(April 2015 Current Affairs)
Yes Bank and Export-Import Bank of India (Exim Bank) recently
tasted success launching what are called ‘green bonds,’ a relatively new way to
finance renewable energy projects.
As reports suggest, higher
interest rates and unattractive terms under which debt is available in India
raise the cost of renewable energy by 24-32 per cent compared to the U.S. and
Europe.
What are green bonds?
A bond is a debt instrument with which an entity raises money from
investors. The bond issuer gets capital while the investors receive fixed income in the form of interest. When the
bond matures, the money is repaid.
A green bond is very similar. The only
difference is that the issuer of a green
bond publicly states that capital is being raised to fund ‘green’ projects,
which typically include those relating to renewable energy, emission reductions
and so on. There is no standard definition of green bonds as of now.
Indian firms like Indian Renewable
Energy Development Agency Ltd and Greenko have in the past issued
bonds that have been used for financing renewable energy, however, without the
tag of green bonds.
Green bonds are issued by
multilateral agencies such as the World Bank, corporations, government agencies
and municipalities. Institutional investors and pension funds also
have appetite for such bonds. For instance, investment funds BlackRock and
PIMCO have specific mandates from their investors to invest only in bonds which
fund green projects. The issuer provides periodic reports about the project.
Why are they in the news?
In March (2015), the Exim Bank of
India issued a five-year $500 million green bond, which is India’s first
dollar-denominated green bond. The issue was subscribed nearly 3.2 times.
The bank has said it would use the net proceeds to fund eligible green projects
in countries including Bangladesh and Sri Lanka. Earlier, in February (2015), Yes
Bank raised Rs 1,000 crore via a 10-year bond, which was oversubscribed
twice.
Why are green bonds important for India?
India has embarked on an
ambitious target of building 175
gigawatt of renewable energy capacity by 2022, from just over 30 gigawatt now.
This requires a massive $200 billion in funding. This isn’t easy. As
reports suggest, higher interest rates
and unattractive terms under which debt is available in India raise the cost of
renewable energy by 24-32 per cent compared to the U.S. and Europe. “India
has big goals in terms of renewable energy installations, but a big hurdle has
been financing and the cost of financing,” says Raj Prabhu, CEO and Co-founder
of Mercom Capital Group, a global clean energy research and communications
firm.
“Budget allocations have been insufficient. Renewable energy is
still part of the larger power/infrastructure funding basket in most banks, and
with most financing going towards coal power projects, there is very little
funding left for renewable energy. Currently,
options for raising funds and investing in the “renewable energy story” in the
public markets in India is very limited,” he says. That’s why green bonds seem like a good option.
Still, why are green bonds an attractive option?
Shantanu Jaiswal, analyst at
Bloomberg New Energy Finance, says, “Green bonds typically carry a lower
interest rate than the loans offered by the commercial banks. Hence, when compared to other forms of debt, green
bonds offer better returns for an independent power producers,” Samuel
Joseph, Chief General Manager, Treasury and Accounts Group, Exim Bank of India,
says as these bonds are meant for specific investors looking to invest in
renewable energy projects, pricing could be attractive.
The bank’s green bond was priced
at 147.50 basis points over US Treasuries (whereas, usually, bonds are priced
at treasuries plus 150 basis points) at a fixed coupon of 2.75 per cent per
annum.
How well have green bonds performed globally?
According to Bloomberg New Energy
Finance, a record $38.8 billion in green bonds were issued in 2014, 2.6 times
the $15 billion issued in 2013. “Most
issuances of international green bonds have been oversubscribed suggesting a
strong appetite for them especially when done by a strong issuer like a large
corporate or a government agency,” the report says.
Who have been the issuers of these bonds?
In the period between 2007 and
2012, supranational organisations such
as the European Investment Bank and the World Bank, as also governments,
accounted for most of the green bond issue. Since then, corporate interest has
risen sharply. In 2014, bonds issued by corporations
in the energy and utilities, consumer goods, and real estate sectors
accounted for a third of the market, according to KPMG.
Credit: The Hindu (http://www.thehindu.com/business/what-are-green-bonds/article7070840.ece)
Further Reading: https://www.adb.org/news/videos/did-you-know-green-bonds
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