Defining Green Bonds Vital to Raise Capital for Renewables in India: Interview

The creation of a green taxonomy that defines which bonds meet the criteria is a must


As India strives to achieve its non-fossil-based energy target of 500 GW set for 2030, the funding is going to be supported by the green bond market and not just the term lending, Chintan Shah, Renewable Energy Expert, commented on the sidelines of the Mercom India Renewables Summit 2023.

He added that defining green bonds will help measure them and set up a long-term bond market, thus driving investments into the sector.

Below are some excerpts from the interview.

What’s your evaluation of Indian corporates and governments’ efforts in achieving the clean energy goal vis-à-vis other countries?

There is no debate about the fact that an energy transition is inevitable. The only questions are when and where it will take place. However, the transition will happen, and the pace and success will depend on political will and the industry’s responsibility.

In India, we have a clear target of achieving 500 GW of non-fossil fuel-based energy by 2030 and are taking various steps towards emission reduction. We have implemented measures such as secure supply chains, increased performance incentives, and localizing wind and solar value chains to achieve this target. This will eliminate impediments and ensure smooth implementation.

The COVID-19 pandemic highlighted the need for localized manufacturing worldwide, including in the renewable energy sector. The Inflation Reduction Act of the United States has similar provisions to India’s production-linked incentive program, which covers the entire renewable energy value chain.

Is the renewable sector backed by the availability of sufficient funds?

The availability of capital is not the issue, but the challenge lies in the pricing of it.

From a macroeconomic perspective, we are currently going through rate cycle corrections. Due to the lack of credit growth during the COVID pandemic, interest rates were lowered.

However, with credit growth picking up, oversupply or undersupply leads to inflation, and to control it, interest rates must be increased. This is a political decision that governments, including the Indian government, have taken. It is a cycle aiming to stabilize interest rates back to pre-COVID levels and is expected to take place within the next two to three years.

Regarding financing renewable and hydrogen projects, interest rate fluctuations should not be a major concern since these projects have a lifespan of around 25 years.

Instead, the focus should be on transitioning from a term lending market to a bond market. The institutional capital locked with mutual funds, Employee Provident Funds (EPFOs), General Insurance (GIC), Life Insurance Company (LIC), and private insurance companies in India amounts to approximately ₹500 billion (~$6.09 billion), and none have invested in the renewable sector’s debt segment.

The Indian bond market primarily focuses on corporate bonds, not asset-backed bonds. However, with a robust revenue stream and a proven 25-year asset, it is possible to create an asset-backed bond market that can raise funds for 10 to 15 years on a fixed-rate basis.

As for hydrogen projects, the end product is deregulated without a price cap. This deregulated product is linked to the dollar, which allows for a natural hedge.

So, there is no need to borrow rupees for hydrogen projects, which can reduce the power generation cost by around ₹0.60 (~$0.0073) /kWh – ₹0.70 (~$0.0085)/kWh. This reduces the cost of hydrogen production in India on both the equity and debt sides.

Can the government of India establish a green taxonomy?

To qualify bonds as green, the government of India can create a green taxonomy that defines which bonds meet the criteria.

The government could also mandate that institutional capital allocate a certain percentage of their assets under management towards subscribing to green bonds, creating a market for them.

This is necessary because achieving the goal of 500 GW by 2030 will require approximately ₹24 trillion (~$292 billion) – ₹25 trillion (~$305 billion) of net investment, which cannot come solely from the term lending market. It will require a combination of the bond market and the term lending market.

What can we do to deepen the corporate bond market?

One solution to deepen the corporate bond market could be to follow other countries and define a green taxonomy. We need to clearly determine what qualifies as “most green,” “relatively green,” and “medium green.” Renewables fall under “most green” since they are measurable. People can then issue long-term bonds on green assets, and institutional capital, such as mutual funds, LIC, GIC, EPFOs, etc., can be mandated to set aside 1% of their AUM (Assets Under Management) to subscribe to these bonds and this is how we create a market.

The total debt required until 2030 ranges from ₹24 trillion (~$292 billion) – ₹30 trillion (~$365 billion), depending on various estimates. This amount cannot come from term lending alone, and we need a combination of term lending from banks and NBFCs and the bond market to meet this need. We need to parallel this transition in the financial sector, or problems could arise.

(Note: Sections of the interview have been paraphrased for better reading. Check out the video for a full chat)