A Sector Where Policy Incentives Shape Fund Strategy Directly
Few sectors see AIF investment strategy as directly shaped by specific government incentive schemes as renewable energy and climate tech. Understanding the Production Linked Incentive (PLI) scheme, green bond financing conventions, and the power purchase agreement risk embedded in nearly every renewable project is essential to underwriting this sector properly — general private equity or infrastructure fund logic isn't quite enough on its own.
The PLI Scheme: Manufacturing-Side Incentives Worth Underwriting Explicitly
The Production Linked Incentive scheme offers financial incentives to manufacturers meeting specific production and investment thresholds in target sectors — including, notably for climate-tech investors, solar PV modules and Advanced Chemistry Cell (ACC) battery storage manufacturing. For an AIF investing in a portfolio company that qualifies (or aims to qualify) for PLI incentives, the scheme's specific eligibility conditions, disbursement timelines, and performance-linked clawback risk should be explicitly modelled into the investment thesis — a company's projected returns can look materially different with versus without PLI incentive realisation, and incentive schemes carry their own execution and policy-continuity risk that a fund's diligence needs to price in rather than simply assume.
Green Bonds as a Financing Layer for Renewable Projects
Green bonds — debt instruments where proceeds are specifically earmarked for environmentally beneficial projects, subject to defined use-of-proceeds and reporting frameworks — have become an increasingly common financing layer underneath renewable energy projects, alongside or instead of conventional project debt. For a renewable-focused AIF, understanding whether (and how) an investee project's capital structure includes green bond financing matters for two reasons: it affects the seniority/security position the AIF's own capital sits within, and green bond frameworks' reporting/certification requirements can create additional compliance obligations that flow through to the project (and indirectly to the fund's own monitoring burden).
Power Purchase Agreements: The Single Biggest Risk Factor
For the large majority of renewable energy generation projects — solar and wind specifically — project revenue depends almost entirely on a Power Purchase Agreement (PPA), a long-term contract under which the project sells generated power to a specific buyer (often a state electricity distribution company, or "discom") at a pre-agreed tariff. PPA risk is genuinely the central underwriting question for most renewable project investments:
- Counterparty credit risk — many Indian state discoms have historically carried weak financial positions, creating real payment-delay or payment-default risk even where the PPA itself is legally sound
- Tariff renegotiation risk — periodic instances of discoms or state governments seeking to renegotiate previously agreed PPA tariffs downward (particularly where technology cost declines have made older PPA tariffs look expensive in hindsight) create a policy/political risk layer beyond ordinary commercial contract risk
- Curtailment risk — a discom's operational or grid-capacity constraints can lead to curtailment (reduced offtake) of a renewable project's generated power even where the PPA technically obligates full offtake, creating revenue shortfall risk not fully captured by reading the PPA's legal terms alone
Carbon Credits: An Emerging, Still-Developing Revenue Layer
Some climate-tech and renewable projects increasingly factor in potential carbon credit monetisation (through voluntary carbon markets or, prospectively, India's developing domestic carbon credit trading scheme) as a supplementary revenue stream. This remains a genuinely developing market with real pricing volatility and methodology/verification complexity — funds should treat carbon credit revenue as a potential upside rather than a core underwriting assumption, given the market's current maturity level.
Viability Gap Funding for Projects That Need It
Similar to broader infrastructure financing (see our Infrastructure AIFs article), certain renewable energy projects — particularly newer or higher-cost technologies not yet independently commercially viable at current tariffs — may access government Viability Gap Funding support, co-funding a portion of project cost to make the overall economics work. Where relevant, this is a structural feature a fund's underwriting needs to explicitly factor in, alongside understanding the specific conditions attached to any VGF support received.
Why Category I's Infrastructure Sub-Category Often Fits, But Not Always
A renewable energy generation project frequently qualifies under the Harmonised Master List of Infrastructure's energy sub-sector, making a Category I Infrastructure Fund (see our dedicated Infrastructure AIFs article) a natural structuring fit for pure-play renewable generation investing. Climate tech more broadly — battery technology, carbon capture, climate-adjacent software or services — often sits more naturally in Category II, given it doesn't always meet the specific infrastructure-asset character Category I's Infrastructure sub-category contemplates.
Structuring Funds for the Energy Transition
We advise renewable energy and climate tech fund managers on category selection, PPA and counterparty risk assessment frameworks, and structuring investments to properly account for PLI, green bond, and VGF policy layers specific to this sector.
This article is for general informational purposes and does not constitute investment advice specific to any renewable energy or climate tech fund's strategy.