Critical role of risk assessment in driving India’s energy ambitions

Higher risks in renewable energy projects can drive up the cost of capital and limit access to finance, hindering the achievement of renewable energy targets.

Meeting India’s renewable energy targets requires annual finance flows to grow to around USD 68 billion by 2032, requiring a 20% annual increase. Effectively addressing sectoral risks is crucial to unlocking this investment potential.

India’s energy transition requires significant increase in financing

India has reaffirmed its commitment to the global energy transition with an ambitious target to decarbonise its power sector. At COP26, Prime Minister Modi announced a goal of achieving 500 GW of non-fossil fuel capacity by 2030. While this target was not officially included in India’s updated Nationally Determined Contributions (NDCs), it remains a key guiding reference in national energy planning documents, including the 14th National Electricity Plan (NEP-14).

NEP-14 incorporates this goal, targeting 596 GW of RE capacity by 2032. This would account for 68.4% of the country’s total installed capacity and meet 44% of its electricity demand. NEP-14 sets specific targets of 365 GW of solar, 122 GW of wind, 47 GW/236 GWh of battery energy storage system (BESS) and 26.7GW of pumped storage plants (PSP), providing a clear roadmap for India’s RE expansion.

India’s RE growth is already progressing in alignment with these goals. By October 2024, the country had achieved 200 GW of RE capacity, with an additional 151 GW under various stages of development and construction. Beyond large utility-scale projects, renewables have also witnessed widespread adoption by commercial and industrial (C&I) consumers, as well as rooftop installations for retail consumers, driven by various regulatory incentives. 

This progress is evident from the significant annual addition of 30 GW of renewables in the calendar year (CY) 2024, which represents a 113% increase compared to 2023. In terms of tendered capacity, 79.3 GW were auctioned in CY 2024, a significant increase from 57 GW in CY 2023. The auction prices were also extremely competitive, as low as 2.48 Rs/kWh (~29 USD/MWh).

India has emerged as a leading destination for RE investments, driven by its favourable geography, stable regulatory framework and competitive electricity market structures. Through 2023 and 2024, India topped BloombergNEF’s Climatescope index, which ranks countries based on their attractiveness for clean power investments. Notably, India has consistently remained among the top five emerging countries over the past five years leading up to 2024.

India’s RE sector has matured over the last decade, supported by policy frameworks such as renewable purchase obligations (RPOs), waivers on Inter-State Transmission System (ISTS) charges, solar park initiatives and favourable open access policies for C&I off-takers. These measures have created enabling conditions for competition, successfully attracting capital and encouraging independent power producers (IPP) to participate in the development of India’s RE ecosystem.  

India’s RE financing landscape has evolved significantly over time, leveraging a diverse range of sources. Equity investments in India’s renewable sector have been made by global investment and pension funds (such as Brookfield, CDPQ), large Indian corporations (Adani, JSW, NTPC), and international oil companies (Petronas, TotalEnegies). On the debt side, funding has been sourced from banks (SBI, Axis), energy focused non-banking financial companies (IREDA, REC), and development financial institutions (World Bank).

Investments in renewable power generation and transmission for financial year 2024 were estimated at USD 13.3 billion, a 40% increase from the previous year. However, to meet the targets outlined in the NEP-14, annual financing must grow at a consistent rate of 20% each year, reaching USD 68 billion by 2032. The RE financing ecosystem must rapidly evolve to support this scale-up. A cumulative investment of USD 300 billion would be needed to meet India’s 2030 RE target of 500 GW, a critical checkpoint for NEP-14.

This would be crucial for scaling RE generation and enhancing grid storage capabilities—particularly with new-age tenders mandating dispatchable renewable generation. Also, rapidly expanding the transmission network to efficiently evacuate power from RE-rich regions to key demand centres would become important. 

Managing risks to lower the cost of capital is key to RE growth

RE infrastructure, characterised by high capital intensity and long gestation periods, often relies on financing structures such as project finance. In project finance, debt repayment depends solely on the project’s cash flow, with no recourse to external earnings or collateral if the project fails. The absolute reliance on an individual project’s revenues introduces significant risk, and the absence of fallback options makes thorough risk assessment essential. 

The availability of capital for renewable projects is a crucial factor in determining whether renewable infrastructure can even be envisioned. Political and economic challenges significantly influence capital availability in a region. For instance, regions affected by conflict or countries with underdeveloped financial systems often pose high investment risks. These conditions can elevate risks to unmanageable levels, significantly restricting the flow of capital for infrastructure projects. 

In regions where the availability of capital is not a pressing issue, the cost of capital (CoC) becomes a key factor in RE growth. The CoC generally increases with higher risks, as investors demand a premium over prevailing rates to engage in projects despite prevailing uncertainties. This is rooted in the fundamental philosophy of investment, where most investors prioritise minimising losses over seeking super-normal profits. 

CoC represents the minimum return required to justify investments in capital-intensive projects, such as constructing a solar photovoltaic plant or wind farm. It serves as a benchmark for assessing whether a project’s anticipated returns can sufficiently cover its costs and meet minimum revenue expectations. 

RE projects typically secure capital from diverse sources, each with varying risk-return expectations. The overall CoC for a project is therefore calculated as the weighted average of all capital sources, technically referred to as the weighted average cost of capital (WACC). For simplicity, this report refers to WACC as CoC. 

Keeping the CoC low for RE projects is essential for the sector’s growth for two key reasons. First, a high CoC can discourage renewable project development given the significant upfront capital expenditures required for such projects. Second, a high CoC increases project costs, often resulting in higher electricity prices to meet investor payback requirements. This, in turn, impacts the accessibility and affordability of renewables, a critical theme for modern energy infrastructure. Recognising this challenge, the report examines the primary drivers of CoC—risks.

Understanding different type of risks becomes important

Effectively mitigating risks—whether through regulatory changes or innovative contracting mechanisms among private parties—requires a thorough understanding of historical data and risk forecasts. This understanding serves as the foundation for planning interventions to minimise risks and reduce the CoC.  

Despite extensive financial literature on risks around infrastructure projects, this attempt simplifies the categorisation of risks specific to renewable projects. Risks can be broadly divided into two categories:

• Project-specific risks: These relate to the development, construction and operation of individual renewable projects, such as a utility-scale solar plant. Examples include challenges in land acquisition, power evacuation, generation shortfalls and other project-specific risks.
• Sector-wide risks: These affect all renewable projects within a region and stem from broader macroeconomic factors. Examples include interest rate fluctuations, exchange rate volatility and sector-wide policy changes, such as abrupt tariff adjustments or restrictions on the import of solar panels.

This report primarily focuses on project-specific risks and does not explicitly address the macroeconomic factors influencing risks in the broader sector. Understanding project-specific risks within the Indian context and their relative importance is crucial for all stakeholders in a RE project, particularly developers and financiers. Additionally, the report highlights measures to minimise or mitigate these risks through targeted interventions.