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Introduction

Financing Low Carbon Infrastructure in India


Dhruba Purkayastha, Manisha Gulati, and Sunder Subramanian

Growth on a low carbon economy trajectory has the potential to yield multiple benets for India. These include, enhanced energy security from ecient energy usage (both supply and demand sides) and renewable energy projects; human health benets from non-polluting transport; and environmental benets through improved forestry and natural resource management, waste reduction programmes, and reduced emissions of local pollutants from energy facilities. As such, reducing carbon intensity of growth is an imperative. A shift to low carbon infrastructure (LCI)1 growth would necessarily have to be progressive and will need a mix of enabling factors spanning the right policy environment, tec nology and process innovation, human and institutional capacity, markets and regulatory frameworks, and more importantly, access to dedicated nance directed towards low carbon growth initiatives. But how much nancing will be required? Various estimates are available at the global level (see Table 4.1) but as far as India is concerned, no readymade estimates are available. Such an estimation requires a great deal of information about physical impacts of LCI; the mitigation and adaptation needs of the country; the expected economic growth, population growth, demand for infrastructure, use of clean technologies, and nally, the funding requirements of such needs. Nevertheless, it would suce to say that the funding requirement is huge and could easily run into billions of dollars. A study by McKinsey

& Company2 corroborates this. According to this study, a projected increase in emissions to 56.5 billion MT of carbon dioxide equivalent in India could be lowered by 30 per cent to 50 per cent by 2030 by investing in energyecient technologies in road transport, power, buildings, and appliances. The report suggests that incremental capital of about 600750 billion euro ($874 billion to $1.1 trillion) would be needed between 2010 and 2030, even after accounting for steep declines in the cost of emerging technologies such as solar power. The estimates are staggeringand there is no clear understanding of how these nancing requirements will be met. Against this backdrop, this chapter examines the options for nancing LCI in India. The main questions addressed here are: What is the role of the public and private nancial sectors in supporting the implementation of a low carbon development strategy? How can international and domestic nancing mechanisms facilitate new public and private sector investment to facilitate low carbon growth, build carbon market access, accelerate technological innovation, and support adaptation to the impacts of climate change? How can the country generate new and additional funds to nance such infrastructure development? What should be the role of commercial banks and nancial institutions in facilitating such infrastructure development?

1 Low Carbon Infrastructure is a broad-based term encompassing all possible measures to reduce carbon footprint in basic infrastructure services such as green/energy-ecient transport, renewable power, reduced carbon emissions in coal-based power, etc. 2 McKinsey & Company (2009).

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Table 4.1 Estimated Costs of Addressing Climate Change at the Global Level Adaptation costs Mitigation costs 0.5 per cent of global GDP in 2030 and 2.5 per cent of global GDP in 2050 0.6 per cent of global GDP in 2030 and about 1.3 per cent of global GDP in 2050 $ 86 billion by 2015 Indicatively at least $ 44166 billion 1.6 per cent of global GDP between 2007 and 2030 approx. $ 200210 billion approx. $ 248381 billion from private and public sources in the year 2030 to return global GHG emissions to the level of 2004 1 per cent of global GDP by 2050 $ 30 billion during 201012 and $ 100 billion a year till 2020 Total costs

Study OECD Environmental Outlook to 2030 IPCC Fourth Assessment Report: Climate Change 2007 UNDP Human Development Report 20078 UNFCCC Dialogue on long-term cooperative action to address climate change by enhancing implementation of the Convention, 2007 Stern Review: The Economics of Climate Change, 2006 Copenhagen Accord, 2009 Source: Authors own.

How should public nance directed for low carbon be intermediated/distributed?

Barriers to Financing Low Carbon Infrastructure


Before exploring nancing options for LCI, it is necessary to get a sense of the current barriers to nancing such infrastructure. The barriers for nancing would dier from project to project but can generally be classied under the following three categories: Divergence between social and private costs The rst and perhaps the most important barrier to the nancing of LCI projects is the existence of externalities. Negative externalities arise when an entitys actions impose costs on others for which the entity does not pay. Similarly, positive externalities arise when the entitys actions generate benets for others for which the entity has to incur costs. Externalities can be internalized if those who benet or bear costs are made to pay in the latter case or are compensated in the former. The social benets from avoided carbon-inicted damages are much larger than the private benets to carbon emitters and are often much greater than the social costs of the investment required to cut emissions. Put more simply, the investments in low carbon infrastructure usually do not generate adequate returns on investment given the potential for generating
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revenue from LCI. The theoretical solution would be to price the damage done and force the polluters to pay for it, thus internalizing the externality. However, this solution cannot be adopted without public intervention. The absence of such intervention leads to a huge divergence between the social and private costs, and therefore provides little incentive for investments in LCI. In addition there are inadequate incentives for research, development, and commercialization of lower carbon technologies3 (LCT). There are of course other discontinuities that sit alongside, but are often not included, in the traditional economic analysis. For example, traditional power infrastructure is often supported by extensive implicit subsidies, which is not available to smaller scale distributed forms of renewable power. Credit market failure Many of the barriers to LCI and related technology development or transfer are the same as the barriers to growth and investment, that is, a poor investment climate, due to a variety of factorspolitical, regulatory, administrative complexity, etc. Financial intermediation for LCI through banks or through markets for nancial instruments is hindered by: lack of familiarity in the lending community with LCT and consequently, LCI leading to the inability to assess risk appropriately;

LCT refers to the development of low carbon technology such as specic solar technology or bio-fuels which could then be applied for LCI.

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high transaction costs relative to conventional project nancing. This is due to lack of maturity of various clean technologies with higher initial capital outlay and long payback periods, increasing the risks leading to higher interest rates being charged; absence of long-term funds and hence nancing instruments; tendency of the lenders to frequently consider asking for recourse, that is, looking at the borrowers assets along with the projects ability to nance itself due to the risks associated with LCT; and inadequacy/unsuitability of bank regulations and investment policies for LCI, since such regulations and policies are often geared for larger conventional projects. Intergenerational barriers In simple terms, this barrier deals with the classic question of why should the existing generation bear the cost of investing in clean technologies, while the benets would arguably accrue to future generations? The question can, of course, be asked dierently by asking why the cost of pollution caused by the existing generation be borne by the future generations.

divided into two broad phases, with Phase I dealing with LCT development and Phase II dealing with the roll-out of commercialized clean technologies. Phase I can be further split into three sub-phases (see Figure 4.1). Phase I: This phase covers the stages from technology innovation and development to scale-up, when the technology can be deployed commercially, but has not yet achieved the volumes and cost reductions necessary for it to be fully competitive with conventional technologies. This phase ends with the achievement of full commercialization. Phase II: This phase refers to the post commercialization stage when the technology is being rolled out at a commercial level to produce goods and services. At this stage, attention would also have to be paid to the needs of businesses that produce, distribute, and sell such goods and services. The nancing strategy for each phase would have to be geared to the nancing needs of that phase. Therefore, in suggesting the nancing options for these phases, we rst identify the gaps in nancing in respective stages, and then suggest an appropriate strategy to address this gap: mechanisms for enabling directed funding and options for meeting the incremental nance requirement. Of course, this does not take into account the signicant allocation of R&D spending which takes place in a corporate context rather than on a project basisin the case of the power sector, examples would include GE, Suzlon,
Phase II Roll-Out Developers equity Debt Risk management

Towards an LCI Financing Framework


Given the context outlined in the section above, we now take a look at the broad contours of an LCT/LCI nancing framework. The LCT/LCI nancing needs can be
Phase I

Innovation Scale-up R&D & Demonstration Pre-commercialization Commercialization

Financing Needs

Grants & subsidies

Grants & subsidies Convertible loans

Debt Guarantees

Technology Innovation Fund

Funding Options

Venture Capital Private Equity Green Infrastructure Financing Institution Market mechanisms

Figure 4.1

LCI/LCT Finance ContinuumFinancing Needs and Some Possible Options

Source: Adapted from UNEP SEFIs Sustainable Energy Finance Continuum.

