Tag Archives: institutional investment

Mobilizing Institutional Investment in Indian Renewables

June 12, 2018 | and

 

India has been a sweet spot for renewable energy investment exhibiting an 11% compound annual growth rate (CAGR) between 2004 and 2017, and ranked among the top five renewable investment destinations in the FS-UNEP Report. Some major contributing factors have been India’s strong macroeconomic fundamentals, its large and well-diversified renewable market, and India’s ability to offer higher excess returns than several comparable markets like China and the United States.

Excess returns on renewable investments

Mobilizing investments by institutional investors, foreign and domestic, is a requisite for India to meet its clean energy targets.

However, this momentum needs to be accelerated to achieve its ambitious clean energy targets, which include 175 gigawatt (GW) of installed renewable energy by 2022, 40% of the total installed capacity to be renewable by 2030 and 30% of vehicles to be electric by 2030.

One promising opportunity lies in institutional investment, both foreign and domestic, through pension funds, insurance companies, and sovereign wealth funds. These investors mostly seek yield-generating investments in low-risk and long-duration assets which align well with the investment profile of renewable energy. Also, over the course of time, the needs of foreign investors have evolved from seeking small size, high-risk and high-return investments to large size, medium-risk and moderate return investments that are well-matched by the renewable sector offerings.

However, certain sector-specific issues such as off-taker risk, limited availability of listed securities and low credit ratings of renewable energy securities restrict the flow of investments. In order to address these barriers, a recent report by Climate Policy Initiative offers potential solutions to stakeholders, including policymakers and regulators.

Sector-specific barriers and potential solutions

The off-taker risk adds as much as 1.07% of additional risk premium to the cost of debt for renewable energy projects. A long-term solution is to fix the root causes, like the one being tried by the Ujwal DISCOM Assurance Yojana (UDAY). Though UDAY has shown promise in reducing operational inefficiencies and improving financial performance in selected cases, it is still early to measure the effectiveness of the scheme in reducing the off-take risk.

Some other promising short-mid term options include tripartite agreements between the Central government, State governments and the Reserve Bank of India; and a credible payment security mechanism (PSM) either by the corresponding state governments or on a standalone basis. However, both the effected PSM and tripartite agreements are available only for public sector intermediaries – National Thermal Power Corporation (NTPC) and Solar Energy Corporation of India Ltd. (SECI) – between renewable power developers and state DISCOMs. There is need to extend these arrangements to producers who sell power directly to state DISCOMs, which ensures the most judicious use of the public capital employed.

Another key reason for low investment levels from domestic institutional investors in the renewable energy sector is lack of investable securities (listed and liquid) since most developers are borrowing and not issuing securities. Indian policymakers have been aware of the need for these vehicles, and they have been gradually created, both for debt (green bonds and infrastructure debt funds) as well as equity (infrastructure investment trust) financial vehicles. However, green bond issuances (at corporate, not project level), no renewable energy specialized Infrastructure Debt Funds (IDFs), and Infrastructure Investment Trusts (InvITs) are indicators that investors are still trying to get comfortable with these vehicles.

In this context, one potential solution is to incentivize banks and Non-Banking Financial Companies (NBFCs) like Indian Renewable Energy Development Agency (IREDA), to securitize their renewable energy project loan portfolio. The government can cover costs related to securitization of renewable energy loan pools (transaction cost) and subsidize partial guarantee fees on bonds issued through securitization structures.

The third major barrier restricting the flow of investments is limited renewable securities with AA domestic rating – the minimum rating required by institutional investors to invest. Though there is a specific solution, in the form of a partial credit guarantee (PCG) offered by India Infrastructure Finance Company Limited (IIFCL), this is not considered successful yet, with only two renewable energy issuances so far, and those in 2016. One of the key issues with these credit-enhanced bonds is that though these are priced appropriately in the market, the net benefit compared to bank debt does not justify transaction costs. As an example, with PCG, the benefit is a maximum of 1.50%. With cost of PCG at least 0.5% and cost of transaction at least 0.5%, the net benefit of at most 0.5% does not justify the hassle of a bond issuance. Initial subsidization of guarantees and transaction fees may encourage issuers to actively pursue PCG-backed bonds in the renewable energy sector.

