Thriving domestic green bonds market key to India’s energy transition

By Shreyas Garg & Gagan Sidhu

India’s installed renewable energy (RE) capacity, excluding large hydro, recently crossed the 100 GW mark. This has happened in a year that saw Indian RE developers raise more capital in international bond markets than ever before. These two milestones are closely linked.

On the one hand, India has set itself an ambitious target of 450 GW of RE (excluding large hydro) by 2030. Growing capacity to 4.5 times the current level will require significant investments in power sector infrastructure. An analysis by the CEEW Centre for Energy Finance (CEEW-CEF) suggests that India needs to mobilise approximately `15 lakh crore ($200 billion) to meet its 2030 ambitions for generation alone. In addition, it will require hundreds of billions of dollars for accompanying transmission, distribution, and storage.

On the other hand, traditional lenders to the power sector (banks and NBFCs) evidently do not have the headroom to finance the 2030 targets by themselves. To put this into context, aggregate power sector exposure for Indian banks across all generation types, and including transmission, stood at ~Rs 6 lakh crore ($77 billion) as of March 2020. The two predominant NBFCs that lend to the power sector, REC Limited and the Power Finance Corporation, had lent an additional Rs 7 lakh crore ($91 billion). Under these circumstances, it is a tall order to expect these sources to absorb the additional hundreds of billions required for RE on top of their current exposures.

This is where bond markets can play an important role. First, they can help developers access debt capital directly from its source instead of going through intermediaries like banks and NBFCs. Debt capital raised through bond markets is thus cheaper and typically carries relatively lenient covenants. Second, many institutional lenders are currently near RBI’s power sector lending limits, so refinancing debt from them through bond markets frees up capital from their books. The resulting recycling of capital allows the lenders to provide fresh loans to the power sector.

In this context, overseas bond markets have been an important source of funds. Since 2014, Indian RE developers (including large hydro) have raised almost Rs 90,000 crore ($12.7 billion) through ‘green bonds’ in overseas markets. Overseas green bonds have refinanced debt for at least 10.6 GW of RE projects in India. The pace of activity has increased sharply in recent months, with developers raising Rs 37,400 crore ($ 5.1 billion) in 2021 alone. This is more than in any previous full calendar year.

Green bond issuances in overseas markets are dominated by some of India’s largest developers (Greenko, ReNew Power, Azure Power, and Adani Green Energy). However, 2021 has seen four new entrants (Continuum Green Energy, Hero Future Energies, JSW Hydro, and ACME Solar) making debut issuances in these markets. Led by Asian investors, overseas markets have shown high interest in Indian green bonds. Average oversubscription is at 370%.

The strong market response has grown further this year, allowing developers to tighten bond pricing. The average interest rate for 2021, at 4.2%, is 100 basis points lower than the overall average. These trends highlight that overseas bond markets are useful sources of cheap debt.

The 10.6 GW refinanced by overseas green bonds is dominated by projects with state utilities as offtakers. Despite the perceived risk of payment delays, developers have generated strong market interest by diversifying portfolios to include multiple utilities. Further, bond pricing has not been materially impacted by portfolio parameters such as technology, operational history, and tariff range.

These findings illustrate how overseas bond markets can finance India’s energy transition. Of course, overseas markets also bring foreign exchange risks, hedging costs, higher issuance costs, and longer lead times. To address these challenges, it is critical to develop the nascent domestic green bond market as an additional route for debt capital. In 2021, the `green bond market saw its first issuance by a developer after a gap of several years when Vector Green Energy raised Rs 1,237 crore at a AAA rating. In addition, the India-International Exchange (INX) is an interesting hybrid allowing developers to raise funds in foreign currencies by listing on an Indian exchange. INX offers a dedicated green bond listing category and saw its first exclusive developer green bond in 2021: a $585 million issuance from ReNew Power.

Besides developers, industries such as upstream RE manufacturing can also consider using their ‘green’ credentials to raise capital through green bonds. Players in energy-intensive industries like steel and cement can accelerate their RE transitions and obtain capital at favourable pricing by committing to turn increasingly green. Some have already begun doing so.

In closing, overseas bond markets have been strong supporters of India’s energy transition. Policymakers must learn from them to help Indian developers look for a similar type of debt capital closer to home. Accelerating India’s drive to 450 GW of RE by 2030 will require sources of capital to fire on all cylinders.

Respectively, consultant, and director, Centre for Energy Finance at the Council on Energy Environment and Water (CEEW-CEF)