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Siemens, the global energy companies, and existing power companies. Also, capital will ow in the face of signicant barriers when there is great potential for marketplace change (through new price signals) or great potential for technological innovation. In the markets that we most commonly refer to when making this type of argument, for example, telecom and pharma, venture capital has often owed quickly as a result of new technology and regulatory opportunities.

Enabling Directed Funding of LCI


Phase I: Innovation to scale-up
This phase can be divided into two broad parts (i) research, design, and development, and (ii) pre-commercialization and commercialization. In the rst part, a general lack of funds for basic innovation and development and a funding gap when technologies move beyond the research stage, (popularly referred to as the valley of death) inhibits progress from getting to and through the demonstration stage. Some technologies or projects may be too far along to get funding from traditional sources that fund research; at the same time, they are unable to attract investors, because they are perceived as being too early in the stage of technology development. This is because there is scarcity of risk capital focused towards this stage for three reasons: Technologies are subject to extensive timing uncertainty in this stage, thereby increasing strategic and nancial risk. In demonstration and deployment, LCTs are more nancially vulnerable than their conventional alternatives to variations in weather, changes in political support, and operational failure due to system complexity. Business risks are also signicant because of capital intensity, high costs of production and consequently, low market demand. This increases the physical, political, and operational risks associated with them. This results in lack of availability of funds to help the LCT achieve full commercialization. The typical nancing needs for dierent stages of technology innovation and development (see Figure 4.1) include seed capital, contingent grants, debt nancing, and debt guarantees. While capital grants are self-explanatory, contingent grants are grants that are loaned without interest or repayment requirements until the technology and intellectual property (IP) have been successfully exploited. Such grants can serve to cover some of the costs during the highest risk development stages, and in some cases

they increase investor condence, which helps to leverage highly needed risk capital. These grants can be particularly eective during high risk demonstration phases when the technology start-up has little or no access to capital. The advantage of contingent grants over conventional grants is that they steer the technology developer and entrepreneur towards private and commercial nancing. To a smaller extent, debt nancing, in the form of soft and convertible loans, can help bring technologies through to revenue generation and commercialization. However, local commercial nancial institutions (CFIs) that is, banks, non-banking nancial companies (NBFCs), and micro-nance institutions are reluctant to invest at this stage due to the high risks involved. The high-risk nature of new technology makes typical credit instruments such as loans dicult to access, particularly when the technology incubator has a weak history of investment, collateral or revenue ows for debt-servicing. Therefore, availability of debt guarantee mechanisms is useful as it can oset some of the risk of the CFIs.

Strategy to Enable Directed Financing in Phase I


Innovation Funds and Venture Capital Given the risks associated with funding LCT in Phase I and the longer timeframe over which these risks are experienced, there is limited willingness by the private sector in India to invest at this stage. Therefore support for development and commercialization of LCTs needs to be signicantly augmented by targeted public sector nancing interventions, directly by the Government of India (GoI), through its agencies or indirectly through universities or research institutes. It may also be useful to acknowledge the importance of demand-side regulatory drivers here. While investors always seem to focus on explicit incentives, for example, feed-in-taris and subsidized funding, history often shows that a limited, but stable set of policy initiatives is often as important. In a similar vein, policy uncertaintyincluding politically unsustainable tax incentivescan often be value destructive. Also note that where risk is a barrier to securing long dated nancing, risk management tools, including innovative FX and credit insurance schemes, can also be quite powerful and less expensive/intrusive. Public sector funding would reduce the risks of investing in LCTs and demonstrate their commercial viability so as to create scaled-up, commercially viable business activity. This in turn would stimulate and mobilize private nance and investment to scale-up their deployment over time. It is therefore important that the GoI creates a Technology Innovation Fund (TIF), which would address a variety of nancing needs required for technology

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innovation and diusion through targeted interventions such as technology incubation, eld trials, capacity building, and seed capital (see Table 4.2). Setting up the TIF is also in line with the announcements made by the GoI in its budget for FY 201011, wherein it has proposed deployment of a National Clean Energy Fund (NCEF) for funding research and innovative projects in clean energy technologies. It is not yet clear whether the NCEF will take up equity in clean energy projects or undertake debt nancing of such projects or it would only support early stage low carbon innovation. However, this fund is limited to the area of clean energy and would not support LCT in other areas/sectors. A TIF focused entirely on LCT would better serve the need of the hour and would also serve to overcome the usual criticism levied at the GoI for introducing overlapping funding schemes, making the public sector funding landscape dicult to navigate for companies constrained by limited time resources besides creating bureaucratic hurdles. Initially, the TIF in India may have to be capitalized by the GoI. It could also seek or leverage contributions from international nancial institutions (IFIs) such as multilateral and bilateral development banks and international nancial institutions which are seeking to cost-eectively deploy funds in the area of technology innovation and development in India. Subsequently, when sucient momentum has built up and some progress has been made, the fund can play an important role in leveraging private nancing sources such as venture capital (VC) into the LCT area by securitizing debt and equity investments at a sucient level to draw in a matching level of venture capital investment. It could invite contributions from corporate leaders interested in investing in the development of LCTs. In fact, private sector investors may accept lower returns while co-investing alongside the GoI,

multilateral and bilateral development banks and IFIs. Else, technology incubators and innovators could leverage support from the fund for obtaining assistance from commercial nancing vehicles such as Venture Capital (VC) at the later stages in the technology development cycle. Several examples of such innovation funds exist across the world. The UK Carbon Trust (see Box 4.1), the China Environment Fund, the Canadian Technology Early Action Measures (TEAM) fund, the Massachusetts Sustainable Energy Economic Development Fund, and Massachusetts Pre-Development Financing Initiative are along the lines of the proposed fund. Initiatives similar to the UK Carbon Trust have been deployed in Australia in the form of a Low Emission Technology Fund that provides nance for large-scale demonstration of industryled low emission technology projects, to reduce the costs of developing such technologies. Many companies that have been funded by these sources have subsequently received further private and public nancing or have commercially replicated their technology in the marketplace. Although early international experiences indicate that VC has not been a very successful route for raising nances for Phase I and several VC rms have in fact had bitter experiences with their investments in this phase, such a situation has arisen mainly because these rms did not have strong business plans, technologies were embryonic, and markets were completely dependent on regulation. More recently, however, the experience with VC funding has been relatively positive and successful examples of VC investment in LCI in developing countries can be found in both Phases I and II. One example (while specically tailored to unserved or under-served low-income communities) is that of E+Co, which has oces in eight international locations and has seed-nanced over 200 clean energy companies located in developing countries in

