Bond Financing for Renewable Energy

Transcription

1 Bond Financing for Renewable Energy 21 July 2015 Energy Studies Institute, Singapore Thiam Hee Ng, Senior Economist Asian Development Bank

2 Outline Introduction Why Bonds? Trends in Bond Issuance from the Renewable Energy sector Trends in Green Bond Issuance Green Bonds in Asia Cost of Capital of Energy firms Challenges

3 Introduction The amount of funds needed to finance renewable energy project in Asia is huge. ADO 2013 estimates that Asia share of global energy to be 50% by 2035 from 1/3 in Global investment in renewable energy rising - $270 b in 2014 PRC major investor in renewable energy - $83 b in 2014 Cost of renewable energy is falling (IRENA 2015)

4 Investment in renewable energy picking up Source: Frankfurt School-UNEP/Bloomberg New Energy Finance

5 Financing is key Constraint in adopting renewable energy more in financing. Zadek and Zhang (2014) argues finance is lagging. Fritz Morgenthal et al (2009) shows GFC hurts RE investment. Ekholm et al (2013) suggests lack of financing can adversely affect RE targets. Large upfront cost and long-term payback makes cost and availability of financing key in deciding if project is viable.

6 Financing Options Multilateral Development Banks (MDB) MDBs such as World Bank and ADB provide technical assistance, and financing at below market rates for lowincome economies ADB s annual investment in clean energy has exceeded $2bn since 2011, reaching $2.3 bn in 2013 Most of ADB s clean energy investment goes toward renewable energy. ADB launched Asia Solar Energy Initiative and Quantum Leap in Wind Initiative to develop 3 GW of solar-generated electricity and 1 GW of wind-generated energy, respectively. Governments Offer subsidies to cover high costs and provide financing at rates cheaper than commercial terms Put in place regulations that reduce investment risk

7 Financing Options Private sector Bank loans Banks are the largest financial institutions in Asia Equity Finance More suited for risky and new renewable energy projects Debt Finance Favored for proven and tested renewable energy project. Usually already operating and generating cashflow.

8 Private sector financing needed Governments alone do not have the necessary financial resources to finance the large needs. Funds will have to be mobilized from the private sector to supplement private sources. Financing for renewable energy has many similar characteristics to infrastructure financing. Bonds which have been successfully financing infrastructure projects could also be used for green financing. (ABM 2013)

9 Government s role Polzin et al. (2015) finds that a long-term supportive policy framework for renewable energy goes a long way towards promoting investment in renewable energy capacity. Fabrizio (2013) found that US states that have backtracked in their regulations to promote renewable energy attracted less investment suggesting the policy uncertainty can deter new investment. Abolhosseini and Heshmati (2014) argue that feed-in-tariff could be useful to reduce the risks to investors for renewable energy projects. Hence, supportive policies that are long-term and do not depend on annual budget allocations tend to be favored by investors. Stable regulatory regime can also work to reduce the risk of investing in renewable energy.

10 Why Bonds? Strong interest in ESG investing. Large investors such as pension funds and sovereign wealth funds have traditionally allocated a large proportion of their portfolio to bonds. Banks are likely to become more constrained in their lending activities under Basel III. This is especially true for long-term lending projects such as renewable projects. Bond markets are more suitable for funding long-term renewable projects at a predictable cost.

11 Renewable energy sector bonds issuance have been rising Notes: Americas refer to Brazil, Canada, Mexico, Panama, Peru, and the United States. Asia refers to the People's Republic of China; Hong Kong, China; India; Japan; Kazakhstan; Republic of Korea; Malaysia; Singapore; and Taipei,China. Europe refers to Austria, Cyprus, Denmark, Finland, France, Germany, Hungary, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Russian Federation, Slovakia, Sweden, Switzerland, Turkey, and the United Kingdom. Source: Bloomberg LP.

12 Surge in Renewable Energy Sector Bonds in PRC Source: Bloomberg LP

13 89% of the renewable energy bonds issued globally from are denominated in local currency Source: Bloomberg LP

14 Tapping local investors is key Asia has a large pool of funds available for investment as it remains a capital surplus region. Being more familiar with the region might lead to Asian investors assessing the risks and returns on renewable energy projects in the region differently from that of advanced economies investors. Domestic investors are also not taking on exchange rate risk. Domestic investors are usually better able to assess the complicated risks of building and delivering renewable energy projects. Growing local currency bond markets that can help finance large infrastructure projects in Asia. Most of the renewable energy sector bonds in Asia are being issued in local currency targeting domestic investors.

