Weekly Current Affairs

Green bonds can fi nance the future [Economy]

  • The Indian government has set an ambitious target of generating 100GW of energy from solar energy sources and 60GW from wind energy sources by 2022.
  • As of March 31, 2016, corresponding fi gures stood at 6.76GW and 26.7GW respectively.
  • Unfortunately, renewable energy is more capital-intensive than coal, and fi nancing this push will require $160 billion of capital, $120 billion as debt, and $40billion as equity.
  • Currently, most renewable projects are fi nanced by bank commercial loans at 11- 12 per cent interest per annum.
  • The Indian banking sector is currently going through a balance sheet adjustment; banks are unlikely to be able to expand their balance sheets to be able to fi nance the additional requirements of the renewable sector. Green bonds may be able to fi ll this gap.
  • A green bond is a fi xed income instrument for the purpose of raising debt capital through markets. It certifi es that the proceeds will be used exclusively for specifi c “green” purposes.
  • The Green Bond Principles are voluntary guidelines issued by the International Capital Market Association which states the procedure for certifying a green bond. These guidelines are lacking in specifi cs, leading to a lack of consensus on what classifi es as a green bond.
  • Green bonds can provide a long-term source of debt capital for renewable infrastructure projects. Since the cost of debt availed for projects is higher than the yield for investment-grade bonds, it may be possible to reduce cost of capital for green infrastructure fi nanced or refi nanced by bonds.
  • While green bonds can facilitate the fl ow of capital to low carbon infrastructure investments, the demand for such investment is driven by low-carbon policy mandates. An enabling policy context is therefore vital for success of green bonds.
  • There are many ways by which the government currently provides subsidies for green projects. The fi rst is through accelerated depreciation provisions, whereby capital expenditure is allowed to be depreciated by 80 per cent in the fi rst year and the remaining in the following fi ve years.
  • Feed-in tariffs are long-term contracts with discoms to purchase power from a renewable project, usually at higher rates.
  • A viability gap funding is a capital grant from the government that bridges the gap between project cost under the prevailing electricity rate and the price quoted by the developer.
  • Under renewable purchase obligations, the National Action Plan on Climate Change (NAPCC) has set an ambitious RPO target of 15 per cent by 2020.