Renewable energy financing in India- Big numbers
Bank of America had committed to support $50 billion in deals for low-carbon initiatives in 2012, while the Goldman Sachs Group announced a $40-billion programme in the same year.
The State Bank of India committed to provide Rs 75,000 crore ($12 billion) over the next five years for the renewable energy sector to support 15,000 megawatts (Mw) of capacity. "Of course, the proposals have to be viable, and they also have to be viable as per the norms of the banks," chairperson Arundhati Bhattacharya said at the RE-Invest conference last month. That was the largest commitment by any bank.
ICICI Bank committed to help build 7,500 Mw, followed by L&T Finance, the Indian Renewable Energy Development Agency or IREDA, and many others, including the Bharatiya Mahila Bank. It is fairly certain that not all these announcements will actually be put into action, but it is encouraging to see that the list of probable financiers is not dominated by the multilateral funding agencies, as would have been the case a few years ago. Projects are already being funded on the strength of their revenue stream, with no recourse or on a limited recourse basis.
It is well known that renewable energy projects are especially sensitive to interest rates, given that all the funding is required upfront. The recent easing of interest rates - with the central bank lowering the benchmark repurchase rate for the second time this year - is, therefore, especially positive for the renewables sector. The repurchase rate - the rate at which commercial banks borrow from the Reserve Bank of India - now stands at 7.5 per cent, and further cuts are expected through the year.
A 200-Mw project being built in Dubai that managed to secure financing at an all-in rate of 4 per cent, has offered to supply power from a solar photovoltaic plant at a record low rate of 5.845 US-cents per unit, or about Rs 3.70. Saudi Arabian company ACWA Power is the developer. In an interview with Bloomberg New Energy Finance, Paddy Padmanathan, president and CEO of ACWA Power, said that efficient panels, an efficient construction contractor, 27-year debt and a debt:equity ratio of 86:14, in addition to the competitive interest rate, all helped in arriving at the "low" tariff.
In contrast, interest rates for developers in India are easily in double digits while the tenure is limited and debt-equity ratios are conservative. That would explain why the levelised tariff in recent auctions ranges between Rs 6.50 and Rs 7.50 per unit.
Easing financing and providing it for longer tenures at lower rates would certainly give a boost to renewables in India, but getting to 175,000 Mw - the target announced in the Budget - would also require adequate unlocking of land resources for renewables as well as an expansion of the transmission capacity.
The successful mobilisation of Rs 1,000 crore ($160 million) by YES Bank last month via a green infrastructure bond issue could set an interesting trend for financing renewables. "The Reserve Bank offers incentives for bonds used to fund infrastructure. This is the first time that this segment is being used for offering green bonds," said a spokesperson for the bank. The bonds will follow the international green bond principles, which specify the use of proceeds and reporting requirements for investments. YES Bank has earmarked the funds mobilised for renewable energy generation projects - solar, wind, biomass and small-hydro. The Indian arm of KPMG will provide the assurance services on the use of proceeds.
A statement from the bank said that it witnessed strong demand from leading investors, including insurance companies, pension and provident funds, foreign portfolio investors and mutual funds. More issuers looking to tap this demand can be expected. Green bonds have surged in popularity internationally, with a record $38.8 billion issued in 2014, more than double the 2013 total of $15 billion.
(This news story is from Business standard)