By Dr. V Bakthavatsalam, Managing Director, IREDA
INTRODUCTION
INDIAN ENERGY SCENARIO
In India, the energy
demand is growing at the rate of 9% per annum due to the increasing rate
of industrialisation, urbanisation and agricultural activity. At present
there is energy and peak demand shortage of about 8 per cent and 19 per
cent respectively. Against the planned capacity addition of 30,000 MW during
the 8th Plan Period, the actual capacity addition was a dismal 19,000 MW.
Investment in power sector needs to be accelerated to avoid the infliction
of incalculable costs on the economy.
The 14th Electric
Power Survey by the Central Electricity Authority (CEA) of India, projected
that an annual capacity growth rate of 9% is required to meet the annual
demand growth of 7.5% for the decade 1996-2006, to provide the required
levels of reliability in power supply. The total investment to meet this
requirement is expected to be US $ 175 billion at fixed prices.
Some of the options
available for reducing this investment are:
-
Removal of current inefficiencies in generation, transmission, distribution
and utilisation
-
Improving the capacity utilisation
-
Exploring the options of using cheaper forms of energy
-
Practising and implementing Energy Efficiency schemes
-
It is estimated that the required capacity addition can be reduced by almost
25% by improving energy conservation measures and through demand side management,
and thereby enable a reduction in the capital investment to US $ 140 billion.
The total investment requirements are envisaged to be shared by both the
public and the private sector with their respective shares projected as
US $ 58 billion and 82 billion.
The challenges faced
by India in the management and development of the power sector is multi-dimensional
and they stem fundamentally from the following:
-
Increase in demand for energy due to rapid industrialisation and growing
population
-
Constraint of financial resources for enhancing this infrastructure facility
-
Limited reserves of coal and fossil fuels and consequent burden on foreign
exchange due to increasing imports
-
In response to these challenges, the energy policy that was evolved focuses
on
-
Rapid development of all forms of energy, both conventional and non-conventional
-
Promoting energy conservation and efficient management of demand
-
Environment conservation and sustainable development
-
Development of decentralised energy systems based on renewable sources
especially for use in rural areas.
ENERGY EFFICIENCY
INVESTMENTS
Numerous studies in
the past by several GOI agencies, public and private bodies, the World
Bank and bilateral donors have referred to the large scope and potential
for energy efficiency in the Indian economy. These investigations have
pointed to the high intensity of energy usage in relation to the growth
in GNP. The energy intensity is high by international standards and even
in comparison to several developing countries. Indian industry on the average
require 50.75% more energy per unit production in the manufacture of steel,
aluminium, cement, paper and chemicals than their foreign counterparts.
Recognising this, over the past several years the GoI has initiated a number
of programmes and measures devoted to promoting energy efficiency. However,
several barriers remain. Inefficient pricing and a variety of market and
non-market barriers have resulted in highly inefficient end-use of electricity
and thermal energy. Among other critical barriers, the specific issue of
lack of financing for energy efficiency and the delivery of cost-effective
energy efficiency services appear to be dominant factors.
On the demand-side,
inefficient pricing and a variety of market and non-market barriers to
energy efficiency have resulted in the highly inefficient end-use o electricity
and thermal energy. This inefficiency exacerbates the energy shortage situation.
While reforms in energy pricing being contemplated by reforming state power
sectors will support increased investments in energy efficiency, many consumers
already pay market-based prices yet under-invest in energy efficiency.
Industrial and commercial sector customers, for example, pay electricity
prices that are close to, if not higher than, long run marginal costs.
Non-price barriers to energy efficiency persist and bar cost-effective
investments in energy efficiency. As supply-side institutional and price
reforms proceed, parallel action to overcome the non-price barriers to
demand side management is needed.
There are a number of
barriers to energy efficiency corporate investments. These include
-
The high relative cost and risk of developing and investing in small projects
among a diversity of end-users,
-
The lack of implementation experience among state holders (end-users, vendors,
financial institutions, ESCOs, etc.) with energy efficiency technologies
and financial mechanisms,
-
The poor credit or unfamiliar risk profile of clients in important market
segments (such as SEBs, Municipalities, rural consumers and small/medium
scale industries), and
-
The lack of medium term loan and leasing facilities.
The Government is
pursuing a long-term strategy to disseminate information to end users on
opportunities and technologies for energy efficiency improvements. The
strategy has focused on energy audits and information dissemination programmes
in the industrial sector operated by public sector institutions such as
the National Productivity Council, the Petroleum Conservation Research
Association, the Industrial Development Bank of India (IDBI) and the Energy
Management Centre of the Ministry of Power.
More recently, the
Government introduced tax incentives for energy efficiency investments,
most notably a 100% depreciation allowance for certain categories of energy-saving
equipment. It has also provided limited financing for energy efficiency
investments in the industrial sector through IDBI. In the Ninth Plan the
GOI plans to allocate Rs. 132 crores (US $37.2 million) towards a national
energy efficiency programme aimed at strengthening policy formulation,
training and development of energy efficiency auditing services at the
central and state levels.
In view of the successful
role IREDA has played in advancing renewable energy projects and the synergism
between its renewable energy activities and energy efficiency projects,
the World Bank has expressed its desire to collaborate with IREDA in developing
and financing energy efficiency in the country. Following are some of the
key attributes justifying IREDA’s role in this new endeavour.
IREDA/WORLD BANK:
ENERGY EFFICIENCY/DSM PROJECT
Energy efficiency
through substitution and saving of conventional energy resources by renewable
energy has been a key result of IREDA’s programmes in India. In view of
IREDA’s record in developing and financing renewable energy projects, the
World Bank (WB) has expressed interest in a collaborative programme aimed
at fostering cost-effective energy efficiency investment in the country.
