Is 2025 the perfect time to invest in India’s green finance stocks?

The rise of green finance – financial investments aimed at supporting environmentally friendly and sustainable projects – has become a crucial factor in advancing India's renewable energy goals.

With India committed to deriving 50% of its power generation capacity from non-fossil-fuel sources by 2030 and various financial institutions and companies pledging ₹32 trillion for renewable energy projects by then, 2025 presents a significant opportunity for investors.

Let’s delve into why.

Growth in renewable energy capacity

India is set to connect a record-breaking 35 gigawatts (GW) of solar and wind energy capacity to its grid by the end of FY25. This would be an impressive increase, considering total renewable energy capacity was 153 GW as of August 2024.

In the first five months of the fiscal year (April-August), 10 GW was added, highlighting the pace at which renewable energy infrastructure is growing.

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In the first quarter of the financial year, 71.5% of the newly installed 13,700 megawatts of power generation capacity came from renewable energy sources. This signals a strong acceleration towards India's long-term target.

Solar energy in particular is expected to gain momentum after a slowdown. India, the world's third-largest solar power producer, saw solar power generation grow at the slowest rate in six years during the first half of 2024. However, projections for the fiscal year show fresh additions of 30 GW of solar capacity, which would reverse this downward trend.

Commitments and investments

Banks, developers and international investors are pouring significant amounts into the sector. Leading financial institutions have committed $386 billion in funding for renewable projects through 2030. This will be crucial in helping India double its clean energy capacity over the next decade.

Major players in the private sector are also contributing to this renewable revolution. For instance,Reliance Industries has pledged to add 100 GW of renewable capacity by 2030, while Adani Green Energy has committed to an additional 38.8 GW.

These efforts are expected to boost India’s non-fossil-fuel capacity by 570 GW, with a significant portion of this set to be developed by 2025.

Shifting perceptions

Historically, the perception that sustainable investments yield lower returns dissuaded many investors. However, this outlook has changed significantly. Green finance now offers lucrative opportunities while contributing to climate goals.

Green bonds, sustainable investment funds and other financial instruments have become increasingly popular in India. For example, REC Ltd, a leading public sector enterprise, launched green bonds as part of its $10 billion global medium term notes program. These bonds, with maturities of 5, 5.25 and 10 years, have allowed the company to raise funds for renewable energy projects.

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As India aims for 500 GW of renewable energy by 2030, green finance will continue to play a critical role. It is estimated that the country will need investments of $10.1 trillion by 2070 to meet its net-zero goals.

The surge in green finance, through green bonds and other instruments, has created a favourable environment for investors seeking both financial returns and sustainability.

Government support

The Indian government has been promoting green finance through various policy initiatives and regulatory frameworks.

The introduction of a production-linked incentive (PLI) scheme for domestic photovoltaic module manufacturing is one such measure. This scheme provides financial incentives to solar PV manufacturers to support the country’s renewable energy goals.

The power ministry has created an environment that allows developers and financial institutions to collaborate on renewable projects. In September, agreements worth ₹1.12 trillion were signed with renewable energy developers for solar and wind hybrid projects, as well as round-the-clock and floating solar plants.

India is also focusing on strengthening its grid infrastructure to support renewable energy.

The latest budget allocated $2 billion for grid enhancement measures, including the Green Energy Corridor, which aims to facilitate the evacuation of renewable energy from grid-scale projects.

This investment represents a 16% increase over the previous year’s budget and is critical for addressing one of the key bottlenecks in renewable energy adoption – grid congestion.

Why 2025 could be the right time to invest

Several factors could make 2025 a key year for investing in India’s green energy finance sector:

• India is on track to increase its renewable energy capacity significantly by 2030, with solar and wind energy leading the charge. As renewable projects multiply, the need for financial investment grows, providing a fertile ground for green energy finance stocks.
• The renewable energy sector is evolving rapidly, with innovations in energy storage, grid management and clean energy technologies set to make green energy more cost-effective and efficient. These advancements should drive higher returns on investment in green finance.
• The Indian government’s support for renewable energy, combined with favourable regulatory frameworks, ensures a stable policy environment for investors and reduces risk.
• Developed countries have pledged to increase climate finance contributions to $100 billion a year through 2025. India, as one of the world’s largest carbon emitters, stands to benefit from this funding. International climate finance will complement domestic efforts, further boosting the green energy sector.

Top green energy finance stocks to watch in 2025

These five companies are key players in India’s green energy finance landscape, each with unique advantages.

