Energy Finance Report

India Considers Coupling its Government Incentives with Innovative Financing Mechanisms to Achieve its Aggressive Renewable Energy Targets

Posted by Van Hilderbrand on 5/7/16 12:33 PM

Co-author Morgan M. Gerard

India_Green_Bank.jpgIndia’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.  

Topics: Green Bonds, Renewable Energy, India Green Bank, India, India Green Bond, Green Bank, India Renewable Energy

Apple Leads the Way as Green Bonds Set to Grow in 2016

Posted by Van Hilderbrand on 3/4/16 3:04 PM

Co-author Morgan M. Gerard

Green_Bonds.jpgGreen bonds are fixed-income debt instruments earmarked for environmental or climate change initiatives. As companies undertake more “green” initiatives, including investing in renewable energy generation, the green bond market has grown rapidly. According to Climate Bonds Initiative, in 2015 there were $41.8 billion green bonds outstanding—a dramatic increase from the $2.6 billion in bonds in 2012. In the United States, municipalities and utilities entered the market first through new green offerings; however, it has long been predicted that private corporations with sustainability and other climate change reduction goals would soon flood the market.

Last month, technology giant Apple Inc. entered the environmental financing arena and filed a nine-tranche debt offering, including the Fruit’s first ever green bond. The seven-year bond’s profits will be reserved to develop the company’s green buildings infrastructure and fuel sustainability improvements along its entire supply chain, as well as to increase investment in renewable energy. According to Reuters, Apple’s first bond issuance was $1.5 billion and became the largest green bond to be issued by a U.S. corporation.

Although Green Bonds have Many Benefits, They also have Drawbacks

As more corporations jump into green bond issuances, accounting firm KPMG notes that the financing tool has both benefits and drawbacks. On the benefits side, green bonds “can give issuers access to a broader range of investors,” and “attract new investors focused on environmental, social and governance (ESG) performance.” Additionally, investors may be more comfortable with the green bond model since with these ‘use of proceeds bonds,’ repayment is tied to the issuer, not the project. Therefore, issuers are able to raise capital for riskier projects, while investors are better secured against non-performance. Yet, reporting and transparency are keys to validating the green credentials of the bonds; investors need to know that their bond holdings are financing green endeavors. Thus, KPMG notes that drawbacks of the bonds include the need for more tedious accounting for projects to ensure their “greenness” and the associated additional verification costs.

The Climate Bond Initiative reports that the accounting mechanisms have improved over time and are becoming more standardized and transparent. For instance, the Climate Bond Standard V2 was launched in December 2015, along with the development of sector specific standards on water, geothermal, bioenergy, low carbon transport and low carbon buildings projects. Another key development was the update of the Green Bond Principles to include more emphases on reporting and assurance. These initiatives will work to grow the market by helping companies and investors alike become more comfortable with this financing instrument.

Apple is Changing the Distributed Generation Landscape

Apple’s offering and increased green bond transparency standards will change the landscape as more large energy consumers opt to own or purchase distributed generation rather than to accept what the regulated utility has to offer. Other technology giants are moving to reduce their carbon footprint and increase their energy security as well, particularly in the data center sector. Thus, Apple’s green bond issuance may be a harbinger of things to come as companies turn to green bonds and other innovative financing mechanism to reach their sustainability goals and to fund their investment in distributed renewable energy generation.

Topics: Green Bonds, Renewable Energy, Green Energy, Distributed Generaton, Renewable Energy 2016, Apple

2015 May be a Banner Year for Financing Environment-Friendly Green Projects

Posted by Van Hilderbrand on 3/24/15 8:13 AM

money tree -467366492

Co-author Jeff Karp

According to Standard & Poor’s Ratings Service, 2015 could be a big year for green bonds. S&P predicts companies to issue $30 billion in bonds, which help fund environmentally beneficial projects in renewable energy, such as wind farms and solar installations, and energy-efficiency technologies, among other investments.

Typically issued by development banks and utilities, corporations may take the lead this year and nearly double their investment in this new asset class from 2014 levels. The good news for these corporations and for investors is that S&P concluded that growth in the green bond market is less vulnerable to plummeting oil prices due, in large part, to a long term fear over climate change.

Green bonds not only offer a major new opportunity for cash-strapped state and municipal governments looking for new finance flows to fund green assets, but also for corporations seeking to raise capital for development projects. This booming asset class provides companies with upfront cash and long term payouts with the ability to structure favorable interest rates, creating an attractive investment with both financial and social benefits.

