Transforming India’s energy efficiency market by unlocking the potential of private ESCOs

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Image depicting the benefits of energy efficiency | © docstockmedia, Shutterstock

India is one of the world’s largest energy consumers. Electricity demand, driven by economic development, population growth, urbanization, and an expanding middle class, is growing rapidly—the government must look to creative solutions to meet it. Energy efficiency implemented through energy services companies (ESCOs) has great potential to address this challenge.

The government has long recognized the importance of energy efficiency and demand-side management for providing reliable, affordable, and sustainable electricity to all—one of the Sustainable Development Goals. Worldwide, the scaling up of demand-side energy efficiency initiatives has become one of the most promising and cost-effective solutions to enhance energy security, avoid power outages, and reduce greenhouse gases and local emissions—while supporting job creation.

India’s government is driven by national targets and global climate change commitments. With the Energy Conservation Act of 2001 and the establishment of the National Mission for Enhanced Energy Efficiency of 2010, the government has provided a robust regulatory and policy framework to promote energy efficiency during the last two decades. The Bureau of Energy Efficiency (BEE) and Energy Efficiency Services Limited (EESL) have been leading the transformation of the energy efficiency market.

The results are striking. Last year alone, India saved over 23 million tons of oil equivalent of energy, valued at over $8 billion. EESL’s deployment of over 366 million LED bulbs alone has helped India avoid building over 9,500 megawatts of new generation capacity—mainly from coal—which would have cost more than $10 billion. These outcomes confirm energy efficiency as a feasible business model for clean energy transition.

Where ESCOs come in

Despite this progress, much of the country’s energy efficiency investment potential—estimated at $150 billion—remains untapped. Demand-side energy efficiency faces implementation barriers, such as weak enforcement of regulations, a lack of awareness, insufficient credit flow, and the perception of high investment risk. Subsidized energy tariffs further discourage the adoption of energy efficiency and distort the market. There are also disparities in energy efficiency performance between different states and sectors, as reflected in the India State Energy Efficiency Index 2019.

The financing and institutional dimensions of energy efficiency have been the most challenging barriers to tackle. In the last few decades, ESCOs have addressed these in OECD and a few developing countries; India has followed suit. ESCOs identify energy cost savings measures and invest in them in return for a share of energy cost savings. They work with energy end-users through energy savings performance contracts (ESPCs) that ensure a level of savings for energy efficiency measures.

However, ESCOs, banks, and energy users—such as micro, small, and medium businesses (MSMEs)—have remained among the weakest links of India’s energy efficiency ecosystems. There are about 150 ESCOs in the country; however, even with their technical capacity for designing and successful track records of implementing energy savings projects across various sectors, they are not able to access finance from banks—especially problematic for smaller ESCOs. Clearly, this stymies the growth of the private Indian ESCO industry.

How can we de-risk energy efficiency?

To unlock financing for the ESCO market in India, the World Bank designed the Partial Risk Sharing Facility (PRSF) for Energy Efficiency Project in 2015 in collaboration with India’s BEE and other partners.  The PRSF applies the Bank’s global experiences, lessons learned, and best practices to demonstrate innovative financing and implementation mechanisms that can tap into the significant private sector potential in India. Supported by $25 million in contingent finance from the Clean Technology Fund and an $18 million grant from the Global Environment Facility, the PRSF Facility of $37 million, managed by the Small Industrial Development Bank of India (SIDBI), provides partial credit guarantees to sub-projects implemented by ESCOs.

The guarantee covers up to 75 percent of the principal for up to five years of tenor with a risk-based pricing arrangement for ESCOs that are BEE-empaneled or graded through external rating agencies. These interventions de-risk energy efficiency investments by providing guarantees to commercial banks that lend to ESCOs under energy savings performance contracts. PRSF provided $6 million in technical assistance for programs implemented by SIDBI and EESL to build the capacity of ESCOs and banks. This support also standardizes tools and templates for designing and implementing ESCO-based transactions, which allows them to achieve ESCO market transformation at scale.

So far, PRSF has supported 28 ESCO projects. Ten large financial institutions in India, including the State Bank of India, have come forward to become a part of the PRSF platform to lend funds for energy efficiency projects, particularly to ESCOs. This development is expected to trigger a large-scale market transformation over the next several decades.

PRSF sub-projects range from energy-efficient variable speed drives in industries to sustainable cooling systems in buildings and LED streetlights in cities—which together cut 95,000 tons of CO2 emissions annually. With a cumulative investment of about $53 million across these sub-projects, PRSF has demonstrated the de-risking and leverage effect of a guarantee instrument by mobilizing private capital over 3.35 times using public contingent funds of just $15.8 million in loan guarantees. It has also paved the way for commercial banks to take a more serious look at ESCOs as borrowers. By demonstrating that energy efficiency projects with ESCO participation can be successful, PRSF has provided a critical piece of India’s energy efficiency market puzzle.

PRSF plans to issue many more ESCO sub-project guarantees for the next five years and mobilize over $100 million in private sector investments. Through PRSF, India is demonstrating the viability of ESCOs in terms of energy savings, financial credibility, and quality of energy services. Within the government’s policy environment and framework for energy efficiency, India’s energy efficiency market transformation is well underway, anchored in India’s developing private sector ESCO industry.

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Ashok Sarkar

Senior Energy Specialist, World Bank

Satheesh Sundararajan

Senior Infrastructure Finance Specialist, World Bank

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