‘Balancing risk perceptions in the transition to a responsible RE system’
Continued World Bank support indicates multilateral and development financing still play an important role in India’s energy transition, and that the renewable sector has yet to develop to the point where private financing can adequately meet the fundin
s providers of funding and investment capital, financial actors are key to the energy value chain. Via capital allocation and investment decisions not only do they enable India’s energy system transition, but also have the power to shape the renewable value chain as it develops to scale, shepherding system actors to ecologically and sociallyresponsible practices.
Despite the record fund flow into renewables (as per the Ministry of Power estimates, investment in India’s renewableenergy (RE) projects in 2024 is expected to surge by a record 83% to ₹1,37,500 crore from ₹74,250 crore in 2023), India still gets World Bank support to hasten renewables development.
Besides ₹2,48,63 crore in lending support for solar park, rooftop and solar installation expansion, India secured ₹1,243.9 crore in financing last year for lowcarbon energy development and ₹1,657 crore for powersector reforms in Himachal Pradesh.
Continued World Bank support indicates multilateral and development financing still play a crucial role in India’s energy transition, and the RE sector has yet to develop to the
Apoint where private financing can adequately meet the funding needs of this fastgrowing sector.
This is irrespective of the huge opportunities it presents within the world’s fastestgrowing economy, where RE capacity addition is also the fastest in the world. Multilateral and developmental finance primarily serve as catalytic capital rather than direct investors in energy transition. Their involvement is aimed at providing oversight, enhancing project credibility and mitigating risks, thus creating an environment where private capital feels confident to contribute significantly.
This signals risk perceptions of the RE sector remain elevated enough to prevent private finance from crowding in. Financiers and investors are still concerned with the bankability of projects where upfront costs are high and funding decisions continue to be based mostly on project economics and marketreturn expectations. Perceived risks may include the unpredictability of project completion given the requirement of regulatory approval; the heterogeneous nature of the sector with different technologies and supply chains specific to each energy source, some of which may be complex; and, the pace of development of the sector where the knowledge of financiers may not keep pace, hindering ability to accurately value projects.
Such concerns are valid but fail to acknowledge these risks are reduced as the sector develops. At a systemic level, there are also significant benefits that can be derived from the pace and quality of transition, and equally significant costs from inaction, slow transition, or one that creates negative externalities in the value chain.
For example, there have been several studies that estimate India’s economic and social costs of climaterelated damages from inaction at ₹2,90,226 crore over the next 50 years, with much of the impact felt by health and agriculture.
The costs may be borne by some or all system actors; they may be difficult to quantify but must be given due consideration, if not priced in, if investment decisions are to be based on true costbenefit analysis. Emergent risks could amplify this and must also be factored in.
We are living in the Anthropocene, in an era of expected cascading impacts from climate change. Even if these are considered tail risks, because of the precipitous nature, it would be foolhardy to downplay the potential effect.
Costs of transition
One cannot deny there are costs to transitioning India’s energy system towards RE. The price tag, however, must be considered relative to the risks and costs of not transitioning at all, or transitioning irresponsibly. Choosing to ignore the longrun social and environmental costs of either of these scenarios may result in skewed perceptions of risk and incomplete valuations, leading to lessthanoptimal investment decisions which may have longrun consequences far beyond losses suffered by the private and financial sectors. In line with this view, the RBI released a draft disclosure framework on Climaterelated financial risks at the end of February, calling on banks and financial institutions to disclose information about climaterelated financial risks and opportunities for users of financial statements to assess such risks and opportunities, and facilitate market discipline. The disclosures align with the global framework set by the Task Force on Climaterelated Financial Disclosures and will cover governance, strategy, risk management, metrics and targets.
Responsible financing and investment not only directly helps to create a responsible RE value chain, but also reduces the risks of investing. In supporting the growth of the sector, financial actors help themselves by safeguarding against litigation, reputation and financial risk.
In funnelling capital into a responsible value chain, they contribute to the longterm health and stability of the sector. To unlock the capital required to accelerate India’s energy system transformation, valuechain actors must work together to address the endemic risk perceptions of investing in the sector. Doing so stands to benefit all.
(The writer is Principal Strategist, Sustainable Finance, Forum for the Future)
To unlock capital for accelerating India’s energy transformation, valuechain actors must address endemic risk perceptions of investing in the sector