Sep 10, 2024 09:03 PM IST
Blended finance can support India’s energy transition trajectory by mobilising commercial capital for public good
The climate crisis is staring us in the face. Intense summers, flash floods, and raging storms are signs that the planet is witnessing unprecedented change. This calls for immediate and swift action. At the 26th Conference of Parties in Glasgow in 2021, India had announced a “net zero by 2070” goal. To achieve this, investments of $10-20 trillion are required. More than 80% of these investments are envisaged from the power sector and 15% in green hydrogen alone. This transition will be enabled by the two key roadmaps developed by the Union government, i.e., increasing the renewable generation capacity to 500 GW and accelerating green hydrogen production to five million metric tonnes per annum by 2030. However, integrating variable renewable energy into the grid and ensuring availability during peak demand hours requires affordable energy storage and offshore wind. This spotlights the financing challenge. Despite the government’s efforts such as viability gap funding covering 35-40% of capex, emerging technologies, outside of pure-play solar and onshore wind, have not yet reached commercial parity with conventional energy. And even in the absence of commodity-demand-risk, this results in higher risk perception, manifesting itself in higher cost of capital. Financing solutions that pool capital and distribute risks are required. Blended finance is one such approach.
Blended finance leverages development finance, multilaterals, and sovereign funds to mobilise commercial capital in areas perceived as high risk. Pooling of instruments such as capital grants, concessional debt and equity, and credit enhancement guarantees help de-risk such areas and attract commercial capital. During 2014-23, blended finance deals worth ~$145 billion have been executed (at a compounded annual growth rate, or CAGR, of 11%) with climate related deals commanding 54% share. India has seen deals worth ~$5 billion (CAGR at 18%) led by the energy and financial services sectors. Strong interest in the Indian market needs to be channelised for funding emerging technologies such as battery storage and offshore wind.
For instance, grid integration of the elevated share of renewable in the energy mix (33% by 2030) requires an estimated 41GW/208 GWh of battery storage by 2030. Peak demand in India is largely serviced by coal-based thermal plants with tariffs of ~ ₹5-6/kWh. At current prices of ₹3.4-3.5/kWh for solar-wind hybrid, the battery storage effective tariffs need to drop to ~ ₹2/kWh to match coal during peak slots. The standalone battery storage tariff is at ~ ₹4.5-5.25/kWh, based on the latest discovered capacity charge of ₹3.72 lakh/MW/month in a Gujarat tender.
Government’s intervention, through the ₹9,400 crore VGF scheme funding up to 40% of the capital cost, will likely reduce the battery storage tariff to ₹3-3.5/kWh. To lower this tariff further, blended finance may be explored. Illustratively, a blended finance facility comprising 5% capital grant, concessional debt at 7% rate of interest, and concessional equity with return expectation of 8% can reduce the battery storage tariff to ~ ₹2.0-2.2/kWh.
Wind energy helps address the issue of renewable energy availability during non-solar hours — offshore wind has better availability at higher tariffs ( ₹10-12/kWh) compared to the more established onshore wind ( ₹3.6-3.7/kWh). Government announced VGF, coupled with localisation, is expected to reduce the offshore wind tariff to ₹6-7/kWh. A similar blended finance facility can reduce offshore wind tariff to ₹4-4.5/kWh, thereby attaining commercial parity. Both these measures shall directly impact green hydrogen prices, 70-75% of which is renewable electricity. Coupled with the government’s hydrogen PLI schemes, blended finance can reduce green hydrogen price from ~ ₹300/kg to ~ ₹260/kg, and closer to grey hydrogen price of ~ ₹200/kg, which is produced using natural gas.
It is pertinent that a robust blended finance facility is designed for emerging technologies. The facility may have a three-tiered structure comprising concessional debt, concessional equity, and capital grants resting on an overarching credit enhancement guarantee. Development finance institutions and multilaterals may contribute with concessional debt while sovereign wealth funds and pension funds may contribute concessional equity. Multilaterals and the government may provide capital grants and/or credit enhancement guarantees to further de-risk emerging technologies. This shall help crowd-in of commercial capital, with developers infusing equity and lenders sanctioning debt at risk adjusted rates. Lenders with expertise in appraising large capital projects shall be best suited to participate in and anchor this facility.
Blended finance can support India’s energy transition trajectory by mobilising commercial capital for public good. The time is ripe to mobilise concessional capital to spur on commercial investments in these technologies.
Kaustubh Verma is managing director and partner, BCG, and Siddharth Khanna is principal, BCG.The views expressed are personal
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