Need for regulators to espouse investors to go green

Apart from addressing the aforementioned sector-specific barriers, there is a clear need for insurance regulators to introduce certain guidelines to insurance companies pertaining to climate risk management framework and carbon footprint disclosure. Introductions of such regulations will allow them to actively assess their portfolio exposure to sectors likely to be adversely affected by climate change in the coming year. This will give them a head start to gradually diversify their current investments from such high carbon sectors and ultimately accelerate finances into low carbon infrastructure sectors, including the renewable energy sector.

Another step in the right direction would be to mandate all companies to provide green ratings on their financial securities. These ratings will allow investors who evaluate environmental aspects in their investment decision-making to make more informed decisions around securities. To introduce such a mandate, the government can initially provide incentives to companies or rating agencies to introduce green ratings.

In conclusion, there is an immediate need for policymakers to implement the aforementioned solutions in order to create an investment environment that lowers risk perceptions of investors in the renewable energy sector. These solutions complemented with evolving regulations and the disclosure landscape will be key to scale-up institutional investment in India.

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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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3 Reasons for Measured Optimism about Climate Finance

December 4, 2014 |

 

A version of this blog first appeared on Responding to Climate Change: http://www.rtcc.org/2014/11/21/three-reasons-to-be-optimistic-about-climate-finance-flows/

This year’s UN climate talks opened in Lima earlier this week and for those who hope the world can avoid dangerous climate change, some major recent announcements have given cause to celebrate. Last month, the world’s two largest emitters – the U.S. and China – reached a deal to tackle emissions. Then, the U.S., Japanese, and UK governments joined others by pledging billions to the Green Climate Fund to help developing nations deal with climate change. These political announcements are clearly timed to inject momentum into the negotiations taking place in Lima. But key questions remain unanswered: What do these financial pledges mean in terms of existing investment in a low-carbon economy future? How should money be spent? And are we on the right track?

At Climate Policy Initiative, our analysis of global climate finance flows helps to identify who is investing in climate action on the ground, how, and whether investments are keeping up what is needed to transform the global economy. We have just released the latest edition of our Global Landscape of Climate Finance report. It shows global climate finance has fallen for the second year running and we are falling further behind the level of investment needed to keep global temperature rise below two degree Celsius – but reveals some positive news as well.

Firstly, that nations around the world are investing in a low-carbon future in line with national interests. Last year, climate finance investments were split almost equally between developed and developing countries, with USD 164 billion and USD 165 billion respectively. With almost three-quarters of total investments being made in their country of origin, the majority of climate finance investments are motivated by self-interest—either for governments or businesses. Motivations include increasing economic productivity and profit, meeting growing energy demand, improving energy security, reducing health costs associated with pollution, and managing climate risk including investment risks.

Secondly, that getting domestic policy settings right offers the best opportunity to unlock new investment. When policy certainty and public resources balance risks and rewards effectively, private money follows. In 2013, private investments made up 58% of global climate finance with the vast majority (90%) of these being made at home where the risk to reward ratio is perceived relatively favorably. Addressing the needs of domestic investors offers the greatest potential to unlock investment at the necessary scale. This is not to say that international and domestic public policies, support and finance don’t have complementary roles to play. It is significant, for instance, that almost all of the developed to developing country finance we capture in our inventory of climate finance flows came from public actors. But ultimately, it is getting domestic policy frameworks right, with international support where appropriate, that will drive most of the necessary investment from domestic and international sources.

