Power sector reforms central to tackling India's climate finance problem

Accounting for nearly half of India's $22.7 trillion net zero investment needs, the power sector has emerged as the biggest challenge in mobilising long-term climate finance

The power sector is emerging as the single largest problem facing India’s ambitions of climate financing. Its sheer size and the multitude of interfaces with other segments of the economy ensure that almost all big-ticket economy-level challenges have at least one finger in the power pie.

 

India will have to invest $22.7 trillion over the next 35 years to meet its net zero target by 2070, according to an analysis released earlier this week by government think-tank Niti Aayog, which noted that the capital mobilisation required is “urgent, massive, and long-term”.

 

Not surprisingly, the power sector dominates the estimate, accounting for nearly half of total investment needs through large-scale deployment of renewables, storage, and transmission projects. The other two problem areas, transport and industry, account for 25 per cent and 20 per cent of that investment requirement, respectively.

 

Where does India stand on a low-carbon pathway?

 

The country has made strong progress, reducing emissions intensity by 36 per cent over 2005 levels and achieving 50 per cent non-fossil power capacity five years ahead of its Nationally Determined Contribution (NDC) target. However, its annual investment flow in tackling climate change stands at a mere $135 billion, including $80–90 billion towards clean energy projects.

 

The basic problem is two-fold. One, fresh investments in emerging and hard-to-abate sectors are deterred by high capital costs, limited concessional finance, and structural constraints. Two, the country’s energy transition spans technologies at different maturity levels: mature renewables that need scale-up capital; mid-stage options such as storage and e-mobility that require concessional or structured finance; and frontier areas such as green hydrogen and carbon capture, utilisation, and storage (CCUS) that depend on grants and blended capital. This makes it imperative to develop a financing strategy that is both stage-sensitive and technology-specific, a challenge that is tough to overcome.

 

According to the government’s assessment, transitioning from the ‘Current Policy Scenario’ (CPS) to the ‘Net Zero Scenario’ (NZS) requires an additional $8.1 trillion in incremental investments by 2070 — estimated as the difference between the $22.7 trillion required in NZS and $14.7 trillion in CPS. Again, the incremental gap is led by the power sector ($4.5 trillion), followed by industry ($2.7 trillion) and transport ($0.9 trillion). The task, then, is to ensure the investment curve, dominated by renewables and transmission infrastructure through 2050, shifts seamlessly to areas such as battery storage, grid storage, and charging infrastructure, alongside major roles for green hydrogen and CCUS till 2070.

 

What steps can India take for an optimal transition?

 

Niti Aayog advocates extensive financial system reforms for India to hit its targets on time. “India can mobilise approximately $16.2 trillion for its net zero transition by 2070 through targeted reforms in its financial system and stronger integration with global capital markets,” the think tank said in its study Scenarios Towards Viksit Bharat and Net Zero – Financing Needs. “On the domestic side, this requires deeper capital markets, greater channelling of household savings into productive assets, and a shift by institutions towards high-quality corporate and green investments.”

 

The analysis reveals a significant and widening financing gap in India’s power sector. By 2050, financing needs for mitigation in the power sector are estimated at $4.32 trillion, while available finance is projected at just over half, or $2.34 trillion, resulting in a funding shortfall of $1.98 trillion. This gap more than doubles by 2070, reaching $5.4 trillion, as financing requirements rise sharply to $12.33 trillion against availability of $6.93 trillion. The growth in this gap underscores both the scale of investment required for the low-carbon transition and the structural challenges in mobilising long-term, low-cost capital for renewable energy, grid modernisation, and storage technologies, according to the study.

 

How can India increase financing for climate action?

 

The first step, according to the Niti Aayog study, is to strengthen power discoms’ finances and reduce counterparty risk.

 

“The most persistent challenge lies with discoms,” the study notes. Many discoms remain financially distressed despite the Revamped Distribution Sector Scheme (RDSS), which provides Rs 3.04 trillion in performance-linked grants. Structural inefficiencies such as high Aggregate Technical and Commercial (AT&C) losses and weak billing and collection systems continue to erode balance sheets.

 

“Even with the Late Payment Surcharge (LPS) Rules reducing legacy dues, contractual insecurity remains a deterrent for investors in power generation projects. Without deeper market reforms such as privatisation or franchise models for loss-making utilities, and stronger legal enforcement of power purchase agreements (PPAs), discom fragility will continue to raise the cost of capital for the sector,” the report said.

 

Experts believe that given the scale and complexity of the climate finance problem, the government can use fossil fuel taxation as an important policy tool.

 

“The fossil taxes contribute approximately one-third to the indirect tax revenue collections in India. Given the significant amount of revenues generated by taxes and duties on fossil fuels, and India’s massive need for climate finance, some of these revenues may emerge as an important source of domestic climate finance,” researchers from the Centre for Social and Economic Progress (CSEP) said in a research paper released on Tuesday.

 

The study calls for funding energy-efficiency technologies in hard-to-abate (HTA) sectors — cement, iron and steel, aluminium — and building renewable energy (RE) transmission systems to meet the country’s 500 GW non-fossil fuel-based energy target by 2030.

 

According to the study, around Rs 75,166 crore is required annually to finance both energy-efficiency technologies in the HTA sectors and the renewable energy transmission system. In light of the recent Goods and Services Tax (GST) 2.0 reforms announced in September 2025, which discontinued the compensation cess, the excess revenue collection from the increased GST rate on coal is estimated at Rs 16,949 crore, based on FY24 figures. Finance from oil and gas taxes is also around Rs 58,217 crore, or 8.7 per cent of collections.

 

“As per existing studies, around Rs 1.32 lakh crore of cumulative capital expenditure is required in HTA sectors. As per the Central Electricity Authority (CEA), capex of around Rs 2.44 lakh crore is required by 2030 in renewable transmission systems. The redirected funds could finance a substantial portion of HTA efficiency upgrades or accelerate renewable grid expansion,” CSEP said in the report.