Climate Action 2016-2017
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BUSINESS & FINANCE<br />
Figure 1. Project cost risk for solar and land-based wind<br />
project revenues will not be enough to pay<br />
back loans if the local currency loses value.<br />
The long time-frames involved in renewable<br />
energy investments mean changes in the value<br />
of a currency of 50 per cent or more are not<br />
uncommon. And, while the provision of lowcost,<br />
long-term debt in a foreign currency can<br />
hugely improve a project’s economics, the cost<br />
of hedging currency risk can almost entirely<br />
erode the benefits.<br />
Together with its partners, CPI’s teams in Delhi<br />
and across the world are working on solutions<br />
to these barriers that investors face (http://<br />
climatepolicyinitiative.org/india).<br />
For instance, our analysis shows that a<br />
federal programme to provide debt of reduced<br />
cost and extended duration could support<br />
renewable energy uptake while lowering the cost<br />
of government support by over 96 per cent. It<br />
would do so by lowering finance costs for private<br />
investors, which in turn would reduce the cost<br />
of electricity tariffs and subsequently the cost of<br />
support. Furthermore, such a programme would<br />
enable the government to recover the full cost<br />
of support over time through loan repayments,<br />
making it possible to reuse this capital to support<br />
further projects.<br />
CPI is also working through the India<br />
Innovation Lab for Green Finance<br />
(http://greenfinancelab.in) to support the<br />
development of a currency hedging solution<br />
The cost of Indian government<br />
support for its renewable energy<br />
targets can be lowered by 96 per cent<br />
by using lower cost, longer term debt.<br />
to attract more investment and help reduce<br />
the cost of renewable energy. The FX Hedging<br />
Facility enables allocation of risks to suitable<br />
parties and eliminates the credit risk premium<br />
otherwise charged in a commercial currency<br />
swap. As a result, it can not only reduce<br />
the cost of currency hedging by almost 22<br />
per cent, but also has significant leverage<br />
potential and could mobilise an estimated<br />
US$28 of foreign debt investment for every<br />
dollar of donor grant.<br />
FINANCING FOR SOLAR AND ENERGY<br />
EFFICIENCY<br />
The India Lab is also developing other solutions.<br />
The Indian government’s 2022 solar targets include<br />
40 GW of rooftop solar power by 2022. A lack of<br />
investor confidence in the sector and the small size<br />
of rooftop solar system deals mean that little debt<br />
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