The Decoding Sustainability article series aims to develop an understanding of the sustainability domain for energy professionals. Part 1 focused on defining the term sustainability, its analysis and ratings, and its relation to profitability.
Part 2 centers on explaining the opportunities for unlocking capital for sustainability to achieve an equitable transition. Equitable transition is meant for the most vulnerable segment of a country to move from cheap oil and gas to renewable energy. These opportunities are in the form of green policies formulated with the various funding mechanisms that have resulted in linear growth in renewable investment (International Energy Agency, 2023).
Clean Energy Policies
It is undisputed that public policies play a pivotal role in shaping the energy transition. Governmental agencies act as a coercive force through these policies to firms/industries/academia by endorsing the R&D and the commercialization of the clean technologies. This is the strongest political extrinsic force which then creates the “technology push” and the “market push.” An example to support this is the diffusion of wind power in Europe that resulted from public R&D support and local market support.
The conventional policy frameworks for clean energy adopted by a government are discussed in this article.
1. Accelerated Depreciation (AD): This is a method to write off the clean energy investment faster than the usual wear and tear. It’s a tangible path to income tax benefits resulting in substantial savings and a shortened payback period. For example, in India, the AD for solar is 40% (supplemented to 60% on a case-to-case basis) compared to the standard machinery depreciation rate of 15%. This implies that in the subsequent financial year, the taxable amount will be calculated on only 40% of the initial asset value (Mahajan, 2022).
2. Viability Gap Funding (VGF): This is the amount of funding support given to the project developers to bridge the gap between availability and capital investment requirements. In India, the VGF capital grant is in installments with an upper limit of 30% of the project cost or $0.41 million per MW, whichever is lower in value (Shrimali, et al., 2017). The exact amount of the VGF is determined through a reverse bidding process where projects bid down on the VGF required per MW. The VGF may be disbursed at one time or deferred, depending on the physical and financial progress of the projects since the disbursement schedules may vary for different projects.
3. Feed-In Tariff (FIT): There are two rate tariff systems in FIT—generation tariff at a rate for each kWh of electricity generated and export tariff at a rate for each kWh exported to the grid. These are paid to households to generate and export clean energy. In some cases, FIT payments typically continue for 20 years or up to 25 years. FIT rates depend on what technology you have and when you installed it. They also change yearly in line with inflation (Minihane, 2023).
4. Power Purchase Agreement (PPA) and Renewable Purchase Obligation (RPO): PPAs are long-term contractual agreements where generators agree to sell the power to a purchasing party. This reduces the cash flow uncertainty by bringing the necessary security in return on capital investment upon project completion. The contract duration can be 3 to 30 years. RPO is the percentage target of power generation through renewable energy sources announced yearly by the state and central governments. This applies in conjunction with PPA. Denmark, Sweden, France, and Germany have RPOs of 35%, 50%, 27%, and 18%, respectively, traded in PPAs. Renewable energy generation companies like XPO (Switzerland), Vattenfall (Sweden), and Holaluz (Spain) sell power in PPA, and large energy consumers such as Google, Amazon, and Nike buy this power to achieve their ambition of reducing their carbon footprint. This very competitive bidding process is currently in development for commercial and government PPAs (Das, et al., 2020).
5. Hybrid Renewable Energy Policies: These policies are developed to tap into the combined strengths of various renewable energy technologies and energy storage, achieving up to 30% more efficiency and resiliency. Hybrid tax credits and tax breaks can incentivize the use of combined technologies. RPO and PPA should also be restructured to include specific quotas for hybrids. There are many real-world successful hybrid case studies driven by supportive policies like King Island, Australia, which manages to produce 65% electricity by using clean energies from wind, solar, and battery storage; Kodiak Island, Alaska, the energy system that combines wind and hydropower; and Copenhagen, Denmark, the energy system that employs a combination of wind and biomass to reach its ambitious renewable energy goals (Hassan, et al., 2023).
