NEW DELHI – It took less than two weeks for French multinational TotalEnergies to put a massive green hydrogen project with Adani Group on hold after the Indian conglomerate was rocked by allegations of fraud.

The deal – part of a plan in which billionaire Gautam Adani’s clean energy business would have invested US$50 billion (S$66.4 billion) over the next decade in the emissions-free fuel – remains in limbo, a victim of Hindenburg Research’s explosive short-seller report.

The fallout is unlikely to be limited to the Adani empire. The brouhaha over the business practices of the group – which became one of the country’s biggest investors in renewable energy after expanding from transport infrastructure – means there will most likely be greater scrutiny of Indian corporate governance across the board.

Energy transition investments in India already lag behind those of other major nations, and now the cost of capital is increasing as global interest rates rise, while the Inflation Reduction Act is creating more opportunities for clean power investors in the United States and its free-trade partners.

All that spells trouble for Prime Minister Narendra Modi’s goal to put India at the forefront of climate action.

“The markets are enforcing discipline on companies, including Adani, to reduce debt and bring in equity,” said Mr Shashank Krishna, a London-based partner at law firm Baker Botts, who advises clients on energy and infrastructure deals. “Some projects that are borderline economically viable or may not have a strong business case will have to be shelved or reduced in size.” 

The multiplying headwinds are making the government’s goal of tripling clean electricity capacity by the end of the decade less achievable. New Delhi wants to increase the current 169 gigawatts (GW) to 500GW by 2030, taking its percentage of the total from 41 per cent to almost two-thirds, a key milestone en route to net zero by 2070. 

If it falls short of this target, the world’s third-largest emitter will be forced to keep relying on coal for longer. That is bad news for a fast-warming planet, and also for an Indian economy hoping to lure investment from multinationals that are under pressure to decarbonise their supply chains. 

The renewable energy ministry did not respond to an e-mailed request for comment.

While India installed 15GW of grid-connected wind and solar capacity in 2022, 44 per cent more than in 2021, it is still well short of what is needed to reach the 2030 target. And ominously for Mr Modi, making a major increase in the level of investment was already proving tough before the Adani crisis. 

Investment in the deployment of renewable energy technology rose about 4 per cent to US$11.5 billion in India in 2022, but that is still lower than a recent peak of US$12.7 billion in 2017, according to data compiled by Bloomberg. It is also a fraction of the US$274 billion total in China and US$49.5 billion spent in the US.

Fiscal incentives such as the Inflation Reduction Act are drawing a lot of capital that could have potentially found its way to India, said Ms Anita George, co-founder of Edhina Capital, an Indian private equity firm looking to invest in clean energy, mobility, green buildings and recycling opportunities. “That has been a dampener for all the emerging markets, not just India.” 

India’s unstable policy environment – with import levies, court orders and doubts over whether the state-level utilities will honour commitments to purchase electricity – are also giving international investors pause. Indian projects need to offer far higher returns than in less risky destinations to compensate for the uncertainty. 

“From a global investor’s perspective, risk-reward in India today seems slightly out of line,” said Mr Pramod Kumar, head of investment banking at Barclays Bank India. If Indian projects offer returns on equity of 11 per cent to 12 per cent and debt of 8 per cent, “globally people are saying given the inflation impact, these returns seem somewhat low”, he said. “So that’s affecting some deal activity”.

To meet its 2070 net zero goal, India requires investment of US$160 billion annually across its energy sector until the end of 2030, according to the International Energy Agency, roughly triple the current levels.

With the industry heavily reliant on a handful of local billionaires and mounting hurdles facing international investors, it is hard to see the country attracting that amount of funding without an aggressive effort from New Delhi to improve its policy settings.

“If you don’t clean up your act, investors will not wait around,” Mr Krishna said. “They have other options.” BLOOMBERG