The proposed project is follow-up Bank lending operation with IREDA to
expand the small hydro programme and, in addition will include a new initiative
to promote and finance the delivery of energy efficiency services and equipment,
implementation of Demand Side Management (DSM) schemes and development
of energy services companies (ESCOs).
ROLE OF IREDA IN
PROMOTING AND FINANCING ENERGY EFFICIENCY
There is a close synergism
between IREDA’s renewable energy activities and the proposed DSM/energy
efficiency-financing programme. Some of the areas of commonality and congruence
between the two are:
In promoting
renewable energy technologies, IREDA is in effect also furthering energy
efficiency among its customers, specifically end-users. For instance biomass
grassfire use has the effect of promoting the substitution of scarce and
costly petroleum fuels by chapter and more abundantly available biomass
fuels.
IREDA’s bio-mass
cogeneration projects merit mention both as an energy efficiency measure
and DSM strategy through reduction of facility primary energy use and through
augmenting peak power availability.
IREDA’s programmes for
financing the leasing of solar photovoltaic devices (such as lanterns)
has important parallels with programmes for financing and delivering energy
efficiency products.
IREDA’s experience with
end-users who purchase and install wind mills and solar heating equipment
can be extended to also cover a wise array of end-use efficiency technologies,
products and systems.
Last, but not the least,
IREDA’s documented success in developing technical, financial and contractual
arrangements for sale of power to SEBs from sugar co-generation or wind
farm facilities has important implications for the promotion and implementation
of utility-driven DSM programmes in the country.
Furthermore, IREDA’s
develo- pment focus and dedicated attention to renewable energy financing
makes it a possible candidate to likewise promote energy efficiency among
its clients. From a developmental financing point of view the following
appear to be salient:
-
The ability to offer mixed credits
-
Experience in working with equipment vendors, leasing companies and utilities
-
Experience in dealing with small loans and a variety of entrepreneurs in
the small, medium and rural/cottage sectors
-
Experience in working with major energy end users
-
Area for DSM/energy efficiency investment
-
DSM investment to promote load management and end-use efficiency in major
industrial estates in the country
-
Energy efficiency equipment financing such as efficiency motors, lighting
equipment and chillers
-
Operator lease financing of capacitors in LT industry and rural networks
-
Energy management systems and controls as an aid to in-plant loan management;
process efficiency technologies and controls
-
Electrical energy substitution technologies such as steam drives, thermal
heating and waste heat energy recovery
-
Commercialisation of efficient electrical end-use devices and systems
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Agricultural and Industrial utility-driven DSM programmes
-
Industrial cogeneration in sugar and process industry
-
Promotion and financing of Energy Service Companies
-
Co-financing DSM investments in reforming SEBs
-
Energy Efficiency Project Components
PROJECT DEVELOPMENT
OBJECTIVES
The project development
objective of the energy efficiency component is to foster energy efficiency
and demand side management investments that register productivity gains
from energy savings and reduced power shortages. Achievement of the objective
would be measured by efficiency gains among participating energy end-users
and by the volume of energy efficiency financing activities that take place
following the project's conclusion.
PROJECT COMPONENTS
The Energy Efficiency/DSM
component of the project will finance investments associated with:
-
design, development and implementation of integrated energy management
services operated by ESCOs and end-users on a performance guarantee basis
-
purchase and installation of energy efficiency and/or loan management devices
and systems
-
production of energy efficiency equipment; and
-
end-user participation in SEB and other utility-sponsored DSM programmes.
Sub-borrowers will
include energy service companies (ESCOs), energy end-users, equipment manufacturers
and vendors, reforming state electricity board (SEBs) and private electric
utilities.
ESCOs will borrow
funds to finance energy efficiency and loan management projects that they
have developed for implementation on a performance guarantee basis. Energy
end-users will borrow funds to finance the purchase and installation of
energy-efficiency or loan management equipment or the retrofit of existing
facilities. Equipment manufacturers and vendors will borrow funds to finance
the manufacture-supply of energy-efficient and load management equipment
to energy end-users, using vendor financing such as deferred payment schedules
or lease mechanisms. Reforming (DSM) programmes and demonstration projects.
These utilities will repay the loans using increased revenues from transfer
of energy savings from low-tariff to high-tariff customers.
A number of investment
funds will also be established to finance operation of energy efficiency
schemes. A Technical Assistance component is proposed to strengthen IREDA’s
capacity to apprise and support energy efficiency projects as well as provide
training and technical assistance of energy conservation and DSM in the
country. Co-financing through a Global Environmental Facility (GEF) grant
is proposed to be sought.
ILLUSTRATIVE SUBPROJECT
PIPELINE
IREDA had organised
an international workshop on Energy Efficiency Project Development and
Financing with the assistance of the World Bank and US-AID. Over 100 professionals
from all over the country attended the workshop. The objective of the workshop
was to present the participants from IREDA and other key private sector
stage holders, various financing models and processes involved in the design,
development and appraisal of energy efficiency and loan management investments.
The participants at
the workshop (including end-users, manufacturers, ESCOs, leasing firms
and senior Government of India Officials) endorsed IREDA’s proposed plan
to finance energy efficiency in the country and supported the proposed
World Bank initiative in the proposed programme.
Based on the feedback
provided by the participants, IREDA then entered into informal consultation
and correspondence with likely borrowers and investors including end-users
who could avail of the proposed Bank line of credit (LoC).
CONCLUSION
The experience gained
by IREDA during the last decade by financing projects for new and renewable
sources of energy now enables us to march ahead and finance energy efficiency
projects as well. This is the natural consequence of the numerous initiatives
in the seacrh for solutions to the energy crisis facing the country. IREDA
invites the whole-hearted cooperation and participation of entrepreneurs
and industries in the delivery of “Renewable Energy” to the nation.