Identifying challenges in the implementation

of LED based street lighting system in

Municipal Corporations

Prepared by

The Climate Group under BHC supported project on LED

street lighting

Acknowledgement: The Climate Group is thankful to the British High Commission and all the other

stakeholders for their support in the preparation of this report.

Disclaimer: This publication has been prepared for general guidance on matters of interest only, and

does not constitute professional advice. You should not act upon the information contained in this

publication without obtaining specific professional advice. No representation or warranty (express or

implied) is given as to the accuracy or completeness of the information contained in this publication,

and, to the extent permitted by law, the authors and distributors do not accept or assume any liability,

responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in

reliance on the information contained in this publication or for any decision based on it. Also, the BHC

had supported the effort that had gone in while completing this study. However the views expressed

under this study are not entirely the views of the BHC, these are only the views of The Climate Group and

any query should be addressed to The Climate Group.

© 2015 The Climate Group. All rights reserved. (UK charity number: 1102909).

Cover Image: A night view of LED installation in Haldia. Picture taken by The Climate Group

TABLE OF CONTENTS:

CHAPTER 1: EXECUTIVE SUMMARY ..................................................................................................................... 5

1.1 OBJECTIVE OF THE PROJECT ................................................................................................... 5

1.2 CASE SPECIFICS-INDIA IN TERMS OF EE GAINS ............................................................................. 6

1.3 KEY DRIVERS OF ENERGY EFFICIENCY IN INDIA ............................................................................. 6

CHAPTER 2: BARRIER & CHALLENGES ................................................................................................................ 7

CHAPTER 3: MUNICIPAL DEMAND SIDE MANAGEMENT- SCENARIO ...................................................................... 9

3.1 STREET LIGHTING AS CASE STUDIES ......................................................................................... 10

3.2 CURRENT MARKET SCENARIO ................................................................................................ 11

3.3 LED LIGHTING SCENARIO IN INDIA........................................................................................... 11

3.4 ENERGY CONSERVATION MEASURES ......................................................................................... 12

3.5 KEY CHALLENGES TO MARKET PENETRATION ................................................................................ 14

3.6 CRITICAL AREAS FOR LED FINANCING IN INDIA ............................................................................ 15

CHAPTER 4: THE ESCO CONCEPT ....................................................................................................................... 17

4.1 KEY ADVANTAGES OF DEALING WITH AN ESCO ............................................................................. 17

4.2 ESCO - ONE STOP SHOP SOLUTION .......................................................................................... 18

4.3 GENERAL PERSPECTIVE OF AN ENERGY SAVINGS COMPANY................................................................ 18

4.4 THE CONCEPT OF SHARED SAVINGS .......................................................................................... 19

4.5 ESCO METHODOLOGY FOR STREET LIGHTING ............................................................................. 20

4.6 BARRIER & CHALLENGES FOR INVESTMENT THROUGH TRADITIONAL PERFORMANCE CONTRACTING ................ 20

CHAPTER 5: CASE STUDIES OF MUNICIPAL LIGHTING IN INDIA ........................................................................... 22

5.1 CASE SPECIFIC EXAMPLE OF ENERGY SAVING VIA LED STREET LIGHTING IN AN OVERSEAS LOCATION ............... 23

5.2 PROCEDURAL MECHANISM FOR RECOVERY OF CAPITAL COST ............................................................ 24

CHAPTER 6: INDIAN LED LIGHTING MARKET 2010-2015 (ESTIMATE) ................................................................... 25

6.1 OVERVIEW ..................................................................................................................... 25

6.2 ROLE OF GOVERNMENT AGENCIES .......................................................................................... 25

CHAPTER 7: SUMMARY OUTLOOK ON POLICY INITIATIVES FOR ENERGY EFFICIENCY IN INDIA ............................... 26

7.1 NATIONAL MISSION ON ENHANCED ENERGY EFFICIENCY (NMEEE) ................................................... 26

7.2 PERFORM ACHIEVE AND TRADE (PAT) ..................................................................................... 26

7.3 MARKET TRANSFORMATION FOR ENERGY EFFICIENCY (MTEE) ........................................................ 27

7.4 FINANCING OF ENERGY EFFICIENCY ........................................................................................ 28

7.5 POWER SECTOR TECHNOLOGY STRATEGY ................................................................................. 28

7.6 NATIONAL MISSION ON SUSTAINABLE HABITAT (NMSH) ............................................................... 29

7.7 12TH FIVE YEAR PLAN ....................................................................................................... 30

7.8 GREEN BUILDING RATING SYSTEMS AND RELATED INITIATIVES ......................................................... 30

7.9 BARRIERS TO ENERGY EFFICIENCY IN INDIA ............................................................................... 30

7.10 OUTLINED FINANCIAL BARRIERS ............................................................................................ 31

CHAPTER 8: ENERGY-EFFICIENCY FINANCING INSTRUMENTS IN INDIAN CONTEXT .............................................. 32

8.1 EQUITY FINANCING FOR ENERGY-EFFICIENCY IN INDIA .................................................................. 33

