By Vibhuti Garg, Energy Economist and Lead India, Institute for Energy Economics and Financial Analysis
Energy transition is happening but not fast enough to limit the global average temperature rise to 1.5 °C. Power investment will need to rise to help the world achieve the Paris Agreement goals. Compared with the average annual investments projected in the International Energy Agency’s (IEA) Sustainable Development Scenario, the global power sector spending in 2019 was about 35 per cent short of the level required a decade from now. The year 2020 also witnessed lower investment due to the Covid-19 pandemic.
In order to address climate change and greenhouse gas emissions, India committed to achieve 175 GW of renewable energy capacity by 2022 and it has increased the target to 450 GW by 2030. It ranks fourth in the world in terms of installed renewable energy capacity with 100.6 GW as of August 2021.
Although India has made tremendous progress, it will need $500 billion in investment to reach the 450 GW capacity target by 2030 ($300 billion for wind and solar infrastructure, $50 billion for grid firming investments and $150 billion for expanding and modernising transmission infrastructure).
Financing will play a critical role in enabling India to achieve its renewable energy targets. Over Rs 5.2 trillion ($70 billion) has been invested in the Indian renewable energy sector since 2014. After a Covid-induced slump, the pace of renewable energy investment has picked up again in this fiscal year.
Investments in renewable energy declined by 24 per cent in financial year 2020-21, dropping from $8.4 billion in 2019-20 to $6.4 billion in 2020-21. However, with the revival of energy demand and commitments from various banks and financial institutions to exit fossil fuel investments, the share of renewable energy investment has been rising. In the first five months of this financial year, from April to August 2021, investment in renewable energy totalled $8.4 billion, equalling the total investment in 2019-20 and exceeding the value of investment in 2020-21.
Until recently, renewable energy investment in India was driven by private sector banks. However, public sector banks are now increasing their lending to the renewable energy sector. The State Bank of India’s (SBI) lending to renewable energy projects has increased to Rs 319 billion ($4.2 billion) or 1.5 per cent of the bank’s gross loan assets.
An acceleration of the trend of global capital shifting to renewable energy would allow India to decarbonise its energy sector and channel investment towards a green recovery.
SBI’s pivoting lending focus, with more funding going to renewable energy compared to coal power projects in the previous financial year, comes as the banking sector is struggling with $40 billion-$60 billion of non-performing or stranded coal assets. Moreover, lending agencies and fossil fuel companies are facing increasing pressure from their boards to shift their strategy and diversify their portfolios towards renewable energy.
A look at the two-year share price performance of Peabody Energy and ExxonMobil shows that the fossil fuel giants have massively underperformed their respective share market benchmarks. ExxonMobil lost $150 billion, or more than 50 per cent of its shareholder wealth, in October 2020, and the loss in value could be much higher now. With the share prices of such companies hitting the floor, board members are having to evaluate their strategies and de-risk their investments by exiting fossil fuel financing. These decisions are made purely on an economic basis – these companies are profit-making entities and want to earn higher returns on their investments.
Further, renewable energy is deflationary, with falling prices helping to drive global capital into the renewable energy sector and away from thermal coal and coal-fired power generation. The IEA predicts that the levellised cost of energy (LCOE) of solar will dramatically go down to $15 per MWh (about Rs 1.10 per kWh) by 2040 from $35 per MWh (about Rs 2.60 per kWh) in 2019. Also, the cost curve in battery storage globally has come down dramatically, from $1,100 per kWh in 2011 to $137 per kWh in 2020 for a stand-alone lithium-ion battery system, and it is projected to drop by another 55 per cent to $58 per kWh by 2030.
The government must work on resolving policy and legacy issues as this would encourage financial institutions to deploy more capital to support “RE+” goals.
The IEEFA has tracked about 180 globally significant banks, insurers and asset managers/asset owners till the first week of September 2021 that have implemented substantial formal coal policies since 2013. This is a reflection of the rapidly diminishing economic merits of thermal coal and the growing understanding that an alignment with the Paris Agreement invariably leaves many coal projects as stranded assets, unable to deliver a viable return over their useful life. An acceleration of the trend of global capital shifting to renewable energy would allow India to decarbonise its energy sector and channelise investment towards a green recovery to build a more sustainable economy.
India is already witnessing increased commitment to renewable energy investment by domestic and global players. In June this year, Mukesh Ambani, chairman of Reliance Industries, announced plans to invest Rs 750 billion ($10 billion) in clean energy over the next three years in support of the group’s world ambitious pledge to achieve net zero emissions by 2035. JSW Energy also plans to scale up its total capacity to 20 GW with a total investment of Rs 750 billion ($10 billion) by 2029-30 from a little over 4.5 GW now, driven by renewable energy. Big clean energy commitments by major players Reliance and JSW Energy will drive more investment into this space. Other public and private entities including NTPC, Tata Power and ReNew Power have also made big commitments.
India has a long road ahead. The task is daunting. But the financial trends in Indian renewable energy and grid infrastructure over the past two to three years strongly suggest that domestic and global capital can support this ambition.
India needs to strengthen its green industrial policy by investing in capacity to manufacture for the clean energy transition. It also needs to start investing in the electricity distribution system of tomorrow, instead of just trying to fix the problems of the existing system.
The country should adopt an “RE+” approach, which means bringing in new technology and unlocking finance not only for the solar and wind sectors, which are competitive on their own, but other flexible sources of generation such as battery storage, pumped hydro, green hydrogen and electric vehicles. The government must now work on resolving policy and legacy issues as this would encourage financial institutions to deploy more capital to support “RE+” goals.