Table 4.2

Role of the Suggested TIF in India: Types of Interventions and Gaps Addressed Gaps addressed Inadequate funding support for relevant applied research for technologies where private funding is minimal due to classic innovation barriers Uncertainty and scepticism about in-situ costs and performance, and lack of end-user awareness Lack of seed funding and business skills within research/technology start-upsthe cultural gap between research and private sectors Co-investments, loans, or risk guarantees to help viable businesses in early stages attract private sector funding Encourage uptake of cost-competitive LCTs

Intervention by Technology Innovation Fund Grants and subsidies for applied research and development of prioritized technologies Funding to evaluate technology performance Business incubation and enterprise creation assistance Early stage funding for low carbon ventures Deployment of existing energy-eciency technologies Source: Authors own.

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Box 4.1 The UK Carbon Trust The Carbon Trust was set up in 2001 by the UK government as an independent company to accelerate UKs move to a low carbon economy. The Trust uses a range of targeted interventions to develop commercially viable low carbon technologies, including: Technology acceleration projects in wave and tidal-stream power, micro-combined heat and power, advanced metering, low carbon buildings, biomass and oshore wind, which address specic shared technical and market barriers faced by industry participants. For example, the Marine Energy Challenge, focused on wave and tidal-stream power, was completed in 2006 and achieved a signicant technology cost reduction, developing a route to cost-competitiveness for wave and tidal-stream energy devices. Business incubation services providing targeted advice on intellectual property protection, intellectual property licensing, fundraising and business planning to low carbon start-ups. Enterprise development where the Carbon Trust has built six new businesses, including Partnerships for Renewables which secured over 100m of private sector funding from 10m public sector investment, accelerating the deployment of wind farms on UK public sector land. Early stage venture capital support for low carbon companies (which face a funding gap). Deployment of existing energy-eciency technologies through advice and resources to help businesses and the public sector identify and cut carbon emissions, working with over 50 per cent of the FTSE 100 companies, conducting over 3,500 site surveys annually and providing over 18m in interest-free loans annually. The fund has also helped shape up the policy landscape for low carbon growth in the UK by providing policy and market insights and by demonstrating the viability and business case of low carbon technology opportunities. To date, the Carbon Trust has made 11 investments totalling over 9m, which have leveraged 91m of private investment into low carbon companies. Source: The Carbon Trust.

the past ten years, in part through an investment fund mandate from the IFC. It makes debt and equity clean energy investments ranging between $ 25,000 to $ 1,000,000. Besides capital, it also provides tools and business knowhow to make clean energy businesses successful. India can aim to target much of such funding by improving the overall environment for investment in the country. It may be useful to highlight that there has been positive activity in VC funding targeted towards LCI in India in recent years in Phase I as well as Phase II (see Table 4.3). But such nancing has its share of drawbacks. For example, VC can be costly for the technology developer, because the investors receive both equity shares in the start up as well as a role in the management and technical developments of the company. While private VC nancing is desirable it may be useful to think of a combined Public-Private Model which could then work well for both the nancial risk-taker and the innovator. Foreign Direct Investment Capital ows from foreign sources can meet part of the huge investment requirement for the transition to LCI. Therefore, besides the creation of a technology innovation fund, there is a need to consciously tap greater Foreign Direct Investment (FDI) in Phase I as a means of strengthening the technological prowess for low carbon development. FDI, with its potential benets of technology and knowledge transfer, can contribute not just in monetary terms but

also full many technology related needs of the country. In fact, by setting environmental requirements (such as a comprehensive suite of policies intended to encourage energy eciency or by altering price signals to large/inecient users and technologies), India can use its purchasing power to transfer environmentally sound technologies into the country or it can encourage the diusion of technologies, thus making them accessible to local industry. This is important because the transfer of technologies cannot be accomplished by way of trading of goods and services or through investment of nancial resources. Many Indian companies either do not have the required R&D base or are not willing to spend their limited resources on modern technologies that can reduce the carbon footprint. Moreover, activities focused on improving the society at large and Corporate Social Responsibility (CSR) are not something which the indigenous companies focus on and that, too, in such a scale so as make a signicant dierence, although it cannot be denied that this is a thrust area for many indigenous companies. Therefore, FDI can only help improve the scenario in terms of environmental sustainability.

Phase II: Roll out


LCI projects generally operate with the same nancing structures as applied to conventional infrastructure projects and businesses. At the same time ventures involved in low carbon goods and/or services also need

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to be given due attention, while making clear distinctions between projects, products, and services. These are linked but have dierent investment propositions with dierentiated risk/reward proles. Funding strategies are not uniform (many projects will be funded 3:1 by debt while a start-up LCT company making an innovative project will often be funded through two or three rounds by venture capital). Examples of ventures could include energy service companies undertaking energy-eciency (EE) improvement projects or ventures producing and selling solar power based applications such as solar lighting systems, solar water heating systems, or alternative fuel-based systems. Such ventures often need nancing support at all stages commencing with start-up capital to raising funds for operation and expansion. The main forms of capital involved in Phase II (see Figure 4.1) include equity investment from the owners of the project, loans from banks, insurance to cover some of the risks, and possibly other forms of nancing, depending on the specic project needs. The nancing characteristics for dierent projects may vary from renewable energy projects to low carbon transport options such as hybrid or electric vehicles, but the fundamental capital needs generally remain the same. Guarantee programmes may also be crucial for certain types of projects to ensure access to aordable debt nancing.

Traditionally, nancing for this stage has been provided by CFIs and international nancial institutions (IFIs), with the latter having played a signicant role through a variety of interventions (see Box 4.2). Most of these interventions involve provision of concessional or grants funding to a local CFI, which then provides structured adapted nancing for LCI development. The role of CFIs in funding LCI has been limited. However, CFIs do fund LCI in forms other than project nance. For example, EE projects are often funded under loans for procurement of new machinery (which is more energy ecient). Several CFIs in the country have now started dedicated programmes or oerings by way of structured products to meet the specic needs of LCI. One example here is the lending programmes for EE developed by CFIs such as the State Bank of India, Canara Bank, the Bank of India, Union Bank, and the Bank of Baroda the Small Industries Development Bank of Indias (SIDBIs) funding of such projects in the small and medium enterprises segment is another example. However, public sector CFIs are still the largest credit providers to LCI given the fact that they have traditionally served social and other non-economic objectives of the government. While at the role of CFIs, it is necessary to highlight the role of the Indian Renewable Energy Development Agency Limited (IREDA) in nancing renewable energy

