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

The paper argues that high currency hedging costs in India negate the benefits of cheaper foreign loans, increasing renewable energy costs by 30% compared to the US. Using a stochastic model, the authors find that a government-sponsored FXHF could provide a 10-year currency hedge at an expected cost of 3.5 percentage points, which is 50% lower than market rates. Such a facility could reduce the delivered cost of renewable energy by up to 19% and government support costs by up to 54%, provided the government manages extreme currency risks. To achieve a credit rating equivalent to India's sovereign rating of BBB-, the paper estimates a cumulative capital buffer of approximately 30% of the underlying loan would be required.

• Domestic debt in India is characterized by high costs, short tenors, and variable interest rates, which increases the cost of renewable energy by 30% relative to the United States.
• Market-based currency hedging in India typically costs around 7% per year, making foreign loans nearly as expensive as domestic loans.
• A government-sponsored foreign exchange hedging facility (FXHF) is estimated to have an expected cost of 3.5 percentage points for a 10-year hedge, representing a 50% reduction compared to market hedging costs.
• If the government bears the expected cost of the FXHF, the delivered cost of renewable energy could decrease by 19% and the cost of government support could fall by 54%.
• If the expected cost of the FXHF is passed to the project developer or off-taker, the delivered cost of renewable energy would be reduced by approximately 9% and government support costs by 33%.
• To ensure the FXHF achieves a credit rating equivalent to India's sovereign rating of BBB- (requiring a 10-year default probability of less than 5%), a cumulative capital buffer of approximately 30% of the underlying loan is necessary.
• The gap between market hedging costs (7 percentage points) and the FXHF expected cost (3.5 percentage points) is primarily explained by a risk-premium of 2.76 percentage points, with the remainder attributed to liquidity and regulation costs.

APA

Farooquee, A. A., & Shrimali, G. (2015). Reaching India’s Renewable Energy Targets Cost-Effectively: A Foreign Exchange Hedging Facility. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2015/06/Reaching-Indias-Renewable-Energy-Targets-Foreign-Exchange-Hedging-Facility_Technical-Paper.pdf

Chicago

Farooquee, Arsalan Ali, and Gireesh Shrimali. Reaching India’s Renewable Energy Targets Cost-Effectively: A Foreign Exchange Hedging Facility. Climate Policy Initiative, 2015. https://www.climatepolicyinitiative.org/wp-content/uploads/2015/06/Reaching-Indias-Renewable-Energy-Targets-Foreign-Exchange-Hedging-Facility_Technical-Paper.pdf.

Wikipedia

{{cite report |last1=Farooquee |first1=Arsalan Ali |last2=Shrimali |first2=Gireesh |title=Reaching India’s Renewable Energy Targets Cost-Effectively: A Foreign Exchange Hedging Facility |publisher=Climate Policy Initiative |date=June 2015 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2015/06/Reaching-Indias-Renewable-Energy-Targets-Foreign-Exchange-Hedging-Facility_Technical-Paper.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{farooquee2015reaching, author = {Farooquee, Arsalan Ali and Shrimali, Gireesh}, title = {{Reaching India’s Renewable Energy Targets Cost-Effectively: A Foreign Exchange Hedging Facility}}, institution = {Climate Policy Initiative}, year = {2015}, month = jun, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2015/06/Reaching-Indias-Renewable-Energy-Targets-Foreign-Exchange-Hedging-Facility_Technical-Paper.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }