Significance of Creating Financing Opportunities for Emerging Energy Storage Industry in India to Achieve Net Zero
The Indian renewables financing market also needs to access domestic capital. There is a scope to raise domestic capital through rupee-denominated green bonds to expand the pool of financing for renewables. But it will only happen if the government, academia, and the private sector—financial institutions, in particular—work together to deliver a decarbonized future.
November 01, 2022. By News Bureau
The Paris Agreement outlines a target of reducing emissions by 45% by 2030 and reaching net zero emission by 2050 to limit global warming to 1.5°C. While projections indicate that the global GHG emission in 2030 will be still around twice as high as required to restrict the 1.5°C temperature rise. We need to take bold and urgent actions to mitigate the climate emergency before it reaches a tipping point.
Energy (electricity, heat, and transport) accounts for over 73% of global GHG emissions. With increased focus on decarbonization, large-scale renewable energy (RE) adoption is becoming a need rather than an option. Battery storage is emerging as an enabler for the adoption of intermittent renewable energy. Even without a crystal ball, we can predict that Sustainable Battery Storage will play a key role in the energy transition.
In a nutshell:
• Energy Storage and Battery storage will play a critical role in supporting the wide-scale deployment of renewable energy resources and reaching net-zero emissions in the near future.
• Though the adoption of energy and battery storage is still considered nascent in many regions, there are strong growth prospects, particularly in the countries moving towards deregulated energy markets with aggressive climate change reforms.
• Lithium-ion has emerged as the leading technology, but other environment-friendly technologies with different benefits are also evolving at a fast pace.
• Energy investment and infrastructure companies are actively exploring the business cases for co-located battery storage to increase Variable Renewable Energy (VRE) asset utilization.
• The foreseeable future of renewables is more hybrid rather than standalone solar and wind powered.
According to the NITI Ayog, India will have a battery storage potential of 600 gigawatt hour (GWh) by 2030, and demand for electric vehicles, stationary storage and consumer electronics will mainly drive the adoption of battery storage. Robust energy storage technologies can help facilitate a smooth transition towards renewable energy, providing commercially scalable and sustainable solutions.
World Bank estimates 27 to 62 Million EVs in India by 2030; up to 15% electric personal cars; an investment of up to INR 214,000 Million for CI; 25% of all e3W fleets using swappable batteries in 5 years !!
The ongoing transition to clean energy has spurred new technologies, new markets and new opportunities for investors seeking to invest in a sustainable future and earn solid returns on their investments. Energy storage, a critical component of the clean energy future, is gaining notice by utilities, large-scale energy users and investors. Today, as the world reels from energy shocks stemming from Russia’s invasion of Ukraine and grapples with the ongoing consequences of global warming, investors seeking opportunities in the clean energy space are moving towards the massive opportunity presented by energy storage.
While a net-zero grid is achievable, the decisions regulators make in the months ahead will not only determine how effectively and affordably our country confronts its capacity shortfall—they will shape the grid and determine its carbon footprint for the next generation and how that will help us in building community benefits— from lower greenhouse gas emissions, better local air quality and energy resilience, to the massive job and investment opportunities—as well as provide greater price stability.
Financing Completes the Picture
With hundreds of megawatts of storage already in the system, India has ample hands-on experience setting aside surplus electricity when it’s generated for use during times of peak demand. A decarbonized grid will need far more storage, distributed much more widely across the Indian states. Governments should not be solely responsible for getting storage and a menu of other essential grid enhancements in place. Financial institutions like Public Sector Banks, FIIs, Local, VC and Investment Banks have already shown an ability to finance battery storage and are ready and eager to do more.
As we know every financial institution hates stranded assets. That means the solution to India’s electricity supply crunch depends on an intersection between good and smart public policy and banking, with the central and states keeping key policies fairly consistent over long periods of time to build confidence in the stability of project cash flows.
Attracting private sector capital into the marketplace will complete the picture of a net-zero future. But, as noted, in order to attract that capital into projects there must be policy certainty (trust we have one of the best policies in place but needs certain sensitivities). The other side of that story is that with great (market) power comes a great potential for good. A government with the policy and regulatory clout to cast a pause over a powerful, emerging market can just as easily make deliberate decisions to assist in derisking the investments that drive that market. This derisking is critical because, as a regulated financial institution, we are limited in how much risk we can take with our depositors’ capital. Therefore, the choices made by the government and regulators are critically important for a financier like the public sector and FIISs. Investing in a net-zero future is in our DNA, but we can only take on investment risk to the extent that regulations permit.
Investments in the energy transition will enable society’s shift towards lowcost renewable energy to minimize climate change and deliver returns for years to come. The LDES will be the lynchpin of that clean energy future, enabling wind and solar to provide base load power and fully retire fossil fuel generators. The opportunity is commensurate with the need for LDES solutions as LDES technologies attract unprecedented interest from governments, utilities and transmission operators. This sector presents both short and long-term benefits which will deliver not only a return on investment, but a lower cost, more sustainable and more secure energy system.
India’s Net Zero commitment by 2070 will require the achievement of nearterm goals starting with the 2030 renewables target. Large corporates and industries are also looking to reduce their carbon footprint and increasingly opting for corporate renewable PPAs. Further, the government is looking to decarbonise other emission-intensive and hard-to-abate sectors which will increase the demand for renewable power.
