February 27, 2008 —Government-led energy efficiency programs started in India decades ago, but interest has intensified recently because of increased concerns about energy security, economic growth and competitiveness, environmental concerns and rising energy costs.
Indian industries pay some of the highest energy costs in the world. Many use expensive backup diesel generators because the supply of power from the grid is unreliable and of poor quality. Aggregate demand for energy is expected to more than triple in the next two decades, much of it met by plants powered by poor-quality local coal.
India's potential energy efficiency market is estimated at more than US $3.1 billion. "There's a huge unrealized potential for energy efficiency, despite the direct financial incentives for making these investments," says Jeremy Levin, a co-author of Financing Energy Efficiency.
But unlike Chinese industry, with its "mega-sized industrial units", India's industrial structure has a larger number of small and medium enterprises (SMEs)—some 3 million which contribute 60 percent of the country's GDP. Reaching these numerous decision-makers and implementing energy efficiency projects is a very different proposition in India than China, says Levin.
Pilot Effort in 3 Industries
The World Bank supported a pilot effort to promote energy efficiency in three industry "clusters"—areas where like industries are located—through the 3 Country Energy Efficiency project. The three industries were steel re-rolling, pulp and paper, and glass. The pilot project identified potential projects and developed financing products to implement the efficiency investments in each cluster. The idea was to try to replicate a large number of basically identical projects throughout the cluster. Projects tended to be small, US$100,000 or less, an amount that could discourage some companies from spending the time and effort to get a loan. However, the actual energy savings realized in each case was high.
"There still needs to be intense technical work to unlock and move this market," says Levin, including seeking out "local champions" to help garner support for energy efficiency among associations, chambers of commerce, state nodal agencies and other organizations in the clusters. "We want to ramp up the effort in many more clusters to do significant levels of pipeline development and project identification work, linked with locally available financial products."
India's sophisticated financial sector is eager to try energy efficiency lending as a new kind of product to market to SMEs. As part of the Three Country Energy Efficiency Project, five local banks¹ have developed and launched special lending schemes for SMEs that are seeking loans for energy efficiency investments. The World Bank is backing the Bureau Of Energy Efficiency's efforts to support increased lending to SMEs through development of a new Global Environment Facility project to scale up previous success in reaching the SME market.
The ESCO (energy service company) industry, however, has not developed as successfully in India as it has in other countries, despite a decade of international support. However, renewed efforts by the Indian government may be the key to unlocking this market, says Levin. The Bureau of Energy Efficiency is supporting new initiatives to procure ESCO services for the public sector. The World Bank has provided support for these new initiatives, and will continue to work with the government of India on energy efficiency.
1 State Bank of India, Canara Bank, Union Bank, Bank of Baroda, and Bank of India
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