Greening India’s Financial Markets: A Role for Green Bonds and Green Banks

This post is co-authored with Anna Mance.

Today, in Delhi, in a high level stakeholder roundtable hosted by the Indian Renewable Energy Development Authority (IREDA), the Indian Ministry of New and Renewable Energy is releasing NRDC’s latest reports on clean energy finance: Greening India’s Financial Market: How Green Bonds Can Drive Clean Energy Deployment and Greening India's Financial Market: Investigating Opportunities for a Green Bank in India.

The two interim reports are a part of the NRDC-CEEW India Clean Energy Finance Series, which strives to highlight through research locally applicable solutions for scaling up clean energy markets in India. The first report in the series with a comprehensive review of the clean energy finance ecosystem in India is here.

With India’s signing the historic Paris Climate Agreement in New York on April 22, financing remains one of the principal barriers to the rapid expansion of the country’s clean energy market. Over $140 billion of investment is required in the next six years to reach India’s solar, wind and efficiency targets to increase clean energy access. At the Delhi roundtable, NRDC and our Indian partner the Council on Energy Environment are leading the discussion on new mechanisms for India to finance its climate commitments from ambitious goals to reality.

At this critical juncture in scaling renewable energy to provide energy access to its growing cities and vast rural communities, India is seizing the opportunity to forge a path as a leader in clean energy finance by building a robust financing ecosystem.

Innovative financial mechanisms and institutions, such as green bonds and green banks, respectively, have proved successful on the state level and internationally, can help propel India’s solar and wind energy markets, and support critical energy-saving and climate resilience projects.

A green bank is a pioneering publicly funded institution that finances the deployment of renewable energy, energy efficiency, and other clean infrastructure projects in partnership with private lenders. Established in seven countries including the US, the UK, Japan and Australia, green banks are a new kind of specialized intermediary designed to accelerate the maturation of clean energy markets. Neither traditional government programs, with limited engagement with markets, nor the private sector, with its competitive pressures and fiduciary constraints, can reliably achieve this outcome. Green banks bridge this gap, playing a transformative role in the market.

Green bonds are a capital-raising tool dedicated to raising funds for green projects. Green bonds offer a measurable price advantage over traditional financing instruments such as commercial lending and equity finance, and have the potential to bring new investors on board with reliable certification and standards.

Green banks and green bonds can be used in tandem to raise, recycle, and deploy capital. For instance, as a financial institution, a green bank can issue green bonds as a tool to raise additional capital or issue loans to fund green projects.

Key benefits of green banks and green bonds:

• Expanding the quantum of capital and broaden the investor base
• Increase liquidity and develop a project pipeline for green investment
• Offering better financing terms including lower lending rates and flexible terms. These terms will draw a broader pool of investors, domestic and international, towards clean energy projects, and ultimately drive down costs to be rate competitive with fossil-fuel energy
• Facilitating scaling up of smaller distributed and off-grid clean energy resources
• Mitigating perceived risk of investing in clean energy and drive further investment

India is exploring how innovative financing can help foster economic growth and development in a low carbon way. This is essential to transform its own ambitious climate targets from mere goals into reality. India’s leadership on financing clean energy has the potential to transform the global markets and tip the scales for rapid clean energy deployment around the world.