8.2 CASE SPECIFIC EXAMPLES OF PRIVATE EQUITY FUNDS .................................................................... 33

8.3 ENERGY SAVING PERFORMANCE CONTRACTING (ESPC) IN INDIA ....................................................... 34

8.4 BEE-PUBLIC SECTOR ESPC APPROACH .................................................................................. 34

8.5 CASE SPECIFIC EXAMPLE-MUNICIPAL ESPC PROJECTS ................................................................ 35

8.6 BEE VENTURE CAPITAL FUND FOR ENERGY EFFICIENCY (VCFEE) ..................................................... 35

8.7 PARTIAL RISK GUARANTEE FUND FOR ENERGY EFFICIENCY (PRGFEE) ............................................... 36

8.8 NATIONAL CLEAN ENERGY FUND ........................................................................................... 38

8.9 USAGE OF FUND ............................................................................................................... 39

8.10 OTHER WINDOWS OF OPPORTUNITY ......................................................................................... 40

CHAPTER 9: OTHER FINANCING INSTRUMENTS ................................................................................................ 42

REFERENCES ............................................................................................................................ 44

LIST OF TABLES

TABLE 1: PERCENTAGE CONTRIBUTION TO ELECTRICITY CONSUMPTION .................................................................. 9

TABLE 2: BREAKUP FORMATION OF ULBS ................................................................................................ 10

TABLE 3: MARKET SHARE BY LAMPS MANUFACTURED IN INDIA (2011) ................................................................ 11

TABLE 4: CATEGORIZATION OF ROADS FOR STREET LIGHTING AS DEFINED IN THE NATIONAL LIGHTING CODE (NLC) ............. 13

TABLE 5: OVERVIEW OF THE OPPORTUNITIES PRESENTED BY LED’S .................................................................... 15

TABLE 6: KEY PROCESS FOR ESCO PROJECT DESIGN ................................................................................... 20

TABLE 7: A CONSOLIDATED OUTLOOK ON THE UNDERLYING CONSIDERATIONS AND EE GAINS TO THE MUNICIPALITIES .......... 22

TABLE 8: BANKS INVOLVED IN ENERGY EFFICIENCY LOAN FINANCING SCHEMES ..................................................... 33

TABLE 9: KEY ASPECTS OF THE VCFEE ................................................................................................... 35

TABLE 10: KEY FEATURES OF THE PRGFEE .............................................................................................. 37

TABLE 11: KEY CHARACTERISTICS OF NCEF .............................................................................................. 38

Chapter 1: Executive Summary

Energy is a key driver of our national economy for several reasons. It is thus critical to bring in

energy efficiency within each end-use application, for instance lighting. Accordingly, the

investments in Energy Efficiency (EE) are being widely deemed as the most cost effective options

in the short-to medium term. Pivotal objectives are to deliver a) enhanced economic

productivity and market competitiveness, b) increase security and mitigate emissions of

greenhouse gases. Several studies have been carried out to bring out the importance of energy

efficiency measures within core sectors of our energy economy. The Asian Development Bank

(ADB) estimated that 1-4% investment in EE as a share of an overall energy sector investment can

meet as much as 25% of the projected increase in primary energy consumption in developing

Asian countries by 2030 (ADB 2013).

1.1 Objective of the project The objective of the study is to preparation of a framework document pertaining to financial

options and opportunities in the area of large scale LED street lighting technology. It will be

based on various commercial models available like BOOT, BOT and other financing models like

shared savings and guaranteed savings modalities and others. The main tasks include:

1. Identification of available project financing opportunities and funding mechanisms

from government and other financial institutions which include:

Financing opportunities under NMEEE of NAPCC (partial risk guarantee fund and

venture capital fund)

Clean Energy Fund

Energy Efficiency Schemes/credit lines of various banks

Funds/credit lines available from bilateral/multilateral funding organisation

such as WB,IFC,ADB other private financial institutions

chemes like risk guarantee fund and others form Bureau of Energy Efficiency

2. Financing opportunities and schemes available from leading commercial banks and

financial institutions from public/ private sector and Bureau of Energy Efficiency.

1.2 Case specifics-India in terms of EE gains Sizeable potential exists in India for making cost-effective investments in energy-efficiency

area. The Planning Commission in its 2011 report has estimated the energy-saving potential to

be in the range of 124-155 billion kWh. This transforms into a value of nearly USD 11-22 billion at

average tariffs. India will need to invest about USD 4.5 billion per year through 2020 in order to

meet its established national energy-saving targets (ADB 2013). However, in spite of the vast

potential coupled with the need for EE investments, the rate of investment in EE technologies

and projects is far behind its assessed potential. The silver lining is that both the national and

state policy makers are laying heightened importance on energy efficiency measures.

