Clean energy must play a central role in achieving India’s green growth goals. The IFC estimates India will need $450 billion to finance its 2030 clean energy targets (IFC 2017). Assuming a typical 70-30 split of financing via debt vs equity, the debt funding requirements translate to $315 billion through 2030. While India’s clean energy sector continues to grow and attract significant investment, there can be serious challenges to the growth trajectory, if the capital deployed in existing projects is not recycled and if new sources of capital are not included to meet the increased future investment requirements (Pragathi and Veena, 2018). It is, therefore, imperative that operational renewable energy projects access capital markets to recycle capital and attract new investor classes. This study, produced by Climate Policy Initiative under the US-India Catalytic Solar Finance Program (USICSF), and as a knowledge partner with the Indian Renewable Energy Development Agency (IREDA), looks at various avenues for renewable energy to access capital markets. We show that shifting project debt to capital markets can be primarily achieved via two pathways:
- Financial institutions such as banks and NBFCs shift diversified loan portfolios to capital markets by converting pools of regular cash flows into investable financial securities, via a process known as securitization.
- Alternatively, developers directly go to capital markets, and use the proceeds to retire existing loans.
- Greater investor protection in case of default to increase demand for the lower-rated securities and help deepen the bond market
- Development of risk-transfer mechanisms, for example Credit Default Swaps (CDS), that would also help increase demand for bonds
- Enhancing the credit rating of the structured bond issuance: In cases where the sponsor of an AIF for renewable energy is able to directly provide a partial credit guarantee, the ratings of the bonds may see an improvement as well, which can attract the interest of institutional investors. This possibility, would for example, be in play if IREDA were to sponsor an AIF. Alternatively, it would be possible to credit enhance at the level of the AIF through other sources of credit enhancements (e.g., balance sheets) available to the sponsor.
- Creating scale through aggregation of renewable energy projects loans: A financial institution like IREDA could bundle multiple projects and increase the size of issuance. The same aggregation could also be possible at the level of AIF for upstream investment.
- Crowding in long-term institutional investors: AIFs, by regulation, cannot invest more than 25% in a single security; this by definition requires other investors in the project. With an anchor sponsor (e.g. IREDA), however, a project may be able to attract more institutional investors, create better credit enhancement structures, and increase the scale of placement relative to an individual project.