15 Most RE bonds are denominated in LCY although the proportion vary Source: Bloomberg LP

16 Source: Bloomberg LP Most Asian RE bonds not rated

17 Case study 1: Trina Solar Ltd (PRC) Trina Solar specializes in the manufacture of crystalline silicon PV modules and integration In October 2014, Trina Solar issued a total of USD 115mn convertible senior notes due Trina Solar plans to use the net proceeds for general corporate purposes, which may include the development of solar power projects and their general financing requirements, expansion of manufacturing capacity and working capital.

18 Case study 2: GS Yuasa Corporation (Japan) GS Yuasa business includes the manufacture and supply of batteries, power supply systems, lighting equipment, and other electrical equipment. In March 2014, GS Yuasa Corporation issued a JPY 25bn zero coupon convertible bond due Its proceeds will be used for capital investments (JPY 10bn) and debt repayment (JPY 15bn)

19 What are Green Bonds? Green bonds are fixed-income securities that mobilize funds for projects with environmental benefits. Most green bonds issued so far have been used to finance climate change mitigation or adaptation, including clean energy, energy efficiency, mass transit and water technology. Green bonds can be either plain vanilla treasury-style retail bonds (with a fixed rate of interest and redeemable in full on maturity), or asset-backed securities comprising several green projects. Green bonds issued by multilateral banks have been well-received and highly rated. Bonds issued by renewable energy and other corporate issuers have been smaller and higher risk. Green bonds are still a sliver of the overall bond universe (at just 0.06%). But with the right support and policy, there is tremendous potential for green bonds.

20 Green Bonds are getting popular Total issuance of global green bonds reached $30.5 billion by December This is more than double the amount in In Asia, green bonds have been slower to take off. Initially, multilateral banks have been the main issuer but corporate market is catching up.

21 Amount raised from green bonds increased significantly in Corporate issuance of green bonds increased by almost 8 times in 2014 Source: Bloomberg LP Note: As of end 2014

22 Supranationals and Europe dominate green bond issuance Source: Bloomberg LP, data as of end 2014 Note: Supranationals African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development, European Investment Bank, International Bank for Reconstruction and Development, International Finance Corporation, Nordic Investment Bank Europe France, Sweden, Norway, Germany, Spain, Italy, Netherlands, Austria, UK Americas US, Canada, Peru Asia Japan, South Korea, Taipei China Oceania Australia Africa South Africa

23 58% of the green bonds are rated as investment grade, with the bulk rated as AAA Source: Bloomberg LP, data as of end 2014

24 European Investment Bank Green Bonds Pioneered green bonds issuance in 2007 EIB is the largest issuer of Green Bonds with EUR 7.4bn raised across 10 currencies, of which EUR 4.3bn equivalent in 2014 alone. Proceeds mostly invested in energy efficiency and renewable energy projects.

25 World Bank Green Bonds First issued in 2008 to support climate change mitigation and adaptation projects. Since then, WB has issued over US$7 billion worth of green bonds. Plain vanilla bond that has the same AAA credit rating as other WB bonds. Strong appeal to institutional investors.

26 ADB Clean Energy Bonds September 2010: ADB sold first Clean Energy Bonds raising US$232.2 mn to support its renewable energy and energy efficiency projects in Asia and the Pacific. May 2012: ADB raised US$339 mn from second sale of Clean Energy Bonds

27 ADB Green Bond March 2015: ADB raised US$500 mn from its inaugural green bond issue, aimed at channeling more investor funds to ADB projects that promote low-carbon and climate-resilient economic growth and development in developing Asia. The 10-year bond was priced at %, with a spread of basis points over the 2% US Treasury due 15 February The coupon is 2.125%.