Box 4.2 Role of International Financial Institutions in Financing LCI Projects International nancial institutions can take many forms. These include assistance from multilateral and regional development banks, bilateral development institutions, and international nancial agencies that provide support for country-level low carbon growth eorts, including the adoption of LCTs, through the combination of conventional lending, concessional funding, carbon nance, and guarantees, which in turn can leverage traditional commercial lending. The range of assistance provided by them covers the following: Credit lines to designated local nancial institutions (DFI) or local CFI that in turn provide structured adapted nancing to the projects Guarantees to mobilize domestic lending for LCI projects and companies by sharing with local CFIs the credit risk of project loans they make with their own resources Debt nancing of projects by entities other than DFIs and CFIs Private equity funds investing risk capital in companies and projects Venture capital funds investing risk capital in technology innovations Carbon nance facilities that monetize the advanced sale of emissions reductions to nance project investment costs Grants to share project development costs Loan softening programmes to mobilize domestic sources of capital Technical assistance to build the capacity of all actors along the nancing chain Examples of IFI assistance in India include the loans to the IREDA by the World Bank, ADB, and KfW Germany, USAID funding of EE through ICICI Bank which lends 50 per cent of project cost at 9 per cent interest rate and Yes Bank credit guarantee, and many more. Source: Authors own.

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and EE projects. The GoI, realizing the barriers associated with nancing these projects, under its strategy to develop a sustainable path of energy development created IREDA in 1987. IREDAs resources have come mostly from international assistance and domestic borrowings in the form of borrowings from other banks and issuance of long term bonds. IREDA has sanctioned loans of about Rs 10,355 crore since its inception. However, other areas of LCI have not been equally fortunate. Going forward, given the huge investment requirements to enable a strategic shift towards LCI, it is clear that these cannot be met only by local CFIs, which nd several more protable projects competing for their funds and IFIs who must provide similar assistance across several developing countries. Even IREDA with its limited mandate and funding sources would not be able to make the desired impact. Therefore, there is a need to broaden the sources of funds for nancing LCI as well as the manner in which these funds are intermediated. On the equity side, there is a need to encourage new nancing sources which can help LCI projects as well as business involved in the LCI space meet the equity requirements.

(SIDBI), and more recently India Infrastructure Finance Company Limited. These institutions were created with the objective of channelizing investment in the sectors under their mandate and most have done commendable work to this end. The proposed GIFI can be visualized to carry out the following functions: Facilitating, nancing, and syndicating the delivery of low carbon investment programmes Acting as a supervisory body to ensure that government funds or grants are eectively utilized for LCI Providing guarantee facilities on behalf of the GoI through allocation of a Statutory Government Guarantee or GIFI Guarantee Scheme Filling the debt gap for LCI through provision of direct loans as well as syndicated loans (loans supplemented by loans from other CFIs) to LCI and provision of credit lines to identied partner CFIs Facilitating a transparent communication of government policy Promoting skills/capacity building on LCI by designing and running training programmes Acting as an intermediary of local cap and trade mechanisms as well as green/renewable energy certicates and making such instruments liquid. The creation of a GIFI would however require a large pool of technically qualied talent. The government would therefore have to undertake a huge capacity building exercise across relevant institutions in the country to create such a pool of talent. A start has already been made under the National Solar Mission which aims to train at least 100,000 specialized personnel across the skill spectrum for employment in the solar industry. But greater attention has to be paid to the creation of skills across the broad set of LCI. Role of Commercial Financial Institutions Even with the creation of a Green Investment Bank, CFIs would continue to play an important role as an intermediary between investors, and companies/organizations operating green projects. CFIs, both in the public and private domain, must consider developing nancial product modications to match the characteristics of dierent types of low carbon or green infrastructure projects. This would help expand the market for such loans and could increase uptake of nancially viable, yet unimplemented projects. The task would perhaps be simpler if CFIs look at such products or servicing such needs as a way to expand and strengthen their position in a specic market or business line.

Strategy to Enable Directed Financing in Phase II


Debt nance A new Green Infrastructure Financial Institution Eective long-term availability of funds for facilitating the shift to LCI would necessitate large-scale, well constructed involvement of local CFIs. However, given the barriers to investment described earlier in this chapter, the extent of funding undertaken by CFIs would be limited. There is therefore a need to have a dedicated nancial institution with specic focus on driving the transformation to LCI. It is suggested that the GoI restructure and empower IREDA as a Green Infrastructure Financial Institution (GIFI) towards this end. IREDA already has substantial sector-specic expertise in some areas of LCI and can easily t into the shoes of a GIFI. However, IREDA would have to be signicantly strengthened to be made capable of responding to, and in many areas anticipating, the needs and complexities of the low carbon transition and thereby designing new and ecient nancial instruments to meet these needs. The concept of a sector specic structured nancial institution such as a GIFI is not new to India. IREDA itself is a case in point. Other similar institutions in the country include the National Bank for Agricultural and Rural Development, Power Finance Corporation, Rural Electrication Corporation, Industrial Development Bank of India, Small Industries Development Bank of India

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CFIs can also consider strengthening the environmental risk management system by better evaluating and addressing carbon risks in the nancing and construction of infrastructure. Signing up to the Equator Principles (EP) or the UNs Principles for Responsible Investment are perhaps the easiest way to do that. There have been several arguments against Indian CFIs signing up to the EP. While a debate on this issue is beyond the scope of this chapter, the point remains that CFIs can take several steps to ensure that infrastructure projects funded by them are benign to the environment. The development of carbon principles jointly by Citi, JPMorgan Chase, and Morgan Stanley (see Box 4.3) could be a guiding force in this regard. The GoI has taken several steps to facilitate greater funding of specic LCI by CFIs especially banks. For instance, under the National Mission on Enhanced

Energy Eciency (NMEEE) it has created a Partial Risk Guarantee Fund, which will be a risk-sharing mechanism that will provide commercial banks with partial coverage of risk exposure against loans made for energy-eciency projects. This will reduce the risk perception of the banks towards lending for new technologies and new business models associated with EE projects. While this is a welcome initiative, it would not be wrong to say that instead of creating separate nancing machineries for dierent LCI, initiatives such as these can all be combined under one roof through the GIFI. In addition, the GoI should consider declaring dened LCI such as renewable energy, EE, and clean transportation projects as a priority sector.4 The inclusion in priority sectors will enhance credit availability at lower rates, lead to greater participation by CFIs in such projects, and eventually make available more funds for such projects.

