Project Finance for Green Renewable Energy Assets: Does It Solve the Higher Cost of Capital Conundrum?

India is taking steps to decarbonize its economy and set a target of building 450 gigawatts of renewable energy capacity by 2030. Project finance has a critical role to play in enabling this transition to a carbon-resilient economy. The opportunity has attracted diversified institutional investors but has not resulted in a lower project cost of capital. To address this problem, this article presents a qualitative risk assessment model. The results show that risk drivers such as high debt-to-equity ratios (D/Es), technology disruptions, and inherent information asymmetry in the contractual bundles that plagued thermal power financing still remain unaddressed. Rethinking how project finance is applied is thus necessary. The author provides three suggestions: D/Es need to be optimized by sculpting them against cash flows; projects need the discipline of global capital markets and institutions over their life cycle; and financial institutions need to actively incorporate climate risk into their internal rating models to price credit risk.