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Financing Clean India

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India has embarked on a low-carbon-inclusive growth trajectory through a slew of policy, institutional market creation measures. These include the National Action Plan on Climate Change, solar missions - national and states, energy efficiency mission, green SEZs, green transportation and renewable energy certificates. It has also set up expert groups on low carbon inclusive growth strategies. All these initiatives would require a humongous amount of financing and a number of estimates have been made for that, such as the one by Mckinsey which talks of an order of magnitude of $1 trillion in incremental capital required by 2030. Just for renewable /clean energy, investment requirement at a mandatory 10 per cent level will be $20 billion in the next five years (2012-2017).The estimates are staggering, but there is less clarity on how such green investment needs would be met. India is fast emerging as preferred destination for clean energy/low carbon investments in terms of industry-attractiveness driven favorable natural endowments for solar, wind, biomass and small hydro projects and there is a huge potential for energy efficiency. The E&Y Renewable Energy Country Attractiveness index places India among the top 5 destinations for renewable energy investments.

There are some questions around how this investment potential could be realized. How can we generate funds — both domestic and international — to finance such investments? More specifically, there is need for complementing investor interest with adequate availability of debt financing. How can we use the existing financial intermediation systems to address these new kinds of investments? How could public finance be possibly directed to leverage increased commercial financing?

Indian commercial banks do not have a good track record of commercially financing projects/ventures which are understood to be "new" and therefore,unproven and capital markets is also out of access for heightened risk perception of rating agencies that prefer to play safe, thereby constraining credit to desirable sectors rather than enabling credit.  Generically applicable to most infrastructure project finance, there is a pronounced credit market failure for ‘cleantech' projects. These projects rarely get financing from commercial banks without additional outside collateral. 

It is important to understand that India's growth story would not be driven by the top few hundred business groups (which is where most of the institutional credit flows) but by thousands of small and medium business enterprises which are emerging on the horizon every year and most of clean energy/technology enterprises usually start off small to medium scale. Cleantech industry is emerging as one of the most promising emerging businesses in India.  But these  businesses have a serious problem with "access to finance" given the small to medium scale of operations, decentralized nature of business models, relatively lower asset intensity and cash flows which are often partly driven by monetization of savings and carbon offsets such as Renewable Energy Certificates (REC) and Perform Achieve and Trade(PAT) mechanisms. These cleantech enterprises which are emerging on the horizon have a wide range of business models ranging from grid connected renewable energy power projects and off-grid distributed generations to energy service and energy saving companies which do not lend themselves to conventional collateral based bank financing.

In order to realize India's cleantech potential, it is imperative that we create private and public financial institutions /banks focused on "Cleantech" and "Low Carbon" projects and enterprises and also garner additional public finance for the same with focused financial intermediation interventions. We need to focus on generating additional resources for low carbon/cleantech financing and create/allow focused financial intermediaries to develop capabilities for financing cleantech investments. Some possible initiatives could include creating a well-capitalized clean/green financing apex institution or restructuring an existing one, providing an enabling regulatory framework for private sector clean tech NBFCs (as sub set of the existing infra-NBFCs),  evolving risk sharing instruments/mechanisms to support commercial bank financing and developing domestic carbon offsets market.

(The author is President  & CEO, Financial Advisory Division, Feedback Infrastructure Services. The views expressed here are personal)