Box 4.3 Carbon Principles Formulated and Adopted by Citi, JP Morgan Chase, and Morgan Stanley Citi, JPMorgan Chase, and Morgan Stanley formed a consortium and consulted with power companies and environmental groups in the US to develop a process for understanding carbon risk around power sector investments needed to meet future economic growth and the needs of consumers for reliable and aordable energy. The outcome of this initiative has been the development of an Enhanced Diligence framework to help lenders better understand and evaluate the potential carbon risks associated with coal plant investments. The carbon principles and associated Enhanced Diligence represent an important step by these banks in contributing to the eorts to address growing greenhouse gas emissions. These principles are as follows: Energy eciency: An eective way to limit carbon dioxide emissions is to not produce them. The adopting nancial institutions will encourage clients to invest in cost-eective demand reduction, taking into consideration the value of avoided carbon dioxide emissions. We will also encourage regulatory and legislative changes that increase eciency in electricity consumption including the removal of barriers to investment in cost-eective demand reduction. The institutions will consider demand reduction caused by increased energy eciency (or other means) as part of the Enhanced Diligence Process and assess its impact on proposed nancings of certain new fossil fuel generation. Renewable and low carbon distributed energy technologies: Renewable energy and low carbon distributed energy technologies hold considerable promise for meeting the electricity needs of the US while also leveraging American technology and creating jobs. We will encourage clients to invest in cost-eective renewables and distributed technologies, taking into consideration the value of avoided carbon dioxide emissions. We will also encourage legislative and regulatory changes that remove barriers to, and promote such investments (including related investments in infrastructure and equipment needed to support the connection of renewable sources to the system). We will consider production increases from renewable and low carbon generation as part of the Enhanced Diligence process and assess their impact on proposed nancings of certain new fossil fuel generation. Conventional and advanced generation: In addition to cost eective energy eciency, renewables and low carbon distributed generation, investments in conventional or advanced generating facilities will be needed to supply reliable electric power to the US market. This may include power from natural gas, coal and nuclear technologies. Due to evolving climate policy, investing in carbon dioxide-emitting fossil fuel generation entails uncertain nancial, regulatory and certain environmental liability risks. It is the purpose of the Enhanced Diligence process to assess and reect these risks in the nancing considerations for certain fossil fuel generation. We will encourage regulatory and legislative changes that facilitate carbon capture and storage to further reduce carbon dioxide emissions from the electric sector. Source: Morgan (2008).

At present the priority sector broadly comprises agriculture, small-scale industries and other activities/borrowers such as small business, retail trade, small transport operators, professional and self-employed persons, housing, education loans, microcredit, etc.

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The GoI can also draw inspiration from the Dutch Green Funds Scheme to develop innovative schemes that encourage the funding of green projects by local CFIs (see Box 4.4). While on the subject of the role of CFIs, it may be useful to highlight that besides direct nancing of projects, CFIs can also play an enormous role in creating a retail market for products and services that in turn promote low carbon infrastructure growth. An example here would be renewable energy applications such as solar home lighting systems and solar water heaters. If consumer durable loans are available for such products on easy terms and conditions, it would help create a market akin to that for consumer goods and would incentivize people to integrate renewable energy applications into their home, thereby avoiding fossil fuel based generation. Similarly, cheaper home loans for home owners/buyers installing roof-top photo voltaic (PV) systems would encourage the uptake of such homes and provide an indirect incentive to real

estate developers to integrate roof-top photo voltaic in buildings. An example of such an initiative can be found in the Standard Chartered Bank, which, as part of its eorts to expand nancing for green development, has developed a green product innovations guide, a tool to help generate ideas for environment-oriented products and services in the countries where it operates. Under this guide, the Bank rolled out a Go Green campaign in Malaysia where it donated RM3 to the Malaysian Nature Society Tree Planting Programme for every customer who activated their online banking before a pre-specied date. This campaign was then replicated it in countries such as Pakistan, the UAE, and South Korea. One may argue that initiatives such as this one are more in the nature of fullling a banks CSR and can hardly be qualied as active interventions. But initiatives such as these help create awareness which could be eective in raising funds through other methods such as green bonds.

Box 4.4 Funding Green Projects through Commercial Financial InstitutionsThe Dutch Experience The Netherlands has adopted a unique method of funding green projects. This method, called the Green Funds Scheme, was launched in 1995 by the Dutch government and comprises the Green Projects Scheme (which establishes the conditions governing the projects), the Green Institutions Scheme (which regulates the role played by the nancial institutions) and nally the tax incentive for individual investors (which gets the ow of funds under way). Under the Green Funds Scheme, a tax incentive scheme has been provided to encourage individual investors to put money into green projects that benet nature and the environment. Individuals who invest in a green fund or save money with nancial institutions practising green banking receive a rate lower than the market interest rate but the tax incentive compensates for this. In their turn, the banks charge green projects a low interest rate. Generally in the Netherlands, an individual investor would normally pay 1.2 per cent capital gains tax on the amount invested. But green capital is exempt up to a maximum of Euro 53,421 per person (as in 2007). Green investors also pay less income tax on their green capital. Their reduction is 1.3 per cent, so the total tax advantage is 2.5 per cent. This means they can accept a lower interest rate or dividend on their investment. The Green Projects Scheme designates projects that are eligible for green project status. There are a few technical and nancial conditions, but the main requirement is that these are new projects providing a signicant and immediate environmental benet. Projects are divided into categories such as renewable energy, construction infrastructure, voluntary soil decontamination, organic farming, etc. The Green Institutions Scheme involves the creation of a green fund or a green bank in participating commercial banks and nancial institutions. The banks issue bonds with a xed value, term and interest rate, or shares in a green investment fund. Usually, the interest rate or dividend paid by the bank is lower than the market rate, which means that the bank can in turn invest the funds in green projects at a lower interest rate. The banks then use the capital in the green fund to oer soft green loans to nance green projects. The banks are obliged to put at least 70 per cent of that money into certied green projects. They may invest the remaining 30 per cent elsewhere to spread the risk and to compensate for nancing barely protable projects. The Dutch central bank and the tax authorities supervise the process. The implementation of this scheme has yielded many benets. First, following the implementation of this scheme, the green capital available under the green institutions scheme rose to Euro 5 billion in 2005. Of this, roughly 85 per cent has actually been invested in green projects. In fact, now the CFIs ask developers to consider sustainable energy nancing, rather than the other way round. Second, the scheme has also had an impact on the way in which people think about their responsibility for the environment. The scheme enjoys broad public support in the Netherlands and has encouraged the banking sector to oer a wide range of sustainable investment products, enhancing its contribution to corporate social responsibility. And together with other tax incentives and grants, the scheme has increased environmental investment among entrepreneurs. Source: SenterNovem, http://www.senternovem.nl/mmles/GreenFunds%20scheme_tcm24-223487.pdf

Financing Low Carbon Infrastructure in India

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Equity nance Given that equity represents the owners contribution, there is no doubt that the equity nance needs would have to be mobilized. But for this moblization, LCI must be made attractive by way of risk mitigation measures and adequate institutional mechanisms to enable debt nancing. The creation of TIF and GIFI will serve the precise purpose of providing the institutional mechanism that would make LCI attractive for equity investments. The main sources of nance that can be tapped for LCI are venture capitalists, private equity (PE) funds, pension funds (mostly international), and hedge funds who invest in companies or directly in projects or portfolios of assets. These funds blend public, private, and philanthropic sources of nancing and engage in investments depending on the type of business, the stage of development of the technology, and degree of risk associated therein. The characteristics of some of these equity funds are provided in Table 4.3. It is heartening to note that LCI in India is rapidly emerging as a new asset class for many of these funds. Recent estimates indicate that capital raised by international PE and VC funds focused on India grew by 67 per cent between 2007 and 2008 with a quantum increase in investment going towards clean technology (see Table 4.4). Another exciting development is that there has been a dramatic growth in PE funds within the country (see Figure 4.2) and many of these have shown a clear intent of investing in LCI.
Table 4.3 Venture Capital Funds Sources of nance Sources with high-risk appetite such as insurance companies, pension funds, mutual funds, high net worth individuals New technology, start-up companies

