Fund fuel for clean energy

A milestone that India has set could become a millstone for it. By 2022, it wants to develop a renewable energy capacity of 1,75,000 MW (so far, it has created 35,778 MW). But faced with a target that’s likely to cost $200 million (Rs 1,263.4 crore), its power producers are finding it tough to get affordable, long-term finance for their projects. There’s hope though, in the form of green bonds. Tax-free debt instruments issued to fund renewable energy and sustainable development projects, green bonds are a cheaper source of finance because they offer lower interest than conventional bonds. For the investor, these instruments are low on risk and high on the feel-good that comes from helping a green cause. Green bonds have been gaining popularity since the World Bank first issued them in 2007. The European Commercial Bank followed, and companies such as Unilever and Toyota have since joined the fray.

According to think tank Bloomberg New Finance, green bond investments rose from $15 billion in 2013 to $38.8 billion in 2014 globally. This April alone, green bonds worth $3.25 billion were issued.

In India, Yes Bank was the first off the mark, raising Rs 1,000 crore in February through 10-year green bonds at an interest rate a tad under 9%. The issue was oversubscribed two times. “Renewable energy is a sunrise sector and we see many opportunities,” says Jaideep Iyer, group president, financial management, Yes Bank.

In March, Exim Bank issued the country’s first dollar-denominated green bonds—five-year bonds worth $500 million, priced at 155 basis points over U.S. Treasuries, at a fixed rate of 2.75%. The issue, oversubscribed 3.2 times, will fund green projects in India, Bangladesh, and Sri Lanka. “Raising $500 million through green bonds was a more expensive proposition than doing so in the ordinary dollar market,” says Yaduvendra Mathur, chairman, Exim Bank. “[So,] why did we do it? It is our commitment to sustainable development.”

In 2014, the Indian Renewable Energy Development Agency (IREDA), the Ministry of New and Renewable Energy’s financial arm, and Greenko, a Hyderabad-based company involved in wind energy and small hydro projects, issued similar bonds, but without the ‘green’ tag. IREDA, which has funded around Rs 16,000 crore worth of renewable energy projects so far, sold 10-, 15-, and 20-year bonds worth Rs 500 crore. The 10-year bonds offered 8.16% interest and the rest 8.55%. “We had government guarantees, so we were expecting success,” says IREDA chairman K.S. Popli. “This year we hope to have another issue between Rs 1,500 crore and Rs 2,000 crore.”

Greenko issued five-year bonds worth $550 million in August last year through its overseas subsidiary Greenko Dutch. The offer was oversubscribed three times. “We see a huge potential for such instruments, which have clear cash flows,” says Vasudeva Rao Kaipa, executive director and chief financial officer, Greenko.

“The government is giving the wind and hydro sectors long-term power producing agreements (PPAs). That is a big differentiator, compared with the conventional energy segment, where fuel costs are a major variable affecting revenue and profit.”

Banks and financial institutions such as the Rural Electrification Corporation, India Infrastructure Finance, and the Power Finance Corporation are expected to launch green bonds this year.

So far the bonds have succeeded despite their varying assessments by rating agencies, but in the future those without a government guarantee could face difficulties. “A green bond channels attention towards a particular type of investment, provided it is combined with a strong balance sheet and backed by a government guarantee,” says Arunabha Ghosh, CEO of Council on Energy, Environment and Water, a climate change think tank. “Unless all these features are present, it cannot be a credible instrument.”

Another grey area is the precise nature of projects eligible for financing through green bonds. Worldwide, there has been concern that some of the projects are not green enough, although they promise steady returns.

“The green bonds issued by Yes Bank and Exim Bank are of the lightest green type,” says Vinay Rustagi, managing director of solar consulting firm Bridge to India. There are no statutory guidelines on what qualifies as a green bond, he adds. Rustagi believes some bonds are “green for marketing purposes only”.

Still, a beginning has been made. It has also resulted in bankers taking a fresh look at their funding strategies. At the Renewable Energy Invest conference in Delhi in February, 30 banks and financial institutions pledged to finance 78,000 MW of renewable energy. State Bank of India alone committed Rs 75,000 crore towards creating 15,000 MW of capacity. “With the kind of thrust the government is giving, I think the prospects of renewable energy are extremely good,” says Yes Bank’s Iyer. “From a lending perspective, if you back people with the right technical capabilities, it’s a sound business.”