Green Bond is a debt instrument used to raise capital – but the issuer in this case publicly states that capital is being raised to fund ‘green’ projects, which typically include those relating to renewable energy, emission reductions and so on. It can be rupee – denominated,dollar – denominated or a combination of both.
How far can it help India to achieve RE targets?
- India has set an ambitious target of 175 GW of renewable energy capacity by 2022. To achieve this, huge investment (almost $200 billion) will be required.
- Higher interest rates and unattractive terms for debt financing have raised the cost of implementing Renewable Energy (RE) projects in India, by 25-30% compared to that in Europe and U.S.
- Insufficient budget allocations for RE sector and overdependence on coal – powered projects have not allowed the sector to grow
- According to Moody’s India has come up as an early leader in Asia’s incipient green bond market. Yes Bank and Exim bank have already issued country’s first green dollar bonds
- Green bonds seem like a feasible option: considering the involved risk is lower and pricing is attractive
- The low-cost funds raised through green bonds will potentially help cut the cost of clean power and make it easier for developers to sell power to distribution utilities, whose inability to effect necessary, but unpopular, tariff hikes has saddled them with losses and restricted their ability to buy costlier green power.
Way Ahead:
- Government needs to develop the Indian Green Bond market
- Only relevant organizations/entities should be allowed to raise these bonds since the repayment is tied to the issuer, and not the success of the projects.
- Major challenges for the issuer:
- high currency hedging costs
- poor sovereign ratings
- low tenure (currently, Green Bond tenures are mainly concentrated between 3-10 years, with only some issuances reaching or exceeding 15 years