Funding Mechanisms
Renewable energy is commonly declared a priority lending sector. For example, Indian government policies ensure a minimum of 40% of net credit lending by public investors (Sarangi, 2018). Global investments in energy transition technologies reached $1.7 trillion in 2023, a record high, up 23% from 2021 investment levels and almost 70% from before the pandemic in 2019. 82% of investment is in renewable technologies, energy efficiency measures, and battery storage. Slightly over $1 trillion went to unabated fossil fuel supply and power, of which around 15% is to coal and the rest to oil and gas. More than 90% of the increase in clean energy investment since 2021 has taken place in advanced economies and China. There are bright spots elsewhere: for example, solar investment remains dynamic in India; deployment in Brazil is on a steady upward curve; and investor activity is picking up in parts of the Middle East, notably in Saudi Arabia, UAE, and Oman (International Energy Agency, 2023).
There are two types of funding mechanisms:
1. Domestic financing is done through government funds, public sector banks, and other public sector companies.
2. Private sector financing is done via nonbanking companies, green bonds, private banks, equity corporations, and crowdfunding. Private nonbanking companies invest to diversify their portfolio and seek tax exemptions by using debt funds.
Government funds like the National Clean Energy and Environmental Funds loan developers at low-interest rates. Large international bonds are issued by the Government of Singapore, Goldman Sachs, International Finance Cooperation, Asian Development Bank, and Asian Infrastructure Investment Bank for giving fixed income funds on credit ratings.
On the other hand, large corporations like sovereign entities, global pension funds, private equity funds, oil and gas majors, and national majors have shown considerable interest in renewable financing.
In addition, several private players crowdfund highly capital-intensive projects of clean energies for risk management (Khanna, et al., 2022; Saboo & Shantanu Srivastava, 2022). A remarkable amount of money (approximately $900 billion) was raised via bonds in 2022. Sustainability and green bonds provide a flexible way for companies or governments to access the debt market with a unique structure. The interest paid to the bondholders can vary based on achieving specific sustainability targets, such as reducing emissions intensity or absolute emissions reductions. Sovereigns/governments have grown from 4% of total sustainable debt issuances in 2017 to 7% in 2022 (International Energy Agency, 2023).
The Way Ahead for Carbon Transition
Such a paradigm shift in the energy sector faces many barriers to renewable capital generation such as inconsistencies, traditional banking framework, lack of cooperation, and fossil fuel dominance. Efforts are underway to bring effectiveness and uniformity to the policy framework by amendments to cover all aspects of renewable energy generation (including hybrid and energy storage). Significant acceleration in approval processes and clearance systems in grid management, land, and other availabilities, and production-linked incentives in a manufacturing environment (Das, et al., 2020) are being observed.
An equitable transition is achievable with the right combination of political framework, supportive financial instruments, and cooperation and technical skills.
For Further Reading
A Comprehensive Review of Wind–Solar Hybrid Energy Policies in India: Barriers and Recommendations by A. Das, H. Jani, and G. Nagababu, Pandit Deendayal Petroleum University.
A Review of Hybrid Renewable Energy Systems: Solar and Wind-Powered Solutions: Challenges, Opportunities, and Policy Implications by Q. Hassan, University of Diyala.
World Energy Investment 2023, International Energy Agency.
Landscape of Green Finance in India 2022 by N. Khanna, D. Purkayastha, and S. Jain, Climate Policy Initiative.
Explained: Maximizing Solar Energy Savings Through Accelerated Depreciation Tax Benefits by S. Mahajan, BigWit Energy.
What is a Feed-In Tariff? by J. Minihane, MoneySuperMarket.
Renewable Energy Financing Landscape in India by A. Saboo, Institute for Energy Economics and Financial Analysis.
Green Energy Finance in India: Challenges and Solutions by G.K. Sarangi, Asian Development Bank Institute.
The Effectiveness of Federal Renewable Policies in India by G. Shrimali, Stanford University & Climate Policy Initiative.
