Last month, Union Minister of State for Power and New& Renewable Energy RK Singh declared that India would have around 60 per cent of its installed electricity generation capacity from non-fossil fuel sources by 2030. He reaffirmed the 450 GW renewable-energy (RE) capacity target by 2030 (excluding 60 GW of hydro power), which represents a 16 per cent compounded annual growth from 86 GW RE at the end of January 2020. Inspite of the Covid-19 pandemic and nationwide lockdown, consistent policy support emboldened investors to sanction over 12 GW in new RE projects between April and June 2020. Given the subdued economic activity in other sectors, India’s commitment to scaling up RE could be one of the drivers of its economic recovery. However, emerging financing challenges could derail India’s energy transition.

India’s 2030 RE target requires nearly $200 billion in fresh investments in generation capacity alone, besides additional investments in transmission and storage to integrate this capacity into the grid. This translates into debt financing requirements of nearly $160 billion for generation capacity, equal to the entire current power sector exposure of domestic banks and non-banking financial companies (NBFCs) — the major sources of RE debt financing. Sectoral exposure limits for banks and rising NPAs for both banks and NBFCs amid the ongoing economic crisis are key barriers to the attainment of India’s RE targets. Could a focus on alternative sources of financing, facilitated by a limited-period subsidised credit enhancement for RE bond issuances, grease the wheels of India’s energy transition?

Bond market as a solution

The bond market enables developers to refinance operational RE projects, thus freeing up scarce bank and NBFC capital for fresh lending to the RE sector. Most Indian clean energy bond issuances have accessed international bond markets: 90 per cent of the $10.2 billion in Indian green bond issuances (86 per cent of which pertain to RE) till end-2019 have been listed either exclusively on the international bond markets or jointly on international and domestic exchanges. However, long-tenure financing in foreign currency-denominated debt exposes issuers to currency risk. Opening up the domestic bond market for RE issuances could circumvent currency risk and accelerate the flow of debt capital to the RE sector.

From the perspective of refinancing through the domestic bond market, the primary barrier is that credit ratings for RE loans do not exceed the A-grade on a standalone basis. The domestic corporate bond market is dominated by institutional investors such as pension, insurance, and mutual funds, which account for around 97 per cent of outstanding bond market issuances. Regulatory mandates typically limit investments by such funds to the AA and above territory. Thus, RE bond issuances need to bridge this ratings gap in order to access the bond market.

Unlocking the bond market

Credit enhancement could open up the bond market for renewables in India by generating a supply of attractively-rated issuances. While credit enhancement products exist in the Indian markets, there have been only two instances of credit-enhanced RE issuances. The coupon rates for enhanced bonds represent an attractive proposition for issuers, whereas the all-in cost of credit-enhanced issuances (including the fee) lowers their competitiveness relative to bank financing. This prevents the recycling of debt capital that could be used to finance new projects.

This deadlock could be broken by creating a subsidised first-loss guarantee facility, operative over a five-year period. With a subsidy support amounting to ₹4,500 crore spread over five years — an annual subsidy of ₹900 crores or 4 per cent of the 2020-21 Budget outlay for the power sector — such a facility could mobilise ₹76,000 crore (16x subsidy amount) in fresh lending to the sector. This would be sufficient to finance a doubling of India’s solar capacity of 31 GW in January 2020 to 63 GW over a five-year period. If implemented, such a facility would help generate an initial track record of RE bond issuances, providing risk-return guidance to the market and catalysing future issuances. In order to ensure that the benefits reach the most financially underserved issuers, we propose a 2:1 mix of BBB-rated and A-rated loans in the portfolio to be credit enhanced.

Based on industry estimates of the GDP multiplier effect of infrastructure investments, the ₹76,000 crore in fresh RE debt flows could add ₹1,90,000 crore (approximately 1 per cent) to the GDP. At the same time, the CEEW Centre for Energy Finance estimates that this would generate 49,000 new additions to the workforce over five years.

Thus, a focus on credit enhancement would not only spark a virtuous cycle of capital flows by stimulating ‘green’ shoots in clean energy, it would also enable India to rebuild better for the 21st century.

Dutt is an Associate and Singh is a Senior Analyst at the Centre for Energy Finance at the Council on Energy, Environment and Water.

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