Cost of capital for Indian renewable energy projects: A review of methodologies, risk drivers, and policy evolution

India’s renewable energy sector faces financing challenges that could undermine its 2030 targets, prompting a review of cost of capital dynamics across utility-scale solar and wind projects to address gaps in understanding how financing costs evolve with market maturation and policy intervention. 

We synthesise evidence from six estimation methodologies, analyse risk drivers through four comprehensive studies, and trace policy evolution over 15 years in this discussion paper. Together, these reveal a fundamental tension in cost of capital research: approaches based on actual project-finance data offer high precision but limited scalability while survey methods and financial market proxies provide broader coverage at the expense of accuracy. 

Historical trends point to a complete financing cycle rather than steady improvement. Multiple estimation methods show WACC compression of 300–400 basis points between 2012 and 2020, driven by market maturation, followed by a 320-basis-point expansion through 2024 as global monetary conditions tightened. Meanwhile, wind's historical financing premium over solar has disappeared as both technologies now access identical debt pricing ranges of 8.5–9.75%. 

Risk analysis across multiple studies consistently points to power purchase agreement counterparty concerns as the most significant financing barrier. This reflects deeper structural problems in India’s electricity distribution system, where companies remain in persistent financial distress, accumulating debt of INR6.84 trillion despite policy interventions. By contrast, currency risk has become less material as domestic financial institutions have developed greater comfort with renewable energy financing. 

Policy evolution through four distinct phases has successfully tackled many project-level risks. Competitive auctions have driven tariff reductions exceeding 80%, yet these technical achievements have been undermined by persistent systemic challenges, with over 50GW of successfully auctioned capacity now stalled as distribution companies delay signing power purchase agreements. This shows that while India has overcome many financing and technical barriers, fundamental weaknesses in the distribution sector continue to constrain growth, leading us to identify four research priorities: quantifying grid integration financial implications, developing bankability frameworks for storage technologies, evaluating risk mitigation effectiveness, and creating energy policy uncertainty indices.

This article was first published by the University of Oxford.