The financial requirements to achieve IEA NZE targets far exceed the current investment and funding capacities available today
Our estimates indicate that India will require approximately $293 billion in investments till 2030 to achieve its solar and wind capacity targets set out in NEP14. This figure encompasses not only the development of solar and wind projects ($211 billion) but also accounts for the essential costs associated with storage and transmission required to integrate renewable energy (RE) at this expansive scale.
Now, if India were to build the required solar, wind, transmission and storage capacities to achieve the IEA NZE solar and wind share targets, this would push up the investment requirement by US $101 billion. This involves an extra investment of approximately $68 billion for solar, $8 billion for wind, $14 billion for storage, and $11 billion for transmission capacity additions. This brings the total investment in this scenario to around $394 billion. The calculations for the same can be found here.
Comparatively, the financial landscape for solar and wind in the preceding 8 years, commencing in 2021, witnessed an investment capacity of approximately $75 billion. To meet the upcoming demands, the financing capacity must increase nearly threefold on average during the next 7-8 years. This heightened level of financial commitment is imperative for facilitating essential capacity expansions in electricity generation, energy storage, and transmission infrastructure.
Renewable projects in India face investment risks, which may be a significant barrier to mobilise investment
Despite the recent uptick in investments in solar and wind installations, individual RE projects in India remain exposed to substantial risks; categorised into regulatory risks, project risks, and financing risks. Some of these challenges include payment delays, renegotiation of Power Purchase Agreements (PPAs), and complexities related to land acquisition. Effectively addressing these risk factors and actively attracting investment, particularly from foreign sources despite these risks, is pivotal for ensuring the successful implementation of renewable energy projects.
Certain risks, such as payment delays and subsequent requests to renegotiate Power Purchase Agreements (PPAs), emerge from systemic challenges linked to prolonged cost recovery issues that demand extensive reforms over the span of decades to rectify. While many SECI projects incorporate a payment security mechanism, establishing this safeguard requires additional capital, often not factored into the overall investment estimate. Despite persistent efforts to minimise investment risks, the reality is that investments are still imperative, even in the presence of these challenges. Therefore, it is essential to explore and implement efficient mechanisms to effectively reduce or manage these risks, ensuring the resilience and success of renewable energy projects.
India will need to have access to substantially more financing capacity and at a competitive rate of financing, in a time bound manner to set solar and wind targets that are in line with the IEA NZE pathway.
India will need an additional $96 billion in financing to achieve the International Energy Agency’s (IEA) Net-Zero Emissions (NZE) solar and wind targets. This financial requirement encompasses the supplementary costs associated with storage and transmission essential for integrating renewable energy (RE) at a more ambitious level.
It is imperative that this financing is secured at competitive rates to ensure the economic viability of the ambitious targets. NEP14 aligns with an optimal capacity generation mix, indicating that the plan represents a least-cost pathway, considering the economic aspects of each technology, including solar, wind, and various storage options. While pursuing goals beyond the NEP14 targets, it’s crucial to recognize that deviating from this plan may not necessarily be the least-cost option. Therefore, to maintain the overall cost of generation in line with the least-cost pathway, the availability of financing at favourable rates becomes a critical factor.
Another thing to note here is that the estimates in this analysis do not include the costs of early decommissioning of coal power plants in India, a particularly pertinent consideration in a scenario where the anticipated increase in renewable energy (RE) is expected to displace generation from coal. In this context, having additional coal capacity beyond what is strictly necessary to meet peak power requirements could result in a lock-in situation. This lock-in has the potential to diminish the cost-effectiveness of expanding RE beyond the initially planned targets.To mitigate this risk and avoid unnecessary lock-ins, it becomes crucial to secure financing well in advance.
Overall, while India’s existing national targets will triple its renewable capacity by 2030, aligning with the IEA NZE tripling pathway will require building additional solar, wind, storage and transmission capacities just on the supply side. It might well be that India will need international financing to increase the ambition to levels necessary to meet the IEA NZE pathway. In the meanwhile, India cannot really afford to slip on the NEP 14 targets for renewables, especially solar and wind to stay as close as possible to aligning with the global goal of tripling renewables by 2030.