| Today's energy efficiency consultants actually
return your money if the guaranteed savings do not
materialise |
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| A typical energy service company (ESCo) identifies
and evaluates energy-saving opportunities in industrial
units, commercial complexes, hospitals, municipalities
and utilities, among others, by using energy audit tools
and recommends a package of improvements that can pay
for itself through the resultant savings. |
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| The ESCo will guarantee that savings would meet or
exceed annual payments to cover all project costs,
usually over a period of seven to 10 years. If savings
do not materialise, the ESCo pays the difference and not
the client or the company implementing the project. ESCo
services are comprehensive and savings are guaranteed
through implementation, monitoring, measurement and
verification. |
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| India has a small but growing community of ESCo
entrepreneurs who have emerged over the past few years.
As energy costs are steeply rising, managing energy
costs has become a critical factor in profitability.
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| Some of the country’s first ESCo demonstration
projects implemented under performance contracting and
guaranteed savings financial arrangements by ESCos and
energy efficiency (EE) consultants are: |
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A project to build energy-efficient lighting
retrofit for New Delhi Municipal Corporation’s Palika
Kendra, implemented by DSCL ESCo Ltd, has resulted in 48
per cent load reduction from 264 to 138 kilo Watts (KW).
A demand-side management programme for Ahmedabad
Electric Co, managed by Asian Electronics Ltd, resulted
in projected savings of 5.04 million kW/year (Rs 30.24
million a year). The total project cost was Rs 75.25
million.
A 135-room five-star hotel in Hyderabad saved Rs 33
lakh in a year on electricity and oil costs — 25 per
cent of the hotel’s annual energy bill — thanks to EE
measures implemented by Shri Shakti Alternative Energy
Ltd.
A Rs 307 lakh-project designed by an ESCo for
Airports Authority of India for IGI Airport is expected
to result in annual savings of Rs 386 lakh — a return of
investment of Rs 125 per cent. |
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| The small number of ESCos that have emerged in India
have come through after surmounting several barriers.
Some of India’s early entrants in the ESCo business have
implemented projects in countries like China, Pakistan,
Indonesia, Kenya, and their project planning and
financial structuring skills are highly sought after in
the global market. |
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| ESCos typically do not have large assets to bank
upon. Therefore, while they have the technical
capability to identify and custom-design projects that
deliver energy saving, they are often unable to convince
their clients, investors and bankers about the certainty
of delivering the savings. |
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| To strengthen this business model, United Nations
Environment Programme (UNEP) and the World Bank, with
funding from UN Foundation, have been implementing a
technical assistance project since 2002 for developing
financial intermediation mechanisms for energy
efficiency investments in India, China and Brazil, known
as the Three-Country Energy Efficiency (3CEE) project.
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| Project partner UNEP-URC (UNEP Risoe Centre on
Energy, Climate and Sustainable Development, Risoe
National Laboratory), Denmark, recently organised an
International Cross Exchange in Beijing in April, to
bring together recent ESCo experiences and their
practitioners from Brazil, India and China. |
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| In each of the partner countries, a core group has
been formed to steer this programme, with representation
from major stakeholders including banks, financial
institutions (FIs), industry associations and ESCos. The
Indian Renewable Energy Development Agency (IREDA), a
Government of India financial undertaking, hosts the
India secretariat of the project. |
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| The 3CEE project supports ESCo market development
through sharing of experiences relating to projects,
financial models and contracting systems. In India the
project has organised discussion forums for ESCos, banks
and FIs. |
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| The project has initiated studies to develop
appraisal methodology; financial structuring for EE
projects and has assisted banks in evolving new EE
financing schemes and security mechanisms. Demonstration
projects have been taken up in specific industry
clusters. |
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| These activities have stimulated the market for
energy efficiency projects in India, and banks now
consider energy efficiency and ESCos a potentially
attractive line of investment. |
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| A significant achievement for the 3CEE project is
that three of the participating commercial banks have
designed and launched schemes specifically targeted at
EE projects. State Bank of India, Canara Bank and Union
Bank of India have launched and are implementing
different EE loan schemes targeted at small and medium
enterprises. |
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| However, such efforts by banks have to be coupled
with initiatives to strengthen the ESCo business so that
available funds can be tapped and projects multiplied.
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| With the enactment of Energy Conservation Act in
2001, and the Central government’s commitment to reduce
energy consumption in select government buildings by 30
per cent over the next five years, ESCo business has got
a boost. Overcoming conventional barriers to such
business and effecting a market transformation holds the
key to its further success. |
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| With the enforcement of the Kyoto Protocol,
potentially attractive business opportunities have
emerged for ESCos, who can design and execute a number
of clean development mechanism (CDM) projects. |
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| To achieve international credibility in the CDM
market, the Indian ESCos and EE consultants have to gain
expertise in financial engineering and excel in
risk-taking and timely project delivery. For those who
persevere in this emerging competitive market the
returns can be highly attractive. |
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| The fourth Cross Exchange of ESCos was held in
Beijing last month, with experts from the three
countries participating. Based on the lessons learnt
from the Cross Exchange, the Indian ESCos drafted an
action plan that highlighted the following:
To bring to the attention of Indian regulatory
agencies utility-driven demand side management
programmes — such as those in Brazil — that could
benefit Indian utilities by reducing the peak demand for
electricity. Utility-ESCo partnership was a significant
force in driving Brazil’s EE business.
To examine the scope for creating an agency in India
to guarantee investments in ESCo projects, similar to
China National Investment & Guarantee Co Ltd
(I&G). In China, the EMCo (Energy Management Co)
commercial loan guarantee programme was set up with GEF
funding of $22 million. I&G has guaranteed about
10,000 projects worth 230 billion Yuan (around $ 30
billion) until March 2005.
The ESCo associations in China and Brazil are
playing a major role in promoting EE business in
collaboration with government agencies, utilities, and
banks. Indian ESCos are keenly interested in setting up
an alliance or coalition in the near term and to work
towards an association of ESCos in the longer term to
promote vibrant growth of the ESCo business.
Some ESCos are willing to pool resources for a
corpus fund to act as a guarantee fund by contributing
up to 10 per cent of the above corpus. The ESCos would
discuss and debate these issue within the ESCo
community, and with banks, FIs and other EE stakeholders
to evolve a consensus.
Globally, ESCos have enjoyed significant government
support. They could lobby with the Indian government for
fiscal incentives on par with other key sectors. To
create a demand-pull for EE services, some fiscal
supports needed are: income-tax rebates on payments made
to ESCos or EE projects; service-tax exemption on energy
audit fees and on ESCo’s share of savings; and
deprecations benefits and a five-year tax holiday for
ESCo projects on par with those enjoyed by new power
projects.
Energy saved through ESCo projects offsets the need
for setting up new power plants. Growth in ESCo business
activity would yield additional revenue to the
government and create employment. Further, energy
efficiency is the most effective tool for mitigating
climate change in the foreseeable future. |
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| (The writer is consultant to India Secretariat of
the UNEP-World Bank Three-Country Energy Efficiency
Project based in IREDA, New Delhi. The views expressed
are personal and not necessarily those of IREDA or any
of the project partners or institutions)
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