More ambitious emissions reduction targets will help Indian fossil fuel giants tap global transition finance
NTPC and Tata Power need massive capital to fund clean energy goals
Key Takeaways:
Establishing formal, outcome-based sustainability-linked finance frameworks aligned with globally accepted science-based targets would help NTPC and Tata Power access new avenues of fundraising in foreign capital markets, such as sustainability-linked bonds and loans.
Under science-based net zero targets, NTPC would have to accelerate decommissioning of coal mines and existing coal-fired power plants and stop constructing new ones, while Tata Power would need to accelerate decommissioning of coal-fired power plants and set out a plan to divest stakes in Indonesian coal mines.
10 August 2022 (IEEFA India): Global green capital presents a multi-billion-dollar opportunity for Indian power sector giants such as NTPC and Tata Power to fund their clean energy transitions. A new report by the Institute for Energy Economics and Financial Analysis (IEEFA) says robust decarbonisation plans that align with climate science-based net zero targets will be critical to mobilising this rising tide of sustainable finance.
IEEFA’s report compares the clean energy deployment and greenhouse gas emissions reduction pathways of NTPC and Tata Power with those of Italian energy company Enel, which, as a pioneer of sustainability-linked financial structures, has raised billions of dollars to fund its decarbonisation.
“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,” says the report’s co-author Saurabh Trivedi, Research Analyst at IEEFA. “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 recommended that financial institutions voluntarily mitigate the potential climate risk in their portfolios. Such a move would require their clients in the emissions-intensive industries to set sustainable energy transition strategies.
The RBI’s recent consultation paper also recommended that financial institutions start factoring in climate risk while investing in or lending to energy transition-vulnerable sectors.
IEEFA’s report notes that NTPC and Tata Power may be able to meet their capital requirements through traditional financing. However, if the RBI’s recommendations are implemented the companies are likely to face rising financing costs.
“Global investors are increasingly concerned about climate risk,” say Trivedi and co-author Christina Ng, Research & Stakeholder Engagement Leader, Debt Markets, at IEEFA.
“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 clean energy deployment plans that will require significant capital expenditure.
However, their plans to reduce emissions intensity by 17% and 20%, respectively, by 2030 fall short of the Intergovernmental Panel on Climate Change’s (IPCC) proposed pathway – a key consideration for global ESG investors. Tata Power is expected to publish revised emissions reduction targets, which are currently in the validation stage with 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 stop constructing new ones, while Tata Power would have to disclose and set out a plan to divest from stakes in Indonesian coal as well as accelerate decommissioning of its coal-fired power plants.
The UN-backed Race to Zero campaign and the SBTi recommend that power companies commit to achieving net zero across Scope 1, 2 and 3 emissions by 2040 or earlier.
IEEFA’s report comes at a time when decarbonisation plans of countries and companies are coming under increased scrutiny. Assessments such as the NewClimate Institute’s recent report help governments and corporations find gaps and address them.
Credible steps by NTPC and Tata Power to transform into clean energy companies will help India to deliver on its international climate commitments, says Trivedi.
“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.”
Read the report: Assessing Decarbonisation Pathways of India’s Power Sector Giants
Media contact: Rosamond Hutt ([email protected]) Ph: +61 406 676 318
Author contacts: Saurabh Trivedi ([email protected]); Christina Ng ([email protected])
About IEEFA: The Institute for Energy Economics and Financial Analysis (IEEFA) examines issues related to energy markets, trends, and policies. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy. (ieefa.org)
