Public Financing for Renewable Energy Sector Development: Recommendations for the 16th Finance Commission

AIndia has pledged to reach net zero emissions by 2070, and set an ambitious renewable energy (REN) target of 500 GW from non-fossil sources by 2030. At present, total RENbased electricity generation capacity in India is 220.10 GW (31 March 2025). To achieve its climate goals, it is essential for India to strengthen its REN sector at both the national and subnational levels to harness its potential. In this paper, we analyse public sector expenditure on the REN sector, and discuss the public finance strategies adopted by states, their utilisation rates, and priorities in public expenditure in terms of schemes and subsidies related to REN. Based on our analysis we have formulated recommendations for the 16th Finance Commission. We have estimated the amount of green grants for states, taking into account the potential and progress in various REN sectors across states. We also discuss the challenges and list short-term recommendations (the low-hanging fruit) and long-term recommendations to enhance states’ performance in achieving the targets of the green transition. Our analysis shows that while fore-runner states in terms of public expenditure on REN, like Chhattisgarh, prioritise subsidies for solar pumps, Gujarat demonstrates a more diversified approach, investing in large-scale solar-wind hybrid parks, microgrids, and decentralised systems. In contrast, Rajasthan, despite its high renewable potential, spends a very small share of its budget on REN. Tamil Nadu, Andhra Pradesh, Tripura, and Jammu & Kashmir have no identifiable budgeted spending for REN through public finances, while Himachal Pradesh, Madhya Pradesh, Karnataka, Assam, and Telangana spend a miniscule amount from their budgets (less than 0.01%) on REN. The majority of the states spend more on revenue than on capital, resulting in the lack of asset creation and infrastructural support in this sector. States also suffer from poor fiscal planning. Haryana, Gujarat, Uttar Pradesh, and Maharashtra spend significantly on subsidies for renewables, while Chhattisgarh and Jharkhand, though providing subsidies on other components of the energy sector, do not report giving subsidies for REN. These differences underscore the need for strategic, well-targeted financing that aligns state actions with their technical and economic potential. Renewable energy technologies are highly capital-intensive with substantial upfront costs. Both government entities and other financial lenders have a back-log of nonperforming assets (NPAs), and the uncertainty of investments returns in this sector makes long-term financing stressful. The financial health of DISCOMs and the lack of green priority specifications in financial frameworks add to the problem. The REN sector, being at a nascent stage of development, also faces substantial operational and institutional challenges like land acquisition, technical and regulatory barriers to solar rooftop panels, poor transmission infrastructure, policy misalignments between central and state governments, and so on. A lack of awareness which creates resistance to the adoption of REN and land-use conflicts are also concerns. To overcome these challenges, this study includes a list of recommended financial incentives, and infrastructural and regulatory support, and an approach toward public expenditure on this sector. Our study suggests that to meet the government REN target of installed capacity of 500GW by 2030, the Finance Commission needs to provide green energy grants to states. We estimate that, considering the potential, installed capacity, and present trend in spending on new energy and REN, the average yearly grant requirement for all states would be around Rs. 14,064 crore over the next five years to reach this target. Given the high risks and low returns in this sector, public investment must lead the way. Keywords: Public Financing of Renewable Energy, Finance Commission, Green Grants, Challenges in Renewable Energy Sector