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State-owned Rural Electrification Corp. Ltd (REC) is set to raise €100 million (Rs 656 crore) from Germany-based KfW Bankengruppe for financing renewable energy projects in India at concessional interest rates.

“Everything has been done and the loan agreement is to be signed," said Rajeev Sharma, chairman and managing director of REC.

REC had earlier availed a loan of €140 million through two rounds of funding of €70 million each from KfW Bankengruppe.

REC has sanctioned loans worth 50,000 crore and disbursed loans estimated at around 25,000 crore in the current fiscal.

REC is borrowing from a foreign lender to tide over the acute shortage of funds facing power companies in India. Also, funds raised from global markets are cheaper, given the high interest rates in India, said Sharma.

India’s power sector, already struggling with funding shortfalls, will need $400 billion of investment during the 12th Five-Year Plan (2012-17) .

REC, which along with Power Finance Corp. Ltd (PFC) accounts for around 60% of the lending to the Indian power sector, has also formulated guidelines for lending to renewable energy projects for the first time.

“We have been lending around 400 crore to renewable energy projects," said Sharma. “Earlier we along with other lenders were following systems and procedures set up for generation projects. There were no uniform guidelines for renewable energy projects."

Realizing that India needs to diversify its energy mix, the government is focusing on alternative, renewable energy options.

The national action plan on climate change recommends India should generate 10% of its power production from solar, wind, hydropower and other renewable sources by 2015, and 15% by 2020. The Central Electricity Regulatory Commission, the country’s apex power sector regulator, has also come up with guidelines on issuing renewable energy certificates to promote green energy. Certificate holders will be able to sell green energy to states, individuals or other trading entities. States have been allotted different renewable energy purchase obligations. The high production cost of renewable energy and its effect on state power utilities’ budgets, however, is viewed as a deterrent.

The 11th Plan had set a target of adding 78,577 megawatts (MW) of power generation capacity, requiring about 10.31 trillion in investments. The power ministry estimated a 4.51 trillion funding shortfall.

To promote green energy initiatives, PFC has formed a unit, PFC Green Energy Ltd, that will lend to renewable energy projects. REC too formed a separate division for lending to renewable energy projects in August.

India is among the top five renewable energy producers in the world with a capacity of 20,000MW and an additional 2,500MW capacity is being added every year, according to the ministry of new and renewable energy.

Tata Securities Institutional Research in a report dated 31 January said, “REC has a foreign currency book of 30 billion. For 3QFY12, the company made a loss of 1.93 billion on their open position book."

utpal.b@livemint.com

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