New Delhi: India is working on a plan to reduce borrowing costs and improve the viability of solar and wind power projects by extending hedging support for foreign loans, leveraging the National Clean Energy Fund (NCEF).

The plan which is still being finalized, may work like this: developers want to borrow overseas as they are cheaper than those offered by local banks and financial institutions.

Even though interest costs of foreign loans are lower, project developers have to hedge their foreign currency exposure. The additional hedging costs of about 6-7% reduces their attractiveness of borrowing overseas. In order to reduce the cost, the government plans to provide guarantees against hedging risk using the NCEF, eliminating the need to hedge.

“With the foreign loans costing around Libor (London Interbank Offered Rate) plus 100 to 200 basis points, the interest rate comes out to be a maximum of around 3% which is very cheap as compared to domestic loans, which are available around 11.5%. The problem is the hedging cost which comes to around 6% with a short duration of three years taking the overall cost to around 9%," said a person aware of the government’s strategy, requesting anonymity.

The government’s premise is that the subsidies to renewable energy projects can be eliminated if the cost of foreign loans can be brought down to 3-4% from the current levels.

Hedging helps firms with foreign currency exposure to protect themselves from unfavourable fluctuations in exchange rates. Hedging is typically done by buying or selling currency forwards and options.

“The idea is that the developer doesn’t need to hedge, with the government of India providing a guarantee that up to a particular level of rupee depreciation, it will stand surety against the NCEF. This thereby takes away the hedging risk and the cost associated with it. The government believes that the rupee wouldn’t depreciate more than 3%, and in the event of it depreciating more than 3%, Government of India will stand guarantee," said the person cited above

The NCEF is a green energy fund announced in the Union budget of 2010-11. Last year’s budget doubled the clean energy cess on coal mined in India or imported to ₹ 100 per tonne, aggregating ₹ 6,000 crore every year. With the mining activity expected to pick up in the country post the coal auctions, the annual collection can increase to around ₹ 15,000 crore every year. The government is expecting an investment of $200 billion in green energy projects.

Speaking at RE-Invest 2015, India’s first global investors’ meet for green energy, Piyush Goyal, minister for power, coal and new and renewable energy, had on Sunday said that while the rupee has depreciated on an annual compounded annual growth rate (CAGR) of 3%, the hedging cost is 7-8%.

“It is a loss to the Indian system," said Goyal while adding that there is a requirement for a “more sustainable framework for the government to bring down the interest rate".

In last year’s budget, finance minister Arun Jaitley also expanded the scope of NCEF’s use to include financing and promoting clean environment initiatives and funding research towards that end. A senior government official aware of the plans said, “This is the broad idea. Let’s see whether it comes in the budget or after it."

Rating agency ICRA Ltd, in a 16 February report regarding the budget expectations, wrote: “Higher budgetary allocation towards the renewable energy sector for funding of grants, viability support as well as incentives to be offered under GBI (generation based incentive) framework."

Firms have been demanding cheaper loans to set up these projects. India, the world’s third-largest emitter of greenhouse gases, has secured pledges from 213 companies for setting up a renewable energy capacity of 266 gigawatts (GW) over the next five years. The government is expecting an investment of $200 billion in green energy projects.

“We can look at some sort of a guarantee mechanism for bringing down the cost of finance," Goyal said on Sunday.

While queries emailed to a spokesperson of ministry of new and renewable energy remained unanswered till press time, the finance ministry’s position could not be confirmed as it is under quarantine during the last phase of preparations for the budget, which will be announced by Jaitley on 28 February.

“The hedging costs are very high," said Yaduvendra Mathur, chairman and managing director, Export-Import Bank of India (Exim Bank) on Sunday.

Sumant Sinha, chairman and chief executive of the Gurgaon-based clean energy firm ReNew Power Ventures Pvt. Ltd, said: “The costs for the sector comes from the debt side. The question is how to reduce the costs of debt financing. This can be done through priority sector lending, interest subvention and reducing the hedging cost through NCEF or some other measure."

The Bharatiya Janata Party (BJP)-led government has sharply raised an earlier solar energy target of achieving 20,000 megawatts (MW) capacity by 2022 to 100,000MW. A wind power capacity of 60,000MW is also targeted by then. The government is aware of the funding challenges and plans to float five funds of $5 billion each, targeted at promoting renewable energy sources.

In a related development, Yes Bank Ltd on Monday said it will raise ₹ 500 crore through issuance of “green infrastructure bonds", which will be deployed to fund renewable energy and energy efficiency projects.

Of India’s installed power generation capacity of 255,012.79 MW, green energy has a share of 12.42%, or 31,692.14 MW.

PTI contributed to this story.

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