Asia should increase diversification of energy sources away from fossils fuels and toward renewable energy to ensure that the region's growing energy requirements can be met sustainably. Greater use of renewable energy can result in lower costs through technological and efficiency improvements, and by reaping the benefits from economies of scale.

The latest issue of Asia Bond Monitor released by the Asian Development Bank (ADB) on June 23 notes Asia's huge energy requirements and its share of the global consumption is expected to rise from around one-third in 2010 to more than one-half by 2035. The use of renewable energy will surge by 50% over this period, but will still account for only 13% of the world's total energy supply in 2035.

The ADB says the main constraints for adopting renewable energy now lies more in the availability and cost of financing. "While the flow of financing for renewable energy has grown, much more investment is needed," it points out. "Stronger intervention in the financial systems is necessary as there is still no comprehensive strategy for financing the necessary investments in renewable energy."

The bond market may become the preferred source of financing for renewable energy projects given that banks in Asia have relatively little experience in financing these types of projects as they often require technical skills to properly evaluate that banks do not possess. The limited track record for renewable energy projects also makes them harder to evaluate. In addition, these projects tend to have large upfront costs and an extended payback period, making them less attractive from the perspective of bankers.

Given the heightened interest in investing in renewable energy, the ADB says there is a large pool of potential investors such as pension funds and sovereign wealth funds, which have traditionally allocated a large proportion of their portfolio to bonds.

Globally, the issuance of renewable energy sector bonds has been increasing rapidly. Total bonds issued by renewable energy companies have increased from US$5.2 billion in 2010 to US$18.3 billion in 2014. While Asia has been leading the way in the issuance of these bonds, almost all renewable sector bond deals in the region originates from China, which accounted for 90% of the total in 2014.

Recent examples of a renewable energy company issuing bonds is Trina Solar, which priced in October 2014 a US$115 million convertible senior notes due in 2019, and GS Yuasa Corporation, which issued in March 2014 a 25 billion yen (US$201.60 million) zero coupon convertible bonds maturing also in 2019

While renewable energy companies have been active in issuing bonds, the ADB says the proceeds need not necessarily be used for green projects. A recent innovation is the development of green bonds where there is a commitment by the issuer for the proceeds to be used for projects with environmental benefits.

The Export-Import Bank of Korea launched the first green bond offering out of Asia in February 2013 with a US$500 million issue for five years. Then in July 2014, Advanced Semiconductor Engineering of Taiwan sold the first green bond from an Asian corporate amounting to US$300 million for three years.

In February this year, India's fourth largest private sector lender YES Bank successfully issued India's first ever green infrastructure bonds amounting to 500 crores rupees (US$80.40). The proceeds will be used to finance green infrastructure projects, including solar power, wind power, biomass and small hydroelectric projects.

Then in March, the ADB raised US$500 million from its inaugural green bond issue aimed at channeling more investor funds to ADB projects that promote low-carbon and climate-resilient economic development.

So while bonds offer a promising avenue to finance renewable energy projects, the market has to develop beyond the highly-rated issuers and embrace more corporates. A wider variety of issuers offering different risk-and-return trade-offs will broaden the market. The use of project bonds and asset-backed securities are also helping to develop the markets.