More Ambitious Carbon Targets Help Indian Power Sector Giants Tap Global Transition Finance

Published on: 10 August 2022
by KnowESG
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Indian power giants such as NTPC and Tata Power can use global green capital to fuel their clean energy transitions. A new analysis by the Institute for Energy Economics and Financial Analysis (IEEFA) states decarbonisation plans that align with climate science-based net zero targets are key to mobilising sustainable finance.

IEEFA's analysis compares the clean energy deployment and greenhouse gas emissions reduction strategies of NTPC and Tata Power with those of Enel, a pioneer of sustainability-linked financing frameworks that raised billions of dollars to fund its decarbonisation.

The report’s co-author, Saurabh Trivedi, Research Analyst at IEEFA, said:

"As India’s leading power companies, NTPC and Tata Power are role models for charting successful pathways to transforming their business models and attracting foreign private capital. However, successfully engaging serious green investors would depend on the companies’ ambition and the transparency of their transition plans.”

The Reserve Bank of India (RBI) has advised financial firms to proactively lower portfolio climate risk. Such a step would require their clients in industries with high emissions to implement sustainable energy transition strategies.

In its latest consultation paper, the RBI also suggested that financial institutions begin to account for climate risk when investing in or lending to industries vulnerable to the energy shift.

According to the IEEFA analysis, NTPC and Tata Power may be able to cover their capital needs through conventional borrowing. However, if the RBI's recommendations are implemented, lending costs will increase for companies.

Trivedi and co-author Christina Ng, Research & Stakeholder Engagement Leader, Debt Markets, at IEEFA, said: 

"Global investors are increasingly concerned about climate risk. To access new financing instruments in foreign capital markets, such as sustainability-linked bonds and loans, Indian fossil fuel-based companies must convince foreign investors, especially environmental, social, and governance (ESG) investors, that they are taking big steps to become clean energy companies.

“This involves explaining how they plan to adapt their business models, establishing ambitious targets, and outlining financing strategies to achieve their targets.” 

The report notes that NTPC and Tata Power have commendable deployment plans for renewable energy that will require substantial capital expenditures.

However, their targets to cut emissions intensity by 17% and 20%, respectively, by 2030 fall short of the path outlined by the Intergovernmental Panel on Climate Change (IPCC)—a crucial factor for global ESG investors. Tata Power is anticipated to announce new emission reduction goals that are awaiting approval from the Science-Based Targets initiative (SBTi).

“Adopting more ambitious emissions reduction targets alongside formal outcome-based finance frameworks, known as sustainability-linked finance frameworks, to raise capital to achieve these targets would send the right signals to ESG investors. It would unlock new avenues of capital,” says Trivedi.

To follow the IPCC's proposed emissions reduction pathway or the SBTi's recommendations to keep global warming below 1.5 °C, NTPC would have to accelerate the decommissioning of coal mines and existing coal-fired power plants and cease the construction of new ones, while Tata Power would have to disclose and outline a plan to divest from stakes in Indonesian coal and accelerate the decommissioning of its coal-fired power plants.

The UN-backed Race to Zero campaign and the SBTi urge that power firms commit to attaining net zero emissions for Scopes 1, 2, and 3 by 2040 or earlier.

The IEEFA analysis comes at a time when countries' and businesses' decarbonisation strategies are under increasing scrutiny. Recent reports from the NewClimate Institute assist governments and companies in identifying and addressing gaps.

Trivedi asserts that credible measures by NTPC and Tata Power to transition into clean energy firms will assist India in meeting its international climate commitments.

“Increasing non-fossil energy capacity to 500 gigawatts and the reduction of projected carbon emissions by one billion tonnes by 2030 were not included in India’s updated Nationally Determined Contribution (NDC),” he says.

“Yet renewable capacity additions will have to expand at a far faster rate for India to be on a pathway towards limiting global warming to 1.5˚C. This requires fossil fuel companies to redouble their efforts to transition to a clean energy future.” 

Source: IEEFA

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