Lab Members Meeting to Review Instrument Designs

Secretariat Summary

On 26 July 2016 in New Delhi, Lab Members met to review the results of the Instrument Design phase for the four India Lab instruments.  Lab Members heard presentations from the Lab Secretariat and the instrument idea proponents on the design, potential impact, and implementation pathways for each instrument. Lab Members then had the opportunity to discuss the instrument designs and express feedback, noting necessary improvements that should be addressed before beginning the Pilot Support phase, and deciding which instruments should continue on in the India Lab process.

Lab Members welcomed the progress presented on the four instrument designs, and highlighted the potential each instrument holds for addressing key challenges in green investment growth. Members recommended to move all four instruments through to the next phase for pilot support and potential endorsement, and also noted a number of open questions and key concerns to be addressed. The Secretariat will work closely with the instrument proponents and Lab Members in the coming weeks to address these questions, identify strategic partners, and further refine the implementation pathway for each instrument. Lab Members will convene again at the end of October 2016 to potentially endorse the final instruments for piloting and decide on the strategic direction of the second India Lab Cycle, set for 2016-2017.

Meeting Objectives

The second Lab Members Meeting of the 2015-2016 India Lab Cycle took place at the Claridges Hotel in New Delhi on 26 July 2016. The purpose of the meeting was to convene Members to evaluate the design of the four instruments, and to collectively decide the strategic direction for the next phase of the India Lab Cycle. It marked the end of the India Lab’s second phase – Instrument Design – and the start of the third and final phase – Pilot Support.

Introduction & Key Updates

To kick off the meeting, Mr. Krishan Dhawan, CEO of Shakti Sustainable Energy Foundation which hosts the India Lab, welcomed participants, and thanked the India Lab for its engaging and iterative work on the four instruments aiming to drive more investment to meet India’s renewable energy and green growth targets. Dr. Gireesh Shrimali, Director of Climate Policy Initiative (CPI), India which serves as the Lab Secretariat, presented on the progress of the India Lab and spoke about the key highlights of the Instrument Design phase, the goals of the meeting, and next steps. Dr. Barbara Buchner, Executive Director of CPI and Lab Secretariat for the Global Innovation Lab for Climate Finance, provided an overview of the pilots from the 2014-2015 cycle of the Global Lab, and the status of the new set of instruments from the current 2015-2016 cycle of Global Lab instruments. Ms. Sandy Sheard, Head of Energy, Climate and Growth Unit in the UK Government, reiterated that the UK government is a strong supporter of both the India and Global Labs, and expressed appreciation for the synergies between the two Labs.

Instrument Presentations

In the next session, lead instrument analysts representing the Lab Secretariat outlined the key elements of the instrument designs, alignment with India Lab criteria, potential impacts, and implementation pathways for each of the four Lab instruments. Instrument proponents were then asked to give a brief overview, offering background on the context, purpose and potential impacts of their idea. Members were then invited to ask questions of the Secretariat analysts and instrument proponents.

Instrument Discussions

Following the instrument presentations, Lab Members discussed each of the four instruments, to deliberate on how these instruments could help drive public and private investment and to identify the strengths, challenges, and areas for future work in the Pilot Support phase.

Rooftop Solar Private Sector Financing Facility Key Comments
Proposed by IFC, a financing facility to provide long-term debt financing at a reasonable rate to rooftop solar developers through aggregation of loan pools and securitization

Instrument presentation: Labanya Prakash Jena, Consultant, Climate Policy Initiative

Proponents: Steven Baillie, IFC, and Sandeep Chopra, Azure Power

Strengths: The Facility can operate well under the current institutional framework and existing financial regulations. There is high potential to attract private capital by expanding the investor base for rooftop solar power – assisted by  the presence of the International Finance Corporation (IFC) as the implementing agency.

Challenges: Lab Members raised a concern that the implementation timeline of 12-18 months is too long, while the need is immediate.

Open issues: Lab Members highlighted the need to establish a clear implementation timeline and shorten the credit disbursal periods.

Loans4SME Key Comments
Proposed by Aurus Lending Solutions, this instrument is a peer-to-peer lending platform to help small and medium enterprises operating in renewable energy and energy efficiency raise debt finance, using a credit rating algorithm to increase lender confidence

Instrument presentation: Vivek Sen, Consultant, Climate Policy Initiative

Proponent: Simmi Sareen, Aurus Lending

Strengths: The platform has high potential to mobilize needed private finance for SMEs in renewable energy and energy efficiency, estimated at around $2.20 billion. The potential leverage of private finance is also very high because of the low amount of public capital required to implement.

Challenges: Lab Members noted that a lack of impact capital can delay implementation of the platform, or may completely prevent it from going live.

Open issues: Lab Members highlighted the need for additional clarification on the operational and institutional model of the credit rating, know-your-customer, and risk management components of the platform. Also, the platform will require a donor to fund the roll-out.

FX Hedging Facility Key Comments
A customizable currency hedging product that lowers the cost of currency hedging by targeting a particular tranche of currency risk, thereby allowing allocation of risks to suitable parties and eliminating the credit risk premium

Instrument presentation: Arsalan Farooquee, Associate and Saurabh Trivedi, Associate, Climate Policy Initiative

Proponent: Ravindra Rathee, RR Corporate Ltd

Strengths: The Facility could potentially address the complicated currency risk issues with foreign investments and, therefore holds promise to drive more foreign private investment. The structure has the potential to reduce the cost of currency hedging by  around 22% and mobilize $28 of private investment for every dollar of donor grant.

Challenges: Lab Members expressed concerns around the costs and level of risk coverage used in the financial model, and the sustainability of the model after a few years.

Open issues: Lab Members inquired about the pricing of the guarantee fee and risk coverage level and asked for validation of the model, and to subsequently identify a guarantor.

P50 Risk Solutions Key Comments
A facility to reduce the cost and increase the amount of long-term debt for wind power projects by transferring revenue variability risk from banks to insurers through a blending of commercial and donor capital

Instrument presentation: Vinit Atal, Associate, Climate Policy Initiative

Proponents: Nigel Purse, P50 Risk Solution and Robert Ashdown, Swiss Re Corporate Solutions

Strengths: The instrument could increase the availability of capital for wind projects by attracting institutional investors.

Challenges: Members expressed concern about the absence of an implementing entity.

Open issues: Members asked to identify key partners including an implementing agency, and outline how to engage them in supporting a pilot. They also wanted clarity on whether the instrument addresses barriers to investment in renewables faced by institutional investors.

Next Steps & Strategic Direction

Lab Members then engaged in a discussion related to next steps and open questions on each instrument, and agreed to move all four instruments forward into the Pilot Support phase. They also recommended that the Lab Secretariat work closely with instrument proponents and relevant Lab Members over the coming weeks to address open issues (outlined above) before presenting the instruments for endorsement at the end of the Pilot Support phase in October. As a result, the Lab Secretariat will follow up with Lab Members over the next several weeks to report on progress, and will also work to address concerns and ensure each instrument is in the best position to receive Lab endorsement at the final meeting in October.

Closing Remarks

Ms. Sharmila Chavaly, Joint Secretary, Ministry of Finance, Government of India expressed that the government is looking at solutions that could be quickly developed; therefore, the India Lab should prioritize instruments that have immediate potential both in terms of scalability and replicability. While reiterating her support for the India Lab instruments, she also expressed that she hopes the India Lab will pursue an aggressive timeline.