Financing Cost Accounts for Major Component of RE Tariffs in India: CEEW Policy Study

Mobilizing finance for investment and innovation in low-carbon energy solutions relics a precarious challenge for global energy transition, as per policy brief issued by Council on Energy, Environment and Water (CEEW).

"Financing costs account for the largest component – between 50 and 65 per cent – of present day renewable energy tariffs in India, and even higher shares in other developing countries where the risk premium is higher," said the brief.

Although developed countries were the first to embrace renewables, the sharpest increases in electricity demand are taking place in developing countries.

The study found that developing economies now use a majority of the world’s energy to support local consumption and they are looking at even significantly larger levels of energy use to power further economic and social development.

Currently, there are over six billion energy consumers in the developing world whose demand is projected to grow by 30 per cent over the next 15 years.

According to CEEW, renewable energy capacity addition in some developing countries have surpassed the addition of new fossil fuel-based generation plants.

But, despite such progress, coal contributes 26 times more to the total primary energy supply in developing countries than renewable energy sources.

Hence, an energy transition at scale will not be driven by policy commitments alone. The cost-competitiveness of renewable energy tariffs is a major determinant for capacity addition.

An analysis of the determinants of renewable energy tariffs, disaggregating the impact of equipment-related factors and financing costs -- including the cost of debt and equity -- shows financing cost accounts for the largest component of present day renewable energy tariffs in India.

It suggests that changes in financing costs could drive future declines in both solar and wind tariffs. Hence, higher cost of financing directly affects the renewable energy tariffs. Clean energy sectors could enjoy lower costs of financing if suitable policy and market-led interventions could de-risk investments and increase competition between various sources of capital.

Investment decisions in clean energy, like any other infrastructure sector, are dependent upon investors’ perceptions of risk-adjusted returns. Various kinds of risks could adversely impact the risk-return trade-off for investors and act as deterrents for investments.

In India while traditional sources of debt capital, namely banks and non-bank financial institutions, have driven investment flows into clean energy, these are not sufficient to bridge the gap between present and desired debt flows.

Hence, a right policy plays a key role in addressing some of the key market challenges and enhancing investor sentiment.

Policies & Regulations | News published on 09/10/2019 by Moulin

 
 
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