At a time when India needs to produce 40% of its energy from renewable sources, developments on the green finance front have spelt encouraging news for the sector
A public-private initiative composed of experts in sustainable investment from governments, development finance institutions and the private sector — called the Lab — has picked a new class of investment vehicles to drive much-needed finance to low-carbon, climate-resilient global development out of over 100 ideas submitted into a competitive pool.
The nine new instruments would tackle persistent investment barriers in clean energy, low-carbon transit, and sustainable land use in developing countries, with a specific focus on Brazil and India.
For India, these include the Residential Rooftop Solar Accelerator, which aims to increase residential rooftop solar power in the country by leasing solar rooftop systems to households that do not have the required credit history to purchase them, and by leveraging data and technology to achieve scale and lower customer acquisition costs.
The other is financing for low-carbon auto-rickshaws and intends to increase sustainable transit in India by financing asset loans for low-carbon and electric auto-rickshaw drivers that leverage financial and digital technologies, such as real time information and payment systems.
The third, a long-term debt facility for traction batteries, aims to reduce the ownership cost of electric buses in India by generating additional revenue from repurposing traction batteries as energy storage batteries after the end of the traction period, which would maximise the use of the battery for another 5-10 years.
A fourth idea selected by the Global Lab is hoping to do a pilot in India — the pay-as-you-save for clean transport to accelerate clean transit in cities by lowering the upfront costs of electric buses via a pay-as-you-save mechanism.
Being a public-private initiative, the Lab brings together leaders and experts in finance and sustainable development, who contribute their expertise, political capital and financial capital to the selected Lab instruments. Its members include officials from the Ministry of New and Renewable Energy (MNRE), Ministry of Finance, Indian Renewable Energy Development Agency (IREDA), Asian Development Bank, ReNew Power, Cyril Amarchand Mangaldas, HSBC India, KfW Bank, YES Bank, World Bank, development agencies of the French, the British and the US governments, among others.
This partnership and cooperation between the public and private sectors, facilitated by the Lab, enables the Lab instruments to overcome investment barriers to clean energy in India that neither the public or private sector could address alone. Till now, the Lab has mobilised USD 977 million for sustainable development. In the past two years, the India Lab has launched five green finance instruments.
“Together, they have the potential to mobilise USD 5 billion for clean energy in India in the next five years and support the addition of 5.7 GW of installed solar power capacity,” Gireesh Shrimali, Director of the Climate Policy Initiative’s team in the country, told indiaclimatedialogue.net.
Two of them — Solar Investment Trusts and the Rooftop Solar Private Sector Financing Facility — aim to drive more long-term capital at a lower cost to small-scale rooftop solar power projects. The other three instruments — Loans4SME, the FX Hedging Facility and SEBs — offer different, targeted solutions to investment barriers for a broader array of projects, including utility-scale and small-scale renewable energy, wind and solar projects, energy efficiency projects and sustainable urbanisation projects.
Innovation is the key
Namita Vikas, Group President and Global Head, Climate Strategy and Responsible Banking at Yes Bank, believes that innovation remains one of the key aspects to mobilise and scale green finance. Green bonds, she told indiaclimatedialogue.net, have demonstrated the role of innovation in directing investments to climate friendly projects with issuances expected to cross $250 billion globally. Since India’s maiden issuance by Yes Bank in 2015, the Indian green bond market is steadily growing.
While green bonds provide investment opportunities for large sustainability projects, smaller ones such as private rooftop solar projects, green buildings and energy efficiency projects still receive minimal financing.
Innovations like the Solar Investment Trusts that provide equity funding to multiple small-scale projects, and Sustainable Energy Bonds that channel finances from impact investors through non-banking financial companies can propel the market, as they aggregate projects across sectors and diversify the risk profile. Green asset-backed securities also hold promise in enabling access to mainstream financing to small-scale projects (such as rooftop solar) and provide opportunities to free bank capital that can be ploughed back into green projects.
“Further, we may see the revitalisation of municipal bonds in the near future, with the potential to be classified as green. In June 2017, the six-fold oversubscription of bonds issued by the Pune Municipal Corporation for water infrastructure provides evidence of this renewed interest in municipal bonds,” Vikas said. “Blended finance, that leverages public or philanthropic funding to crowd in private investment, also holds enormous potential in India. Yield Cos also provide for an alternative funding model that is still to be established in India.”
