Creating and Sustaining Markets for Energy Efficiency

Project General Information



01381


9258

Climate change

Climate Change

VI





India’s CO2 emissions from fuel combustion have increased almost 200% between 1971 and 2011 from 200.1 million tons to 1,745.1 million tons -  of which 900 million tons in 2011 were from electricity and heat production (IEA, 2013, p. 52-73).   In 2012 India was the fourth largest energy consumer in the world, behind the United States, China, and Russia. In the same year the country had the tenth-largest economy as measured in 2012 U.S. dollars (converted at official exchange rates), and the third largest, when GDP is adjusted for inflation and purchasing power. Inflation-adjusted GDP has grown at over 7% per year since 2000, with a dip to around  5% in 2012 according to the Indian Central Statistical Organization (CSO). This pace of economic growth, coupled against a projected increase in population of an additional 400 million by 2050 (making India the world’s most populous nation with 1.6 billion people, according to Pew Research Centre data), underscores the need  for effective supply and demand side management of energy resources.

 

Energy policy in India has been focused on securing adequate energy resources to meet the growing demands.  Primary energy consumption more than doubled between 1990 and 2011, while the country’s dependence on imported energy resources and inconsistent energy sector reform have made it difficult to meet increasing demand.  India has 236.38 gigawatts of installed electric capacity, of which 70% is generated by coal-fired plants. Estimated electricity consumption increased from 43,724 GWh in 1970-71 to 772,603 GWh in 2011-12, marked by a 11.2% increase between 2010-11 and 2011-12.  The deficit in energy supply, along with the significant rise in energy demand in the country, has necessitated a greater focus on energy efficiency.

 

Making clean and affordable energy and electricity available to consumers has become a growing concern for the Government of India (GOI) and other stakeholders. In order to mitigate the climate effects of increasing demand, India set a voluntary target in 2009 to reduce the greenhouse gas (GHG) emissions intensity of its gross domestic product (GDP) by 20% to 25% over the 2005 levels by 2020.2 In fact, India’s CO2 “intensity” ( measured by grams of CO2 per kilowatt-hour of electrical output) has improved by 7% between 2005 and 2011 (Pales and West, OECD/IEA, 2014).  The GOI has also determined that increased end-use efficiency is essential in order to contain energy demand without sacrificing growth. A target was set in 2010, to reduce the energy intensity of its economy by 20-25% below 2005 levels by 2020 (MOEF, 2010). Achieving this target will require about US $68 billion of investment in efficiency measures (ADB, 2013). A number of barriers exist, however, which include: (i) regulatory: subsidized electricity and voluntary nature of EE programs; (ii) institutional: capacity to support needed scaling of EE is limited; (iii) financing: up-front costs can be high for EE technologies, but project sizes are small from a perspective of financial institutions, with returns often difficult to analyze; and (iv) awareness: limited understanding of EE technologies and associated benefits, which limit the rate of adoption (ADB, 2015). 

 

The GOI has focused part of its efforts on energy demand management through policy measures to encourage energy efficiency in various sectors.  Both government policies and efforts by multilateral and bilateral organizations to conserve energy across a wide range of sectors have supported the emergence and growth of new domestic and international energy service companies (ESCOs).  The business proposition of the ESCO is essentially to identify opportunities for increasing the energy efficiency of industrial and commercial units, among others, through design of comprehensive energy solutions, and implementation of different financial models. From three ESCOs in the early 1990s, the country has witnessed growth in the number to 114 in 2011.  The GOI has strengthened the institutional and legal framework through the Energy Conservation Act in 2001, which, among others, createdthe  Bureau of Energy Efficiency (BEE).  Further measures in 2009 established Energy Efficiency Services Ltd (EESL) as a joint venture “public sector undertaking” under the Ministry of Power. The present authorized capital of EESL is US $84 million which will be raised by four public sector companies, NTPC, Power Grid Corporation of India (POWERGRID), Rural Electrical Corporation Ltd (REC) and Power Finance Corporation Ltd (PFC)