1.3 Key Drivers of Energy Efficiency in India Today energy efficiency is emerging as a viable solution for rapidly developing economies such

as India and China. These two countries are witnessing an unprecedented economic growth at

present. India in particular has taken several initiatives in EE in terms of the formation of

working groups, enactment and amendments to legislation and setting up of public and private

organisations that focus on promoting energy efficiency. The cornerstone of such

developments is the creation of India’s National Plan on Climate Change which comprises of

eight national missions. One of these is the National Mission on Enhanced Energy Efficiency

(NMEEE) (NAPCC, 2008). The NMEEE seeks to upscale efforts to create a market for EE, which is

estimated to be around USD 12.4 billion (NMEEE, 2010). The implementation plan for NMEEE,

prepared jointly by the Ministry of Power (MOP) and Bureau of Energy Efficiency (BEE), was

released in 2010.

The energy portfolio of India is dominated to a significant extent by fossil fuels. The country is

confronted with several challenges concerning climate change and energy security. However,

these challenges also function as drivers for enhanced market penetration of EE technologies.

Globally, India occupies fourth place in terms of its primary energy consumption after US, China

and Russia. The average energy and peak power deficits in the country stood at 8.7% and 9%

during 2012-2013 according to the Central Electricity Authority (CEA). Nearly 90% of India’s

commercial energy supply is met by fossil fuels marked with a high enough dependence on

imports. As per the twelfth Five Year Plan (2012-2017) of GOI, the domestic production of energy

sources is expected to increase with continued dependence on imports. For example, around

78% of the demand for crude oil in the country is met via imports. This places a heightened

concern to bridge the supply-demand gap and reduce the import dependence.

Chapter 2: Barrier & Challenges

A wide range of barriers related to energy end-users and project developers hinders the

implementation of energy efficiency measures and technologies. These mainly include the

following few:

High cost of energy efficient products: Energy efficient products and appliances

generally have a high initial capital cost. This becomes a stumbling block to adopt them

readily. Take for instance the use of energy efficient light emitting diodes for street

lighting in municipal areas. The end-users normally do not carry out a life cycle analysis

of the products and their costs during the product purchase. Secondly, awareness

levels about the likely benefits of installing energy efficient products are also subdued.

There is also a limited availability of potential financing mechanisms for energy

efficiency.

Limited technical knowledge of EE: Most project developers have limited technical

knowledge about the various aspects of EE. Therefore, they hesitate to implement such

technologies.

Lack of internal funds for EE: Internal funds are generally not readily available for

procurement of the equipment or products needed for EE project implementation, both

in the public and private sectors in the country. As such, the uptake of EE is very limited

due to the need for external financing, which is often difficult to obtain. Finance plays a

key role in facilitating large-scale implementation of EE projects and energy efficient

technologies. There is a growing adoption of energy efficient measures in India;

however, several barriers continue to stall sufficient financing of such projects and

technologies. Some key barriers to financing EE projects include:

Lack of non-recourse finance for EE projects - A large number of FIs do not perceive EE

measures as a separate project. Thus, they are unwilling to provide loans without any

lien on assets of the parent entity. This makes it difficult for the implementing

organization to raise finance for such projects, as most organizations utilize their

borrowing limits for their core businesses.

Perceived difficulty in evaluating financial returns of EE projects - Banks and FIs may

have difficulties in evaluating financial returns from EE projects. This hinders the

availability of both debt and equity finance for EE projects.

High transaction costs due to small project size - EE projects are relatively small in size

and have a high transaction cost, compared to other conventional lending by banks and

FIs. This not only makes EE projects less attractive for conventional bank financing, but

also limits the interest of international FIs (such as multilateral and bilateral donor

organizations) to whom the scale of financing is important.

Risk perception of EE vis-à-vis conventional projects is briefly summed up as under:

1. Traditional projects receive priority over the energy efficiency projects even when they

do not offer the best business case or may not offer the best return. Those advancing

loans are more familiar with the conventional energy projects.

2. The energy efficiency project developers in turn seem to be less aware about the project

packaging and presentation requirements of the financial community say banks etc.

There is also a lack of standardised contracts, agreements and project proposal

templates that could facilitate such communication.

3. The energy efficiency service providers possess limited capacity at times. These service

providers have limited capacity vis-à-vis technical, business and project and risk

management skills. These skills are quite important for efficient project development

and execution and can enable EE service providers to develop bankable projects.

4. The formal measurement and verification (M&V) procedures and protocols for Energy

Saving Performance Contracts (ESPCs) have neither been sufficiently developed nor

widely accepted in India. This also limits the capacity of ESCOs to effectively deliver EE

projects.

5. The project proponents or hosts lack the capacity to understand the basic concepts of

ESPC. They also do not fully understand the need for appropriately structuring energy

services and financing arrangements for EE projects. Thus, they are unable to develop

bankable proposals for projects implemented by ESCOs.

6. The ESCO industry in India is still at a nascent stage and lacks financial strength. This

greatly limits the adoption of the ESCO mode of financing. This poor financial strength

further limits ESCOs' ability to find funding sources.

7. The lenders usually require high levels of collateral or strong borrower balance sheets

to provide financing. ESCOs, however, often lack such collateral or strong balance

sheets (or may not be willing to commit their available collateral for EE projects). Banks

and FIs also lack experience in lending to ESCOs and consider the ESPC business to be

risky.

