WEEKLY SOLAR ROUNDUP

Greenko and Azure close record green bond issues

Greenko and Azure Power have together raised USD 1.5 billion from sales of green bonds in the last two weeks. Other offshore green bond issuances by ReNew Power, NTPC, Rural Electrification Corporation (REC), IDBI Bank, Axis Bank, Yes Bank and L&T Infrastructure Finance mean that India is amongst the top ten green bond markets in the world with a cumulative issuance of over USD 4 billion. In the first seven months of 2017, India’s green bond issuance reached USD 2.1 billion, sufficient to fund debt for over 3.5 GW of new renewable energy projects. Indian renewable sector needs a significant amount capital (about USD 150 billion) to achieve the ambitious 175 GW target and there is abundant capital available internationally; Renewable assets in India are still considered too risky by global funds due to poor offtaker ratings, frequent payment delays and weak regulatory enforcement; The Indian government should try to reduce risks for private investors but the recent trend of PPA cancellations and renegotiation attempts is not helpful in this regard; In 2015, the Securities and Exchange Board of India (SEBI) had endorsed the internationally recognized green bond principles, providing regulatory clearance for Indian renewable assets to tap into offshore green bonds. Indian renewable sector needs a significant amount capital (about USD 150 billion) to achieve the ambitious 175 GW target. There is plenty of capital available internationally with sovereign wealth funds, pension and insurance funds but expectations need to be tempered.

First, renewable assets in India are still considered too risky by these global funds. While Greenko and Azure were successfully able to place their bonds, Morgan Stanley owned wind developer, Continuum, failed to do so. It launched a USD 400 million issue but failed to raise the money because of the weak credit profile of its customers (poorly rated DISCOMs). International investors are highly selective about risk and most Indian renewable IPPs, rated 2-3 notches below investment grade, are not deemed sufficiently attractive.

Second, Indian regulators impose strict curbs on offshore issuance of bonds – both by quantum and cost – limiting the prospects of this route. Even so, there is little cost advantage for developers in raising funds through green bonds. Greenko and Azure issues have been completed at rates between 5.0% and 5.5% resulting in all-in cost of over 9% including hedging cost. This is hardly attractive in comparison to domestic borrowing cost particularly when refinancing risk is taken into account. Main advantage for the issuers is diversification of their funder profile and freeing up of their bank credit lines in India.

To make green bonds more attractive for Indian issuers, the Indian government should try to reduce risks for private investors and developers. NTPC offtake, UDAY scheme, solar park policy and SECI payment security fund are good steps but much more needs to be done. Documentation and risk allocation framework needs to be improved to match international standards. More importantly, we need alignment of policy objectives between central government and states as well as strict enforcement of regulatory framework. Recent PPA cancellations (wind projects) and renegotiation attempts are not helpful in this regard.