Examples of domestic PE funds include Jacob Ballas Capital India, Chrys Capital, Actis, ICICI Ventures, IDFC Private Equity, IL&FS, and Baring India. Many of these such as IDFC Private Equity have consciously built a green infrastructure portfolio, with an estimated investment of over Rs 1,000 crore ($ 200 million) either invested in, or already committed, to such infrastructure. Similarly, VC rms are setting up exclusive carbon funds for clean infrastructure projects which have the potential to generate carbon credits. The IFCI Venture Capital Fund (see Box 4.5) is one such example. The GoI too has announced the creation of a Venture Capital Fund for Energy Eciency (VCFEE) under the NMEEE, which would be implemented from 1 April 2010. It is expected that the VCFEE will ease a signicant barrier from the viewpoint of risk capital availability to energy service companies and other companies who invest in the supply of energy ecient-goods and services. While VC and PE funds are becoming active investors in this space and have the potential to ll the equity gap, there is little scope to tap the domestic pension funds for nancing LCI in the short to medium term. There are two main reasons for this. The rst is the absence of a comprehensive old age income security system in the country. With the organized workforce accounting for only about 10 per cent of the total workforce, the coverage by government provident funds or private pension schemes is rather low. The second is that the regulations applicable to such funds have historically been based solely on investment

Characteristics of Dierent Types of Equity Funds Private Equity Funds Sources with medium-risk appetite such as institutional investors and high net worth individuals Pension Funds Organized sector workforce, companies in the organized sector by way of their contribution towards the benet of employees, labour unions, and the government Public equity (via stock markets), corporate and government bonds, real estate, ination-linked assets (such as commodities, ination linked bonds), specialized Private Equity or Venture Capital funds cash yielding investments, that is those that generate a stream of cash year on year Low-risk appetite, stable returns at around the 15% level

Investment areas

Companies and projects with more mature technology including those preparing to raise capital on public stock exchanges (pre-IPO stage), demonstrator companies, or underperforming public companies 35 years

Investment horizon

47 years

Return requirement

Many multiples of original investment (50500% IRR)

Higher return requirement (typically 25% IRR)

Source: UNEP Sustainable Energy Finance Initiative, Bloomberg New Energy Finance, and the Royal Institute of International Aairs (2010).

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Table 4.4 PE and VC Funds Focused on India: by Sector and Stage No. of Funds 23 1 1 5 1 5 1 37 1 18 16 2 37 2007 closes ($ million) 3230 NA NA 625 214 500 NA 4569 1750 1615 804 NA 4569 No. of Funds 16 NA NA 3 1 1 NA 21 2 15 4 NA 21

Sector General Agribusiness Clean Technology Technology Industrials/Mfg Infrastructure Consumer Total Stage Buyout Growth/Expansion Venture Capital Multi-stage Total

2008 closes ($ million) 4963 85 100 583 200 1632 147 7710 1340 3860 1110 1400 7710

Source: Emerging Markets Private Equity Association (2009).

50 40 29 30 20 10 0 2004 2005 2006 3 12

43 33

2007

2008 (H1)

Figure 4.2 Source: IFC (2009).

Number of PE Funds Launched in India during 20048

in government-run saving plans and xed income instruments. It is only in the last year or two that the government has been prepared to introduce a small degree of exibility in terms of asset allocation, and even this has not yet been fully rolled out. Therefore, it is unlikely that this segment can be tapped. However, there is hope from international pension funds, which have started looking at increasing their exposure to India. Examples of such funds include the two Dutch pension funds, Algemene Pensioen Groep N.V. (APG) and The Stitching Pensioenfonds voor de Gezondheid, Geestelijke en Maatschappelijke Belangen (PGGM). The strategy of both these funds appears to be to invest

directly in these assets classes in India, rather than invest as limited partners in a third-party private equity or infrastructure funds. Although the trend of investments by pension funds is at an early stage, providing a favourable investment environment to such funds would help raise nance. While there is no doubt that the growing PE and VC market would be an important source of funds for equity nancing, these funds come with their pros and cons. For example, PE business models rely on high returns. Therefore, business would need to carefully evaluate the benets and costs of obtaining such funding. In order to encourage greater funding of LCI by equity funds, an array of policy measures need to be adopted to tackle the range of market failures involved and to facilitate the necessary private nance ows. Possible policy measures include tightening building codes and fuel eciency standards, implementation of renewable portfolio obligations for power distribution utilities, and urban planning utilizing the latest technologies.

Raising Incremental Funds


The huge funding requirement for LCT/LCI has already been discussed. Given the limited availability of funds from the usual sources like budgetary support by the GoI, IFI assistance and the retail deposit base of banks, it is imperative that additional instruments/sources be explored to raise funds. Three options can be considered

Financing Low Carbon Infrastructure in India


Box 4.5 The IFCI Green India Venture Fund The IFCI Venture Capital Fund, which was set up as a subsidiary of IFCI Ltd in 1975 with the objective of providing the much needed risk capital at the start up stage for green eld projects, has oated the Green India Venture Fund with a corpus of Rs 330 crore ($66 million). The life of the fund will be seven years with three prolongation options of one year each. IFCI has made a 10 per cent sponsor contribution towards corpus of the fund and the remaining corpus will be raised from other nancial institutions/banks/companies/multilateral agencies and foreign investors. The fund will invest in the following areas: Energy-eciency equipments, industrial process, lighting, and building material Renewable energy such as wind, solar, and biomass Energy storage technology, process, equipment such as fuel cells, advance batteries, hybrid systems Waste management including waste recycling, waste usage Water treatment and water conservation Pollution control projects/processes and technologies Transportation: Vehicles, logistics, structures, fuels, etc., aimed at improving eciency and/or reducing negative environmental impact Materials with clean and environment friendly applications Aorestation and reforestation activities Manufacturing/Industrial process aimed at reducing negative ecological impact The investment criteria for the fund are as follows: Investments to be made generally by way of equity and equity linked investment instruments in companies operating to achieve aims indicated in the investment objective of the fund. At least 50 per cent of investment to be made in companies engaged in energy/power related activities/ projects Maximum investment per portfolio company not to exceed 10 per cent of the Fund Corpus Appropriate mix of investments in various companies engaged in, amongst others, CDM projects and other projects engaged in reducing negative ecological impact, ecient usage of resources such as energy, power, etc., and other related sectors. Investment to be made in generally early stage investment or expansion capital stage Source: IFCI Venture Capital Funds Ltd.

