Green bonds, banks can boost India’s clean energy market

India needs Rs 17.5 trillion to finance clean energy projects in order to ramp up its capacity to 160 GW by 2022

By Karnika Bahuguna
Published: Wednesday 04 May 2016

Financing is one of the biggest barriers for clean energy projects (IStock Images)

Green bonds and green banks are the two new advanced financing tools that can attract low-cost finance for ramping up India renewable energy capacity, according to a new sectoral analysis.

The analysis released by the Indian Renewable Energy Development Agency in partnership with the Natural Resources Defense Council (NRDC) and the Council on Energy, Environment and Water (CEEW), consisted of two reports. The reports are part of NRDC and CEEW’s series on clean energy finance with local partners in India, as well as key government agencies.  

Financing is one of the biggest barriers for clean energy projects. India needs around Rs 17.5 trillion (US $264 billion approximately), in financing to achieve its target of 160 gigawatts of solar, wind and other types of renewable energies by 2022, the analysis states.

The first report titled “Greening India’s Financial Market- How Green Bonds Can Drive Clean Energy Deployment” offers strategies to further lower the cost of money raised through debt markets in India and abroad.

What is a green bond?

A green bond is a fixed-income financial instrument used to raise funds through the debt market. It is like traditional corporate bonds but the key difference is that green bonds raise funds for projects with environmental benefits, such as renewable energy, low carbon transport or climate adaptation.

Green bonds that tap into international resources to leverage a wider investor base of pension funds, sovereign wealth funds and insurance companies are required to be scaled up, suggests the report.

Strategies to strengthen the green bond market should aim at reducing the cost of capital, stimulating demand from institutional and retail investors and expanding issuer base.

Government, banks can strengthen market

“RBI can allow insurance and pension funds to invest a certain percentage of their fixed income portfolio in green bonds to open up an enormous market for clean energy investment in India,” added the report.

The finance ministry can provide credit enhancement and guarantees to alleviate the perceived risks associated with such projects and draw more corporate players. Credit enhancement means guarantee in the form of financial support to cover losses in an adverse situation. It enhances the overall credit rating of a green bond.

“The Ministry should also consider providing future allocations of tax-free bonds with a larger share for clean energy to help diversify and deepen the debt markets in India,” it recommended.

According to the report, India has used green bonds to finance only about $1 billion worth clean energy projects. The size of the global market for green bonds is estimated to reach $100 billion this year, it said.

The second report called “Greening India's Financial Market: Investigating Opportunities for a Green Bank in India” explored the possibility of India being on the forefront of innovation as part of the International Green Bank Network.

Green banks are public entities created to work with the private sector to increase investment in clean energy and bring clean energy financing into the mainstream. They are innovative and new tools that have been successful in the United Kingdom, Australia, Japan, Malaysia, and several US states, it said.

A green bank can offer lower interest charges than traditional banks. They can also tap into international capital to finance solar and wind projects, it suggested. According to the report, the Indian Renewable Energy Development Agency—a public-sector entity—currently appears to be the closest institutionally to a green bank, the report said. It added that opportunities for state level banks are promising.

“Attractive low-cost finance for clean energy projects is crucial for tapping into India’s vast clean energy potential and for transforming India into a low-carbon economy. In 2015, India was the fourth largest issuer of green bonds in the world, raising debt worth $1.1 billion, ahead of several major economies such as China, Japan, Norway and the UK,” said Arunabha Ghosh, CEO, CEEW.

Green banks can do more to grow clean energy markets, said the report. They can offer flexible, affordable lending that matches the terms and payback period of a clean energy project, thereby lowering the cost of energy. They can also engage in market development and demand generation, the report said.

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