun 2022, ~114 GW of RE capacity has been installed in India, as per information provided by the Ministry of New and Renewable Energy (MNRE). The remaining targeted capacity of ~61 GW is under various stages of implementation. Also, under the Paris Agreement goal, the government of India is also committed to generating 50% of installed energy capacity from non-fossil fuel sources by 2030.
To achieve the ambitious target, investment in the sector needs to be scaled up significantly. As per MNRE, India would need an investment of US$18-24 billion annually for its long-term commitments in the RE space. However, estimated annual investments in the sector in the last few years have been in the range of US$9 billion only, which implies a huge gap between the required and actual investment.
Achieving an investment target of this enormous size could be a daunting task unless new investor classes are tapped via the debt market since 70% of funds in RE projects are sourced via debt. Although established companies are able to get success in financing, other players, which are mainly MSMEs, smaller energy service companies, and unlisted, and lower-rated companies face difficulties in raising finances from capital markets despite having a sound business model. Further, new technologies require a higher risk appetite from debt investors that the mainstream market finds difficult to provide.
Such a barrier to clean energy financing can only be solved via alternative sources of financing like Alternative Investment Funds which can pool together commercial and impact capital, and especially lock in large international pools of capital. Such Alternative Investment Funds help RE players get access to early stage/construction financing, as well as affordable capital for project finance.
Due to increasing energy demand in India led by strong economic growth, capacity additions in the renewable energy space needs to accelerate at a faster pace. After a hiatus due to Covid, investments in the sector more than doubled in FY22 over FY21. Thanks to the rising participation of several private players including the behemoths like Reliance and Adani and a steady increase in FDI inflow, driven by growing commitments to meet clean energy targets under the Paris agreement, and an increasing pool of impact investors.
India has overshot its commitment made at COP21 by achieving 40% of its power capacity from non-fossil fuels about 9 years before time with phenomenal growth in the share of solar and wind in the overall energy mix. Unit economics have been improving due to technological developments, increasing awareness, and strong support from both the public and the private sectors. The next level of growth is expected to get boosted due to emerging technologies such as hydrogen, battery storage, low-carbon steel, et al.
The views provided in this blog are the personal views of the author and do not necessarily reflect the views of Vivriti. This article is intended for general information only and does not constitute any legal or other advice or suggestion. This article does not constitute an offer or an invitation to make an offer for any investment.