Tag Archives: green bonds

Solar Municipal Bonds: Unlocking India’s Energy Potential

June 7, 2018 | and


India has topped the charts across the world in bad air quality. A recent study by the World Health Organisation (WHO) shows that 14 out of the 15 most-polluting cities in the world are in India. New Delhi, the capital of India and the second most polluted city in the world, can serve as an apt example to reveal the grave situation where breathing in open air is equivalent to smoking three packs of cigarette in a day. While car exhaust is a major culprit, fossil fuel-based power plants also play a large role in this situation.

Switching from fossil fuel based power plants to clean energy power from sources like wind and solar can play a key role in combating air pollution and climate change. Clean energy, especially distributed solar power, is also critical to solving the issue of energy access to millions of unpowered homes in India.

To address this twin challenge of air pollution and climate change, India has set aggressive targets of 40 GW of rooftop solar by 2022 which would require an investment of ~USD 40 billion in next 4 years. This would be a significant undertaking given that the current rooftop solar capacity installation stands at ~1.8 GW. Moreover, India is likely to install only ~13 GW of rooftop solar by 2022, considering the current rate of annual capacity addition. This is merely 33% of the set target.

Although rooftop solar is increasingly becoming cost-competitive, it still requires investment upfront to buy and install panels. Rooftop solar is approximately 17% and 27% cheaper than the average industrial and commercial tariff respectively. Despite the falling prices,   high upfront cost of rooftop solar installation, limited access to debt finance, and perceived performance risk restrict rooftop solar adoption.

Our previous research suggests a third party financing model or the “RESCO” model to help address these barriers. However, the success of this model has been limited as only 360 MW (18%) of the total of 1,800 MW have been installed under the RESCO model. This is mainly due to inadequate availability of debt capital for project developers.

So what’s the solution?

A recent study by Climate Policy Initiative (CPI), Indian Council for Research on International Economic Relations (ICRIER), and Stockholm Environment Institute (SEI), creates a case for municipal entities to promote rooftop solar in India by issuing green bonds in capital markets.

The study proposes a transaction structure wherein a special purpose vehicle (SPV) or a corporate municipal entity (CME) owned by the municipal corporation would raise the green bonds and disburse the proceeds of these bonds to SPVs owned by project developers via capital lease arrangements. In our paper, we also provide a detailed roadmap for municipalities to deploy the proposed model. After the installation and payment is complete for rooftop solar, cash flows would funnel back to the initial capital financiers. The proposed transaction structure is a Public Private Partnership (PPP) approach, similar to the Design-Build-Finance and Operate (DBFO) model with financing activity taken care by a public entity such as Municipal Corporations.

Transaction Structure to raise Municipal Bond for Rooftop Solar Financing

Municipal bonds have already been successfully tried in India for other infrastructure projects that serve the public good. For example, Pune Municipal Corporation recently issued a municipal bond for its water sector. With a 7.5% of coupon over 10 years, the 12 times oversubscribed bond showed significant appetite of investors for investing in such instruments. The solar municipal bond would help reduce costs for rooftop solar power at those same rates, by around 10-14%. This is a large financial savings that will ultimately help the electricity consumers by reducing the cost of already-cheaper solar power further.

In addition to reducing the cost of rooftop solar, municipal bonds also have the potential to mobilize significant untapped investment from new sources such as domestic institutional investors which has a potential of USD 56 billion in the green bond market and reached a total issuance size of USD 156 billion in 2017.

Still, financing rooftop solar via municipal bonds would face some barriers. This includes finding municipalities with credit ratings of A+ or more, reluctance of municipal corporations to issue bonds, lack of municipal mandate to promote electricity generation, high transaction costs, etc. which may hamper the uptake of this mechanism. However, the study points to several fixes like credit enhancement mechanisms, first loss capital, and legislative amendments from the central government that could encourage municipal bond issuance for rooftop solar.

These recommendations, and the others we outline in the CPI-SEI-ICRIER study, are a win win for all – for India, it will help reach its rooftop solar targets. For municipal corporations, it will help build organizational capacity to raise municipal bonds for other projects. And for the very cities struggling with clean air, this innovative but proven model can help residents save money on electricity, something that helps everyone breathe easier.


A version of this blog first appeared on Green Growth Knowledge Platform (GGKP), a global network of international organizations and experts that identifies and addresses major knowledge gaps in green growth theory and practice. 

