COP 27 Climate Summit: What’s next for the Clean Energy Financing in India (A note)

As about 190 countries gather during the 27th Conference of Parties or COP27, Climate Summit by the United Nations (UN) at Sharm el-Sheikh, Egypt, the agenda of clean energy financing steals the limelight again on the global stage. The parties to the UN convention are required to present their progress towards the ambitions to cut the emission of greenhouse gases like carbon dioxide and agree on new treaties and measures to achieve the targets.

The concerns for climate change are undoubtedly alarming. Recent reports suggest that not enough has been done to avert a climate crisis. The World Meteorological Organization (WMO) revealed at the beginning of this year’s summit that the last eight years have been the hottest on record while the rate of increase in the sea level has doubled since 1993 with the last two and half year’s accounting for 10% of the overall rise.

Climate Financing Target

The UN has identified financial resources and investments as keys to addressing climate change issues that range from emissions reduction, adaptation to the already occurring impacts, and building resilience. At the COP15 in 2009, the developed countries committed to providing $100 billion in assistance per year to developing countries for climate reforms by 2020. The funding was supposed to be drawn from public, private, and alternative sources of financing. However, wealthy nations have failed to reach their targets. For instance, Asia received only ~25% of global climate finance despite being home to ~60% of the world's population. The question arises is $100 billion per year enough to act on the climate action pledges?

As per a report by the New Climate Economy — a flagship project of the Global Commission on the Economy and Climate — effective climate actions can result in $26 trillion worth of economic benefits for the globe by 2030. However, the benefits of that gigantic size cannot be achieved with an annual investment of $100 billion. The report by the United Nations Environment Programme stated that developing countries need annual adaptation (refers to adjustments in ecological, social, or economic systems in response to climate change impacts) support of $160 billion to $340 billion by 2030 and $315 billion to $565 billion by 2050.

India’s stance and the significance of alternative sources of financing

The government of India set a target to achieve renewable energy (RE) capacity of 175 GW in India (excluding large hydro projects), which would include 100 GW of solar energy, 60 GW of wind energy, and 15 GW via small hydro projects, biomass projects and other renewable technologies by Dec 2022. Also, under the Paris Agreement goal, the government of India is also committed to generating 50% of installed energy capacity from non-fossil fuel sources by 2030.

To achieve the ambitious target, investment in the sector needs to be scaled up significantly. Achieving an investment target of this enormous size could be a daunting task unless new investor classes are tapped via the debt market since 70% of funds in RE projects are sourced via debt. Although established companies are able to get success in financing, other players, which are mainly MSMEs, smaller energy service companies, and unlisted, and lower-rated companies face difficulties in raising finances from capital markets despite having a sound business model.

Such a barrier to clean energy financing can only be solved via alternative sources of financing like Alternative Investment Funds which can pool together commercial and impact capital, and especially lock in large international pools of capital. Such Alternative Investment Funds help RE players get access to early stage/construction financing, as well as affordable capital for project finance.

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