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Green Bond market in India can address financing needs of clean energy sector

It is noteworthy that India will require about USD10 trillion investment by 2070 to become truly carbon-neutral.Premium
It is noteworthy that India will require about USD10 trillion investment by 2070 to become truly carbon-neutral.

Although the market for green bonds is at a nascent stage in India, it can potentially herald a wholly new avenue for financing for sustainable projects as the country marches ahead in its quest for clean energy and become carbon neutral by 2070.

Starting nimble footed just a decade ago but with a clear focus and commitment to reduce greenhouse gas emission in the energy sector, India has achieved what only a few countries have been able to do so far.

The country today has over a 100 GW of renewable energy installations and is going strength-to-strength to accomplish the target of cutting down its carbon footprint by 33-35% from 2005 levels by 2030 to meet Paris Agreement requirements. India today ranks fourth in terms of installed renewable capacity globally.

In having such formidable clean-energy installed capacities, a massive investment of 5.20 lakh crore has already been made. Of this, an overwhelming contribution of about 4 lakh crore has come in the form of foreign debt which has been raised by large Indian players engaged in clean energy business.

While foreign debt has no doubt been instrumental in setting up such large clean energy capacities in India, nonetheless, such funding is fraught with exchange risks and certain other uncertainties.

The exchange risks involved in foreign debt funding warrants adequate hedging which increases the cost of the debt. Hedging cost today is in the region of 5% which, when added to interest cost of 4-6%, makes the debt really expensive. There are also many other expenses associated with foreign debt like upfront fees and recurring fees for compliance costs, international ratings, agency fees, etc.

It is noteworthy that India will require about USD10 trillion investment by 2070 to become truly carbon-neutral. Around USD 8.4 trillion is required to transform India's conventional power sector to clean energy sources and another USD 1.5 trillion is needed for other green energy projects like harnessing green hydrogen technology, according to Council on Energy, Environment and Water Centre for Energy Finance (CEEW-CEF). This means that the debt funding that would be required will be in excess of USD 1 trillion, which will increase the cost of setting up clean energy projects. Here, the domestic green bonds market can come to the rescue here and can play the vital role of providing finance to such projects in a cost effective way.

Although the market for green bonds is at a nascent stage in India, it can potentially herald a wholly new avenue for financing for sustainable projects as the country marches ahead in its quest for clean energy and become carbon neutral by 2070.

Interestingly, the domestic financial market can play as large a role as the international market, or may be even bigger, as far as issuance of green bonds is concerned. The current policies and aspects related to power sector financing needs to be reworked.

Some innovative companies have indeed explored the domestic green bond market and have been suitably rewarded. 

Government and regulatory bodies

Here the government can also play a role in further developing the financing market, together with some of the regulatory bodies like SEBI, RBI, etc. The need of the hour is to instigate the banks and domestic institutional lenders to adopt some of the measures prevalent abroad like having differential interest rate wherein cheaper finance is provided to companies that have a defined target of becoming carbon neutral by a certain date. This will go a long way in making sure the right kind and size of capital comes to the clean energy sector.

Government grants to cover issuance costs

The government can also come up with some incentives to the clean energy companies like grants that will cover their costs of external review, expenses related to credit ratings and some of the other costs related to the issue of green bonds like it is done in economies like Hong Kong and Singapore.

This will make the existing bond market have to become stronger, more vibrant and multi-faceted to be able to meet the financing requirements of the clean energy sector.

Disclaimer: This is a company press release. No HT journalist is involved in creation of this content. 

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