Forthcoming WRI research hopes to help overcome barriers in India’s burgeoning ESCO market.
India’s energy demand is expected to more than double by 2030, and there is a pressing need to develop innovative ways to conserve energy. Energy efficiency measures such as the efficient lighting installation, motor control technologies and co-generation systems can reduce energy consumption and consequently, lower operating costs.
According to data from the Indian Ministry of Power, the investment potential for energy savings amounts to USD 9.8 billion with annual savings of 183.5 billion kWh. Those energy savings would mean 148.6 million tons of avoided CO2 emissions per year.
In recent years, domestic and international energy efficient technology providers and equipment manufacturers have recognized the market potential of energy efficiency products and services.
The growth of this industry has led to investor interest in funding the energy efficiency sector. In 2007, ICICI Bank, India’s second largest commercial bank, provided $1.25 million in debt funding to HMX Sumaya, a New Ventures India finalist company that manufactures energy efficient Heating, Ventilation and Air Conditioning (HVAC) systems. In 2008, Tribi Embedded Technologies, another New Ventures India finalist company, received $2.5 million in equity funding from Sequoia Capital, an international Venture Capital firm with close to 60 investments and $1.8 billion capital under management in India.
The Energy Service Company (ESCO) industry is a sub-sector within the energy efficiency industry that can play an important role in realizing energy savings and financial returns in India. An ESCO is a company that provides energy efficiency-related services on a performance contracting basis, unlike energy auditing or consulting firms who use a traditional fee for service model. ESCOs develop and implement projects that result in energy savings for their clients, and assume the risk that the project will save the guaranteed amount of energy. ESCOs measure, monitor and verify the energy savings and are paid on the basis of the actual savings realized.
The concept of performance based contracting is what sets ESCOs apart from consulting firms and equipment contractors, since the compensation for the ESCO is directly linked to the amount of energy actually saved by the client over a specified period of time. This mechanism gives ESCOs a strong incentive to maximize energy savings through the implemented measures. In the traditional contractor model, payment is only for the specific equipment and services provided, and contractors are not accountable for the actual amount of energy saved once the project is implemented.
Compared to similar industries in US, Brazil and China, the Indian ESCO industry is relatively small, but has grown quickly over the past five years. One of the factors holding back the Indian industry has been the ESCOs’ lack of access to financing.
As part of the Accelerating Clean Energy Markets in India (ACEM) project, WRI has analyzed the investment potential of the ESCO industry in India. The resulting report will be released in April, and in it, WRI seeks to address the lack of market information about this high growth industry.
The ACEM project is working with financial institutions to establish innovative funding mechanisms for clean energy market expansion in India. The project aims to leverage US$ 125 million or more in committed investment to clean energy by 2010, and bring investment to over 20 clean energy enterprises.
WRI started the research by consulting various stakeholders in the Indian investment community on promising clean energy sectors that would benefit from new financing mechanisms. Investors expressed interest in the ESCO concept, but cited the lack of market information and analysis as a barrier to investing in the industry.
To address the gaps in information, WRI conducted a survey of the Indian ESCO industry and interviewed various banks, government officials, ESCOs, and ESCO clients to develop a market profile of the sector. Using findings from this research, the ACEM team aims to work with Indian banks on ways to increase investment capital for ESCOs and their projects, and substantially increase the opportunity for energy efficiency gains.