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Expensive Loans Dim The Prospects For Renewable Energy In India

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India, a country blessed with enormous reserves of renewable energy, pays up to 32 percent more for electricity from solar and wind than the U.S. or Europe because projects are so expensive to finance, according to a report.

A joint study by the Climate Policy Initiative and the Indian School of Business issued in December found that a combination of high interest rates and unclear government policies make the electricity from a clean-energy project carry a premium of 24 to 32 percent compared to a similar project in the West. Expensive clean energy makes it more likely that India will end up building its 21st Century energy infrastructure with coal, which would lead to higher carbon emissions and worsen the problems of global warming.

India suffers from high interest rates because of rising inflation, rapid growth, high risk, and an ever-expanding demand for borrowed dollars. Infrastructure investment, for example, is expected to grow from 8 percent to 10 percent of gross domestic product by 2017.

"Renewable energy lessons from the U.S. and Europe may not apply to India's financial realities," the report said.

On the plus side, clean energy has a strong and growing presence. India is the fifth-largest market for wind turbines in the world, with more than 16 gigawatts installed. The central government has a goal of building 20 gigawatts of solar power by 2022, and India's states are making massive investments toward that goal.

However, many of these solar projects are sponsored by state electricity boards, whose poor financial shape give investors pause.  Furthermore, the central government's means to knit together the state programs -- a market for renewable energy certificates -- is seriously underperforming, the report said.

The report recommended that India look to Brazil as an example of how to use debt to grow renewable energy. Another rapidly growing country with a decentralized government, Brazil has financed nearly every renewable energy project through the National Social Economic Development Bank (BNDES) with low-cost and long-term debt financing.