Financing India’s Energy Transition

The energy transition in India is a tale of multiple transformations.

The first is a shift towards increased access to electricity. Making remarkable progress, India went from having the largest unelectrified population in 2015 to nearly 97% household electrification in a span of just five years.

The second is the decarbonisation of the country's electricity system as it continues its journey from developing to developed economy.

Critical to both of these challenges is finance, which will be needed at a massive scale in the coming years to resource a clean energy transition that can deliver India’s development aspirations and help reduce global greenhouse gas emissions.

India’s climate and energy ambitions

The contours of this energy transition are captured in India's Nationally Determined Contributions (NDCs), the pledges countries make to meet the Paris Agreement goal of limiting global warming to 1.5 degrees Celsius. India’s NDCs, submitted in 2015 and updated in 2022, set ambitious targets for itself by 2030:

45% reduction in emissions intensity of Gross Domestic Product (GDP) over 2005 levels.

At least half of installed electricity generation capacity to be from non-fossil-fuel sources with the help of tech transfer and low-cost international finance, including from the Green Climate Fund.

To create an additional carbon sink of 2.5–3 billion tCO₂e through additional forest and tree cover.

To mobilize domestic funds, as well as new and additional funds from developed countries, to implement the above mitigation and adaptation actions in view of the resource required and the resource gap.

India has made rapid progress towards these goals and is on track to meet them before 2030. The emissions intensity of India’s economy, or the emissions produced for each rupee of GDP, had fallen by 36% by 2020 over 2005 levels, while an additional carbon sink of 2.29 billion tCO2e had been created by 2021.

As of February 2025, non-fossil-fuel sources comprise 47% of the installed electricity generation capacity.

A steep climb ahead

But the climb from here on is steeper, particularly in reducing power sector emissions, which comprise almost 40% of total emissions.

Despite a fourfold increase in the installed capacity of renewable energy sources between 2014 and 2024, its share in the electricity produced grew by just over two times, from 6% to 14%. Almost three out of every four units of electricity produced in 2024 still came from coal.

As India looks to continue increasing the share of clean energy in its energy mix, three crucial challenges face the country:

1. Rapidly growing demand

Since 2021, the electricity requirement has grown by 9% every year, faster than the 5% seen in the decade before. As demand continues to grow faster than expected, India must also increase the pace of setting up generation capacity.

2. Evening peak demand

The timing of electricity demand is as important as overall demand. Electricity demand often peaks in the evening, when people switch on their air conditioners and solar energy is absent. For the time being, coal still provides the critical energy needed to keep people comfortable in India’s warm climate. The longer-term solution will be a significant ramp-up for energy storage to use the electrons generated during the day later in the evening when needed.

3. Rapid and large-scale financing

Estimates in 2020 showed that just meeting India’s 2030 installed electricity generation capacity targets required investments of around USD 200 billion over and above existing plans. Adding transmission jacks up the requirement to about USD 224 billion, increasing to USD 345 billion when energy storage is added. While the public sector can make some investments, private companies must also invest in clean energy and need to mobilize the necessary resources.

Why is money difficult to find?

A Parliamentary Committee’s findings in 2022 suggested that only about half the required investment to meet India’s energy targets was mobilized across all modes in the preceding years. More recent estimates suggest that the gap across all NDCs, including those unrelated to energy, has widened to 75%. In the longer term, to reduce its emissions to net-zero by 2070, India would require support worth USD 1.4 trillion.

On average, 75% of the investment in renewable energy projects in India is financed through debt. The massive scale of debt required to set up almost 500 GW of renewable energy implies that it requires mobilizing new sources of money beyond existing well-established sources such as banks and non-banking financial companies (NBFCs). Banks can only lend to a particular sector – in this case, the power sector – to a certain level, while sector-specific NBFCs can provide capital for specific infrastructure projects. In India, government-owned sector-specific NBFCs, like the Indian Renewable Energy Development Authority (IREDA), play a crucial role in channeling finance to clean energy. In its early days, it utilized funds raised by the Government of India by taxing coal to provide cheaper credit for clean energy projects via banks. Among a variety of sources, IREDA also borrows from multilateral development banks (MDBs), such as the World Bank, to provide affordable loans for clean energy projects.

However, mobilizing debt at the necessary scale also exceeds NBFCs’ capacity. Borrowing from international markets and institutions through financial instruments such as bonds presents another option but also other challenges. Volatile equipment prices such as solar modules, nascent business models for new technologies such as energy storage, and non-payment from power utilities – the largest energy buyers – make clean energy investments risky. In addition, developing countries suffer from a global credit rating system that makes them appear riskier places to invest than they actually are due to rating agencies’ biases, information gaps, etc. This makes borrowing from the market more expensive as lenders demand a higher interest payment for bearing higher perceived risk, eventually making clean energy projects more expensive. Recent changes in global policy have also made borrowing from the international market in international currency, such as the US Dollar, more costly for project developers.

India is among many emerging markets and developing countries that require greater support for finance due to these reasons. In 2024, emerging markets and developing countries (apart from China) saw only 15% of global clean energy spending despite being the source of 85% of future electricity demand growth.

Quality and quantity

So, the answer to mobilizing finance for India’s energy transition lies in increasing the amount of finance, improving the terms on which international finance is available, and using the money smartly.

The Paris Agreement calls for developed economies to provide financial resources to developing countries for climate actions. The New Collective Quantified Goal on climate finance agreed at COP29, in which developed countries committed to taking the lead in mobilizing USD 300 billion for developing countries, certainly must be delivered and scaled up. Developed countries must also make a larger share of these resources available as concessional loans and grants rather than debt at market rates.

At the same time, using the available money more smartly is just as important. Funds must cover some perceived risk by lenders or investors by assuring repayment in case of defaults. This can enhance a project’s credit rating and lead to a multiplier effect, allowing developers to raise more money from the market. The Asian Development Bank (ADB) has already done this with IREDA. But similar facilities that allow private sector companies to issue bonds in domestic and international markets, while subsidizing the additional cost stemming from such facilities will truly unlock the scale of finance necessary to meet and surpass the goals set out in India’s NDC.

A new NDC is coming

Under the Paris Agreement, NDCs are updated every five years. The last update was in 2020; the next NDC round is due this year. So far, 19 out of 198 Parties to the Paris Agreement have submitted revised NDCs. India can increase its ambition on its clean energy targets to break the vicious cycle of growing emissions, a warming climate, rapidly growing energy demand, and persistent use of emissions-intensive fuels to serve it. Mobilizing finance through various modes – public and private, debt and equity – is central to breaking this cycle.

While developing countries must foster an environment conducive to financial investment in high-priority sectors, developed countries must significantly increase the quantity and quality of their contributions to support the ambitious goals set by developing nations.