Subsidised credit-enhancement bond facility for renewable energy proposed

To ward off defaults, it could be a fully-funded facility with a facility manager, under guidance of board of trustees; will pay off bond investors if issuer can't service coupon and repay principal

Given the challenges faced by domestic financial institutions and the limitations of both international and domestic bond markets, the chances of India achieving its renewable energy target by 2030 look grim in the present scenario, according to a study conducted by CEEW-Centre for Energy Finance. It has, therefore, suggested a subsidised first-loss cover facility to credit-enhanced bonds raised by the developers and institutions looking to refinance their underlying projects.

To instantly ward off defaults, it could be a fully-funded facility with a facility manager, under the guidance of the board of trustees. The proposed facility will pay off bond investors in the event the issuer is unable to service the coupon and repay the principal. Also, the guarantee can be accessed multiple times during the tenure of the bond within the eligible amount.

According to CCEW-CEF estimates, a fully-funded facility with a capitalisation of about Rs 4,543 crore ($649 million) would be able to facilitate debt refinancing of Rs 76,000 crore. “If deployment of this amount of capital in new solar projects were realised, the existing solar capacity would be doubled from 31 Gw in January 2020 to 63 GW over the tenure of the facility. Assuming a debt:equity ratio of 80:20 and investment cost of Rs 3 crore a MWp installations,” said the study.

Kanika Chawla, director, CEEW-CEF, said this market could be created over five years. “This would create an investor class that will be willing to invest in these bonds,” she added.

The renewable energy installations, like any infrastructure project, are characterised by a debt-heavy capital structure. Achieving the 2030 RE target required a debt capital of Rs 160 billion for generation capacity alone. This additional debt would entail doubling of the current debt exposure of banks and non-banking financial companies (NBFCs) to the power sector as a whole. At present, banks and NBFCs evidently do not have headroom to extend further credit to the power sector. According to Chawla, after a quarter, there will be roll-out of large scale infrastructure projects and banks would chase those projects because they would be backed by government counter guarantee. “Renewables will then find it difficult to get bank finance.”

Currently, most banks are breaching their sectoral exposure limit of 15 per cent. Renewable is clubbed with power sector, so the sectoral limits are reached. “Renewable energy assets, however, are different from power. Default rate on renewable is very low. The power sector cannot be looked at as homogenous sector,” said Chawla.

Both banks and NBFCs are facing an impending increase in non-performing assets as a result of the ongoing economic downturn caused by the ongoing COVID-19 pandemic, which would also limit their ability to lend. Therefore, alternative sources of debt capital must be considered to augment the existing flow of debt capital towards renewables, said the study.