For more S&W articles regarding green bonds please see our prior blog post, Transforming the Traditional Municipal Bond Market to Finance Environment-Friendly Green Projects, and our article in Banker & Tradesman.

If you have questions regarding green bonds, please contact S&W’s Energy Finance practice.

Special thanks to Morgan Gerard who assisted in the preparation of this post.

Topics: Green Bonds, Energy Finance, Renewable Energy

Transforming the Traditional Municipal Bond Market to Finance Environment-Friendly Green Projects

Posted by Van Hilderbrand on 9/26/14 12:16 PM

Following the model of the World Bank and the International Finance Corporation, several state governments and private companies are ramping up their issuance of green bonds to finance low-carbon, environmentally beneficial projects in renewable energy, clean water, sustainability, biodiversity, energy efficiency, land conservation, river revitalization, drinking water, and infrastructure. These governments face a host of needs driven by the impacts of climate-change. But with already stretched budgets, financing sustainable infrastructure has been a challenge.

Although traditional municipal bonds have been used to finance environmental projects in the past, what makes green bonds unique is that they are earmarked specially for environment-friendly projects. Municipal bonds, with certain exceptions, have always been non-project specific. The sustainability linkage taps into investors’ increasing desires both for more transparency and to become good stewards of the environment. Green bond issuance is growing rapidly - from $11 billion in 2013 to an estimated $40 billion this year - bringing the global market to around $500 billion.

State & City Governments

In 2013 Massachusetts became the first state in the U.S. municipal bond market to issue these so-called green bonds. The offering was so successful that Massachusetts tripled the volume of green bonds offered in 2014, selling $350 million in bonds to individual and institutional investors this month. According to Massachusetts Treasury officials, the demand for green bonds far outpaced the supply. The Treasury reportedly received $1 billion in buy orders for the $350 million bonds offered.

Massachusetts offered a 10-year bond, rated double-A-plus with a yield of 2.45%, to help fund, among other projects, the construction of a marine terminal in New Bedford. The terminal will be designed to support the construction of offshore wind energy projects, including staging the first U.S. offshore wind farm in Nantucket Sound, the Cape Wind project.

As the Wall Street Journal recently reported, other states, including California, New York and the District of Columbia, have also issued green bonds to finance a wide-range of projects. New York’s Energy Research and Development Authority has issued green bonds to finance hundreds of drinking water and wastewater projects across the state. Just this week, California issued new debt that initially included $200 million of green bonds to finance projects that strengthen and protect the environment, such as clean water and public-transit infrastructure. California quickly expanded the offering to $300 million in response to strong investor demand.

U.S. cities also are jumping in. New York City released a report this week detailing how New York can become the nation’s first major city to finance projects through green bonds. The projects envisioned by NYC’s Comptroller, Scott Stringer, would focus on cutting greenhouse gas emissions, green buildings, clean drinking water, and greener and more severe weather resilient infrastructure.

Private Industry

Private companies are also participating. Abengoa SA, a Spanish energy company and global leader in the development of solar-thermal power plants, plans to issue the first European green bonds to raise $642 million to finance renewable energy, water, power transmission, energy efficiency, bioenergy, and waste-to-energy projects. GDF Suez, a French utility company, recently issued green bonds for its renewable energy and energy efficiency projects. Earlier this year, Toyota also became the first car maker to issue green bonds to fund electric vehicle and hybrid car loans.

To ensure transparency and industry standardization of where bond proceeds can be invested, several private financial institutions have signed on to the Green Bond Principles, a set of voluntary guidelines developed by Ceres and bond issuers such as the World Bank and the International Finance Corporation. The Principles focus on four key areas — use of proceeds, project evaluation and selection, management of proceeds, and reporting.


Green bonds offer a major new opportunity for cash-strapped state and municipal governments looking for new finance flows to fund green assets, and for developers in search of financing for sustainable projects. These bonds offer attractive investments both for financial and social benefits.

Please check back here regularly for updates. If you have questions on green bonds or other innovative energy financing issues, please contact any of the members of S&W’s Energy Finance practice.


Topics: Carbon Emissions, Energy Policy, Green Bonds, Energy Finance, Solar Energy, Renewable Energy, Wind

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The Energy Finance Report analyzes developments in energy finance as well as provides updates and perspectives on market trends and policies.

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