Unlocking trillions: How REFO could transform India’s energy landscape

India’s ambitious target of achieving 500 GW of renewable energy by 2030 demands an infusion of roughly Rs 33 lakh crore, yet there is a significant financing gap in the sector. To tackle this, policymakers are considering the Renewable Energy Financing Obligation (REFO), a bold mechanism designed to ensure that financial institutions channel a fixed portion of their lending portfolios to renewable energy projects.

By mobilising dormant capital and de-risking investments, REFO could accelerate the nation’s clean energy transition. It builds on the framework of India’s Renewable Purchase Obligations but shifts the focus from mandating power procurement to securing dedicated financing. Under this mechanism, banks, non-banking financial companies and institutional investors would be required to allocate 5-15 per cent of their annual lending to projects in solar, wind, green hydrogen and energy storage.

The Union Minister for New & Renewable Energy, Pralhad Joshi, recently underscored the urgency of this proposal at the National Workshop on Mobilizing Finance for Renewable Energy, emphasising the need for innovative financing models and flexible lending terms.

The potential impact of REFO is significant. Access to a steady stream of affordable capital could lower borrowing costs dramatically, with solar tariffs now at record lows of around Rs 2.15 per kWh.

Presently, solar project interest rates range from 9-12 per cent; with REFO, these rates may drop to 7 or 8 per cent, making renewable projects more competitive than fossil fuels. This would not only spur broader adoption but also help displace a substantial share of coal-generated power.

Moreover, by shifting the burden of financing from public coffers to private institutions, REFO could ease fiscal pressures on the government and stimulate market-driven growth, attracting long-term investors and fostering innovation in emerging sectors like offshore wind and green hydrogen.

The government’s blueprint for REFO is comprehensive. It prioritises lending for strategic renewable segments such as rooftop solar, PM-KUSUM scheme, offshore wind and green hydrogen projects. Critical measures include streamlining loan approval processes to cut turnaround times from over six months to under 90 days, lowering collateral requirements and expanding the use of financial instruments like green bonds and climate finance funds.

Additionally, developing robust risk-mitigation frameworks — especially for new technologies like battery storage — is essential to making these investments attractive to private financiers.

Despite its promise, REFO faces notable challenges. Critics caution that mandating a share of lending for renewable projects may impose additional financial burdens on banks and fossil fuel companies, potentially leading to higher costs for consumers. Concerns also persist over the efficient allocation and monitoring of funds.

Without robust oversight and transparent fund management, the capital set aside under REFO might not be deployed effectively. Overlapping regulatory measures could create a confusing policy environment that undermines investor confidence. Inadequate enforcement might even allow institutions to sidestep the obligation altogether.

Global experiences provide valuable lessons for refining REFO. In the United States, blended finance models and loan guarantees under initiatives like the Inflation Reduction Act have attracted over $1.2 trillion in renewable capital.

Brazil’s PROINFA programme uses tiered obligations for different renewable sectors to ensure diversified growth, while South Africa reinvests non-compliance fines into a National Renewable Fund, creating a self-sustaining cycle of investment. These examples suggest that while REFO’s top-down approach holds great potential, its success will depend on careful policy design, stringent enforcement, and the flexibility to accommodate regional disparities.

Ultimately, REFO represents a bold step toward bridging India’s financing gap and unlocking trillions in dormant capital. If implemented effectively, REFO could become a cornerstone of India’s clean energy transition, propelling the nation toward a sustainable, low-carbon future. The big question remains: Can India’s financial sector rise to the challenge and unlock its green potential? The answer will shape the country’s energy landscape for decades to come.

The mechanism looks like a bold step toward closing India's financing gap and unlocking trillions in unused funds. If it works as planned, REFO could become a key pillar in India's clean energy transition and help drive a low-carbon future.

Yet, many questions remain. Can India’s financial sector truly adjust to this new model, or will outdated practices and unclear regulations get in the way? Is REFO the clear solution to India's green financing challenges, or just another well-intentioned but ultimately perplexing policy initiative?

The answers are still uncertain, leaving us to wonder whether this ambitious initiative will unlock India’s full green potential or simply add another layer of complexity to the energy transition.