Driving India's Energy Future: The Role Of Energy Sector Financial Institutions
India requires substantial capital investments to scale up renewable energy installations, upgrade infrastructure, and improve energy efficiency across various sectors.
Written By Vivek Sen, Saarthak Khurana & Arnab Sarkar
As India advances towards its ambitious climate commitments, it stands at a critical juncture, where an economy-wide energy transformation is envisioned for 2070, aimed at achieving sustainability and a low-carbon future. India's GDP is projected to soar from nearly $3 trillion (according to the International Monetary Fund) in 2023 to approximately $46 trillion by 2070, according to Goldman Sachs.
To support India's sustained economic growth, energy demand is expected to rise significantly, thereby also substantially increasing per capita energy consumption, which currently stands at nearly one-third of the global average. Recognising the need to drive growth and sustainability simultaneously, India committed to ambitious targets not just for 2070 but also revised Nationally Determined Contributions (NDCs) intermediate goals for 2030.
The Investment Imperative for a Net-Zero Pathway
To meet these goals, India requires substantial capital investments to scale up renewable energy installations, upgrade infrastructure, and improve energy efficiency across various sectors. According to India's submission to the UNFCCC, implementing its NDC will require an estimated $2.5 trillion from 2015 to 2030, equivalent to approximately $170 billion annually, only for meeting mitigation targets. Mobilizing finance at this scale remains a significant challenge, calling for targeted institutional and policy interventions.
Alongside domestic efforts, the role of multilateral development banks (MDBs) and international development finance institutions (DFIs) is increasingly recognised in de-risking investments, facilitating co-financing models, and providing concessional capital for early-stage green infrastructure projects. These institutions are well-positioned to crowd in private finance through guarantees, technical assistance, and standard-setting support.
Financial institutions (FIs) with a sector-specific focus on the energy sector play a crucial role in enabling the green finance necessary for India's low-carbon transition. Traditionally catering to key areas of the economy, such as the energy sector's infrastructure needs, sector-specific FIs have broadened their mandates with the evolving economic and sustainability needs of the country. This strategic shift aligns with India's commitment to reducing greenhouse gas emissions and fostering technological innovation in the energy sector.
For instance, REC has mobilised substantial green finance through multiple green bond issuances, including $450 million in July 2017 with a 10-year tenor and $750 million in April 2023 for a five-year term. In January 2024 alone, REC raised over JPY 122 billion (approximately $835 million) through four separate yen-denominated green bonds, with tenors ranging from 5 to 10 years, to support renewable energy and other eligible green infrastructure projects. Similarly, PFC has issued green bonds in USD and Euros, totalling $400 million and EUR 300 million, respectively.
To best utilise the capital raised, these sector-specific FIs have strategically expanded their mandates to include renewable energy projects, EVs, green hydrogen initiatives, and other clean technologies. This evolution supports India's goals of reducing greenhouse gas emissions, enhancing energy security, and fostering technological innovation. Recent initiatives include PFC financing for 5,000 electric vehicles to reduce CO2 emissions and REC financing for green hydrogen and ammonia production facilities in Odisha. Despite significant progress in attracting green finance, current investment levels need to be increased to meet India's climate goals.
According to CPI's Landscape of Green Finance in India, the country channelled about $57 billion annually into sustainability-focused investments in FY 2021-22, reflecting a substantial increase from $43 billion in FY 2020. However, this represents only about 30 per cent of the financing required to meet its Nationally Determined Contribution (NDC) targets. Barriers such as perceived risks in low-carbon projects in emerging economies and high capital costs are not just obstacles but urgent challenges that must be addressed, as highlighted in the International Energy Agency's 2023 report Reducing the Cost of Capital. Overcoming these challenges and fostering a conducive financial ecosystem is crucial to attracting global green capital from a diverse range of sources, including multilateral development banks (MDBs), sovereign wealth funds, private equity, and infrastructure finance.
There are significant opportunities for energy sector FIs to transform into institutions capable of channelling international green finance and unlocking private capital on a scale. These institutions, with their deep technical expertise and established presence in infrastructure lending, are uniquely positioned to play a key role in enabling India's energy transition. By developing new financial products aligned with global standards/taxonomies and expanding their scope to include climate resilience and adaptation financing, they can serve not only as direct financiers but also as aggregators and facilitators of blended and concessional capital. In doing so, energy sector FIs can be equipped to mobilize both public and private investment across the low-carbon economy.
With the proper policy support and international partnerships, they have the potential to become the next big bet in green finance and play a pivotal role in India's low-carbon growth story. Energy sector FIs can directly support India's decarbonization goals by developing innovative financial instruments that align with evolving regulatory frameworks and market conditions. These include sustainability-linked bonds, green securitization, and results-based financing, which can improve bankability and mitigate risks specific to low-carbon projects. A recent example is India's first securitization transaction backed by residential rooftop solar loan receivables, rated by ICRA. The underlying loan pool consisted of small-ticket loans, with an average size of approximately Rs 2 lakh, extended to individuals installing solar panels on their rooftops. This pioneering transaction introduced a new asset class into India's securitization market and demonstrated the potential for scaling decentralized renewable energy solutions through capital markets.
In addition to bonds, energy sector FIs can explore blended finance, which combines donor-concessional finance with commercial capital to reduce investment risks in green projects. Green guarantees can provide assurance and lower perceived risks for private investors, encouraging greater private sector participation. Establishing climate resilience funds that target financing projects aimed at enhancing climate resilience can also address the need for solutions to mitigate climate impacts. Together, these instruments will not only increase the flow of capital and reduce the cost of green finance but also reinforce the strategic role of sector-specific FIs as catalysts for India's low-carbon transition.
Unlocking the Potential of FIs for India's Low-Carbon Transition
India's transition to a low-carbon economy necessitates a rapid and substantial increase in green investments across various sectors, including renewable energy, electric mobility, green hydrogen, energy storage, and grid modernization. Energy sector FIs are well-positioned to support this transition due to their deep market presence, experience in infrastructure financing, and alignment with national priorities. To unlock their full potential, these institutions must evolve their operational models, financial instruments, and partnership approaches. Some of the immediate steps that Energy Sector FIs can take are as follows:
Aligning investment strategies with India's green finance taxonomy, while ensuring coherence with emerging international standards, will build investor confidence and attract long-term green capital.
Developing co-financing models that blend concessional and commercial resources can improve the bankability of clean energy projects, while incorporating risk-sharing features such as credit enhancement can draw in private investment.
Aggregating distributed assets such as rooftop solar, batteries, and electric vehicle infrastructure into larger investment portfolios will reduce transaction costs, spread risk, and enable access to institutional capital.
Addressing domestic financing challenges through targeted risk-mitigation instruments such as credit guarantees, first-loss protection, and payment security mechanisms will further enhance investor confidence.
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In parallel, building internal capabilities in green finance through training, knowledge sharing, and adoption of international best practices will help financial institutions evaluate project risks more effectively, integrate environmental, social, and governance considerations, and innovate through mechanisms such as results-based financing. With these interventions, energy sector FIs can play a decisive role in directing capital toward green infrastructure and technologies, helping to place India firmly on the path to a resilient and low-carbon future.
(About Authors: Vivek Sen is director, Saarthak Khurana is senior manager, and Arnab Sarkar is senior analyst at Climate Policy Initiative. Views are personal)
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August 02, 2025, 16:41 IST
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