PFI

History of investments by private financiers: Energy investments today in emerging and developing economies rely heavily on public sources of finance, but in our climate-driven scenarios, over 70% of clean energy investments are privately financed, especially in renewable power and efficiency. Public sources of finance, including state-owned enterprises, will continue to play vital roles, especially in grid infrastructure and in transitions for emissions-intensive sectors. Provision of blended capital from development finance institutions is critical to attract private investment to markets and sectors at early stages of readiness – or in situations where the risks are hard to mitigate.

Investment in energy transition projects which are at nascent stage require significant de-risking at the early stages of development to attract private investors to participate and invest in infrastructure projects. Some key recommendation of risk mitigation is provided below:

• Supporting alternative infrastructure financing models using financial structure and vehicles that include government de-risking instruments.
• Leveraging the capabilities of national and multilateral development banks to de-risk projects
• Make (quasi-)equity contributions with the aim of enhancing financing and risk profiles of infrastructure projects.
• Establish dedicated guarantee funds to support the development of PPPs.
• Set up governance frameworks for project development that enhances the judicious management of commercial, financial and legal risks.
• Alleviate currency risk by promoting local currency investments and hedging instruments.
• Promote blended finance approaches that involve the government, NDBs, MDSs or development finance institutions.
• Delivering high-quality infrastructure and leveraging private investment to fund it depend on a correspondingly high quality of infrastructure governance and delivery models that offer an acceptable distribution of risk-adjusted returns for public and private partners. The selection of the delivery model depends on the sector, the nature of the specific project and the type of investor. Effective infrastructure delivery models depend on the existence of clearly defined legal and regulatory framework conditions that give all stakeholders predictability and a clear understanding of their respective roles, responsibilities, rights, obligations and expectations.
• Importance of Private investment in green hydrogen sector: Globally, governments have committed more than USD 37 billion in public funding to hydrogen development, while the private sector has announced investments of around USD 300 billion. However, this is still only a small part of the USD 1.2 trillion of investment in hydrogen supply and use that is needed between now and 2030

Renewable energy forms a major chunk of investment in green hydrogen projects and scaling up renewables in line with their potential to meet energy security and climate objectives requires significantly larger investment than currently forecasted. While the bulk of investment will need to come from the private sector, public capital providers (such as multilateral and national development institutions) have an important role to play in terms of mobilizing private sources.

A robust hydrogen market would, thus, necessitate considerably greater collaboration amongst financiers, government agencies, technology providers, and the wider industry. In this emerging ecosystem, green finance can play a significant role. It can help in mobilizing the collective savings available to finance the development of the sector and ensuring transparency in the use of private capital and building confidence in the investor base.  Although we are already seeing substantial private investment, it is ultimately being led by governments in the form of specific policies, subsidies, targets, and strategies. Green hydrogen, like all other industries, will rely heavily on the government to supply the levers for private financing to get more involved in the sector’s evolution as the private sector is more inclined to invest in sectors with high returns and minimal risk.

Going forward, a combination of public and private financial instruments will be essential to provide significant and distinct advantages. For instance⁴:

• Grants can support innovation or early-stage projects
• Equity ownership can allow venture capitalists to take the lead by investing in projects with significant growth potential
• Other funding mechanisms can include project financing and green bonds
• For standalone project financing, making green hydrogen bankable is crucial, and in this regard, offtake agreements can help boost confidence amongst investors
• Green bonds can help in mobilizing cost-effective global finance by opening a new pool of liquidity for these projects
• To decrease investment costs for hydrogen equipment with dedicated support, potential financing of hydrogen equipment through leasing or pay-per-use arrangements with equipment suppliers is an option. Putting a price on carbon can also help facilitate green hydrogen projects
• Fiscal incentives such as tax breaks can be introduced at various levels of the green hydrogen value chain to limit the impact of high capital costs on the profitability of projects
• Furthermore, technology sharing, and R&D public-private partnerships can also help in reducing costs, realizing synergies, and exploiting complementarity.

Key private financiers in India:

1. Bajaj Finance Limited
2. Tata Capital Financial services Ltd.
3. Aditya Birla Finance Ltd.
4. L&T Finance Ltd.
5. Mahindra & Mahindra Financial services Limited
6. Cholamandalam Investment and Finance company
7. SREI Infrastructure Finance Limited