Corporate Funding in Energy Storage Up Significantly with $12.9 Billion in Q1 2022
Energy & Battery Storage
Total corporate funding (including VC, Debt, and Public Market Financing) in Battery Energy Storage came to $12.9 billion in 26 deals compared to $4 billion in 27 deals in Q4 2021. Funding was up significantly year-over-year (YoY) compared to $4.7 billion in 18 deals in Q1 2021.
Venture capital (VC) funding (including private equity and corporate venture capital) raised by Battery Storage companies in Q1 2022 came to $1.1 billion in 21 deals a 15% increase compared to $1 billion in 14 deals in Q1 2021. Quarter-over-quarter (QoQ) funding was 28% lower compared to $1.6 billion in 21 deals in Q4 2021.
The top five VC funded Battery Storage companies this quarter were: Hydrostor, which raised $250 million from Goldman Sachs Asset Management; Sunfire raised $215 million from Copenhagen Infrastructure Energy Transition Fund I and Blue Earth Capital; Factorial Energy raised $200 million from Mercedes-Benz (DAI) and Stellantis; Viridi Parente raised $95 million from Thomas Golisano, Ashtead Group/ Sunbelt Rentals, and National Grid Partners; and Our Next Energy (ONE) raised $65 million from BMW i Ventures, Coatue Management, Breakthrough Energy Ventures, Assembly Ventures, Flex, and Volta Energy Technologies. Seventy-six VC investors participated in Battery Storage funding this quarter.
Financing the green energy–banks need to take giant steps to enhance their exposure in the sector RES expansion would require a funding of INR 20 trillion (US$262bn) to meet the desired goal: HDFC Securities
With considerable capacity additions anticipated in the renewable space to meet the set climate goals, access to capital and funding will be critical in determining the success of RES in India. The sector has been attracting increasing investments in the form of debt and equity through various channels like NBFC, NBFC—infrastructure debt funds, private equity, domestic and international bonds, institutional capitals such as pension funds and insurance companies, private equity, government entities, foreign funds, and banks. Furthermore, development financial institutions such as the Asian Development Bank, the Asian Infrastructure Investment Bank, and their consortiums have also joined the international bond market for financing RES projects worldwide. These institutions provide long-term funds with negligible interest rate fluctuation risks, which bode well for RES projects that already face a volatile generation risk due to unavoidable seasonal variations.
The battery storage is expected to be around INR3.7 trn (US$48bn), taking the sector’s overall debt requirement to ~INR16.7 trn (US4217bn). Over the next eight years, RES would require ~INR3.5 trn in equity capital (US$45.5bn). Source: HDFC Securities
Financing will be a key challenge for building these large assets
A number of Indian renewable energy developers have successfully managed to access foreign equity and debt capital. But there is a larger pool of ESG and sustainability-linked funds available that could be accessed, such as through government-backed sovereign green bonds. For dollar-denominated green bonds, the currency risk adds to the cost of capital. The Indian renewables financing market also needs to access domestic capital. There is a scope to raise domestic capital through rupee-denominated green bonds to expand the pool of financing for renewables. But it will only happen if the government, academia, and the private sector—financial institutions, in particular—work together to deliver a decarbonized future. None of these institutions can create that future unassisted, the problem is simply too big. Yet by working together, we give ourselves the best possible chance of success. If we’re serious about decarbonizing the energy sector, storage has to play a role. But the current project finance approach and treating storage purely as a generation asset isn’t necessarily going to get us there; we need to think differently, we need to think transformationally about the system.”
Investment in Renewables and Storage
The pandemic has led to an increased focus on sustainability.
Embedding ESG factors in the capital market has become a trend. As the levelized costs of solar and wind energy (LCOE) have dropped significantly in the past few years, investors are bullish on renewable energy project investments.
As per the latest Bloomberg NEF report, renewable energy investment has increased to 11% YoY in 1H 2022 amounting to $226 billion net investment with a large part of it driven by the Asia Pacific. A noteworthy increase in investments by venture capital and private equity funds has also been observed in recent times.
It is predicted that the global energy storage market to 2030 can have 30% compounded annual growth (CAGR). While energy storage is still considered a nascent market in many countries, equity investors are actively considering Battery Energy Storage Systems (BESS) investment opportunities with strong revenue streams and returns.
Sustainable and climate-friendly investments have become major drivers for both institutional and retail investors across the globe. For new power generation assets, renewables have dominated investment and are expected to account for over 80% of expenditure on all new generation capacity. To smoothen the variability of renewable generation assets, co-location of battery energy storage would be crucial. In recent times, lithium-ion batteries will remain the dominant and cost optimum option to enable further renewable-power integration into our grids. Several other promising solid states, Flow and other battery technologies with new chemistries along with hydrogen will become a viable alternatives in the next few years.
Investment in grid-scale battery energy storage will continue to have strong growth prospects. However, some of the headwinds are uncertainties around consistent revenue streams, policies/regulatory reforms in key energy markets, concerns on battery safety, raw material mining practices, and end-of-life disposal.
- Omkar N Pandey, CGO, Sanvaru Technology Limited
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