India has committed to source 50 percent of its electricity from non-fossil fuels by 2030 and achieve net zero emissions by 2070. These ambitions sit alongside a structural reality: coal still accounts for roughly 70 percent of electricity generation, while energy demand is expected to double by 2040, driven by industrialisation, urbanisation, and rising incomes. This creates a dual challenge: India must expand its energy supply while simultaneously decarbonising it.
Meeting this dual objective depends on how the transition is financed. Mobilising capital at scale remains constrained by high borrowing costs, payment delays in the power sector, weak balance sheets of distribution companies (DISCOMs), and policy uncertainty at the state level. Yet policy continues to emphasise capacity expansion and technological deployment, overlooking the financial conditions that determine whether projects are built, scaled, or delayed.
The Scale of the Financing Constraint
India’s renewable capacity has expanded rapidly to around 275 GW, yet the next phase of growth depends on significantly higher investment in grid modernisation, storage, and transmission infrastructure. Estimates suggest that integrating high shares of renewables will require hundreds of billions of dollars in grid and storage investments over the next two decades, making financing conditions central to project viability.
The cost of capital becomes a decisive variable. Renewable energy projects in India typically face borrowing costs of 10-12 percent, compared to 3-5 percent in many advanced economies. This gap arises from regulatory uncertainty, counterparty risks from DISCOMs, and uneven policy signals across states, which limit the ability of lenders to price risk with confidence. As a result, financing costs rise, pushing up tariffs and slowing project execution.
Financial sector constraints further compound the problem. DISCOMs, the primary buyers of electricity, continue to face persistent financial stress. Payment delays to generators often extend several months, with outstanding dues periodically exceeding ₹1 lakh crore. Domestic lenders, already exposed to the power sector, operate under balance sheet constraints that limit additional lending in the absence of credible risk-sharing mechanisms.
As a result, the pace of renewable scale-up is increasingly shaped by capital conditions.
The Investment Paradox in Clean Energy
In hard-to-abate sectors such as steel, cement, and chemicals, financing constraints take a different form. Decarbonising these industries requires a shift toward emerging technologies like green hydrogen and carbon capture, which involve higher costs, longer timelines, and greater technological uncertainty.
These characteristics translate into weak commercial viability under current market conditions, as cost structures remain uncompetitive relative to conventional alternatives. For investors, this results in uncertain returns over extended horizons, making it difficult to form stable expectations about project performance. As a result, risk cannot be priced with confidence, leaving capital deployment contingent on external support.
Technologies that are central to long-term decarbonisation therefore continue to depend on early-stage capital despite their limited commercial viability, slowing their diffusion across industrial sectors.
From Targets to Capital Architecture
Addressing these constraints requires a shift from target-setting to building a financing architecture that can support scale. This involves not only mobilising capital, but shaping its cost, allocation, and risk profile across sectors.
Lowering the cost of capital is the central lever for accelerating clean energy investment. De-risking instruments such as blended finance, sovereign guarantees, and expanded participation by multilateral development banks can absorb early-stage uncertainties, particularly in emerging sectors like green hydrogen and energy storage. By improving risk allocation, these mechanisms enable private capital to enter at scale.
The direction of capital flows is equally critical. Strengthening financial sector alignment with climate objectives, through deeper green finance markets, standardised taxonomies, and incentives for low-carbon lending, can ensure that available capital is channelled toward technologies and sectors that drive decarbonisation.
System-wide risk, however, continues to be anchored in the financial health of the power distribution segment. Improving the viability of distribution companies through stronger payment discipline, cost-reflective tariffs, and governance reforms is essential to restoring confidence across the energy value chain.
At the outer boundary, the scale of India’s transition will depend on access to international climate finance. Given the magnitude of investment required and the global benefits of decarbonisation, concessional capital flows will hinge on credible policy frameworks, transparent governance, and regulatory stability.
A Financing-Led Transition
India’s energy transition now hinges on lowering the cost of capital and strengthening risk-sharing across the energy ecosystem. Progress will depend on how effectively financing conditions enable investment to flow into both renewable infrastructure and emerging low-carbon technologies.
If these constraints are addressed with consistency, India can accelerate clean energy deployment while sustaining growth, shaping a transition that is both economically viable and scalable over the long term.