Support for task force
In December 2017, 237 companies with a combined market capitalisation of over USD 6.3 trillion committed to supporting the Task Force on Climate-related Financial Disclosures (TCFD). TCFD is a voluntary framework set up by G20 for companies to disclose the financial impact of climate-related risks and opportunities.
Even though direct accountability for Indian companies may not be enforceable, in today’s scenarios of global competitiveness in governance and compliance, it is hoped that processes would automatically align. Multilateral agencies like the World Bank would make it mandatory for disclosures relating to the processes adopted to identify, assess and manage risks and opportunities and the metrics and targets used to assess and manage them, as a prerequisite for extending any credit.
Major renewable energy companies in India are now borrowing through foreign bonds and structured finance across the globe. They would thus automatically adhere to the best practices acceptable worldwide to get cheaper loans, as compared with domestic funds, sources in the renewable energy industry told indiaclimatedialogue.net.
At an organisational level, the adoption of TCFD recommendations translates to inclusion of climate agenda in its governance, forward-looking climate strategies, integration of climate risks in its enterprise risk management framework, establishing targets and metrics to evaluate climate related risks and performance, culminating in disclosures. Implementation of these recommendations benefits the organisation in strengthening its growth strategy, as well as in developing climate resilience.
TCFD adoption, Vikas said, will increase the availability of finances in India to meet its commitment for electric vehicle adoption and renewable energy targets. Overall, the major impact of adoption of TCFD would be in diverting finances from carbon intensive industries to sustainable and climate friendly businesses.
The TCFD recommendations require organisations to identify climate risks and opportunities and incorporate these into their overall strategies. Many forward looking organisations already monitor, optimise and disclose their carbon footprints, through improving energy efficiency and adopting renewable energy sources in a targeted approach. When organisations implement the TCFD framework, it will further strengthen this trend of reducing carbon footprint as it identifies renewable energy as an opportunity to manage climate risks. With the resultant enhanced transparency on climate parameters, investors would also support businesses that identify renewables as an opportunity.
In India, this holds enormous potential, as it aligns with the nation’s target of achieving 175 GW of renewable energy capacity by 2022. As per a recent Climate Policy Initiative report, the renewables sector would require an additional USD 189 billion to meet the targets and the voluntary adoption of TCFD across Indian companies could prove incremental in diverting the much needed finances to the clean energy sector. Recently, Yes Bank said it would mobilise USD 1 billion for financing solar projects in India up to 2023 and USD 5 billion up to 2030.
However, a source in the renewables sector said that the Renewable Purchase Obligations have not been mandated adequately, so any effort to offset renewable cost or demand with thermal energy seems unlikely, given the precarious financial positions of state power distribution companies (discoms). However, if policies are framed with accountability with state support by way of reserve funds, it may boost the sector. “Given that the energy price of solar and wind is now equal or less than thermal, financing needs to be well supported not only with steps like TCFD, but more so basics being in place, like land acquisition, timely clearances, payments from discoms, to ensure that projects are funded in time and do not turn into non-performing assets,” he told indiaclimatedialogue.net.
India is one of the few countries to have introduced a carbon tax and the government has collected around INR 560 billion (USD 8.6 billion) in coal cess (now called Clean Environment Cess) since it was introduced in 2010-11. The cess rate has doubled periodically to reach from INR 50 per tonne to INR 400 per tonne.
Shrimali however says that this tax on carbon is too low to directly influence investor behaviour. The originally stated goals were financing and promoting clean energy initiatives, funding and supporting research in clean technologies. “While the intent of imposing a coal cess was good, its utilisation for the originally stated goals has faltered. Only 40% of the total cess collected has been transferred to the National Clean Energy and Environment Fund. Its scope has been expanded to finance objectives like Namami Gange, Green India Mission and Integrated Development of Wildlife Habitats,” he told indiaclimatedialogue.net. “To make matters worse, these funds will be used to compensate states for any revenue generation loss due to GST (goods and services tax) implementation.” GST is the new value-added tax regime introduced in India last year.