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Green bonds – not a silver bullet, but needed nonetheless

India’s ongoing energy transition, led by a buoyant renewable energy market and increasing activity in the electric mobility sector, is characterised by consistent and strong high-level policy targets and ambition. Even as there is need for enhanced policy certainty on the objective functions driving the energy transition, the policy environment is enabling increased private sector activity in both clean energy deployment, and electric mobility. The scale of the ambition and the size of the market on offer in both these sectors provides both and an opportunity and a challenge. The ambitious targets act as an advanced market commitment, encouraging market activity by private players. However, the quantum of capital required to realise these targets are mammoth. As a result, despite the dynamism of the renewables and electric mobility markets, the constraint on the availability of adequate affordable capital, from multiple sources is impeding the pace and efficiency of the energy transition.


Domestically, bank debt has been the primary source of domestic currency capital for infrastructure projects. With competing demands on this limited pool of capital, which is highly regulated by the Reserve Bank of India (India’s Central Bank), the bond market could potentially be a critical source for making debt funds available to enable the energy transition. Identifying this potential, this report presents a detailed analysis of the case for green bonds as a complementary source of debt capital for these sectors. Green bonds are a category of bonds, the proceeds of which can be used in specific clean energy and climate change related end uses, including renewable energy and electric mobility. The report considers green bonds as a tool to address the capital raising needs of both the private sector, as well as sub-sovereign government (in this case state governments), for the renewable energy and electric mobility sectors.


Investment flows in RE capacity deployment have averaged at USD 10 billion annually, over the period 2013-2017. However, to meet India’s Nationally Determined Contributions under the UNFCCC Paris Agreement annual investment of USD  30 billion will be needed over the period 2018-2030. Similarly, the scaling up of EV sales from current levels of around 1% of total vehicle sales to around 30% of total vehicle sales by 2030 will require considerable increase in investment flows. Further, the scale up of both renewable energy and electric mobility will require additional investments in supporting infrastructure such as transmission infrastructure and solar parks for renewables and charging infrastructure for electric mobility.


In the face of such large credit requirements, the bond market could complement the traditional sources of debt, especially through refinancing of primary debt. Refinancing through bonds presents several advantages, including the lowering of the cost of capital and providing access to institutional investors such as insurance, pension and mutual funds. Further, bond market investors favour longer term investments with coupon rates, making them a better fit for renewable energy and electric mobility projects, creating more certainty over debt repayments, in contrast to shorter tenure floating rate interest rates for bank loans.


Globally the bond market has been critical to the advancement of the energy transition. Bond issuances (labelled as green) supporting climate action stood at as much as USD 167.3 billion at the end of 2018. However, India’s corporate bond market is currently at a nascent stage of development. As it currently stands, the bond market needs significant policy advances to be made for it to get propelled along the trajectory of market maturity. Several planned and ongoing initiatives could help advance the depth of the bond market in general, making it more robust and a valuable source to access debt for renewable energy and electric mobility projects in particular. These include the implementation of the Insolvency and Bankruptcy Code (IBC), which could help address concerns pertaining to creditor protection in the event of default by bond issuers. The IBC has been characterised by improved outcomes, as compared to the pre-existing regime for creditor protection. Further, the introduction of instruments geared towards liquidity management (tri-party repo) could enable greater participation from institutional investors.


Complementing these developments, a range of measures have also been taken to encourage greater participation of large industry actors and institutional investors in the bond market, boosting the volumes in the bond market. These include regulatory developments disincentivising bank borrowing by large industry actors and mandating the fulfilment of a portion of their debt capital requirements through bonds; the lowering of minimum credit rating requirements for pension funds; and tax incentives aimed at enhancing returns from asset-backed securities. Measures aimed at enhancing foreign portfolio investments and those geared towards lowering the transaction costs of bond issuance are also under consideration.


Having realised the opportunity posed by the bond market for accessing capital for renewable energy and other climate linked green activities, issuances from India (financial entities, companies, and public sector entities) have become the twelfth largest green, with total cumulative issuance between February 2015 and December 2018 standing at USD 7.15 billion. However, it is important to note that a bulk of these issuances have been in foreign bond market to avoid the challenges of the domestic bond market. Existing green bond issuances have been used for refinancing renewable energy projects by project developers, and to raise capital for lending to renewable energy projects by banks and Non Banking Financial Institutions. In the electric mobility sector, the issuance of green asset-backed securities (ABS) by financial institutions presents a ready avenue for the issuance of green bonds to finance the acquisition of EVs by mobility providers or for private ownership. Green ABS issuances could capitalise on the existing ABS market for auto loans, and benefit from the packaging of cash flows from loans to internal combustion engine (ICE) powered vehicles and those for EVs to diversify their portfolio. In addition, creditworthy original equipment manufacturers (OEMs) could issue standalone green bonds to refinance existing loans. While start-up companies could find it challenging to issue green bonds, convertible green bonds could potentially offer a solution for these companies.


While corporate bonds address the debt capital needs of private sector entities, state governments also regularly access the bond market for their capital raising needs. By extension, states could also issue green bonds to finance investments undertaken by state entities to support the scaling up of renewable energy and electric mobility. The readiness of a state to issue green bonds depends upon its creditworthiness (supply of capital) and its capacity to deploy the proceeds of green bonds in suitable end uses (pipeline of demand for capital). Being sub-sovereign entities, a state’s creditworthiness is a function of its standalone creditworthiness and the extent of credit support it receives from the central government. Given the thrust towards ensuring greater fiscal discipline among states monitored through the RBI’s new valuation methodology for bond issues by states, this report develops a framework for assessing states’ standalone creditworthiness, incorporating parameters pertaining to its economic strength and both short and long-term debt management.


The capacity to deploy the proceeds of green bonds depends upon the availability of suitable current and potential end uses for the deployment of these proceeds, and the ability to recover proceeds to service and repay the debt raised. In addition, resource availability and the presence and effectiveness of suitable policy and regulatory measures geared towards lowering risks for investors determine the attractiveness of that state for investments in renewable energy and electric mobility.


In order to maximise the advantage of mobilising capital through green bonds, it is essential to take steps to systemically lower the cost of capital pertaining to green bonds. Realising scale will aid this process, however the existing value created through green bonds, specifically in accessing new pools of capital for longer tenures at fixed coupon rates is likely to help green bonds scale. Through measures such as aggregation, securitisation and credit enhancement, green bonds could become a potential source of capital for underserved markets such as distributed renewable energy, and parts of the electric mobility value chain. A combination of the large capital appetite of the clean energy markets, as well as the overall ongoing and planned bond market reforms could see green bonds spearheading a surge in India’s bond market, while also paying for its energy revolution.