November 7, 2023

Scaling up Clean Power Financing: Challenges & Opportunities

Scaling up Clean Power Financing: Challenges & Opportunities

To achieve the targeted climate goals, various players including the government, financial institutions, etc. have been prioritizing clean energy sector and increasing investments in it. However, the current investment levels are insufficient to meet the targeted goals and need to be tripled to achieve the net-zero targets.

Moreover, policy and regulatory support are required to reduce investments made in the fossil fuel sector and divert the same towards clean energy transition. The trend of investing in the RE industry is primarily dominated by investments in the solar energy sector which has seen an upward trend in the past years. New policies in India can lead to more diversified global solar PV manufacturing supply chains.

Investment opportunities in six low-emission and climate-resilient urban infrastructure sectors like waste, water, renewable energy, electric vehicles, public transport and green buildings are prominent. Urban Local Bodies face access barriers to financial support in Clean tech implementation, rely on fiscal transfers from the provincial or federal governments. To meet rising energy needs that aligns with the Paris Agreement, annual investment in Emerging Market and Developing Economies(EMDEs) will need to more than triple from USD 770 billion in 2022 to USD 2.2-2.8 trillion per year by the early 2030s.

By country /region	2015	2022	2026-30	2031-35
Total EMDEs	538	773	1784-2222	2219-2805
China	287	511	730-853	850-947
Southeast Asia	28	30	171-185	208-244
India and Other Asia	76	32	321-348	418-467
Africa	26	32	160-203	207-265
Latin America	63	66	150-243	209-332
Middle East and Eurasia	57	52	233-390	303-550

Source: IEA( figures are in bn USD)

Scaling up private finance for the Clean Tech is helpful for Governments to create the environment for private investment, Governments to Strengthen the energy sector institutions, Credible Climate Transition commitments and planning by governments, Larger concessional finance will be required to mitigate project risks, enhance credit quality, and improve financing terms to attract private investors, Green bonds, sustainability linked loans and voluntary carbon markets to be emphasized to attract international investments and Deeper capital markets and financial systems will be required

Key Drivers of Clean Tech Adoption are High ROI, Reduction in Capital cost, Subsidization of capital cost by Government, Increase in Grid tariffs, Installation made mandatory by Government in select States, Cheaper and environment friendly option than DG set, Increase in per capita income and Significant increase expected in per capita electricity consumption

Challenges for adoption of Clean Tech Financing are Banks’ reluctance to fund Clean Tech, Lack of technical know-how of Clean Tech, Lack of access to secondary market, Smaller ticket size, Reluctance from borrowers to pledge, Loan Approval time, Regulatory Approvals , Post Installation Maintenance requirement etc.

When it comes to local financial institutions, investments have been minimum in terms of solar lending because of institutional challenges, risk of payment defaults, bad debt, etc. The development of small-scale solar projects such as rooftop solar projects has not picked up the required pace as local FIs have not been very keen to lend money. In the absence of affordable financing options by the local banks, uptake of solar systems has been slow, especially in rural and developing regions. In India, local banks have been financing large commercial solar projects but their lending to the residential rooftop segment is minimal owing to small ticket sized loans, lower risk appetite, and policy and regulatory challenges. Some banks have come up with dedicated solar loan products, but the interest rates offered are not attractive and often require home mortgage as a guarantee.

The Asia-Pacific solar energy market is expected to grow further in the coming years. The prominent factors driving the growth are the issues related to elevated grid electricity prices and increasing regional solar energy investments. However, the increase in investments is mostly in India primarily because of a suite of favorable policies and regulations such as tax exemptions and central financial assistance.