28 All rated green bonds issued by supranational institutions are rated AAA Not rated 29% Investment Grade (AAA) 71% Source: Bloomberg LP, data as of end 2014

29 World Bank Group leads in green bond issuances Total Number of Green Bond Issuances International Bank for Reconstruction & Development (World Bank Group) 66 European Investment Bank 21 International Finance Corporation (World Bank Group) 20 African Development Bank 17 European Bank for Reconstruction & Development 13 Asian Development Bank 9 Nordic Investment Bank 7 Source: Bloomberg LP, data as of end 2014

30 Majority of green bond issuances from government entities are from Europe Source: Bloomberg LP *in USD

31 Green bond issuances from government entities are rated investment grade Source: Bloomberg LP, data as of end 2014

32 Corporate sector showing interest in green bonds In January 2014, a group of financial institutions launched the Green Bond Principles. Private sector interest was high after seeing strong demand for multilaterals green bond issuance. Citigroup, Bank of America Merrill Lynch, JP Morgan and Crédit Agricole were the original backers of the Green Bond Principles. Now the support has swelled to 55 underwriters, issuers and investors as signatories. Despite the growing enthusiasm, there are some concerns where this is a more of a rebranding exercise rather than mobilizing new investment. It is important to ensure that the corporate green bond market develop to ensure there is a liquid market that can attract new investors to participate.

33 Most of the corporate green bonds are from Europe Source: Bloomberg LP Note: As of end 2014 Americas refer to Canada, Peru and United States Asia refers to Taipei,China Europe refers to Austria, France, Italy, Norway, Spain, Sweden and United Kingdom Oceania refers to Australia

34 Most Asian renewable energy bonds not labelled Interest in sustainable investing still low in Asia. Only 0.8% in Asia compared with 60% in Europe (GSIA 2014) Lyon et al (2014) halo effect limited in PRC Labelling green bonds could attract broader group of investors but plentiful liquidity mean Asian issuers have found domestic buyers easily. Additional costs of labelling certification and monitoring

35 First Asian corporate green bond Advanced Semiconductor Engineering from Taipei, China has issued a US$300 m, 3 year green bond in July There was strong investor interest with most of the bonds taken up by Asian investor. The yield of 125 bp above US Treasuries is roughly comparable with that of other bonds. But with tighter liquidity ahead, there may be greater pricing advantage for green bonds.

36 YES bank corporate green bond In February 2015, YES Bank of India issued Asia s second corporate green bond. YES Bank raised INR 1000 crores (US$156 m) from the 10-year bond. The amount raised will be used by YES Bank to finance Green Infrastructure Projects in Renewable Energy including Solar Power, Wind Power, Biomass, and Small Hydro Projects. KPMG, India will be providing the Assurance Services annually, on the use of proceeds in accordance with the Green Bond principles.

37 Utilities sector accounts for half of the amount raised from corporate green bonds Source: Bloomberg LP, data as of end 2014 Note: Consumer Discretionary Educational Services Consumer Staples Consumer Products Energy Renewable Energy Financials Banks, Diversified Banks, Financial Services, Real Estate Industrials Industrial, Waste & Environment Services & Equipment Technology Semiconductors Utilities Utilities, Power Generation

38 63% of the corporate green bond issuances are not rated Source: Bloomberg LP, data as of end 2014

39 Yield Cos Yield Co gaining popularity in the United States. The Yield Co investment structure is targeted at long term investors looking for higher yields in the current low interest rates environment. Yield Co purchase renewable energy projects that are already operating and generating a predictable cash flow. As the Yield Co invest in renewable energy projects that are already up and running, most of the construction and operating risks are eliminated. Yield Cos are usually structured by securitizing several assets to make them more liquid. Further, a portfolio of assets is also more diversified and less risky. Alafita and Pearce (2014) shows that securitization can reduce project financing costs significantly. The first Yield Co was NRG Yield which raised $500 million in 2014 to finance a wind farm. In 2015 TerraForm Power issued $800 million green bond to finance its acquisition of a wind farm.

40 Key challenges in renewable energy bonds. So far, market is still small. But important first step has been taken to mobilize more funding. The market is still new. This means there is a lack of standardization. This makes it hard for investors to determine which bonds are financing environmentally sustainable projects. One key issue is what can be considered green. While renewable energy is obviously green other technology may be more debatable. Would nuclear power be considered green? There needs to be a more systematic assessment of what qualifies as a green bond now that the market has broadened to many corporate issuers.

41 Policy challenges ahead Deepening capital markets and developing a pool of long term investors. Ensure a stable regulatory framework to facilitate long term investment. Government support may be needed to level the playing field. Narrowing information gap may reduce risk perception of investors.

42 Thank you Thiam Hee Ng