Reaching India’s Renewable Energy Targets Cost-Effectively: A Foreign Exchange Hedging Facility

In India, a significant barrier to market-competitiveness of renewable energy is a shortage of attractive debt. Domestic debt has high cost, short tenors, and variable interest rates, adding 30% to the cost of renewable energy compared to renewable energy projects elsewhere. Foreign debt is as expensive as domestic debt because it requires costly market-based currency hedging solutions. We investigate a government-sponsored foreign exchange facility as an alternative to reducing hedging costs. Using the geometric Brownian motion (GBM) as a representative stochastic model of the INR–USD foreign exchange rate, we find that the expected cost of providing a currency hedge via this facility is 3.5 percentage points, 50% lower than market. This leads to an up to 9% reduction in the per unit cost of renewable energy. However, this requires the government to manage the risks related to unexpected currency movements appropriately. One option to manage these risks is via a capital buffer; for the facility to obtain India's sovereign rating, the capital buffer would need to be almost 30% of the underlying loan. Our findings have significant policy implications given that the Indian government can use this facility to make renewable energy more competitive and, therefore, hasten its deployment

Reaching India’s Renewable Energy Targets Cost-Effectively: A Foreign Exchange Hedging Facility

In India, a significant barrier to market-competitiveness of renewable energy is a shortage of attractive debt. Domestic debt has high cost, short tenors, and variable interest rates, adding 30% to the cost of renewable energy compared to renewable energy projects elsewhere. Foreign debt is as expensive as domestic debt because it requires costly market-based currency hedging solutions. We investigate a government-sponsored foreign exchange facility as an alternative to reducing hedging costs. Using the geometric Brownian motion (GBM) as a representative stochastic model of the INR–USD foreign exchange rate, we find that the expected cost of providing a currency hedge via this facility is 3.5 percentage points, 50% lower than market. This leads to an up to 9% reduction in the per unit cost of renewable energy. However, this requires the government to manage the risks related to unexpected currency movements appropriately. One option to manage these risks is via a capital buffer; for the facility to obtain India's sovereign rating, the capital buffer would need to be almost 30% of the underlying loan. Our findings have significant policy implications given that the Indian government can use this facility to make renewable energy more competitive and, therefore, hasten its deployment

Driving Foreign Investment to Renewable Energy in India: A Payment Security Mechanism to Address Off-Taker Risk

India’s ambitious renewable energy targets of 175 GW by 2022 will require significant foreign investment. A major issue facing foreign investment in India is offtaker risk or the risk of the public sector distribution companies (DISCOMs) being unable to make payments on time for the procurement of power. Ultimately, this will require long-term financial structural fixes for DISCOMs, some of which are currently under consideration. However, in the short-term, one solution is a government-supported payment security mechanism to build investor confidence. In this paper, we develop a framework, in order to enable assessment of an existing payment security mechanism. We built our framework using elements of credit and financial guarantees – probability of default, exposure at default, and recovery after default. We applied the framework to estimate the size of payment security mechanism involving a central aggregator during JNNSM Phase 2, Batch1. We estimated this size to be INR 4160 million or INR 5.55 million/MW, or less than 10% of capital costs, but more than 2.5 times the size of a previously proposed facility. In other words, the existing facility did not provide adequate coverage of off-taker risk

Net zero portfolio targets for development finance institutions: challenges and solutions

Development finance needs to be better aligned with climate change objectives, and many experts see net zero portfolio targets as a powerful way to achieve this. This paper explores the operational implications of net zero portfolio targets for development finance institutions (DFIs). We set out an agenda to move development finance towards net zero goals in a way that acknowledges development concerns. These include (1) setting context-specific emissions pathways with granular bottom-up data and emphasising climate-development win-wins; (2) dealing with inertia and lumpiness in the portfolio through ‘when’ flexibility (multiyear carbon budgets) and ‘where’ flexibility (sharing of carbon space); (3) encouraging transition projects through future-emissions accounting and transition credits; (4) managing climate-development and other trade-offs with an internal carbon price and ESG standards; and (5) accounting for emissions after project-end with monitoring and legal provisions

Introduction of Software Products and Services Through Public 'Beta' Launches

Public 'Beta' launches have become a preferred route of entry into the markets for new software products and web site based services. While beta testing of novel products is nothing new, typically such tests were done by experts within firm boundaries. What makes public beta testing so attractive to firms? By introducing semi-completed products in the market, the firm can target the early adopter population, who can then build the potential market through the word of mouth effect by the time the actual version of the product is launched. In addition, the information gathered through the usage of the public beta gives significant insights into customer preferences and consequently helps in building a better product. We build these marketing and product development implications in an analytical model to compare the different product introduction strategies like 'skimming' or 'penetration pricing' with beta launches. This analysis is done for products of branded and unbranded Web 2.0 companies like Google and Flickr etc. We also examine the impact of different monetization models like direct pricing and advertising on the beta launch strategy

Reaching India’s Renewable Energy Targets:Effective Project Allocation Mechanisms

Auctions for renewable energy are gaining popularity around the world. In this context, we examined 20 renewable energy auctions in India and elsewhere to answer two questions: first, have auctions been effective; and second, how can they be designed to achieve India’s renewable energy targets? We found that auctions are almost always cost-effective, with savings up to 58% from baseline feed-in tariffs. However, auctions have not resulted in adequate deployment, with only 17% of the auctions with greater than 75% deployment. We then examined how to best design auctions by assessing seven major risks, and found the following: first, for every 1% increase in total risk, deployment effectiveness decreased by 2 percentage points; second, project specific risks have 60% greater impact than auction specific risks; and third, deployment effectiveness is most affected by auction design, completion, and financial risks. We also found that right policy design can lower these risks to improve both deployment and cost effectiveness

Have State Renewable Portfolio Standards Really Worked? Synthesizing Past Policy Assessments to Build an Integrated Econometric Analysis of RPS effectiveness in the U.S.

Renewable portfolio standards (RPS) are the most popular U.S. state-level policies for promoting deployment of renewable electricity (RES-E). While several econometric studies have estimated the effect of RPS on in-state RES-E deployment, results are contradictory. We reconcile these studies and move toward a definitive answer to the question of RPS effectiveness. We conduct an analysis using time series cross sectional regressions - including the most nuanced controls for policy design features to date - and nonparametric matching analysis. We find that higher RPS stringency does not necessarily drive more RES-E deployment. We examine several RPS design features and market characteristics (including REC unbundling, RPS in neighboring states, out-of-state renewable energy purchases) that may explain the gap between effective and ineffective policies. We also investigate other RES-E policies and technology-specific effects. Ultimately, we show that RPS effectiveness is largely explained by a combination of policy design, market context, and inter-state trading effects

Financial Performance of Renewable and Fossil Power Sources in India

This paper seeks to study and compare the historical and present-day financial performance and risk profile of the renewable energy and fossil fuel power sectors. Our findings are as follows. First, renewable energy power portfolios have historically shown more attractive investment characteristics including, on average, 12% higher annual returns, 20% lower annual volatility and 61% higher risk-adjusted returns. Second, investors perceive renewable energy power investments to be less risky than fossil fuel power investments, with the expected returns on debt to the fossil fuel power sector is at least 80 basis points higher than for expected returns on debt for the renewable energy power sector. Third, the main risk factors driving the risk perception of both renewable energy and fossil fuels are counterparty, grid and financial risks; counterparty risk is the most significant risk by far, followed by grid risk and then financial sector risk. Our findings have significant implications for investments in these technologies in India