Chapter 3: Municipal Demand Side Management-

Scenario

The municipal sector consumes around 4% of total electricity generated in India. Amongst the

key areas of municipal DSM are a) Street lighting, b) Water pumping system, c) sewage pumping

system and d) municipal buildings. Table 1 presents the percentage contribution to electricity

consumption below:

Table 1: percentage contribution to electricity consumption

S. No Categories % contribution

1 Industrial 36%

2 Domestic 26%

3 Irrigation 22%

4 Commercial 8%

5 Water works 3%

6 Public Lighting 1%

Figure 1:% contribution of electricity consumption

3.1 Street lighting as case studies As per reliable estimates, public lighting accounts for more than 1% of the total energy

consumption in the country. Savings potential to the tune of over 60% exists in case of street

lighting segment. It is widely perceived that energy efficiency in street lighting is easy, non-

critical and the fastest path to implement via a smoothly networked association of

stakeholders. The agency under whose direct purview lies the implementation of street lighting

is commonly referred to as the, “Urban Local Bodies”. As per the 1991 census, following is the

breakup formation of ULBS:

Table 2: Breakup formation of ULBS

S. No Particulars Nos.

1 Total number of urban local bodies 3255

2 Number of Municipal Corporations 55

3 Number of Municipalities 1808

4 Number of Townships 620

38%

27%

23%

8% 3%

1%

Percentage Contribution of electricity consumption

Industrial Domestic Irrigation

Commercial Water works Public Lighting

5 Number of Town Panchayats 453

Estimates suggest that the size of municipalities has almost doubled during the last 10 years.

Majority of the urban local bodies have either inadequate or poor street lighting thus leading to

high cost on maintenance. Further, the city based ULB’s spend about 5-7% of their revenue

expenditure on street lighting as against a spending of as much as 20% by ULB’s in towns. This

indicates to a high enough concern for energy conservation to the best possible extent.

3.2 Current market scenario India and other South Asian countries happen to figure amongst the fastest growing regions in

the world. Additional installation of power generation facilities is the need of hour while taking

into account a) fast growing population, b) urbanisation, c) industrialisation. As of now, lighting

consumes just around 18% of total power produced in the country. Today majority of the market

is dominated by ICL and fluorescent lamps. The market share by lamps manufactured in India

(2011) is presented in Table 3 below:

Table 3: Market share by lamps manufactured in India (2011)

Type of lamp Type of lamp Percentage contribution

1 Incandescent lamps 63%

2 Fluorescent lamps 14%

3 Compact Fluorescent lamps 21%

4 Other lamps (LED’s) 02%

Technologies which are expected to fast replace the conventional lighting are CFL’s and LED’s.

The CFL lighting penetration in India is often perceived as a success story by the Govt. of India.

Favourable policy interventions resulted in a phenomenal increase in CFL production from 20

million lamps in 2003 -2004 to more than 255 million in 2009-10. Additionally, the cost of CFL’s

also came down by around 50%.

3.3 LED lighting scenario in India Light emitting diodes also known as the small lighting wonders are mostly imported into the

country till date. As per the available estimates there are around 10 million street lights in India

which can be replaced with the new generation LED lights. Selective few LED street lighting

projects have already been launched so as to explore the feasibility of street lighting.

3.4 Energy conservation measures The incandescent lamp (GLS) is used as a major light source in India. These lamps have an

efficacy of 10 to 20 Im/W and a life of 1000 burning hours, There are varieties of gas discharge

lamps with efficacies ranging between 50 and 200 Im/W and having a life between 5000 and

15000 burning hours. These gas discharge lamps are:

a) Tubular fluorescent lamps;

b) Compact fluorescent lamps (CFLs);

c) High pressure mercury vapour lamps (HPMV);

d) High pressure sodium vapour lamps (HPSV); and

e) Metal halide lamps.

CFL lamps are available in lumen packages, so that they can replace GLS lamps of equivalent

lumen output. The fluorescent lamps have been made further energy effective with the use of

triband phosphors instead of the conventional fluorescent powder. The luminous efficacy of this

new family of lamps is 35 percent higher. There is another area, which can give good energy

saving. "Every gas discharge lamp needs a ballast, Today, most of these ballasts are the

conventional electromagnetic type.

All these ballasts, when the lamp is in operation, consume electric power known as ballast loss.

With proper design, the ballast loss can be substantially reduced. Use of such "low loss ballasts

can result in a lot of energy saving.

However, the best solution in this area is to gradually introduce electronic ballasts. These

ballasts, not only have very low losses because of electronic components, but increase the

luminous efficacy of fluorescent lamps because of high frequency operation. The overall

luminous efficacy of an electronic ballast and high frequency fluorescent lamp combination is

25 percent higher than that of a conventional ballast and fluorescent lamp combination.

Even the best lamp and ballast combination may not give the ideal result if used in luminaires

which are poorly designed. A lot of light will be wasted in such luminaires.

