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The purpose of this study is to provide a better understanding of the potential of India’s Energy Service Company (ESCO) industry in order for financial investors to make better-informed investment decisions.
Full Report (PDF, 832 Kb)
Executive Summary (PDF, 377 Kb)
Appendix C (PDF, 202 Kb)
Appendix G (PDF, 196 Kb)
An ESCO is “a company that provides energy-efficiency-related and other value-added services and for which performance contracting is a core part of its energy-efficiency services business” (definition from Lawrence Berkeley National Laboratory and the National Association of Energy Service Companies).
We describe lessons from the ESCO industries in Brazil, China, and the United States and analyze factors that could either contribute to or hinder the growth of the Indian ESCO industry. We also assess the industry’s growth potential and look at three case study examples. Last, we summarize the key issues and opportunities and make recommendations to increase the industry’s attractiveness to investors.
Our ultimate aim in driving greater investment in the ESCO industry is to reduce greenhouse gas emissions and contribute to a more sustainable development in India and across the world.
Against a backdrop of national concern about climate change and rising oil imports, interest in implementing energy efficiency initiatives has been increasing in India’s government, business, and investment sectors. Both government policies and efforts by multilateral and bilateral organizations to conserve energy across a wide range of sectors have contributed to new domestic and international energy efficiency companies to serve this market. This expansion over the last half decade has in turn led to investors’ interest in funding the energy efficiency sector. The potential for energy savings is enormous: an estimated 183.5 billion kWh per year, based on reports prepared by the Asian Development Bank and the Indian Bureau of Energy Efficiency (BEE).
One subsector within the energy efficiency industry that can help deliver both energy savings and financial returns in India is the specialized energy service company (ESCO) industry.
In other emerging countries, ESCOs have made significant contributions to energy efficiency programs and local economies. In Brazil, such companies produce annual industry revenues of USD 344 million (2008), and in China, USD 121 million (2006). In both countries, the industry is growing at double-digit rates.
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India’s ESCO industry has grown steadily and significantly over the past five years; we estimate a compounded annual growth rate of 95.6 percent from 2003 to 2007. Our data and analysis indicate that this still young industry has a high investment potential for debt investors (see below for Data and Information Sources). The majority of ESCOs’ energy efficiency projects have payback periods of less than two years, and ESCOs save clients an average of 20 to 25 percent on baseline energy costs. Currently, opportunities for equity investment in India’s ESCO industry are generally limited to direct investment in the larger energy service companies, most of which are vendor ESCOs – those ESCOs affiliated with or owned by an equipment or control manufacturer. Larger energy service companies (revenues of USD 0.2 million and above) report no problems with funding projects, although some of their clients may still have some difficulty when clients are providing the financing.
Smaller ESCOs, however, have had difficulty because they lack the collateral to meet bank requirements. Moreover, some prospective clients are unwilling to finance, or cannot obtain financing for, ESCO projects owing to a lack of confidence in energy service companies’ capabilities and/or reluctance to take risks. A particular concern raised by prospective clients was the industry’s domination by “vendor” ESCOs that are technology biased (i.e., offer only one technology and suite of products), rather than providing comprehensive energy management services. Another barrier that we found was Indian banks’ lack of engagement. 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.
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WRI’s analysis indicates that the following actions can help the ESCO industry become more attractive to investors and realize its market potential:
For equity investors, banks, and other financial institutions:
For government:
For energy service companies:
For enterprise development programs:
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The information and data used for this publication were derived from three sources: (1) a survey that WRI conducted among ESCOs in India; (2) interviews of selected ESCOs, financial institutions, ESCO clients, prospective ESCO clients, and government entities; and (3) secondary sources. WRI’s survey included only those ESCOs that have had at least one client contract in hand and met the aforementioned ESCO definition. Based on these criteria, we identified twenty-six ESCOs, twenty-four of which responded to the survey.
The ESCOs which responded to our survey are as follows:
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