 

EESL has a mandate to work as an ESCO to design and implement energy efficiency projects, provide consultancy services under the Clean Development Mechanism CDM), and support capacity building of State Designated Agencies (SDAs), utilities, financial institutions and other stakeholders. EESL also leads market-related actions of the National Mission for Enhance Energy Efficiency (NMEEE).For ESCOs in India there is an estimated potential 183.5 billion kWh per year in energy savings, with an estimated market value of US $18 billion, based on reports prepared by the Asian Development Bank (AsDB) and the Bureau of Energy Efficiency (BEE).

 

Energy efficiency lending programs in India, were given impetus in part, by the “Three Country Energy Efficiency Project” (3CEE), which intended to achieve major increases in energy efficiency investments by the domestic financial sectors in Brazil, China and India, overcome barriers to financing energy efficiency projects, and to identify financial mechanisms adapted to each country’s conditions (Morel, 2008).   Five of India’s largest banks have established small energy-efficiency lending programs, including the State Bank of India, Canara Bank and Union Bank of India. Programs are gaining traction, and primarily target existing bank clients, although the Union Bank program lends to small and medium-sized enterprises (SMEs) with no liability to other banks. The banks will finance 75 to 90 per cent of the project cost, but all three banks have a maximum lending limit of US$220,000 (INR10 million) (Sridharen, 2005).

 

In order for ESCO clients to be able to obtain market-rate financing for energy efficiency projects, banks must recognize the savings potential that an ESCO’s involvement can offer.Despite implementing a number of demonstration projects in commercial and industrial sectors, ESCOs have not yet achieved a critical mass which will be sufficient to support uptake and scaling up to meet India’s sustainable energy needs.There are a number of barriers which constrain the performance of ESCOs:

 

Unclear understanding of the ESCO business model:  Many client companies and organization do not have sufficient awareness of how the ESCO operates and how financial models will generat co-benefits. Moreover, contract negotiations are often protracted and arduous (Urge-Vorsatz, et al., 2007)

 

Limted access to finance: Most projects undertaken by the ESCOs are capital intensive. ESCOs are dependent on either the prospective clients or financial institutions for funding. Banks often lack awareness on the savings potential of  EE projects, which result in higher interest rates and capital costs. In a survey conducted by the World Resources Institute (WRI), about 42 % of ESCOs faced capital financing issues, particularly SMEs (Delo, Lall and Singh, 2010)

 

Limited capacity in public sector:  Central, State and Urban Local Bodies (ULBs)are often unable to to identify and propose energy efficiency investments due to high administrative and transaction costs

Government procurement regulations:  The public sector plays a pivotal role in creating a market within which ESCOs can operate successfully, however there are a number of conflicting regulations and overlapping mandates and jurisdictions, which distort energy efficiency markets.   Markets are characterized by:  i) energy policy disincentives (e.g high costs of electricity which stimuates self-generation of inefficient diesel power), ii) limited enforcement of energy policy and lack of clear incentives (Dhingra & Julena, 2005), and iii) poor understanding of legislation which may differ across States (Urge-Vorsatz, et al., 2007)

 

Perceived technology bias:  The industry is presently dominated by “vendor-driven” ESCOs, which are affiliated to equipment manufacturing companies. Clients generally perceive the services offered by these ESCOs to be biased, rather than providing comprehensive energy management solutions (Kumar and Vaddy, 2013). Further, there may also be technical, safety and reliability concerns hamper the introduction of any new technology

 

Weak institutional arrangements: ESCOs face entry barriers, such as accrediting mechanisms to certify ESCOs, legal redressal systems, tax, auditing and legal requirements (Karrir, 2005).

