RE-Financing India's Energy Transition

Overview

This report outlines a financial intervention to enhance the capital flow into India's ongoing energy transition. It proposes a subsidised credit enhancement for domestic renewable energy (RE) bond issuances. Currently, banks and non-banking financial companies (NBFCs) do not have enough headroom to extend further credit to the RE sector. One of the alternatives is to issue bonds to refinance banks and NBFC loans that could free up the tied-up bank capital and allow lending to the projects in the sector. However, most of the RE projects in India may not find it easy to accomplish refinance through bonds because they are rated below AA, the unsaid forbidden territory of domestic bond issuances. The use of existing credit enhancement products to uplift the ratings to the required AA band does not allow for a feasible all-in cost of borrowings. This fact has led to minimal uptake of domestic RE bond issuances and locking of the debt capital within existing projects. Hence, a subsidised credit enhancement holds the key to unlocking the flow of capital from the bond market. The report delineates the structure of a subsidised first-loss cover facility to credit-enhance bonds raised by the issuers looking to refinance their underlying projects.

Key Highlights

• India's RE targets require a 16 per cent compounded annual growth rate (CAGR) in capacity addition from the 86.32 GW at the end of January 2020 to achieve 450 GW by 2030.
• The transition will cost USD 200 billion to set up the generation capacity alone. The debt-heavy nature of RE infrastructure investments will require a large-scale mobilisation of debt capital.
• The banks and NBFCs do not have an evident headroom to keep lending at the pace required to meet targets of the sector.
• The bond market offers an alternative, but the international bond markets with several investors looking for green investments are bound by currency risk and also suffers from the usual short term tenor problem. While the domestic market is majorly limited to AA and above ratings. 
• None of the RE projects have been able to achieve the AA rating on a stand-alone basis, hence remain outside the purview of institutional investors in the domestic bond market. 
• The shorter tenure preferences of domestic bond investors is an additional barrier to refinancing of RE loans through bonds of a comparable tenure.
• Currently, credit enhancements for bond market issuances in India suffer from a high all-in cost. 
• India's RE sector is caught in a three-way circularity marked by the inability of banks and NBFCs to lend at the pace required, the low ratings of existing RE projects, and the high all-in cost of credit enhanced bonds limiting the flow of debt finance. Thus, it calls for regulatory interventions to help India achieve RE targets.

Subsidised Credit Enhancement

• The proposed facility managed by a facility manager under the guidance of the board of directors will pay off bond investors in the event the issuer is unable to service the coupon or principal repayment. The first-loss guarantee can be accessed multiple times during the tenure of the bond within the eligible amount
• A subsidy of INR 4,543 crore (USD 649 million), spread over a defined period of five years, can facilitate a doubling of India's installed ground-mounted solar capacity from 31.66 GW to 63.32 GW. The quantum of debt capital required for the same works out to INR 75,984 crore.
• Only projects with an operational track record of at least three years and with no history of delay in loan repayments are to be eligible for a credit guarantee.
• Developers should offer a set ratio of higher-rated loans for every lower-rated loan in the portfolio that is credit enhanced.
• Cap of maximum INR value of bonds that any single issuer is allowed to credit-enhance over the subsidy window at 20 percent of the facility size.
• The value of bonds guaranteed under the facility cannot exceed the amount being financed; the proceeds of bonds can be used only for INR-denominated project debt.

Impact of the proposed solutions

• The subsidised credit enhancement, as per our estimate, is expected to mobilise INR 75,984 crore (USD 10.85 billion), which can be utilised for fresh primary lending to the RE sector. 
• The project deployment by this mobilisation can facilitate the addition of 49,000 people to the workforce. 
• Investments mobilised by credit enhancement will lead to an addition of 1,90,000 crore to India's GDP (approximately 1 per cent of India's GDP)