High interest rates, short-term loans add 24-32% to renewable energy costs: study

Climate Policy Initiative (CPI), a global policy effectiveness analysis and advisory organisation, and the Centre for Emerging Markets Solutions (CEMS) at the Indian School of Business (ISB) have found that high interest rates and relatively short-term loans for renewable energy projects add 24-32% to the cost of renewable energy in India, as compared to similar projects in the US and Europe.

The CPI-ISB energy and environment programme report ‘Meeting India’s renewable energy targets: The financing challenge’ finds that even if the cost of debt goes down, issues with loan terms, access to low-cost equity, limits on foreign debt and national banking practices are likely to present additional barriers for growth in India's renewable energy sector in the medium and long-term.

“The national government has a goal to reach 4,000-10,000 Mw of renewable energy by 2017 and 20,000 Mw by 2022. Debt market issues make it more expensive for India to meet these goals,” the report said.

In 2011, India launched renewable energy credits, a market-based national policy, to help the country reach its renewable energy targets more efficiently. The CPI-ISB report ‘Falling short: An evaluation of the Indian renewable certificate market’ finds that the Indian renewable energy certificate market is not likely to achieve government objectives. Though the design of the renewable energy certificate mechanism appears adequate, the performance of the market has been far from satisfactory, it says.

“High debt costs, common in emerging economies, are a potential barrier to the growth of renewable energy. CPI is now analysing how other nations have addressed this issue. Brazil's national development banks has provided low-cost debt to spur these projects forward, and may provide some helpful lessons for India,” David Nelson, director of CPI, said in a release on Wednesday.

According to Reuben Abraham, executive director, CEMS, ISB, India has more than enough wind and solar potential to meet the country's ambitious targets. However, he said, without policy solutions, the country's financing challenges will force this sector to fall behind.