#1 Indian Renewable Energy Development Agency

IREDA is a government-owned company that promotes and finances renewable energy projects. An RBI-registered non-banking financial company (NBFC), it operates under the ministry of new and renewable energy.

In May it established a subsidiary called IREDA Global Green Energy Finance IFSC Ltd in GIFT City, Gujarat, to tap international markets and provide competitive funding for renewable projects.

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IREDA's green bond framework, reviewed by Emergent Ventures India and certified by the Climate Bonds Initiative (CBI), ensures adherence to green finance standards, with CBI providing post-issuance certification.

On 10 September, IREDA Global Green Energy Finance IFSC Ltd received provisional registration as a finance company from the International Financial Services Centre Authority (IFSCA).

#2 Rural Electrification Corporation

REC plays a vital role in financing renewable energy projects across India through loans for hybrid projects, pumped storage systems and interstate transmission projects, and support for electric bus projects.

It has secured a green loan facility from Italy's Export Credit Agency to fund green projects and aims to expand its green finance loan portfolio to ₹3 trillion by 2030.

The company has signed agreements worth ₹1.12 trillion with renewable energy firms for solar and wind hybrid projects, round-the-clock systems and floating solar plants.

In the first half of FY25 it disbursed ₹909.6 billion in loans, a 20.1% increase year-on-year. Of this, ₹112.9 billion was allocated to green loans, marking a 92.7% rise from the previous year.

In Q2 FY25 alone it disbursed ₹473 billion in loans, up 13.7% from the same period in FY24, with ₹59.5 billion directed towards renewable energy, representing 37.4% year-on-year growth.

#3 Power Finance Corporation

In September PFC raised $1.3 billion through a foreign currency term loan – the largest such loan facility by a public sector company in India. The funds will be used to finance green energy projects.

PFC’s growing presence in the renewable sector, and its focus on diversifying funding sources, makes it an attractive stock for investors.

#4 Indian Railway Finance Corporation

IRFC finances a variety of green projects within Indian Railways, emphasising sustainability and the reduction of carbon emissions. One of its significant initiatives is funding the installation of solar panels at railway stations and infrastructure, helping reduce dependence on fossil fuels. IRFC has also played a crucial role in financing the procurement of electric locomotives and improving the energy efficiency of railway stations and workshops.

#5 Tata Power

Through its subsidiary, Tata Power Solar, the company has forged a strategic partnership with the Bank of India (BOI) to streamline financing for rooftop solar installations and electric vehicle (EV) charging stations.

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This collaboration makes Tata Power Solar the first solar company to partner with BOI for both solar and EV charging station financing, and solidifies its leadership in green energy solutions.

It has also signed an agreement with ICICI Bank to offer financing for solar units for residential and corporate customers. Under this agreement, customers can access loans of up to ₹90 lakh with collateral-free options and repayment tenures of up to five years.

Challenges and the road ahead

While the rise of green finance and renewable energy in India is promising, it does face some challenges.

These include transmission bottlenecks, land acquisition delays, and inefficiencies in the distribution system. Transmission capacity remains a significant hurdle, with renewable energy projects sometimes experiencing delays in connecting to the grid due to congestion.

Moreover, sectors such as steel, cement, and fertilisers present unique challenges. These industries are responsible for nearly 21% of India’s total emissions, with much of this coming from industrial processes rather than energy consumption.

Transitioning to cleaner alternatives in these sectors is difficult because of the high process temperatures required and the limited availability of scalable technologies.

The introduction of a carbon market in India, along with stringent emission targets, could help address these challenges by putting a price on carbon emissions.

Despite these obstacles, the sheer scale of India’s renewable energy ambitions (the goal is to add 44 GW a year through 2030) suggests that significant opportunities exist for investors willing to navigate the complexities.

Conclusion

India’s green energy sector offers a promising investment landscape. It’s attracting considerable interest from both industrialists and investors, thanks to government initiatives and a growing emphasis on sustainability, and positions companies for remarkable growth.

With $386 billion already committed by financial institutions and private companies, 2025 is poised to be a pivotal year for green energy investment in India.

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However, the journey is not without challenges, particularly in terms of technology and implementation. Despite these hurdles, the prospects for growth and a meaningful impact remain substantial, making it an attractive opportunity for forward-thinking investors.

Nevertheless, it is always prudent to conduct thorough research before making any investment decisions. Ensure such investments align with your financial objectives and risk tolerance.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com