Understanding green financing in India -

Understanding green financing in India


Indian economy is struggling to come to terms with the unprecedented COVID Crisis. While the government authorities are focusing to bring down its impact on the other hand by safely restarting the activities the bigger challenges of climate change needs to be addressed on a war footing. The increasing floods, heat waves, storms etc. together put a loss of almost five per cent of our GDP. Even before the pandemic, we have seen fog, mist cover, polluted air in almost the entire North India and more particularly in the capital city leading to the closure of educational institutes, cancellation of trains and flight etc. To put in perspective the need of the hour is to facilitate Green finance investments which have a positive impact on the environment or reduce the risk of climate change. The only solution to these issues is Clean Power, Low Carbon Emission Transport, Energy-efficient real estate, climate favored agriculture. A huge fund outlay is required to achieve these goals, which is in other words is termed as Green Financing.

India’s energy sector is one of the fastest-growing in the world and it requires substantial investments to achieve the country’s climate goals.

Recently, India has set an ambitious target of 450 G.Watt renewable energy generation capacities by 2030, making it one of the most ambitious targets in the world, which almost requires eleven lakh crore outlays each year. The power generation sector remains the primary recipient of investment, even though other sectors like solar power generation, sustainable transportation projects, energy-efficient real estate projects etc. also require massive outlays to meet its environmental goals. Nevertheless, strong financial support and timely policy interventions from the Government have played a crucial role in accelerating the growth of the country’s renewable energy sector. It was Rs 111.00 thousand crores and Rs 137.00 thousand crores during FY 2017 and 2018 respectively. However, it is far below estimates of Rs 11 lakh crores set by Nationally Determined Contribution (NDC). But given current rates of availability of resources against the backdrop of COVID 19 pandemic, the government will not only need to find new and alternative ways to finance the transition but also will have to facilitate private sector participation to scale up investments for a sustainable and transformational impact. International finance is also likely to come with “green strings” attached. Therefore, identifying and analyzing key sources of finance, the instruments used for mobilizing and disbursing funds, and their ultimate beneficiaries become critical for diagnosis, planning and monitoring green investments in the country.

The Reserve Bank of India felt that the development of green financing, funding of environment-friendly sustainable developments are not without challenges, which may include false compliance claims,  misuse of Green Loans and most importantly and maturity mismatches between long-term green investment and relatively short-term interests of investors. Green Investment terminology needs a clear definition.

Renewable energy constitutes almost 80% of India’s clean energy expansion, whereas the remaining investment goes into other energy generation activities which offer incremental environmental benefits.

The sectors are:

1. Power Generation :

  1. Wind – Construction and operation
  2. Solar – Rooftop, utility, utility-scale concentrated solar power
  3. Hydro and Tidal – Construction and operation
  4. Geothermal – Construction and operation
  5.  Biomass Energy – Construction and operation

2. Power Transmission and Energy Efficiency:

  1. Use of Energy Efficient Technology.
  2.  Renovation & Modernization (R&M) of thermal power technologies
  3. Green built infrastructure- construction of new green establishments & renovation/up gradation /modernization of existing building blocks.
  4.  Smart Grid projects implemented under the National Smart Grid Mission
  5.  Green energy corridor projects.

3. Sustainable Transportation:

Vehicles – Examples of low emission private transport including two, three and four-wheelers, and public transportation such as electric buses

  1. Charging Infrastructure (public and private) – While home & work can be considered private investments, parking and BEV charging investments can be considered public.
  2.  Mass rapid transit system (MRTS) including metro rail projects.

Sources of Funding Green Projects:

The sources of funding are broadly categorized as Domestic and International. In both the sectors there is Public as well as private participation.

Domestic funding happens through public and private participation.

  • The public funding happens  in the form  of 
  1. Grands/ Aids from the budgetary allocation of the Government.
  2.  It also covers recurring and  current expenses
  3. State or Central Govt Loans
  4. Through equity participation from the Central or State Govt or Both.
  5.  Project financing in the form of Debt by Public Sector Undertakings
  6.  Equity participation of the Public Sector Undertakings.
  • a. The private participation comes from the local bond market and other institutions like Bloomberg New Energy Finance which provides primary research service, covers clean energy, advanced transport, digital industry, innovative materials and commodities. The terminal provides corporate strategy; finance and policy professionals navigate, change, and generate opportunities.

b. Commercial Banks providing Project financing through debt. Also subscribing in the Green Bonds.

c. Electric Vehicle sales.

Reserve Bank of India through its policy changes facilitates credit flow to the sector. For example, RBI had included lending to social infrastructures and small renewable energy projects within its priority sector lending targets.

As per the data available for the two financial years of FY 2017 & 2018, 85%  of the investment in the renewable energy sector has come from the Domestic Sources, which denotes strong domestic preference in investment in the sector. Domestic private finance sources include commercial financial institutions; project Developers for Residence as well as commercial real estate, corporates and households as well as commercial and institutional establishments. Almost all the investments go to the Solar and Wind Energy Sectors. Out of the total Green Finance, the Government expenditure achieved has been Rs 71000 crore which constitutes roughly 29% of green finance.