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Understanding green bond data can help cities in developing countries tap the market

September 6, 2016 |


The population in developing and emerging countries is urbanizing at three times the rate of developed countries. But cities in the ‘Global South’ have limited access to capital to invest in water, energy, housing and transportation systems to meet the needs of growing urban populations.

Many of them raise capital through local banking sectors whose loan terms are often unsuitable for funding new infrastructure. Capital markets offer an alternative source of cheaper and longer-term finance but less than 20% of cities in developing countries have access to local capital markets and only 4% have access to international capital markets.

In recent years, green bond markets have emerged as a new way for investors in the capital markets to access sustainable investments. Cities have taken note. European cities in France and Sweden have been issuing green bonds since 2012. Municipalities in the US have a long track record of raising low-cost debt in the municipal bond market but only recently have begun to label bonds as ‘green’ in order to meet this demand signal from investors.

So how much finance has flowed from green bond markets to cities in developing countries?

Climate Policy Initiative (CPI) analysis shown in the chart below shows that approximately USD 2.2 billion of total flows in the green bond market have been directed towards cities in developing countries (“the South”) compared to USD 17 billion in developed countries (“the North”).

Global green bond market flows

The figure below breaks down the sources of those flows to cities in the North and South. Cities in the North mainly use their own municipal (MUNI) issuance power (84%) but also benefit from Development Finance Institutions (DFI) linking city-based projects to their green bonds (13%) while cities in the developing countries in contrast rely almost entirely on DFIs to raise finance for their projects (94%).

To date, Johannesburg’s USD 137 million bond is the only municipal green bond issued in developing countries. Important work to help address this imbalance is underway. It aims to develop local capital markets and improve the creditworthiness of cities.

But if a city cannot issue bonds, what is the potential of other channels open to them to access finance from green bond markets? Helping local governments and city administrators in developing countries to identify these channels and increase their access to the green bond markets is one way to close this investment gap. This is why CPI is contributing analysis and developing guidelines for accessing the green bond markets as part of the Green Bonds for Cities project.

Our analysis shows the sources of green bond market flows to developing countries are diversifying.

Since 2008, USD 39 billion has been directed to projects or activities in developing countries. From 2008-2013, this consisted entirely of flows from Development Finance Institutions but, from 2014, domestic corporate issuance began to grow and was then joined by issuance from commercial banks from China and India in 2016.

Global green bond market flows to developing countries

Clearly, cities don’t necessarily need to issue their own bonds to tap the green bond market. City or municipal-based infrastructure development companies could provide one option for them to do so. Such companies commonly raise finance in developing countries such as China, often with central government guarantees.

Public-private partnerships with corporations or commercial banking institutions could help cities leverage their green bond issuances for new infrastructure developments.

Perhaps the avenue with the most significant potential is through domestic, bilateral and multilateral development finance institutions (DFIs). DFIs could scale up their own green bond mandates to increase support for city-based infrastructure in developing countries, work to source and help finance projects, and eventually support cities to issue their own bonds through guarantees or other risk mitigation instruments.

Green Bond DFI Flows to North and South

The chart above reveals three interesting insights into DFIs’ green bond issuance:

  • Domestic DFIs in developing countries, such as NAFIN in Mexico and the Agricultural Bank of China, already account for 18% of total flows from DFIs’ green bonds to the South. They could provide a potential source of collaboration for cities.
  • Multilateral DFIs such as the World Bank, EIB, ADB and AfDB currently only link USD 2 billion of the USD 18 billion flowing to the south to city-based projects. There is potential to scale-up.
  • In combination, multilateral and bilateral DFIs such as EIB, EBRD and KfW’s send more green bond flows to projects in the North than the South. USD 25 billion of flows goes to the North versus USD 21 billion of flows to projects in the South.

CPI’s analysis will inform guidelines for city administrators and stakeholders in developing countries on how to develop a market access strategy for the Green Bonds for Cities project. From autumn 2016, this project will provide toolkits and training sessions with the aim of expanding green bond market flows to cities in the South.
CPI is working with South Pole Group on this in collaboration with ICLEI and Climate Bonds Initiative. The project is funded as part of the Low-Carbon City Lab (LoCaL) under Climate KIC.

This op-ed was originally published on Environmental Finance.

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