Co-author Morgan M. Gerard
India’s story for the last decade has been one of rapid industrialization and a growing thirst for energy, regardless of the carbon profile of the energy source. As the world moves towards carbon conscious energy generation, there has been a global push to direct this rapid industrializer towards more low- and zero-emission sources.
India signed the climate reduction plan realized at the United Nations Framework Convention on Climate Change, Twenty-First Conference of the Parties (COP 21). Even before India became a party to the Paris Agreement, its central government pushed for aggressive renewable energy targets –100 GW of solar energy, 60 GW of wind energy, 10 GW of small hydroelectric energy, and 5 GW of biomass-based energy projects to be operational by March 2022. Moreover, India’s Minister of Power, Coal, and New & Renewable Energy, Piyush Goyal, articulated recently that the government would try to achieve some of these targets ahead of schedule. With all of this said, the country’s leaders still note that financing remains a key barrier to the proliferation of lower emitting energy resources. India requires over $140 billion of energy investment in the next six years to reach these targets and to increase clean energy access according to the International Energy Agency and the Natural Resources Defense Council (NRDC).
To date, the push towards renewable energy in India has been mostly achieved through government incentives that make renewable energy projects more economically attractive, including the enactment of a national offshore wind energy policy, generation-based incentives, and favorable accelerated depreciation for renewable energy assets. However, according to a report by NRDC and the Council on Energy Environment and Water, India’s plans could be greater facilitated by innovative financing efforts, such as a green bank and a market for green bonds.
Green Banks Leverage Public Funds to Cover Project Financing and Reduce Market Inefficiencies Inherent in Green Energy Solutions
A green bank is within the same vein as a government incentive; however, it may seek to assist projects by leveraging its loan portfolio or that of private investors, rather than to simply provide monetary incentives. In essence, a green bank is a public or quasi-public financing institution that provides low-cost, long-term financing support to clean, low-carbon emissions projects by leveraging public funds through the use of various financial mechanisms to attract private investment. A green bank bridges the gap between commercial financing and riskier projects that require government assistance.
Green banks have been successful in raising capital for renewable energy projects in more developed economies such as the United States, the United Kingdom, and Japan. In the United States, green banks have been generally State instrumentalities. Although their financing is only available in select States, the banks have been able to effectively leverage capital to improve the renewable generation composition in their locality.
Green banks can take on a variety of structures, as exemplified by Connecticut, New York, and Hawaii. Connecticut’s green bank acts as standalone, quasi-independent entity, which allows for flexibility and autonomy in its lending and operational practices. On the other hand, the green banks in New York and Hawaii are divisions of an existing state agency. For example, the New York green bank is housed within the New York State Energy Research and Development Authority (NYSERDA), and its current mission is to support the initiatives of the State’s energy market restructuring taking place through the Reforming the Energy Vision (REV) initiative. Lastly, a green bank can act as an infrastructure bank separate and apart from the government.
Green banks are able to provide many different kinds of financing tools, and banks may choose which they prefer. Such products include long-term and low interest rate loans, revolving loan funds, insurance products (such as loan guarantees or loan-loss reserves), and low-cost public investments or it may design new financial products.
Green Bonds Create an Attractive Investment in Environmental and Climate Change Projects with both Financial and Social Benefits
A green bond, on the other hand, is not a government incentive, but a fixed-income debt instrument earmarked for environmental or climate change initiatives. Green bonds offer a new opportunity for cash-strapped state and municipal governments looking for new finance flows to fund green assets. A central hurdle to constructing renewable energy assets faced by India’s localities is the high debt faced by its local utilities. Recently, the Reserve Bank of India provided relief to local banks taking on debt from their state electricity providers as part of the country’s massive bailout of its utilities. According to Reuters, “India’s state utilities are reeling under debt of 4.3 trillion rupees ($64.42 billion), after years of undercharging customers for electricity as state governments sought to win votes.”
Green bonds are currently a booming asset class that provides the issuer upfront cash and long-term payouts with the ability to structure favorable interest rates, creating an attractive investment with both financial and social benefits. To date, the NRDC Report states that India has used green bonds to finance only about $1.85 billion in clean energy projects to date. For comparison, Apple, Inc. recently issued green bonds valued at $1.5 billion.
If Indian states are permitted to issue green bonds, there is a question as to whether their credit rating will support the maneuver in light of the bail-out provided to state-run utilities. As mentioned above, states are in the midst of taking on their utilities’ cost of non-compliance with their loans. An energy ministry statement said that “the quantum of loans being taken over by states that have adopted so far adds up to Rs.1.96 trillion rupees, accounting for 45% of the Rs. 4.3 trillion utility debt outstanding as of 30 September 2015.”
The Addition of Green Banks and Green Bonds to Existing Government Incentives May Drive Renewable Energy Investment
The financing mechanisms of a green bank and green bonds could help India scale its renewable energy sector to achieve its generation and emissions targets. These financing tools are not simply government incentives, but an active push towards commercial financing of the renewable energy sector. This type of government policy can attract those with renewable energy market expertise that are looking for ways to take advantage of growing markets and access to capital. And credit support by the central government or an independent green bank credit rating could be helpful in providing liquidity. However, India must carefully steer its plans to incentivize new renewable generation while trying to climb its way out of a utility debt crisis.