Green Bonds to Grow in Asia on Demand in China, India

Demand for new renewable power projects across Asia is set to soar in coming years, led by growth in China and India but also driven by growing energy needs across the region. When it comes to financing those projects, green bonds are poised to play a greater role, experts say.

While the use of green bonds in Asia has lagged their use in the West, appetite is growing and will continue, according to speakers at a recent conference in Singapore.

“We definitely see appetite [for green bonds] picking up,” said Sujay Shah, director at Standard Chartered Bank, speaking on a panel at the Asia Clean Energy Summit in late October. That interest is coming from a range of bond buyers including pension funds, mutual funds and hedge funds, he says. “There’s a tremendous amount of interest we are seeing in the last 15 months in the green bond space. That will only accelerate.”

The need is certainly there. Asia will see between $20 billion and $50 billion invested in energy projects annually through 2020, said keynote speaker David Walker, CEO of DNV GL. That need is unlikely to abate for at least a generation: Walker pointed to forecasts that say Asia will need to add 400 gigawatts of new power capacity to meet expected demand through 2040.

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Commercial banks tend to lack the appetite to finance renewable projects, said Carmela Locsin, director general of the Asian Development Bank, due to long payback periods and other reasons. Green bonds can fill the funding gap, she said, and indeed, a small but growing list of Asian issuers have been issuing such bonds.

Asian green bonds so far

The first Asian issuer of green bonds was the Export-Import Bank of Korea, according to Ken Cheung, partner at Singapore-based law firm Bird and Bird ATMD. The Korea Eximbank issued a $500 million five-year note in February 2013.

The first Asian corporate green bond came last year when Taiwan’s Advanced Semiconductor Engineering sold a $300 million six-year note that was oversubscribed, Cheung said. The first Japanese green bond also came in 2014 when the Development Bank of Japan floated a three-year, 250 million euro bond.

Asia has seen at least two high-profile green bond issuances this year. The first-ever Chinese green bond came over the summer, with wind energy company Xinjiang Goldwind Science & Technology selling $300 million worth of bonds. The company, which will use the proceeds for working capital and refinancing,  said it received orders of $1.4 billion for the bond, according to Reuters.

And in March, the Asian Development Bank sold $500 million worth of green bonds, the agency’s first green bond issuance. It won’t be the last, either. “ADB expects to issue more green bonds in the future to fund its climate change project finance activities,” ADB treasurer Pierre Van Peteghem tells CleanTechIQ.

ADB has invested more than $2 billion in clean energy projects annually since 2011. According to Locsin, projects the agency wants to back include climate change adaptation, transportation, energy efficiency, solar, wind and hydro. “It’s very much a very broad spectrum of eligible projects,” she said at last month’s conference.

Proceeds from the March bond issuance will finance a variety of projects across the region, such as the Sarulla geothermal power development on the Indonesian island of Sumatra, a 350 megawatt project that is eligible for $250 million in loans from ADB. The proceeds will also help fund $120 million in loans for a wastewater treatment and reuse project in China, as well as a program to put more electric vehicles on the road in the Philippines.

The ADB bonds are 10-year notes with a 2.125% coupon, and were lead managed by Bank of America Merrill Lynch, Morgan Stanley and SEB, according to ADB. About 44 investors bought the bonds; they included BlackRock, Calvert Investments, Nikko Asset Management Europe, Nippon Life Insurance Co., State Street Global Advisors, TIAA-CREF, AP2, AP3, AP4,and Banque Syz & Co. About 31% of the bonds were placed in Asia, 45% in Europe, the Middle East and Africa, and about 24% in the Americas.

Green bonds globally

Going forward, the green bond market in Asia will be driven mainly by the need to finance clean energy projects in China and India. “China and India will lead the growth of the green bond market,” Cheung said. “They want to grow their energy sectors, and that needs to be financed. One way to do that is through green bonds. … That’s where we will find the real growth in the market.”

Henry Shilling, a senior vice president at Moody’s, concurred with that outlook in an October report on green bond issuance globally. “We expect India, along with China, to be a prominent driver of regional issuance in coming years, given ambitious targets on building out renewable energy capacity,” he said in the report.

Globally, total green bond issuance was $7.5 billion in the third quarter, bringing the year-to-date total to $27.2 billion, the Moody’s report said. The company projects a pick-up in issuance in the final three months of the year, and says total green bond issuance in 2015 should exceed $40 billion.

Half of the third quarter’s proceeds, about $4 billion, will be used for renewable energy projects, Moody’s says. Another $1.7 billion, or 19%, will fund sustainable water management programs while $1.6 billion is earmarked for energy efficiency projects.

Overall, though, renewable energy projects may continue to struggles in Southeast Asia, said Csilla Kohalmi-Monfils, executive vice president at ENGIE, speaking at the Asian Energy Financial and Investment Conference, which ran concurrently with the Asia Clean Energy Summit. Countries in the region “say a lot about wanting renewables, but we don’t see a lot of consistency with regard to targets and regulatory frameworks,” she says. “That’s causing some questions in investors’ minds on where to go and how to do it.”

Yieldcos Struggle in Asia

Yieldcos are another financing method that are fairly well established in the West. Yet they are “relatively new to Asia,” Standard Charter’s Shah said. SunPower floated TerraForm Global, which owns solar and wind projects in China, India and Southeast Asia, as well as in South Africa and South America, in a July IPO. The company sold 45 million shares of TerraForm Global at $15 each, which was  down from initial plans to offer nearly 57 million shares at $19 to $21, Bloomberg reported.

TerraForm Global share prices have drifted steadily lower since the IPO, and it — along with TerraForm Power, SunPower’s other yieldco — has struggled along with the parent company. In October, and in October SunPower announced it would not sell projects to the two yieldcos through at least next year, Bloomberg reported. TerraForm Global itself had been trading below $5 a share; a 10% jump last Friday let the shares close the trading week at $5.24.

TerraForm Global’s performance since its IPO has experts feeling cautious about the near-term future of yieldcos across the region. “Yieldcos are a little behind” in Asia, Cheung said, adding that they need “proper tax incentive and frameworks. Without that, “I think yieldcos will struggle in Asia for the time being.”

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