It is imperative- today to look into all the aspects of application and select the most optimum

solution for all lighting installations. For example, luminaires with mirror optics" and

widespread light distributions saves approximately 25 to 33 percent energy for the same lighting

level in offices. Similarly, road lighting luminaires using pot optics and tubular HPSV lamps

achieve the same lighting parameters with 30 percent less number of poles and luminaires than

the conventionally designed luminaires. The associated energy and material savings are

enormous.

There are enormous saving opportunities in almost all the sectors of lighting if following steps

are taken:

a) Incandescent lamps replaced with fluorescent lamps, retrofit compact florescent lamps and

non-retrofit compact fluorescent lamps;

b) Conventional" fluorescent lamps replaced with T5 fluorescent lamps;

c) Electronic ballasts installed in place of electromagnetic ballasts;

d) High pressure sodium vapour lamps and ballasts used instead of high pressure mercury

vapour lamps and ballasts; and

e) Metal halide lamps used in place of high pressure mercury vapour lamps and tungsten halogen

lamps. With proper implementation of energy-effective lighting design and good engineering

practices, it is possible to conserve energy.

Street Lighting

In road and street lighting the following aspects are considered:

a) Energy saving through selection of efficient lamp technologies and design practices;

b) Capital cost saving using proper spacing and placement;

c) Maintenance cost 'saving using lamps with longer life and optimum spacing;

d) Reduced glare and improved visibility by careful selection of luminaires and lamps;

e) Improved sense of security by selection of efficient systems and incorporating proper

design. This can make an area appear safer and more secure.

f) Improved sense of economic development of communities; and

g) Improved safety of motorists, cyclists and pedestrians, improved traffic guidance and a

pleasant environment.

Table 4: Categorization of roads for street lighting as defined in the National Lighting Code (NLC)

S.

No

Classification

of Lighting

Installation

Type of Road Average IL

luminance

Uniformity

Ratio

Transverse

Uniformity

on Road

Services

1 Group A1 Important traffic routes carrying fast

traffic 30 0.4 0.33

2 Group A2

Other main roads carrying mixed traffic

like main city street, arterial roads and

throughway roads

15 0.4 0.33

3 Group B1

Secondary road with considerable traffic

like principle local traffic route and

shopping

8 0.3 0.2

4 Group B2 Secondary roads with light traffic 4 0.3 0.2

Sl. No Junction Type Lux (Eav) Uniformity Ratio

1 Key Junction & Complex Flyover interchanges 50 0.4

2 Main City Junctions without any interchanges 20 0.4

3 Other smaller junctions 15 0.4

4 Pedestrian Crossings 50* -

5 Bus Bays 5 -

3.5 Key challenges to market penetration Primary issues in the smooth enhanced penetration of LED’s are along the following few

considerations mainly:

Technology

The technology to manufacture the LED chips is possessed by just a few companies. They are

reluctant to set up the manufacturing bases in South Asia mainly to protect their intellectual

property rights (IPR).

Cost

Such an exclusivity of technology along with existing import taxes leads to the high cost of LED’s.

Standards

Absence of national technical standards for testing and verification of LED technology and

specifications which apart from constraining its penetration lends itself to import of sub-

standard LED devices. Table 5 gives a brief overview of the opportunities presented by LED’s as

under:

Table 5: Overview of the opportunities presented by LED’s

Efficiency Higher luminous efficacy as compared to CFL’s

Consume less electricity at reduced costs and GHG emissions

Safety Do not produce any toxic waste upon disposal

Life Typical operating life span of 50000-60000 hours as compared to 10000

hours for CFL’s thereby reducing life cycle costs

Strength Can withstand mechanical shock and rugged conditions unlike the

fragile CFL’s

Well suited to the rural conditions in rural India

3.6 Critical areas for LED financing in India Multi-pronged approach is needed as far as financing of LED’s is concerned. The same can be

briefly mentioned as under:

Project financing

Several planned street lighting projects will need financing from either the central or state

governments or external financers.

Research and Development

Financing for support infrastructure like testing and standardisation facilities is required.

Manufacturing

Companies that are inclined to set up manufacturing facilities will also need the flow of funds.

Clean Development Mechanism

The banks and financial institutions are expected to have a major role to play in carbon trading

if, indoor LED distribution projects for example are modelled along the lines of ”Bachat Lamp

Yojana”.

Chapter 4: The ESCO Concept

An energy services company initiates the identification, study, conception, financing,

implementation and follow-up of the energy saving measures using a contractual engagement

between the ESCO and the client (be it a discom or a user) through an Energy Performance

Contract or simply EPC.

In turn, EPC deals with the following few aspects:

Financing of the projects from energy savings

Permits the realisation of the project for which money may not otherwise be available.

Mobilises the private capital

Ensures that the savings will be realised within a certain time frame

EPC is also known as third party financing and is widely regarded as a sustainable mechanism of

innovative financing. Amongst the key characteristics of an ESCO is that it arranges the finance

and does not always finance through its own funds. Simply put, an energy services company is

not a bank by itself.

4.1 Key advantages of dealing with an ESCO It is of interest to know as to why a municipal corporation for example should deal with an ESCO.

