|Project Rationale and Linkage to Country/Regional Strategy
Background. India has undergone a rapid economic transformation, with an average annual gross domestic product growth rate of 6.8% during 2008 2013. However, more rapid economic growth is inhibited by chronic electricity shortages, which constrain commercial activity. Around 300 million citizens (around 25% of India's population) have no access to electricity, while many with access have an intermittent supply. Meanwhile, the government's push to narrow the electricity supply gap has increased India's dependence on fossil fuels, particularly imported oil (for diesel-based captive generation) and coal. To balance the conflicting objectives among growth, climate change, and energy security, India is scaling up renewable energy investment.
Demand analysis. The Government of India has ambitious programs to target renewable energy development as a key element in the overall expansion of power generation capacity. As of 31 December 2013, India's total installed electricity-generating capacity was around 234 gigawatts (GW), which included around 30 GW of renewable energy. Based on strong policy incentives, India's Twelfth Five-Year Plan targets an increase of 30 GW of renewable energy generation capacity by FY2017, and a further increase of 45 GW by FY2022. Demand for renewable energy investment is thus expected to be robust during the 10-year life of this MFF.
Financing challenges. A major challenge to sustaining high levels of renewable energy deployment in India is the lack of sufficient long term debt financing for project lending. Due to the relatively high upfront (per megawatt) cost of renewable energy projects, loan tenors of 12 or more years are usually required to make projects financially viable. However, such long-term funds are scarce in the Indian market, where project lending is predominantly bank-based, and commercial banks have difficulty lending long-term funds from short-term deposits, given the implied asset liability mismatch. Similarly, the implementation of Basel III capital regulations in India will lead to banks having to raise additional capital given the stricter requirements on capital adequacy and asset liability management, and to raise additional long-term funds. Both of these factors are expected to lead to rising long-term funding costs and constrained project lending capacity.
Indian Renewable Energy Development Agency. Under the administrative oversight of the Ministry of New and Renewable Energy, IREDA is a wholly government-owned nonbank financial institution established in 1987 to promote renewable energy investment. IREDA is well capitalized with increasing profitability. Taxable bonds issued by IREDA from 2008 are all rated AAA by local rating agencies, including Credit Analysis and Research Limited (known as CARE Ratings) and Brickwork. IREDA's lending constitutes about 11% of total renewable energy lending in India. What differentiates IREDA from other commercial lenders is its deep sector knowledge; experience to understand the technical and commercial risks; and its advantageous long-term capital base. This enables IREDA to provide limited recourse, cash flow-based financing for up to 15 years, which most commercial banks in India cannot. In addition, commercial banks typically favor lending based on the balance sheets of their existing, large corporate customers irrespective of the quality of the underlying project, rather than project, cash flow-based lending. IREDA's ability to fund renewable energy projects on the merits of their cash flows and risk profiles enables it to fund good projects from smaller, less-capitalized sponsors. This widens the pool of project developers and investable projects, leverages additional private capital, and facilitates renewable project development.
Road map. In 2008, India launched the National Action Plan for Climate Change to promote sustainable development by using clean technologies to limit greenhouse gas emissions, and to increase the share of power generation by renewables to 15% by FY2022. To help meet this target, the government is leveraging IREDA's position as a uniquely specialized renewable energy financier. IREDA's medium- to long-term business plan (FY2014 FY2024) includes a total disbursement of about $6.6 billion, leading to an estimated additional 13.4 GW of energy capacity. To accomplish this expansion, IREDA is building its capacity, streamlining its operations, and seeking additional capital from ADB and other sources to enable increased support for renewable energy investments.
Strategic context. ADB support to IREDA is consistent with ADB's Energy Policy, which includes promoting renewable energy to increase energy security and facilitate the transition to a low carbon economy. It is also consistent with ADB's country partnership strategy (CPS) for India, 2013 2017, which emphasizes clean and renewable energy expansion. ADB support aligns with the CPS in terms of its energy sector road map and financial sector development (catalyzing infrastructure investments, including through investment funds and credit lines). The investment program thus directly aligns with multiple facets of the CPS.
Policy framework. ADB's support is consistent with India's policies and initiatives. Taking into account India's energy security concerns and the environment, the Integrated Energy Policy 2006 identified the need to expand the use of renewable energy technologies as a key pillar for energy sector development. The New Hydro Policy 2008 streamlines hydropower investment and tendering procedures. The Jawaharlal Nehru National Solar Mission, launched in 2010, intends to deploy 20,000 megawatts (MW) of solar power by 2022. Renewable energy policy incentives include tax incentives, feed-in (e.g., preferential) tariffs, generation-based incentives, and regulations establishing minimum renewable purchase obligations for power distribution utilities. By bringing critically needed longer-term debt financing to the renewable energy sector in India, ADB's support will complement these government incentives, catalyze private sector investment, and facilitate sector development.
Investment program. The government has requested ADB to provide a $500 million MFF to fund a portion of the long-term credit IREDA needs to meet its renewable energy development target. The MFF leverages public sector resources (from IREDA) to catalyze private sector investments in renewable energy. Increasing the power supply through renewable energy sources sustains economic activities, alleviates poverty, and supports inclusive and environmentally sustainable growth, while minimizing India's carbon footprint. The MFF will incorporate a comprehensive institutional capacity development program, supported by IREDA, development partners, and ADB technical assistance (TA). The preconditions for using the MFF modality are in place, including the road map and strategy, policy framework, and investment and financing plans. The MFF is the most suitable modality, and allows ADB to make a long-term commitment to support the institution. The MFF modality enables ADB to work with IREDA to better match ADB's energy strategy in India with the country's renewable energy goals over the medium-term. More specifically, the MFF approach gives IREDA the phased funding it needs to match its subproject pipeline growth, and provides flexibility to adjust subloan terms and future tranche conditions as needed to match IREDA's onlending requirements, while preserving the possibility of offering innovative financial products (e.g., local currency financing, partial risk guarantees, and other credit enhancement products).