India has come a long way since the early 1990s when the country commenced power sector reforms and started wooing big international producers. The focus then was on thermal energy and the dialogue — including with some Hong Kong-based big boys — but was bogged down by endless negotiations on Purchase Power Agreements (PPAs), something I was privy to as I was based there back then. They were happy to focus on Mainland China and everyone knows why — all action and no discussion — or the Philippines and Indonesia.
The latter urgently needed to fix their notorious brownouts. Today, the climate crisis is pushing for a green transition to renewable energy. This shift offers unique challenges and opportunities not just to insurers, but other financial institutions and players at the grassroots level in uniquely synergistic ways. It calls for re-laying the money pipelines. All these present blue-sky opportunities.
Delayed and disorderly carbon transition
Insurers do three things. They are risk managers, risk carriers and investors. They have a pivotal role to play. However, there are disconnects, divergences and manifestations of oxymorons when it comes to what they actually do and what they ought to do.
Moody’s believes the credit impact of “a delayed and disorderly carbon transition” is the greatest threat to financial firms, as the increasing frequency of catastrophic weather events will lead to loan defaults and rising insurance claims. If insurers were serious, they would think hard before insuring anything that accentuates the burgeoning climate crisis. Nor would they invest in it. They need to be nudged to facilitate the green transition. There is no stopping them from insuring projects in seismically sensitive locations and patronizing the fossil fuel industry both as insurers and investees. The top four National Pension Scheme (NPS) players make similar allocations of their funds to the same fossil fuel company. Perhaps because they get the best returns for the pensioners and thereby also comply with the regulations. Stranded assets do not exist in their glossaries yet.
Environmental, Social and Governance (ESG) is slowly beginning to make inroads into the stock market (SEBI) and the central bank (RBI) regulators’ narrative. It struggles with the insurance (IRDAI) and pension funds (PFRDA) regulators. Thanks to the government’s push on sovereign green bonds, there is a fleeting reference by the IRDAI in this circular where “insurers are encouraged to consider investing in sovereign green bonds.” Removing investment barriers to fund India’s energy transition calls for improving climate disclosures and ESG ratings to encourage investments.
The total investment corpus of the insurance industry is Rs. 5868948 crores (1 USD = 82.50 INR) as of 31st December 2022 (Life: Rs. 5,370,834 crores and General: Rs. 498,114 crores). Add another Rs. 500,000 crores of the national pension scheme (NPS). Despite a rapid erosion vis-à-vis the US dollar, imagine what a small portion of this, channeled into solar energy rather than fossil fuel, can do.
Vibhuti Garg of the Institute for Energy Economics and Financial Analysis (IEEFA) throws some light on this: “India is currently investing around $18-20 billion in energy generation capacity and a further $20 billion in the grid on an annual basis. To achieve the Sustainable Development Scenario (SDS) in the International Energy Agency’s India Energy Outlook 2021, the country would need to triple its current rate of annual investment to $110bn”. An affirmative guidance from the regulator can surely help overcome what appears to be a “daunting” task. While most Indian general insurers would insure the asset side of solar power generation, only two private insurers provide a parametric cover. Insurers could also help the renewable energy cause by means of guarantees and credit insurance.
To get to the alpha of solar energy, ‘BCD’ (Blended, Cooperatives, Diversity & Inclusivity) is a possible way forward. Imagine a consortium of Azim Premji Foundation (philanthropy), SEWA Bank (financing a self-help group of women entrepreneurs), Asian Development Bank (ADB), Bandhan Bank (origins in microfinance for women), PFC (Power Finance Corporation) and, let’s say, Life Insurance Corporation of India (LIC) working towards financing solar power generation and transmission grid in rural India. Sounds challenging and would raise many an eyebrow.
Imagining is the easiest part but a patchwork of siloed regulations, if any, for respective entities is where blended finance is the solution. Sovereign green funds mean the credit rating of the country will apply, however ‘deficient’ the startup’s rating. Again, each participant in the fund is free to decide their share of risk appetite and who takes how many hit and when. Multiple financial services regulators must, however, converge to ensure efforts toward decarbonisation.