The domestic public finance includes central and state line ministries and eight major PSUs

under the power, environment and renewable energy ministries.  The bulk of this finance was

directed towards renewable energy development in the country (70%), followed by energy

Efficiency and power transmission improvement (20%), and sustainable transportation

(10%). The total government expenditure related to climate change has increased to 0.7% from 0.6%  of the total government expenditure.

A number of schemes have received funding from PSUs such as the Indian Renewable Energy Development Authority (IREDA) and the Solar Energy Corporation of India (SECI). SECI was formulated to implement the Jawaharlal Nehru National Solar Mission (JNNSM) and its targets of installing 100 GW by 2022.  This will help produce  40 GW Rooftop and 60 GW through large and medium scale grid-connected solar power projects.  IREDA was established as an NBFC,

to provide financial support to real estate developers by sanctioning project loans against the securitization of future cash flows of existing projects that can be used for business expansion in the renewable energy and energy efficiency sectors Other PSUs including NTPC Limited have been working proactively towards improving renewable energy production.

Issuance of Green bonds which are debt securities issued by financial, non-financial or PSUs where the proceeds are used to finance 100 per cent green projects and assets.  In order to attract environmentally sustainable investments, India joined the International Platform on Sustainable Finance (IPSF) in October 2019.

Most Indian firms turn to the LSE to raise funds through green bonds. Renewable energy firms (such as Azure, NTPC, Greenko and Renew Power) and banks (such as Yes Bank, EXIM, L&T Finance, Axis, IDBI and REC) have issued green bonds on the LSE.

However, the cost of issuing these bonds at 5 to 6 %  and adding the hedging cost of 3 to 4% makes then less cost-effective and hence these companies prefer issuing masala bonds which are rupee-denominated bonds with a coupon of 7.5% approximately.

Similarly, International Funding also happens through private as well as public participation.

International Public Participation:

Grands and aids are received through The Organization for Economic Co-operation and Development (OECD) the international organization that works for better policies for a better life.  It also provides Official Debt Assistance (ODA) through Debts or Grands.

International Private Participation: The major source is through Foreign Direct Investment (FDI) through equity participation.  Similarly, the corporates in India can raise Green Bonds in International Markets. Green funds are also available from internationally repute Philanthropic Organizations in the form of Aids.

Foreign Direct Investment (FDI) in the renewable energy sector crossed the USD 1 billion mark in 2018. They are mainly in the solar and wind energy projects due to the presence of advanced markets. While FDI inflows into the clean energy sector have been increasing in absolute terms, they constitute only 1% of the total FDI flow into the economy.

India’s tracked green investments in the three sectors i.e., power generation, energy efficiency and power transmission, and sustainable transportation, fall far short  (almost one-tenth ) of the requirements laid down by several national and international studies.

It noted that there is a need to upscale green finance across all low-carbon sectors as the “current scope and extent of green finance is grossly insufficient to mitigate the effects of climate change in India.” 

Reference:

  1. https://www.climatepolicyinitiative.org/wp-content/uploads/2020/07/Accelerating-Green-Finance-in-India_Definitions-and-Beyond.pdf
  2. https://www.climatepolicyinitiative.org/publication/accelerating-green-finance-in-india-definitions-and-beyond/
  3. https://www.orfonline.org/research/moving-from-growth-to-development-financing-green-investment-in-india-49420/
  4. https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/04SP3C0C7B9A49CC43C0AF10F4F6BD4C67D7.PDF
  5. https://www.bioenergyconsult.com/green-financing/
  6. https://www.unenvironment.org/regions/asia-and-pacific/regional-initiatives/supporting-resource-efficiency/green-financing
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  8. https://www.lbbw.de/articlepage/experience-banking/green-finance-basics_9uz8ako99_e.html
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  10. https://think-asia.org/bitstream/handle/11540/9621/adbi-wp917.pdf?sequence=1
  11. https://development.asia/explainer/green-finance-explained
  12. https://www.ifc.org/wps/wcm/connect/12ebe660-9cad-4946-825f-66ce1e0ce147/IFC_Green+Finance+-+A+Bottom-up+Approach+to+Track+Existing+Flows+2017.pdf?MOD=AJPERES&CVID=lKMn.-t
  13. http://documents1.worldbank.org/curated/en/148291573020848322/pdf/Executive-Summary.pdf
  14. http://unepinquiry.org/wp-content/uploads/2016/09/1_Definitions_and_Concepts.pdf
  15. https://www.climatepolicyinitiative.org/publication/landscape-of-green-finance/
  16. https://india.mongabay.com/2020/09/india-needs-massive-increase-in-green-finance-for-required-climate-action/
  17. https://www.krishisanskriti.org/vol_image/08Jul201511070585%20%20%20%20%20%20%20%20%20Pooja%20Neemey%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20177-181.pdf
  18. https://www.longdom.org/abstract/emerging-green-finance-in-india-its-challenges-and-opportunities-2653.html
  19. https://www.orfonline.org/research/financing-indias-green-transition-60753/



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