Issuance of renewable energy bonds is set to take off in Asia as new regulations push banks to step back from extending loans to projects, the Asian Development Bank (ADB) said in its June bond market report.
"Energy needs in Asia are huge," the ADB said, estimating the region's share of energy consumption globally will rise by about a half of global use by 2035, from around a third in 2010. "To ensure that the growing energy needs of Asia can be met sustainably, there will have to be increased diversification of energy sources away from fossil fuels and toward renewable energy."
But the main obstacle to Asia adopting more renewable energy sources is from financing, it said.
"Most renewable energy projects have high initial costs and very low operating costs. This means that renewable energy projects will require significant long-term financing," the ADB said. "Given that government finances are already overstretched in many developing economies in Asia, it is unlikely that government can act as the direct financier in most cases."
While banks are usually the main source of project financing in the region, new Basel III regulations requiring banks to hold more liquid assets may make them reluctant to step up for renewable energy projects, the ADB said. With institutional investors under pressure to divest fossil-fuel holdings, those large pools of assets could spur greater investment in renewable energy, it said.
"More renewable energy companies in Asia are expected to tap the bond market to finance investment needs," it said, but it noted that so far much of the new renewable bond issuance had come from mainland China amid strong government support for the sector.
That support, coupled with deep capital markets, would be important to developing the pool of long-term investors for the bonds, the ADB said.
"Relatively underdeveloped financial markets means that the cost of financing tends to be higher in these economies," the ADB said, noting that while accessing foreign debt may help to bypass inefficient local markets, that adds foreign-exchange risk as international debt is often priced in U.S. dollars.
Asia's bond markets are continuing to develop, it said, ading that emerging East Asia's local-currency bond issuance continued to gain traction in the first quarter, reaching $8.3 trillion by end-March, although that was only up 1.6 percent from the previous quarter, representing slower growth compared with the fourth quarter's 2.0 percent rate. Also, most of the growth was from government issuance, rather than corporates, it said.
Overall, total bonds issued by renewable energy companies rose to $18.3 billion in 2014, from $5.2 billion in 2010, with China accounting for a huge portion of Asia's segment issuance, the ADB said.
The ADB isn't alone in expecting Asia's renewable bond issuance to pick up.
"While issuers from the U.S. and Europe currently accounts for around 43 percent of the outstanding market, Green Bonds are gaining traction in the rest of the emerging and developing world as well," Bank of America Merrill Lynch said in a note last week. Green bonds are issued with a specific commitment to use the proceeds for a 'green' project, such as climate change mitigation, clean energy or mass transit.
"Emerging markets such as China and India are likely to drive growth of issuance as they move towards more ecofriendly economies," Bofa-ML said, citing data from Moody's.
The bank's analysts expect China will need around 2 trillion yuan of financing from domestic and international capital markets annually from 2015-2020 to meet its five-year plan for environmental investments.
India will need around $200 billion to meet its renewable installation targets alone, Bofa-ML said, noting that Yes Bank became the first company in the country to issue a Green Bond earlier this year.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1