India plans push for green bonds

New Delhi: The government has approached at least eight lenders, including Rural Electrification Corp. Ltd (REC), to raise low-cost and long-term funds to help finance India’s plan to quadruple its renewable energy production, while also aiming to make it economically viable for debt-laden distribution companies to buy clean power.
The dollar- or rupee-denominated green bonds may be raised by India Infrastructure Finance Co. Ltd (IIFCL), Power Finance Corp. Ltd (PFC), REC, IDBI Bank Ltd, Indian Renewable Energy Development Agency Ltd (Ireda), ICICI Bank Ltd and Yes Bank Ltd, among others, according to three people familiar with the development.
India needs as much as $200 billion to meet its target to install 100 gigawatts (GW) of solar power and 60,000MW of wind power by 2022. Obtaining affordable, long-term and adequate funds has been a challenge for developers of clean-energy projects in India, where interest rates are high and banks are often reluctant to lend to renewable energy projects.
The low-cost funds raised through green bonds will potentially help cut the cost of clean power and make it easier for developers to sell power to distribution utilities, whose inability to effect necessary, but unpopular, tariff hikes has saddled them with losses and restricted their ability to buy costlier green power. The government is aiming to provide green power at less than `4.50 a unit.
“One needs dedicated funds for clean energy. They are important because of zero fuel cost which is inflation free,” said Anil Razdan, a former power secretary. “But the issue is who are they going to supply this power to? If they are going to supply to the same distribution companies, how is this debt going to be securitized? It comes back to the same issue of getting the discom story right.”
The Partnership to Advance Clean Energy—Deployment Technical Assistance Program (PACE-D), a US-India bilateral initiative, is also being leveraged to create expertise to help India raise green funds. PACE-D is funded by the US Agency for International Development (USAID).
“We want the financial institutions to raise green bonds which can be a mix of both dollar-denominated or rupee-denominated bonds,” said a senior Indian government official requesting anonymity because the plans are in the initial phase.
The Reserve Bank of India on Tuesday allowed companies to sell rupee-denominated bonds overseas, a move that will help Indian borrowers raise overseas debt without taking on the currency risks.
The Narendra Modi government has pushed renewable energy to the top of its energy security agenda, seeking to minimize India’s dependence on coal-fuelled electricity.
“A lot of brainstorming is taking place,” added the government official cited above. “We have approached even the private sector firms.”
While domestic financial institutions have made a commitment to finance renewable energy projects totalling 78GW, firms have been demanding cheaper loans to set up these projects.
Yes Bank has already raised `1,000 crore through its green infrastructure bonds with a tenure of 10 years and AA+ rating. Export-Import Bank of India, which has lent to solar and wind programmes, sold the country’s first green dollar bonds in a $500 million issue of 2.75% notes on 24 March, Bloomberg News reported on 27 March.
A senior official at state-owned REC, who also didn’t want to be identified, confirmed that the government has approached the organisation to raise green bonds.
While queries emailed to the spokespersons for India’s ministry of new and renewable energy, IIFCL, PFC, IDBI Bank, ICICI Bank and Yes Bank remained unanswered at the time of going to press, an Ireda spokesperson said in an emailed response: “Our company i.e. Indian Renewable Energy Development Agency Limited, uses money only for lending it to Renewable Energy projects and therefore whatever bonds we raise are technically green bonds.”
Piyush Goyal, minister for new and renewable energy, power and coal, has said that the government was exploring various financing models for the country’s renewable energy sector. The government is also trying to improve counter-party risk—bidding in dollar-denominated tariff and creating an escrow account to help developers hedge risk.
“In the Indian context, there are certain challenges for the issuance of Green Bonds in the international markets. These include high currency hedging costs; poor sovereign ratings (currently at BBB-); and low tenure (currently, Green Bond tenures are mainly concentrated between 3-10 years, with only some issuances reaching or exceeding 15 years tenure),” PACE-D said in an issue paper.
“However, there are opportunities for Indian entities to participate in Green Bonds at this nascent stage—though on a smaller scale issuance, ranging between USD 150-250 million. Such an early participation could provide an opportunity to Indian entities to capture attention of investors (in a yet uncluttered Green Bonds market), potentially leveraged for future issuances, thereby enabling better terms (due to expected low risk perception by international investors) for prospective similar issuances.”
In India, the world’s biggest greenhouse gas emitter after the US and China, renewable energy accounts for only 12.14%, or 31,692.14MW, of the total installed capacity of 261,006.46MW. The emphasis on solar and wind power is also expected to strengthen the country’s standing at global climate change negotiations that culminate in a summit in Paris in December.
Source: Mint; 13 April 2015
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