Well it may be on account of the following few reasons mainly:

offers a single platform

ideal source for project realisation

happens to be a proven method of financing over the last 20 years

project realisation is undertaken by experts drawn from energy-efficiency area

Easy Financing

o Does not need any capital investment

o Enjoys access to off-balance sheet financing

o Availability of capital for other priorities

There are several other reasons for striking a relationship with ESCO. The most important one’s

are briefly indicated under:

Financial impact

o Quick and assured savings

o New capital equipment

o Utility cost reduction

o Cost control instead of cost enhancement

ESCO route offers a low risk in terms of monitoring of the implemented measures. Additionally it

leads to skill enrichment of the employee workforce besides resulting in improved working

conditions. The gainful thing is that it adds an overall value to the enterprises. The energy

services company has specialised experience in the packaging and implementation of energy

projected risks. As for the payment, it is based on successful completion and obtaining of energy

savings in actual. The ESCO performance contracting guarantees energy savings within the

client’s organisational framework. Financing allows the realisation of the projects in respect of

which funds would otherwise not be available.

4.2 ESCO - one stop shop solution In totality, an ESCO offers the unique set of following few attributes and can be regarded as one

stop solution for all energy efficiency requirements be it related to street lighting or water

pumping etc.

General contracting

Energy analysis

Consulting engineering

Project management

Project financing

Training

Performance guarantees

Energy monitoring

Savings maintenance

Risk management

The ESCO approach is inherently of the following nature:

a) The client enters into an arrangement with an ESCO

b) The ESCO brings in the contractors, equipment manufacturers, government agencies,

financial institutions, professional consulting engineer and energy suppliers.

c) Guarantees (analysis, concept, installation, financing, monitoring and training)

In totality, an ESCO offers performance based projects wherein the compensation is tied to the

amount of energy actually saved. Thus the ESCO compensation is at a full risk.

4.3 General perspective of an energy savings company An ESCO may normally have its involvement in the key areas of Demand Side Management (i.e.

study, implementation, management and evaluation), Indoor air quality improvement,

Renewable energy and cogeneration, technology transfer etc. The demand side management

options generally include the following few:

Building energy efficiency and design of energy efficient buildings

Efficient lighting

Efficient motors

Efficient power suppliers

Efficient appliances

The project development process for an ESCO generally revolves around the following few things:

Opportunity assessment

Preliminary energy audit

Investment grade audit ( engineering analysis, economic analysis)

Project proposal

Project implementation

Commissioning and training

Monitoring and verification

Success of an ESCO project involves the breakdown of the following few costs:

Cost of work and equipment

Interim financing

Engineering fees for study, drawings, specifications and supervision

Project management

ESCO administration, overhead and profit

Thus the total project cost is on account of a) energy management, b) monitoring and c) capacity

building (i.e. personnel training). The simple payback is the ratio of total cost and annual savings.

Design attributes of business model at guaranteed savings

1. ESCO guarantees that energy savings will cover debt service.

2. Energy savings are measured against a baseline established by the contractor in

advance.

3. ESCO pays any shortfall.

4. The customer pays debt service to the bank.

4.4 The concept of shared savings ESCO business model usually hinges around a shared savings model with the following few key

characteristic features:

It is not paid solely from the share of the savings.

Generally found in such a market that faces little or no competition at all.

It usually takes higher risk in a new market and tries to introduce a more profitable

scheme.

In case ESCO provides financing, it will normally take a large portion of the savings (i.e.

up to 90%) for a fixed period (corresponding to a notional repayment of the debt).

4.5 ESCO methodology for street lighting Municipal lighting is a significant end-use application provided by the municipal corporations in

urban areas. Table 6 highlights the key process attributes as per the following manner. The

overall cost (i.e. energy and O&M) savings accrue to the municipalities.

Table 6: Key process for ESCO project design

Memorandum of Understanding Signed between municipalities and the energy services company

Preparation of Detailed Project Report/Revalidation

Detailed walk through energy audit for data validation of DPR and joint verification

Technology Demonstration Assesses actual savings, determination of annuity payments, technical specifications

Agreements Agreement between municipalities and ESCO for implementation

Payment mechanism The payment security mechanism to be finalised Implementation ESCO will implement the project based on its own

resources M& V Deemed savings approach used

4.6 Barrier & Challenges for investment through traditional

performance contracting The primary requirement for a successful engagement on performance contracting basis is the

need to have a baseline that is close to actual reality; adequate data on consumption patterns

that could normalize the seasonal and other variations; and the equipment installed meet the

required standards. If this is not the case, it is extremely difficult to deliver a guaranteed savings

unless the pre-project baselines are reset. The non-performance of the ESCO delivery system

can be attributed to the following reasons.