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for this purpose. These are issuance of green bonds, a carbon cess, and domestic carbon market mechanisms. Green bonds Green bonds are typically tax-exempt bonds, which are issued by federally qualied organizations and target institutional and retail investors. Therefore, they help raise additional funds from consumers and the private sector rather than general taxation. Green bonds could be related to specic technologies or projects to ensure that the money raised is invested in a particular set of projects. On the other hand, bonds could be generic in nature as far as the technology or project is concerned and the proceeds could be used to nance any LCI project that meets predened criteria. The willingness of investors to buy such bonds will be determined by their risk-return characteristics and competitiveness vis--vis normal bonds. Therefore, within the category of green bonds, dierent products could be developed to cater to dierent risk. However, large institutional investors may also be concerned about how bond proceeds are used. They would therefore expect credible evidence that tangible benets will be delivered.

Several examples of green bonds can be found globally. For example, the World Bank Green Bond issued through the International Bank for Reconstruction and Development raises funds from xed income investors for World Bank projects that seek to mitigate climate change or help aected people adapt to it. The bonds garnered funds from socially responsible institutional investors, high-net-worth individuals as well as retail investors. Four such bond issues have been oated by the World Bank till date. A special green account has been used for proceeds from green bonds. At the end of every quarter, funds are deducted from this account and added to the World Banks lending pool for green disbursements to support eligible projects. The experience with these bonds has shown that investors are interested in products that oer both appropriate risk-adjusted returns and contribute to the climate. However, green bonds are not free from problems. Since these bonds are tax free and are government backed nance, they would compete for nite nancial resources of the GoIeither from public debt or taxationand such approaches could create a moral hazard in that the government could be asked to fund sub-optimal projects

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on the understanding that it bears the risk of commercial failure. Anyhow, green bonds can only be a temporary measure, designed to bridge a market gap because in the long term, the policy and regulatory framework must provide a clear market signal for the shift to LCI. Carbon Cess/Levy Another option that can be explored to raise funds is that of a carbon cess/levy. Such a cess/levy can take many forms. It can be a direct levy on airline travel and shipping, conventional power/fossil fuel generation, private transport, diesel, fuel oil and kerosene products; a cess on certain categories of electricity consumers; heavier customs duty on energy equipment for fossil fuels; a levy on energy-intensive materials or on energy-intensive industries. The proceeds of the suggested cess can go towards a fund established specically for this purpose. This suggestion is already being explored by the GoI, albeit in a small manner. It has announced the levy of a clean energy cess on coal @ Rs 50 per tonne in its budget for FY 201011. This cess will be applicable to the coal produced within the country as well as on imported coal. The proceeds of the cess will go into the NCEF. Such a fund as proposed herepossibly called as low carbon development fundshould be ring-fenced under a legislative framework so as to ensure that the proceeds of the fund are utilized for funding green infrastructure and technologies. It can be modelled on the Central Road Fund, which is a dedicated fund created from the levy of a cess on petrol and diesel (Rs 2 per litre on petrol and High Speed Diesel). The fund is distributed for development and maintenance of national highways, state roads, rural roads, and for provision of road overbridges/underbridges

and other safety features at unmanned railway crossings under the Central Road Fund Act 2000. It is suggested that the low carbon development fund be utilized by the GoI in two ways. First, part of the fund could be placed under the GIFI which would use it to provide debt nancing for projects and part of it could be utilized by GoI and its agencies towards lowering the capital cost of LCI projects by way of viability gap funding that is a grant to meet a portion of the capital cost of the project with the objective of improving the commercial viability of the project. A global example of a similar cess is the Thai Energy Conservation Promotion Fund (ECON Fund) which was launched as part of the Thai Energy Conservation Act in 1992 to provide nancial support for projects ranging from EE, demonstration and dissemination of renewable energy technologies, R&D projects, projects on market enhancement for renewable energy technology equipment, and training and promotional campaigns. The fund receives revenue from a small tax on benzene, diesel, fuel oil, and kerosene products sold and used in Thailand. In India, the states of Maharashtra and Karnataka have levied a cess on the consumption of electricity. The proceeds from the cess are used to fund certain categories of LCI (see Box 4.6). Domestic Market Mechanisms Besides the above options that serve to directly raise funds, there is a need to strengthen domestic market mechanisms that could provide for indirect funds for LCI. This is all the more pressing because of the uncertainty surrounding the Clean Development Mechanism (CDM) post 2012 (see box 4.7). The rst option that can be explored in

Box 4.6 Green Cess on Electricity Consumption in Maharashtra and Karnataka In Maharashtra, the state government jointly with a private sector nancial institutionthe Infrastructure Leasing & Financial Services (IL&FS)has promoted the Urjankur Nidhi Trust Fund to promote non-conventional energy projects in the state. The fund would initially promote bagasse-based co-generation power projects which have a signicant potential in Maharashtra. The fund would provide nancial support in the form of equity with maximum support per project of up to 20 per cent of the project cost or 20 per cent of the corpus, whichever is lower. The fund will also provide crucial support functions during project development, project management, and distribution of resulting power. The fund has a corpus of Rs 418 crores of which Rs 218 crores would be contributed by the government of Maharashtra. This fund would be replenished through the imposition of a green cess of 4 paisa per unit on industrial and commercial power consumers in Maharashtra. The other 200 crores would be contributed by private institutional investors. In Karnataka too, the state government has levied a cess called Green Energy Cess at 5 paisa per unit on commercial and industrial consumers. It is expected that the cess would generate Rs 55 crore annually. A part of the proceeds raised through this cess will be set aside for the Energy Conservation Fund. The remaining proceeds would be utilized for nancing renewable energy projects in the state, strengthening the evacuation system for such projects and for an integrated information and communication programme in the state. Source: Maharashtra Energy Development Agency (2010); Karnataka Renewable Energy Development Limited (2010).

Financing Low Carbon Infrastructure in India


Box 4.7 Carbon Finance under the Clean Development Mechanism The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol that allows industrialized countries with a GHG reduction commitment (called Annex 1 countries) to invest in ventures that reduce GHG emissions in developing countries where costs are lower than in industrialized countries. The benets of these reductions are monetized through the issuance of Certied Emissions Reductions (CERs). A price on these CERs enables the monetisation of future cash ows from the advanced sale of CERs. This is popularly known as carbon nance. A total of 373,747,027 CERs have been issued till date under this framework and over 1,730,000,000 CERs are expected until the end of 2012. Though India does not have any emission reduction target, it is able to sell CERs pursuant to the CDM, to large emitters covered by the EU ETS, countries that have emission reduction targets under the Kyoto Protocol, or any other entity that wishes to purchase such CERs for compliance purposes. India ranks second by number of projects registered by the CDM Executive Board at 491 and second by volume of issued CERs at 77,296,186 as of 10 March 2010. Though CDM is an important nancing mechanism for incremental costs, it has been well short of the scale required. This is because the carbon market has not provided investors with the strong, long-term price signals that are necessary to support large investments in low-carbon solutions. The primary reason for this lies in the uncertainty regarding the future international climate regime on account of the long-term framework for the post-2012 period. Second, the short-term, compliance-driven buying interests in industrialized countries have not supported large, cleaner investments in infrastructure that have long-term emission reduction potential. Third, the project-by-project approach under the Kyoto Protocol involves high transaction costs for developers of LCI and has therefore been unsuccessful in generating a large-scale transformation to LCI. Source: Authors own.

