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How Can Green Bonds be Effectively Used to Finance Renewable Energy Projects in India

Jun 16, 2020 2:05 PM 5 min read

Adani Green Energy plans to raise up to $12bn through issuance of green bonds over the next four to five years to fund an installed capacity of 25GWh. On the way it hopes to become the world’s largest renewable energy player.

Consider this. India is currently the second-largest emerging green bond market after China. But our nationwide issuance of $3.2bn in 2019 pales in comparison to China’s $34bn and Adani’s forward looking $12bn plan.


 New green bond issuance in 2019 - by country ($bn)


In terms of cumulative issuance from 2012-2019 as well, we are currently at $10.9bn vs. $142.9bn by China.

 Cumulative Emerging Market Green Bond Issuance 2012-2019


It is thereby worthwhile to see some of the structural challenges at play before all the excitement takes over.

But first things first. What is a green bond? 


Some Serious Green!

A green bond is essentially like any other bond i.e. A promise between an issuer and an investor.  

When an investor buys a bond, they lend capital to the issuer for a certain period of time. The issuer, in turn, uses these funds to build assets i.e. Anything that generates an income, with the promise of returning the principal plus interest.  

Green bonds are bonds with a specifically mandated use of funds i.e. Green projects and assets. Therefore the money coming from a green bond is to be earmarked for climate and environment-oriented projects.  

India is the only country in South Asia that has issued green bonds. A number of Government agencies have contributed to issuance, for instance the Indian Renewable Energy Development Agency (IREDA) and the Indian Railway Finance Corporation (IRFC). State Bank of India (SBI) also entered the market with an $650mn Certified Climate Bond in 2018.

Lately benchmark-sized issuances from non-financial corporates have also emerged viz companies such as Adani, Greenko, and Renew. 


How Can Green Bonds be Effectively Used to Finance Renewable Energy Projects


Why are Green Bonds Important for India?

The Government of India has set an ambitious target of installing 175 GW of renewable energy capacity by the year 2022, including 100 GW from solar, 60 GW from wind, 10 GW from bio-power and 5 GW from small hydro-power. This requires significant capital, amounting close to $200bn.

To put this into perspective, India’s renewable energy capacity stood at c. 86 GW at the end of January 2020.

The deficit as evident is significant. A traditionally high cost of capital domestically doesn’t help, in turn increasing renewable energy project expenses by roughly 24-32% vs the United States and Europe. 

Moreover, renewable energy is still a part of the larger power/infrastructure funding basket for most banks, and with a large part of the financing reserved for coal power projects. Thus there remains very little funding left for RE.

Lastly, many funders shy away from lending to renewable energy companies due to their nascence in terms of track record, underlying execution risk of projects, government-driven demand, and broader regulatory uncertainty. 

Against this backdrop, green bonds, which typically carry a lower interest rate than loans offered by the traditional banking system, but higher than many what certain specialist institutions have an appetite for - can become an alternative. 


Who Can Issue a Green Bond?

Between 2007 and 2012, organisations such as the European Investment Bank and the World Bank accounted for most of the global green bond issuance. Since then, corporate interest has risen sharply. 

In 2014, green bonds issued by corporations in the energy and utilities, consumer goods, and real estate sectors accounted for a third of the market, as per KPMG.

India entered the green bond market in 2015 with YES Bank issuing the first green bond for financing renewable and clean energy projects, in particular wind and solar. It was later joined by SBI, Exim Bank and Axis Bank, who have also tapped the international market. The Luxembourg Stock Exchange is also reportedly in talks with Indian conglomerates to issue green bonds.


Potential Impact of Green Bonds in India

The implementation of green bonds will lead to a multiplier effect in the deployment of renewable energy projects in India, owing to lower costs, increased capital inflow, and access to finance at various stages of the project lifecycle.

Low cost-long term debt: Low financing costs will naturally result in the reduction in the cost of power generation. This will in turn witness larger adoption of renewable energy projects from stakeholders such as consumers, Independent Power producers (IPPs), technology manufacturers, and distribution companies. Moreover, availability of capital at various development stages are likely to lead to larger implementation of projects.

Increased capital access: Green Bonds being tradable and flexible instruments are likely to attract a larger pool of investors to the RE sector, including pension funds, insurance companies and sovereign wealth funds. 


How Can Green Bonds be Effectively Used to Finance Renewable Energy Projects


Challenges at Bay

With no standardised framework to establish what constitutes a “green” project, there have been multiple debates and controversies on whether green bond issuers are using funds for projects which are green enough. 

For instance, Reuters, way back in 2015, reported how activists were claiming that the proceeds of the French utility GDF Suez’s US$3.4bn green bond issue were being used to fund a dam project that hurts the Amazon rainforest in Brazil.

To add to this, smaller average project sizes often make issuance under conventional bond structures un-viable.

Some other key challenges within the Indian context are:

  • Lack of availability of quality information to identify, measure and track green investment
  • Supply constraints i.e. including limited availability of “labelled” (read: validated) green assets. Setting the standards to label
  • Low issuance by “sovereign” entities e.g. municipal authorities, government agencies 
  • Lack of awareness and technical knowhow amongst the issuer and investor community
  • Stable and standardised regulatory regime
  • Underdeveloped bond markets with insufficient liquidity and high transaction costs

This is where the Government must step in to help scale the green bonds market in India. 

Now that will be something to get excited about!


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