Thirdly, that despite a fall in overall investment, money is going further than ever. While investment fell for the second year running, this is largely because of decreased private investment resulting from falling costs of solar PV and other renewable energy technologies. In some cases, deployment of these technologies is staying steady or even growing, even though finance is shrinking. In 2013, investment in solar fell by 14% but deployment increased by 30%. Technological innovation is reducing costs and because of this renewable energy investments in some markets are cheaper than the fossil fuel alternatives, particularly in Latin America. Achieving more output for less input is one of the basic foundations of economic growth, so this is great news. From solar PV, to energy efficiency and agricultural productivity, growing numbers of low-carbon investments are competing with or cheaper than their high-carbon counterparts. This despite a highly uneven playing field in which global subsidies to fossil fuels continue to dwarf support for renewables and where carbon prices do not reflect the true costs of emitting CO2.

So what do our findings mean for the recent China/U.S. deal and Green Climate Fund pledges? Increasing political pressure on other countries to keep pace in terms of their domestic action and international commitments is an encouraging sign as the deadline nears for finalizing a new global climate agreement in Paris just one year from now. Reaching a global accord offers the best prospect for tackling climate change. But we must recognize that international agreements are themselves, guided by collective national interests. There is clear recognition that international public resources should complement and supplement national resources where these are insufficient. But if we are to bridge the investment gap they should also be focused on finding ways to lower costs, boost returns and reduce risks for private actors. Public finance alone will not be enough to meet the climate finance challenge.

Many private investors are ready to act. In September, over 300 institutional investors from around the world representing over $24 trillion in assets called on government leaders to phase out fossil fuel subsidies and implement the kind of carbon pricing policies that will enable them to redirect trillions to investments compatible with fighting climate change. Businesses and citizens are investing, and technological innovation means more and more investments are making economic and environmental sense. Accompanying innovation with policy, appropriately targeted finance and new business models can build the momentum and economies of scale to make the low-carbon transition achievable. The low-carbon transition isn’t just a way of reducing climate risk, it also represents a huge investment opportunity.

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Why risk coverage matters and what can be done to scale up green investment

December 6, 2013 |

 

Risk, whether real or perceived, matters. It is the biggest barrier preventing private capital from flowing into investments and, given the enhanced risk profile of low-carbon technologies, it is even more crucial for climate finance investments. Higher risks demand higher returns and higher financing costs, making low-carbon technologies even less competitive.

While not all risks need to be reallocated, whenever risk falls onto a party not suited or not willing to bear it, risk coverage instruments (such as guarantees) can be key to unlocking private resources without depleting public budgets.

CPI has observed this phenomenon time and time again in our case studies.

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How a Danish public guarantee facilitated an unexpected source of finance for a Swedish windfarm

September 16, 2013 |

 

Institutional investors, such as pension funds and insurance companies, hold a vast share of society’s wealth with over USD 71 trillion of assets under management. Despite being frequently cited as potential sources of large-scale investment for wind farms or solar plants, CPI recently found that barriers and management practices prevent all but a few institutional investors from actively engaging in renewable energy projects.

That’s why, when an institutional investor does engage in a renewable energy project, it is important to draw out lessons to understand what worked, what was needed to encourage their participation, and what potential exists to replicate and scale similar approaches.

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Why policy matters for institutional investment in renewable energy

May 23, 2013 |

 

Institutional investors steward a large fraction of our society’s wealth. In OECD countries, pension funds, insurance companies, endowments, foundations, and sovereign wealth funds collectively manage over $45 trillion in assets ($71 trillion if you add in other investment managers and pension assets outside of pension funds). Needless to say, the financial security of these institutions is a matter of significant public importance.

Many of these institutions have investments in carbon-intensive assets – such as coal, oil, and gas extraction companies – which could have less value in a climate constrained world. Recently, policymakers, the public, and beneficiaries of these institutions have begun to call on institutions to divest from fossil fuels to reduce their exposure to this potential risk.

Another option may be to increase investment in low-carbon assets like renewable energy. To date, however, not much research has addressed the policy constraints on increasing institutional investment in low-carbon assets.

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