 

Inadequate mointoring and validation (M&V) protocols:  Energy savings is measured from a baseline set at  the start of a defined EE project. Metering systems for energy monitoring have become costly, and often faulty tracking systems lead to disputes between the ESCO and the client. This results in loss of earnings for the ESCO and also creates mistrust between the parties. There are no robust M&V protocols to measure and validate energy savings of demonstration projects in a transparent manner.  M&V systems need to help ESCOs demonstrate tangible energy savings.

 

This proposed GEF project aims to reduce some of these barriers and generate multiple benefit streams to strengthen the capacity of EESL as a model ESCO in India.

 


Full Size Project(FSP)

National


Asia and the Pacific


India


GEF Trust Fund

Stage Grant to UNEP Grant to other IA Co-Financing UNEP Fee Other IA Fee
Project
$ 4,510,157.00 $ 14,345,806.00 $ 0.00 $ 582,956.00 $ 1,114,081.00
PPG
$ 150,000.00 $ 150,000.00 $ 0.00 $ 13,500.00 $ 13,500.00


Yes


Asian Development Bank (ADB)



External



Executing Agency Category

Partner Category

Name Category Period
Geordie Colville
Principal


Risk Rating Mitigation measure Political risk: Changes in government priorities resulting in reduced support for the project, delays in activities and overall ineffectiveness of the interventions. Low The project seeks to transform the market for deployment of LED lighting in homes and street lights. This energy efficiency upgrade through DSM and an ESCO approach is considered a high priority of the Government as spelled out in the Action Plan on Energy Efficiency from the Bureau of Energy Efficiency. The project will also use the lessons learned from LED programs for expansion in other technologies in the domestic sector. The project will also extend and test this model for the deployment of tri-generation and smart grid technologies. These programs and planned expansion to include other appliances are part of the GoI priorities and therefore unlikely to change as the Government has already facilitated the segment through enactment of Electricity Act, 2003 and Energy Conservation Act 2001. Technical risk: Lack of energy savings from deployment of efficient technologies Low to Medium The LED lighting technologies are well established and proven in Indian conditions through existing EESL projects. Super efficient ceiling fans is an additional technology for EESL. EESLwill require a new deemed savings calculation for ceiling fans, however it will use the same business model that EESL has been using in its street lighting and domestic lighting work and will be marketed to the same domestic consumers who have received LED’s. In all, the departure from EESL’s existing business is small and therefore the risk is considered as low. Both smart grids and tri-generation have potential for large savings, but are new technologies for EESL. The project will finance investmentin smart grids and tri-generation to identify and address the technology risk as part of the project learning. The risk is medium. Sustainability risk: The risks envisaged here include inability to scale up implementation and lack of financing beyond the project period. Low EESL has committed financial resources to ensure that replication occurs beyond the project’s implementation period. The revolving fund to be established will also ensure that the best practices of project design and implementation are replicatedbeyond the project covered in the initial project cycle. Lessons learned on in the domestic and street lighting sector programs will also inform future programs for expansion into other sectors. Financial risk: The risk of non-payment for investments made by EESL Medium UNEP, AsDB and EESL will provide training to various stakeholders on the long-term financial benefits of investing in energy efficiency. Climate change risk: The project is not subject to any climate change risks. Nil While there is no direct climate change risk to the implementation of the proposed project foreseen, the project’s activities will, via its interventions, help to mitigate climate change risks for the direct beneficiaries of the project. For instance, the increased use of energy efficient technologies will reduce electricity consumption, thus reducing energy costs and negative impact on the environment. There may well be opportunities to build “climate proofing” elements to installed energy infrastructure. Other environmental risks: These include the waste stream generated from replacement of light bulbs (incandescent and CFLs) under EESL programs. Furthermore, as EESL programs expand to reach 240 target cities, contracted suppliers will need to adhere to cleaner production guidelines in order to avoid offsetting gains made from the GEF and loan projects. The proposed GEF project and AsDB loan and other investments will be guided by the AsDB Safeguard Policy (2009), and EESL tendering / procurement policy and practice with appropriate measures built-in during project preparation




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Fiscal Year Project activities and objectives met


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