Baseline Challenges -Data of number of lights & number of functioning lights provided by

MCs was inaccurate

Inaccurate Billing- This grossly affected bidders in guaranteeing the minimum level of

cost savings

Conforming of BIS standards- Current streetlights, in most cases, do not comply

with standards

Detailed M&V

Payment to ESCOs was contingent on a detailed M&V plan. Absence of a clear baseline & manual

operations of street lighting were big challenges

Chapter 5: Case Studies of Municipal Lighting in

India

The Bureau of Energy Efficiency (BEE) is playing a pivotal role in reducing energy consumption in

street lights that currently use highly inefficient lamps. BEE has been providing grants to

municipalities in India to undertake the pilot LED street light projects. Till date, more than 30

such LED based street lighting projects have been identified in 23 states for which, BEE has

already disbursed Rs. 90 million. Some of the projects have been completed by now in Arunachal

Pradesh, Assam, Maharashtra, West Bengal and Nagaland etc. Several such projects are under

execution while others are in the initial stages of project conceptualisation.

Nasik Municipal Corporation earned an enviable distinction of having the first duly approved

project by Board at an EESL investment of Rs. 400 million. The financial closure for this project

was achieved via a loan component from a nationalised bank i.e. Union Bank of India. Further

EESL methodology was developed following successful completion of the Nasik project. Key

outcome of this project was disseminated to all states and municipalities across the country.

EESL engaged with 24 municipalities spread over 9 states in India. Total estimated investment

to the tune of Rs. 1500 crores (USD 250 m) estimated within the next 2 years as against an

expected investment of $ 500 million over the next 3 years. Table 7 presents a consolidated

outlook on the underlying considerations and EE gains to the municipalities as under:

Table 7: A consolidated outlook on the underlying considerations and EE gains to the municipalities

Repair & Maintenance Cost Savings S.No. Name of the

Municipality Existing Electricity Cost (INR in Lacs)

Present O&M Cost (INR in Lacs)

Total (before LED Retrofit) INR in Lacs

Annuity (inclusive of O&M) INR in Lacs

Electricity Cost with LED INR in Lacs

Total (after Project) INR in Lacs

Annual Savings

1. Nagpur Municipal Corporation

2053 300 2353 1585 590 2175 177

2. Jabalpur Municipal Corporation

371 63 434 295 107 403 32

3. Kolkata Municipal Corporation

8754 1911 10697 7405 2398 9802 895

4. Sangli Municipal Corporation

596 58 654 432 190 623 32

5. Solapur Municipal Corporation

693 110 803 543 218 762 41

6. Ludhiana Municipal Corporation

3235 240 3475 2273 982 3255 220

7. Faridabad Municipal Corporation

767 37 804 519 253 773 31

8. Trichur Municipal Corporation

417 26 443 288 123 411 32

9. Hyderabad Municipal Corporation

13205 163 13368 8181 1001 12484 883

10. Bikaner Municipal Corporation

322 19 341 221 102 323 18

5.1 Case specific example of energy saving via LED street

lighting in an overseas location Los Angeles is a classic example of as to how LED use for street lighting resulted in huge savings.

A total of 140,000 city street light fixtures were replaced with LED fixtures besides installation

of a remote monitoring system. Following few are the salient features of this LED project:

Total project cost of $ 57 million

$ 10 million energy and maintenance savings on a per annum basis

40500 tons of carbon dioxide/year in annual CO2 savings

Simple payback period of 7 years

Installation period of 5 years to allow city to tender in small, discrete increments

Project ultimately funded with combination of 7-year, $ 40 million loan at 5.25% provided

by LADWP; $3.5 million from street lighting maintenance assessment fund and

$0.24/kWh

5.2 Procedural mechanism for recovery of capital cost LED market penetration in India is still in a nascent stage. A slew of financial and fiscal measures

are needed to enhance the visibility of LED’s like for example through municipal lighting etc.

Indicative route of LED financing is along the following few considerations mainly:

A financier enters into an agreement with an ESCO/Project implementer to provide

energy efficient equipment to a customer and future repair and maintenance

The financier covers all the equipment and project maintenance costs

The customer repayment is based on the energy savings and reduced operating

expenses

Following the expiration of the agreement, the customer has the option to purchase the

equipment as per the following:

a) Energy savings company designs and installs the equipment

b) The 3rd party and the ESCO enter into a contract to pay for all installation and

maintenance costs

c) The 3rd party covers the full project cost and the customer repays him on the basis of

energy savings

Chapter 6: Indian LED Lighting Market 2010-2015

(estimate)

6.1 Overview Estimated at USD 73.3 million in 2010 and expected to reach USD 470 million by 2015

Street lighting to account for nearly 60% of the LED market in 2015

Higher acceptability by the government and energy efficiency are expected to be a

crucial success factor for quick adoption

The Indian LED lighting market is estimated to grow at more than 40% till 2015. Following is a

quick glance at the growth drivers:

Investment by the government in energy efficient lighting systems

Decline in the average prices of LED’s

Quick ROI to drive adoption

Improvement in technology addressing new applications

Global mandate to combat global warming and migration to technologies like LED

Energy efficiency is the top driver

Lighting consumes about 17% of the total energy

More than 80% of current lighting is based upon antiquated technology and thus use of

more efficient LED technology will not only save energy but also lead to reduction in the

emission of greenhouse gases.

