Of a post financial crisis banking sector and an

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of a post-financial crisis banking sector and an electric utility sector with increasingly constrained balance sheets (McKinsey, 2013a; b; c). Bond markets, which provide both an alternative and a complement to bank and corporate financing of debt, will need to play a pivotal role. Bonds have the potential to provide the long- term sources of debt capital needed by LCR infrastructure projects. Given that the cost of project finance debt arranged by banks is higher than the yield for investment-grade project bonds in most jurisdictions 4 , it may be possible to achieve a reduction in the weighted average cost of capital (WACC) for LCR infrastructure financed or re-financed with bonds (WEF, 2013), although the cost of capital is usually an inherent feature of the project and its risk, not the financing method. Bonds can raise capital directly for LCR projects, or they can re-finance existing shorter- term loans potentially at a lower cost. Lowering the cost of capital for renewable energy is important because an estimated 50-70% of the costs of electricity generation are in the financial cost of capital, with only the balance being the physical or operational costs of the installation (OECD, 2015b). Thus, even small changes in the WACC can have substantial impact on the long-term levelised cost of 0 20 40 60 80 100 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 Outstanding Securities (USD trillions) US$ 75.5tn domestic securities General government US$ 45tn Financial corporations US$ 39tn Non-financial corporations US$ 11.4tn Households US$ 0.2tn International organisations US$ 1.5tn US$ 21.8tn international securities Figure 1: USD 97.2tn in total debt securities in 2014 Source: OECD analysis based on BIS debt securities statistics. Note: Debt securities include a variety of instruments such as bonds, notes, and money market instruments, which have different maturities and intended purposes, most of which are not related to infrastructure finance. There is potential overlap between domestic and international securities. USD 97.2 trillion In 2014 the total amount of capital held in global debt securities (i.e. bonds, notes and money market instruments) markets issued by all types of entities (banks, governments, corporations, etc.) was estimated at USD 97.2 trillion. Source: OECD analysis based on BIS data. Source: OECD analysis based on BIS data. THE PROBLEM . 3 POLICY PERSPECTIVES
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Annual issuance of green bonds tripled from USD 11 billion in 2013 to reach USD 36.6 billion in 2014. Issuance is expected to grow further in 2015, but less than some observers had expected, with USD 40 billion issued by November 2015 (Figure 2). These green bonds are issued into a broader market of around USD 600 billion in outstanding securities, 6 comprising USD 532 billion of “unlabelled climate- aligned” bonds as designated by the NGO Climate Bonds Initiative (CBI), and USD 66 billion of labelled green bonds, as reported in June 2015 (CBI/HSBC, 2015).
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  • Fall '15
  • Wei WANG
  • Debt, Bond market, green bond

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