India’s commitment to energy transition remained steadfast even amid the Covid-19 pandemic with 22 GW capacity sanctioned at renewable energy (RE) auctions in 2020. However, the capacity of domestic financial institutions to fund this energy transition has not remained unscathed. The RBI’s January 2021 Financial Stability Report indicates that gross non-performing assets of the banking system are set to rise from 7.5 per cent (of total advances) in September 2020 to 13.5 per cent by September 2021.

India’s 2030 RE ambitions require $200 billion in fresh investments for generation capacity alone, which translate into daunting debt financing requirements of $160 billion — equal to the entire current power sector exposure of domestic banks and non-banking financial companies (NBFCs). Not only do the rising stressed assets make financing at this scale challenging, they also reduce the appetite of financial institutions to lend to segments with less firmly established business cases such as the productive use applications of distributed renewables (DRE), which have a market potential of $50 billion. While the recent Budget proposed the recapitalisation of public sector banks and the setting up of a development finance institution to address economy-wide financing constraints, dedicated allocations to clean energy financing were limited to ₹1,500 crore for Indian Renewable Energy Development Agency (IREDA).

While this is insufficient to cater to the sector’s needs, policymakers may consider targeted interventions — a limited-period subsidised credit enhancement and a green taxonomy — that can significantly augment capital flows to clean energy at an even lower annual cost.

Opening up bond market refinancing of RE project loans extended by banks and NBFCs through a subsidised credit-enhancement facility can help address the funding constraints for utility-scale renewables.

Unattractive credit ratings for RE loans — which generally do not exceed the A-grade on a standalone basis — are the primary barrier to greater domestic bond market capital flows. Institutional investors such as pension, insurance, and mutual funds dominate demand for corporate bonds, accounting for 97 per cent of outstanding issuances. Regulatory mandates typically limit investments by such funds to AA and above rated issuances. Credit enhancement is one means to make RE issuances attractive to these investors. However, while credit enhancement lowers bond yields, the fees associated with existing credit enhancement products makes overall borrowing costlier than bank financing. This has limited the uptake of domestic bond market issuances for RE projects.

This stalemate could be resolved through a subsidised first-loss guarantee facility for credit enhancing bond issuances which refinance RE project loans extended by banks and NBFCs. A CEEW Centre for Energy Finance analysis indicates that subsidy support totalling ₹4,500 crore spread over five years — ₹900 crores per year, equivalent to only 4 per cent of the 2021-22 budgetary outlay for power and renewables — would enable such a facility to refinance RE debt totalling ₹76,000 crore (16x subsidy amount) through the bond market.

This would free up an equivalent amount of bank and NBFC capital for fresh lending, augmenting overall flows to the RE sector. The track record of RE issuances generated by the facility will have the added benefit of providing much-needed risk-return guidance to the market, thus catalysing future issuances as well.

Internationl capital

A green taxonomy can make international capital more accessible to financially under-served clean energy segments. Concessional green capital that either directly lends or catalyses private sector investments by underwriting risks can be valuable in scaling up the deployment of DRE applications. However, with the green credentials of innovations such as DRE-powered charkhas and sewing machines not always evident, concerns related to green-washing can hold up the flow of international capital.

In this context, a green taxonomy — a classification system for sustainable activities with defined performance indicators — can allay investor concerns and aid in the identification of a credible pipeline of projects. In devising a green taxonomy, regulators must strike a balance between a taxonomy that is both fit-for-purpose for India and harmonised with international standards. Such a taxonomy should be able to evaluate and ascribe green credentials to the wide range of clean energy applications deployed in the Indian context.

At the same time, to simplify due diligence for international investors, it must also be mappable to international standards. The EU taxonomy for sustainable activities is one such example. The International Platform for Sustainable Finance, a multilateral forum for dialogue between policymakers on sustainable finance regulatory measures, can facilitate a collaborative approach that ensures international harmonisation.

In the context of policy options to drive a sustainable post-Covid economic recovery, both the subsidised credit enhancement and a green taxonomy are low-hanging fruit that can maximise investment flows at a minimal burden on the public exchequer.

The writer is a senior analyst at the Centre for Energy Finance at the Council on Energy, Environment and Water

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