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this regard is the cap and trade system. Cap and trade is basically an environmental policy tool that delivers results with a mandatory cap on emissions while providing sources exibility in how they comply. Under such a system, a company is given a limit or cap on its carbon emissions. If its emissions come under the cap, it can use the dierence as a credit that can then be sold to another company. If a company goes over its cap, it must buy carbon credits to make up the dierence. These carbon credits can be traded on an open market like a stock exchange. Alternatively, the government can auction the emissions permits to the companies required to reduce their emissions. This would create a large and dependable revenue stream. These nancial resources could be used to nance LCI. Other market mechanisms that have recently been created in the country and need to be made operational at the earliest are RECs or energy-eciency certicates (EECs). The idea of RECs is to create two dierent markets with RE, one for physical electricity produced and the other for the environmental attributes of such electricity. With such a system, RE is fed into the electricity grid and sold at market prices, but the RE producer also receives a certicate that is sold on the market created for certicates and improves the competitiveness of the renewable production. The market for RECs has recently been created through regulations to that eect by the Central Electricity Regulatory Commission (CERC). Two categories of RECs have been created thereinsolar RECs and non-solar RECs (RECs issued to renewable energy other than solar). This is in keeping with the countrys

target for increasing the installed capacity of solar power to 20,000 MW by 2022 under the GoIs National Solar Mission. Each REC issued would represent one Megawatt hour of electricity generated from an RE source and injected into the grid. Further, only generators of RE not selling electricity to distribution utilities through power purchase agreements at preferential taris will qualify for RECs. Renewable energy certicates will be transacted only through a power exchange, which will also facilitate their price discovery. EECs or Energy Savings Certicates (ESCerts) are certicates issued as a result of achievement of certain pre-dened energy savings as a consequence of energy eciency improvement measures. In Europe, several countries have already implemented a white certicate scheme. These include France, Italy, and the UK. Like RECs, White Certicates too, facilitate the nancing of EE projects. ESCerts have been introduced by the GoI under the NMEEE. Specic Energy Consumption (SEC) norms would be set for 714 units in 9 energy intensive sectors and ESCerts would be issued to those who exceed their target SEC reduction. It is envisaged that trading of ESCerts would be carried out bilaterally between any two designated consumers (within or across the designated sectors), or on the power exchanges.

Conclusion
The key ingredient in successfully addressing a low carbon growth path in India is a massive amount of new investment in LCT and consequently LCI. This leaves us

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with the question: how can the country facilitate more of this kind of investment? The solution to this question involves the development of a coherent nancing strategy. This chapter has proposed such a strategy by answering two important questions, that is, the institutional mechanism for enabling credit, thereby making it attractive for equity investors to invest in this space and the channels to raise extra funds for such investment. Needless to say, fostering the growth of clean technology companies and projects would also require an appropriate regulatory environment and would also be dened by commercial realities.

In conclusion, the overall nancing strategy has three broad components: (i) create a technology innovation fund to nance LCT innovation and diusion; (ii) create or adapt existing nancial institutions into a dedicated nancial institution with a mandate and comprehensive strategy for providing debt nancing to LCI; and (iii) establish/strengthen the domestic carbon trading market. The institutional mechanisms proposed here will provide the terra rma for leveraging private nancing sources. Some part of the incremental nancing requirement can be met through issuance of green bonds and levy of a carbon cess.

References
Climate Change Capital (2009). Accelerating Green Infrastructure Financing: Outline proposals for UK green bonds and infrastructure bank, Brieng Note1, March 2009, available at http://www.climatechangecapital.com/media/2153/ Accelerating%20Green%20Infrastructure%20Financing %20Final%2021-05-09.pdf Emerging Markets Private Equity Association (2009). Fundraising and Investment Review 2008, April 2009. Forum for the Future (2010), Clean Capital: Financing clean technology rms in the UK, United Kingdom, available at http://www.forumforthefuture.org/les/Cleancapital.pdf, last date of access 15 February 2010. Grantham Institute for Climate Change and the Environment (2009). Meeting the Climate Challenge: Using Public Funds to Leverage Private Investment in Developing Countries, London School of Economics, September 2009, available at http://www2.lse.ac.uk/GranthamInstitute/publications/ OtherPub/Leveragedfunds/Meeting%20the%20Climate %20Challenge.aspx International Finance Corporation (2009). IFC Sustainable Investment Country Reports: Sustainable Investment in India 2009, May 2009, available at http://www.ifc.org/ifcext/ sustainability.nsf/AttachmentsByTitle/p_Sustainable_ investment_in_India2009FINAL/$FILE/Sustainable_ investment_in_India2009FINAL.pdf IFCI Venture Capital Funds Ltd. (2010). Available at http:// www.ifciventure.com/, last date of access 20 January 2010. Karnataka Renewable Energy Development Limited (2010). Available at http://kredl.kar.nic.in/Renewable%20Energy %20Policy%202009.doc, last date of access 15 February 2010. Maharashtra Energy Development Agency (2010). Available at http://www.mahaurja.com/pdf/urjankur.pdf, last date of access, November 25, 2010. McKinsey & Company (2009). Environmental and Energy Sustainability: An Approach for India, August 2009. Morgan, J.P. (2008). Leading Wall Street Banks Establish the Carbon Principles, February 2010. http://www.jpmorgan. com/pages/jpmorgan/news/carbonprinciples, last date of access 15 January 2010. Nazworth, Napp (2009). Cap-and-Trade Versus Carbon Tax: Two Ways to Reduce Carbon Emissions, April 2009, available at http://pollution-control.suite101.com/article.cfm/ capandtrade_versus_carbon_tax#ixzz0h0iYowsc Senter, Novem (2007). The Green Funds Scheme, SenterNovem publication, 3GB0701, November 2007, available at http:// www.senternovem.nl/mmles/GreenFunds%20scheme_ tcm24-223487.pdf, last date of access 20 January 2010. The Carbon Trust, UK, http://www.carbontrust.co.uk/ The Cleantech Group (2008). Cleantech Venture Capital and Private Equity Investments in India, 2008 The World Bank (2008). Scaling Up Carbon Finance In India; Background PaperIndia: Strategies for Low Carbon Growth, 2008, available at http://moef.nic.in/downloads/ public-information/LCGCarbonJune2008.pdf, last date of access 15 February 2010. UNEP and Partners (2009). Catalysing Low-carbon Growth in Developing Economies: Public Finance Mechanisms to Scale up Private Sector Investment in Climate Solutions, 2009. UNEP Sustainable Energy Finance Initiative (2005). Public Finance Mechanisms to Catalyze Sustainable Energy Sector Growth, 2005, available at http://www.energy-base.org/ leadmin/media/base/downloads/SEFI_Public_Finance_ Report.pdf, last date of access 3 January 2010. UNEP Sustainable Energy Finance Initiative, Bloomberg New Energy Finance, and The Royal Institute of International Aairs (2010). Private Financing of Renewable EnergyA Guide for Policymakers, UK. United Nations Framework Convention on Climate Change (2010). Clean Development Mechanism, http://cdm.unfccc. int/Statistics/index.html, last date of access 20 February 2010.

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