The Government of India has set an ambitious target of generating 100GW of energy from solar and 60GW from wind energy sources by 2022. As of 31 March 2016, the corresponding figures stood at 6.76GW and 26.7GW respectively. Unfortunately, renewable energy is more capital intensive than coal and financing this push will require ~$160 billion (~INR 11 trillion) of capital, $120 billion as debt and $40billion as equity. To put this number in perspective, Government of India’s gross borrowing for FY17 is budgeted at INR 6 trillion. This number is more than four times the country’s annual defence spending.
Currently, most renewable projects are financed by bank commercial loans at 11-12% interest per annum. Indian banking sector is currently going through a balance sheet adjustment; banks are unlikely to be able to expand their balance sheets to be able to finance the additional requirements of the renewable sector. Green bonds may be able to fill this gap.
A green bond is a fixed income instrument for the purpose of raising debt capital through markets. It certifies that the proceeds will be used exclusively for specific “green” purposes. The Green Bond Principles are voluntary guidelines issued by the International Capital Markets Association which state the procedure for certifying a green bond. These encompass use of proceeds, evaluation procedure, management of proceeds and financial reporting. These guidelines are lacking in specifics leading to a lack of consensus on what classifies as a green bond. Green bonds can provide a long-term source of debt capital for renewable infrastructure projects. Since cost of debt availed for projects is higher than the yield for investment-grade bonds, it may be possible to reduce cost of capital for green infrastructure financed or re-financed by bonds. While green bonds can facilitate the flow of capital to low carbon infrastructure investments, the demand for such investment is driven by low-carbon policy mandates. An enabling policy context hence is vital for the success of green bonds.
The government currently provides subsidies for green projects by way of:
Accelerated Depreciation provisions: Capital expenditure is allowed to be depreciated by 80% in the first year and the remaining in the following 5 years
Feed-in Tariffs: are long term contracts with discoms to purchase power from a renewable project, usually at higher rates.
Viability Gap Funding: capital grant from the government that bridges the gap between project cost under the prevailing electricity rate and the price quoted by the developer.
Generation Based Incentive: The government provides INR 0.5/kWh supplied to the grid, subject to a cumulative maximum of INR 10 million/MW. The incentive must be drawn over a minimum of 4 years and a maximum of 10 years.
Renewable Purchase Obligations: The National Action Plan on Climate Change (NAPCC) has set an ambitious RPO target of 15% by 2020 which have been implemented by 28 states in the country.
Green bonds would enable investor diversification, mitigate risks since the repayment is tied to the issuer only, build a community of green investors, and enable refinancing bank loans at lower cost. Assets under management by signatories to the UN supported Principles for Responsible Investment (PRI) are around $60 trillion so far and an increasing number of institutional investors and financial institutions globally are publicly pledging to increase their green bond holdings.
Yes Bank became the first issuer of INR denominated green bonds in February 2015 when it issued INR 1000cr of green bonds at 8.85% to finance new renewable energy projects. Since then, Axis Bank, IDBI Bank and some companies too have raised funds via green bonds. Currently, there is no pricing advantage for banks in issuing green bonds and likewise to the borrowers whose projects were invested in.
Green bonds have been around for a decade but the regulation and investment in them is still miniscule compared to the total market for debt mainly on account of lack of green bond standards, low credit rating of potential issuers and higher cost of issuance. Considering that fossil fuels have enjoyed huge subsidies throughout their history (viz. subsidized diesel, kerosene and gas) and have contributed to environmental degradation and global warming; it is apt that clean energy initiatives get equitable treatment. In order to develop a green bond market, the government essentially needs to increase the funds available for investment in green projects, by providing for specific tax incentives and development of long term finance markets in general.
Some of the key actionable steps specific to would be:
Though the market is nascent, broad guidelines are coming to the fore. As the market matures, investors will require that green bond issuers report on status of deployment and environmental outcomes of the investments. For the green bond market to have long-term credibility, investors and governments would need evidence that the projects funded have in fact delivered the intended environmental benefits. To summarize, the Government of India can lead the global push towards green by taking three steps to reduce our races’ carbon footprint; standardize “green” bonds as a way to finance environmentally sustainable projects, provide incentives to investing in projects funded by a carbon tax on polluting sources of energy and finally, increase funds channelled towards investing in environmentally sustainable projects.
Changing IRDA norms for size of investment for insurance companies,
Creating mandates for provident funds to invest in infrastructure and environmentally sustainable projects,
Increasing the Priority Sector Lending limit for bank loans under solar energy from a meagre INR 15cr,
Standardize the definition of green to be able to target government efforts in the direction and,
Mobilize retail savings by way of tax exemption on the lines of Section 80CCF: These in essence are government subsidies but renewable energy, energy efficiency and other sustainability projects have immense externalities in terms of health and environment and hence should be promoted.
Though the market is nascent, broad guidelines are coming to the fore. As the market matures, investors will require that green bond issuers report on status of deployment and environmental outcomes of the investments. For the green bond market to have long-term credibility, investors and governments would need evidence that the projects funded have in fact delivered the intended environmental benefits. To summarize, the Government of India can lead the global push towards green by taking three steps to reduce our races’ carbon footprint; standardize “green” bonds as a way to finance environmentally sustainable projects, provide incentives to investing in projects funded by a carbon tax on polluting sources of energy and finally, increase funds channelled towards investing in environmentally sustainable projects.
This article first appeared in The Hindu.
Saurabh Roy, Fellow, Pahle India Foundation