How India can galvanize PE-VC funds for its Net-Zero ambitions, ET EnergyWorld

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In the pursuit of a greener and more sustainable future, the world’s attention has turned towards renewable energy sources as a means to mitigate climate change. However, as the climate crisis deepens, reducing the carbon footprint of electricity generation and mobility sectors is just one piece of the puzzle. In India, where the electricity sector contributes to about one-third of greenhouse gas emissions (GHG), a comprehensive energy transition demands a multi-faceted approach that goes beyond the realms of renewables and electric mobility. This realization should entice PE-VC funds to expand their investment horizons beyond conventional sectors.Opportunities galore: Understanding the decarbonization landscape

India’s GHG emissions are a tapestry woven from various sectors like electricity (~35%), agriculture (~23%), manufacturing & construction (~15%), transportation (~8.6%), hard-to-abate industrial processes (~5%), etc. Not all segments can be electrified in this intricate web to reduce GHG emissions. Each sector demands bespoke decarbonization solutions. For instance, while the power sector aims to promote renewable energy, smart grids, and long-duration grid-scale energy storage solutions, the food sector necessitates introducing precision agriculture solutions, efficient supply chain networks, and organic fertilizers. The hard-to-abate industries aim to adopt novel fuels, transformative carbon-negative processes like CCUS, and new raw materials for realizing circular economy goals. The transportation sector looks to reinvent itself through innovations in electrification or alternate fuels like Green Hydrogen or Biofuels, smart mobility platforms, and green infrastructure creation. The construction sector can cut its carbon footprint by optimizing HVAC requirements, using eco-building materials, and adopting green architectural design elements. Such diversity of solutions highlights the need for a holistic financing strategy that seizes decarbonization opportunities.Corporate Capital and the Energy Transition Challenge

While some corporations may be able to invest significant capital, they must weigh the value of prioritizing core business expansion versus energy transition initiatives. Even when the objectives of business expansion and decarbonization overlap, they may adopt a conservative approach by staying away from investments that are perceived to be risky. Increasingly, most corporations rely on external financing for fulfilling major capex/op-ex/M&A targets, as their balance sheets might not suffice to fund ambitious projects. Herein lies the massive opportunity for PE-VC funds to spearhead India’s decarbonization journey by investing in high-potential climate solutions.Characteristics of PE-VC operating arena

The climate-technology risk spectrum is typically bound by concessionary grants (high risk) at one end and conventional debt (low risk) at the other extreme. PE-VC funds have their game plays set in the middle of this spectrum. They are champions in supporting technologies that have proven viability but can present only a limited track record. Their business models can be relatively immature or untested but hold the promise of early signs of rapid scale-up potential. They are characterized by moderate risks tied to policy and regulatory uncertainty.

Climate-tech: A perfect opportunity to unleash PE-VC’s strengths

So far, PE-VC funds, with their ability to provide growth capital, sector-specific expertise, and risk management frameworks, emerged as a driving force behind India’s ambitious clean energy projects. Fit-for-purpose climate-tech solutions for diverse sectors align remarkably well with the criteria of PE-VC investing. Such funds allow room for tailored strategies for technology enhancement and provide hands-on expert management advisory and rapid scale-up pathways with a typical time horizon of 5-7 years for producing returns. With an inherent ability to evolve as per global business cues, PE-VC funds can navigate temporary uncertainties to support innovations.

Armed with their rigorous due-diligence processes for estimating climate impact, most PE-VC Funds can weed out superfluous solutions and ‘green-washing’ efforts as they can set apart good investment opportunities from mere good stories. This is a much sought-after value-add towards promoting positive investor sentiments in the Indian capital ecosystem. This has contributed to broadening the active investor base (about 800 in 2022) and setting up India-focused funds. Investments of PE-VC funds in India’s climate-tech space are expected to mature with time and may also support late-stage growth opportunities and potential buyouts. The path ahead seems uncharted, but with PE-VC funds as key enablers, the transformational shift towards a greener future becomes both feasible and promising.

The Three Segments of Opportunity

The investment opportunities span electric vehicles (EVs), charging infrastructure, utility-scale energy storage, and green hydrogen production. These technologies exhibit varying scales and types of investment requirements – from consumer financing for EVs to substantial capital for charging stations and green hydrogen infrastructure. Within this paradigm, three distinct segments emerge as investment hotspots for private equity firms:

1. Energy Storage: While the technology of energy storage is established, the need for commercial capital to scale up is evident but risky for mainstream investors. PEs/VCs can invest across the value chain, including the development and deployment of advanced battery technologies and grid-scale storage solutions. The sector needs growth and risky capital to a minimal critical mass that can reduce unit cost drastically, thereby making it a profitable venture. PEs can provide this kind of capital and exit when mainstream investors are assured about the sector’s profitability.

2. Electric Vehicle Ecosystem: The EV value chain holds tremendous potential for investment opportunity – Consumer financing for personal vehicles (cars, two-wheelers, etc.), lending opportunity for commercial fleets, setting up charging networks, and manufacturing of batteries and EVs.

3. Industrial and Agricultural Decarbonization: Industries with intricate energy needs and emissions patterns require tailored approaches that banks and conventional financial institutions consider risky. Private equity investments will discover investment opportunities in optimizing industrial processes, energy efficiency, CCUS, precision agriculture, etc.

Despite an ongoing liquidity crunch, the present interest of PE-VC funds for small to medium-sized deal activities can be just right for India’s climate tech. Such funds can act as motivators for climate-tech innovators to get their unit economics right and focus on core business performance. This cautious optimism of the short term can lay the foundation for a diversified and resilient climate-solutions ecosystem in India that can serve the world’s demands in achieving its net-zero ambitions.

[This piece was written exclusively for ETEnergyworld by Prasad Ashok Thakur, a CIMO scholar and an alumnus of IIMA and IITB, and Labanya Prakash Jena, Head, Centre for Sustainable Finance, Climate Policy Initiative (CPI). Views expressed are personal]

  • Published On Sep 15, 2023 at 02:36 PM IST

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