Yes, an Amul for Solar Energy. Tapping into the proven genius of a community. Calls for a Verghese Kurien-like leader for solar power. He and the team saw merit in pioneering the cooperative model: farmers willing to associate together for produce and to be led by professionals while being owners of the cooperative. In a newly independent resource-constrained nation, where food security was of utmost importance, focus on social capital rather than the formation of capital assets bode well. The rest is history.
Moreover, investing in projects that improve one's community, increases one's sense of connection and social responsibility. Given the size and complexity of the country, a top-down approach to clean energy alone would not work. It calls for a grassroot approach.
Diversity & inclusion
I had the pleasure of interviewing Vibhuti Garg of IEEFA India last year on the IWD. Here are some brilliant, assorted thoughts:
“With greater access to electricity, more women are able to free their time from general household chores and divert their time on income generating opportunities… many women in small towns are now selling solar lamps and solar house systems which enhance energy access but also create opportunities for them to become entrepreneurs… Also, it allows more girls to undertake education and be part of the formal workforce. Women feel more protected with improved street lighting in their areas. Further, in some households shifting to electric cooking will also save them the time and hard work of collecting biomass, cow dung and wood pellets for cooking. It will also have a positive impact on their health as they will not be exposed to indoor pollution using traditional fuels which are polluting…
Most of the micro-enterprises set up by women are self-financed, which makes them more vulnerable. A lot more supportive ecosystem needs to be created for them to thrive and have better livelihood opportunities… They do not have the finance for upfront payment to start a business… a low proportion work in science, technology, engineering and mathematics (STEM) roles. It has been demonstrated that a lack of gender equality in the energy sector puts utilities at a disadvantage, boards with at least 30% women have higher profit margins than those that do not. It has also been suggested that energy sector organisations that improved gender equality can boost innovation.
Women in rural India are now getting opportunities in high earning jobs and because of improved energy access they will have more options. Solar Sahelis in Rajasthan is a classic example of how women have turned into entrepreneurs. They rope in more women to their network and demonstrate improved sales through after-sales services. By participating in income-generating activities, their welfare and both physical as well as mental wellbeing has improved”.
Women-power also focuses on the business of solar power generation and distribution.
IEEFA warns that:
“Power Finance Corporation (PFC)/Rural Electrification Corporation (REC) growth will not come from coal. Their share of coal lending to loan book has been declining, down from 71% to 47% for PFC and 45% to 40% for REC, since FY 18. New coal plant construction over the next decade will be marginal at best and Climate Risk Horizons estimates that the growth in conventional generation loan books for both companies will be negative over the coming years.
PFC/REC are failing to adapt to the energy transition underway, it says. The proportion of renewable energy in PFC’s gross loan assets has grown from 4% to just 11% between FY 2018-21; its share in REC’s loan book has been stagnant at 3-4%... We estimate that without course correction in favour of investments in the energy transition, PFC and REC’s net profit will grow at a mere 0.2% and 2.5% CAGR respectively from FY 2022-2025, due to slowdown in loan book growth and lower yields. PFC and REC will need 142% and 156% CAGR growth in their renewable energy loan book over the next 3 years in order to deliver a 10% net profit CAGR.
To achieve this loan book growth PFC and REC would need to disburse approximately Rs. 497,315 crores over the next three years. If achieved, this quantum of lending will meet the debt capital requirement of approximately 89 GW of solar and 38 GW of wind capacity”.
This tells us that unless a course correction towards green energy is adopted, these lenders will surely be in real trouble. Big investors like the LIC ought to see the writing on the wall, as should others investing in and insuring these assets or for that matter pensioners expecting continued returns. Access to low-cost capital via green bonds in international markets will be key for PFC/REC. Continued lending to new coal projects will pose a material risk in this regard, as ESG-aligned investors become wary of greenwashing.
In a report published in February this year, IEEFA highlights that India requires a further US$500 billion in investments in new wind and solar infrastructure, energy storage, grid expansion and modernisation to reach 450 gigawatts of capacity by 2030. Given its investible corpus and the expected growth, insurers have the transformative power to exceed this expectation. While almost all of the fresh capacity installed during 2022 is renewable energy, the fact remains that fossil fuel still accounts for almost 80% of energy. Solar is the way forward but it must proceed both top-down and bottom-up — drawing on all the blue-sky opportunities it can.
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