E-Paper
Bridging the finance gap in India’s green industrial transition
This article is authored by Dhruba Purkayastha, senior fellow, Industrial Transition Accelerator.
Heavy industries are responsible for nearly 30% of global emissions. With accelerating industrial growth in India, both the production and consumption of aluminium, steel, cement and chemicals have been surging annually, accompanied by consistent rise in the transport, aviation and shipping industries. Given the heavy reliance of these sectors on fossil fuels, a concomitant rise in GHG (greenhouse gas) emissions is expected.
As one of the fastest-growing major economies in the world, India holds a pipeline of 65 commercial-grade green industrial plants covering chemicals, cement, aluminium, steel and aviation. Of these, green chemicals comprise most of the proclaimed projects, attesting to the nation’s edge in low-cost renewables propelled by a growing policy momentum.
This green industrialisation offers an ideal opportunity for India to enhance its worldwide competitiveness in producing clean fuels, chemicals and materials. Even as this attracts investments of $150-plus billion, it can generate direct and indirect jobs of more than 200,000 across engineering, construction and skilled value chains. This opportunity will abate 160-170 MtCO₂e every year, equivalent to 5-6% of the country’s national emissions.
These opportunities if materialised and investments made, can establish India as a leading country in low-carbon manufacturing capabilities. This opportunity is also in sync with India’s NDC and Low Carbon Transition Agenda and the global call to for industrial decarbonisation to fully functional green industrial plants that hold strategic significance for both energy security and exports. For example, solar and wind plants now being established will boost India’s energy security and insulate it from external price shocks since import dependence on coal, natural gas and ammonia will be curbed. Significantly, India already provides sufficient low-cost solar power at the lowest prices worldwide.
While all these ambitious projections sound good on paper, the ground reality is different. Currently, only six projects have reached this final investment decision stage, as varied hurdles have hit other projects. Funding remains one of the prime problems, requiring regulatory approvals and a conducive environment that can facilitate investment decisions with financial closure.
A major FID barrier is the lack of a premium on green demand. Even a modest premium on long-term binding contracts for green products remains limited. This affects the bankability and certainty of projects. Similarly, first-of-a-kind (FOAK) assets are hindered by funding constraints as these are perceived to have higher risks and capital costs, especially where no track record exists. The problems are exacerbated by the low availability of early-stage funding to develop projects. These challenges make even receptive lenders wary of being the first to provide funds.
Even when debt is available, the capital cost is substantially higher than that for conventional renewable energy projects, acting as a huge hurdle for the viability of such investments, particularly in FOAK projects. Consequently, such projects depend on an extremely high proportion of equity, even between 50 and 70%, compared to around 30% for renewable energy projects. In turn, this triggers a cascading effect whereby infrastructure gaps (e.g., ports and transmission) and regulatory uncertainties increase both the overall costs and perceived risks for lenders.
Though the problems seem formidable, novel financing structures and de-risking mechanisms could help resolve such issues. Among others, sovereign-backed risk-sharing instruments and credit guarantees will limit perceived risks, while concessional and blended finance can reduce interest costs.
Moreover, equity co-investment by off-takers and value-chain partners will align incentives and augment bankability. A crucial role can also be played by multilateral banks and development finance institutions to anchor early projects and draw commercial capital. Additionally, procuring bankable off-take contracts is of paramount importance. Such a series of steps will bring in the much-needed private capital at scale.
Besides the above, pragmatic policy interventions are necessary to address barriers and advance projects towards FID. For instance, premium markets could be penetrated via voluntary buyers’ alliances, public procurement, advance market commitments and regulatory support. Green cost gaps could be plugged by deploying carbon pricing mechanisms, concessional finance that offsets premiums and public funding. Market mechanisms and standardised procurement models will enable the matching of demand and supply as well as transparent price discovery.
Infrastructure barriers could also be surmounted with innovative solutions. Public-private partnerships can be established for planning and investment in shared infrastructure like power, ports, CO₂/H₂ transport and storage, to name a few. Trade-ready supplies could also be supported by building green corridors and ensuring regulatory alignment with the main export markets.
By addressing financial, infrastructure and regulatory challenges, it will be possible to move faster to FID. Such a decisive approach will be instrumental in positioning India as a competitive, low-carbon industrial leader in the coming years. Finally, the country’s vision of emerging as a global leader in green industrial projects will then be realised.
This article is authored by Dhruba Purkayastha, senior fellow, Industrial Transition Accelerator.
