How can the Cost of Capital Shape India’s Renewable Energy Future?

The cost of capital will play a key role in shaping India’s renewable energy future. Keeping the cost of capital low accelerates renewable energy deployment while ensuring affordable electricity for consumers.

A 4OO bps increase in cost of capital can put off India’s RE targets of 500 GW by 2030 by 100 GW.

Even a moderate 200 bps increase in cost of capital (from 10% to 12%) could add ₹27,000 crore to annual electricity generation costs, while a 200 bps reduction (to 8%) could save approximately ₹32,000 crore.

Cost of capital significantly impacts the cost of RE generation

The CoC significantly affects the Levelised Cost of Electricity (LCOE) for RE projects due to their capital-intensive nature. Unlike conventional energy projects, which incur substantial operational/fuel expenses over time, RE projects require most of their investment upfront before commissioning. As a result, Cost of Capital (CoC) is a critical determinant of LCOE.

In India, the generally acceptable CoC for RE projects is estimated to be around 10-11%. Our analysis indicates that for solar projects, a 10% CoC can result in financing costs contributing to 45-55% of the Levelized Cost of Electricity (LCOE). 

Furthermore, a 100 bps increase in the CoC can lead to an approximate 5% rise in the LCOE, highlighting the significant impact of financing costs on the overall cost of RE generation. These findings underscore the critical role of maintaining a low cost of capital in ensuring the affordability and competitiveness of solar power.

High cost of capital impairs purchasing power of DISCOMs

As the share of RE grows, the cost of capital (CoC) plays an increasingly critical role in shaping the overall cost of electricity generation. A high CoC can either result in higher electricity costs for retail consumers or place significant financial strain on Discoms, especially in states with weak utility finances. This dynamic can shift reliance back to coal-based power generation, further compounding the issue.

Our analysis for the year 2030 shows that an increase in CoC from 10% to 12% could increase power purchase costs for DISCOMs by 3%, or ₹0.12/kWh. Although this difference may seem modest, its impact is far from negligible, as the financial woes of DISCOMs primarily stem from the ₹0.55/kWh gap between the average cost of electricity purchased and the average revenue recovered. This gap resulted in ₹79,000 crore revenue shortfall for Discoms in FY23. This is more than half of the total budgetary allocation for the power sector in FY2024-25, including allocations for RE.

Keeping RE electricity costs low not only benefits consumers but also encourages Discoms to proactively seek more RE in their supply mix. The financial implications of a seemingly slight increase in CoC are substantial. A 200 bps increase in CoC (from 10% to 12%) could add ₹27,000 crore to annual electricity generation costs, while a 200 bps reduction (to 8%) could save approximately ₹32,000 crore. Beyond the energy sector, higher electricity costs can erode industrial competitiveness, especially for energy-intensive sectors reliant on affordable power. This threatens one of renewable energy’s core promises of providing low-cost electricity while advancing sustainability goals.

High cost of capital as a barrier to RE growth

As the CoC increases, the LCOE for RE increases substantially, making these projects less attractive. This reduced competitiveness compared to conventional fossil generation can lead to reluctance from Discoms or buyers to procure RE electricity, even when mandates are in place. Such hesitancy could dampen demand for RE capacity, this slowing down its uptake. This challenge is particularly pronounced in markets like India, where the affordability of energy services is vital.

If the CoC increases by 200 bps (e.g., from 10% to 12%), Ember’s modelling estimates indicate that India’s RE capacity by 2030 could be limited to 448 GW, falling well short of the 500 GW target. Conversely, a 200 bps decrease in the CoC (e.g., from 10% to 8%) could enable India to achieve 540 GW, far exceeding its target.

The cascading effect of a higher cost of capital (CoC) suggests that, over time—especially beyond the 2030 timeframe examined in this report—India could add significantly less RE capacity if elevated CoC levels persist.

Such a shift could jeopardise India’s clean energy transition and climate commitments, as a delayed scale-up of RE would make it harder to achieve long-term decarbonisation goals. This underscores the need for a dedicated effort to manage risks and investor expectations, ensuring that financing remains accessible and cost-effective for renewable energy.