As of now overall LED penetration in India is low but it is gaining momentum rapidly in certain

applications like down lighting, accent lighting and to a certain extent in low wattage street

lighting.

6.2 Role of Government agencies It is widely perceived that the support of government agencies will be a key determinant for

enhanced penetration of LED lighting products. Several pilot scale projects have already been

kick-started in some states in India. Some tenders for low wattage street LED street lighting are

also awarded. However, lack of proper standards can lead to concerns about the reliability;

standardisation activity has already begun at the Bureau of Indian Standards (BIS). Guidelines

from BEE are already in a circulation phase and stakeholder comments have been sought. Low

wattage street lighting LED solutions designed and developed in India are by now deployed for

A2, B1 and B2 category roads.

Chapter 7: Summary outlook on Policy Initiatives

for Energy Efficiency in India

The Government of India has developed and implemented several policy and institutional

initiatives to encourage adoption of energy efficiency (EE) in the country. These include enacting

laws and amendments to legislations, announcing the NAPCC and the NMEEE etc. Following are

the most important:

Energy Conservation Act 2001

The Electricity Act 2003

Energy Conservation Building Code

7.1 National Mission on Enhanced Energy Efficiency (NMEEE) GOI released the National Action Plan on Climate Change (NAPCC) in June 2008. It comprises of

eight key national missions to guide the country through the climate change challenge. National

Mission on Enhanced Energy Efficiency (NMEEE) is an Indian government initiative proposed to

address national problems of inefficient energy use. It is one of eight proposals created by

India's National Action Plan for Climate Change and is based on the Energy Conservation Act of

2001. The Mission will enable about Rs. 75,000 crore worth transactions in energy efficiency. In

doing so, it will, by 2015, help save about five per cent of our annual energy consumption.

The NMEEE is one of the eight missions that focus on Indian government’s increased and

renewed emphasis on achieving energy efficiency in the national economy (NMEEE, 2010). Key

initiatives under NMEEE are as under:

Perform, Achieve and Trade (PAT)

Framework for Energy Efficient Economic Development (FEEED)

Market Transformation for Energy Efficiency (MTEEE)

Energy Efficiency Financing Platform (EEEP)

7.2 Perform Achieve and Trade (PAT) The Perform Achieve and Trade scheme is a market-based mechanism to enhance energy

efficiency in the ‘Designated Consumers’ (large energy-intensive industries and facilities).

The scheme includes the following project steps:

Goal setting: Set a specific energy consumption (SEC) target for each plant,

depending on level of energy intensity (specific energy consumed = energy use /

output) of that plant. The target will specify by which percentage a plant has to

improve its energy intensity from the base line value in a period of three years.

Reduction phase: Within a three-year period (2011-2013) the designated

consumers try to reduce their energy intensity according to their target.

Trading phase: Those consumers who exceed their target SEC will be credited

tradable energy permits. These permits can be sold to designated consumers who

failed to meet their target.

Designated Consumers who fail to achieve their target have to compensate this failure by buying

permits. If they fail to do either of this, they may have to pay penalties.

The energy consumption reported by designated consumers is based on audit by any of the BEE

accredited agencies. The BEE may verify correctness of reported values.

7.3 Market Transformation for Energy Efficiency (MTEE) Accelerated shift to energy efficient appliances in designated sectors will be enabled through

innovative measures. These products would be made more affordable. This target would be

achieved by DSM measures, supported with CDM financing wherever possible.

The initiative includes the following activities:

National CDM Roadmap

Programmatic CDM: BEE is exploring undertaking CDM Programme of Activities for

the following sectors: lighting (Bachat Lamp Yojana), Municipal DSM, Agricultural

DSM, SME sector, Commercial Building sector and for Distribution Transformers.

Standards and Labelling: Step by step notification for mandatory labelling for

Equipment & Appliance for Domestic Sectors, Hotel Equipments, Office

equipments, Industrial Products, Transport Equipments.

Public procurement: Amendment of procurement rules to explicitly mandate

procurement of energy efficient products for all public entities.

Technology program: Replacement of inefficient appliances by efficient products

such as efficient lighting, ballasts, AC, refrigerators in domestic sector. Reduction

of Transmission & Distribution (T&D) losses :

Energy Conservation Building Code (ECBC): Mandate maximum energy consumption

norms (per square feet) for new commercial buildings and existing buildings

(through retrofit).

ESCos Promotion: Assuring ESCo quality through accreditation. Promoting their

capacity through set of 1200 bankable efficiency retrofit demonstration projects

covering all sectors and the entire country.

Capacity building and information: Creating a pool of trained manpower in states,

government agencies, banks and financial institutions. Continuing the training of

Energy Auditors and Energy Managers.

Policy transparency

7.4 Financing of Energy Efficiency The initiative focuses on the creation of mechanisms that would help finance demand side

management programmes in all sectors by capturing future energy savings. The initiative

includes the following activities:

• Fiscal instruments: Tax exemptions for the profits and gains made from energy

efficiency projects by ESCos and Venture Capital funds. Reduction of VAT for energy

efficient equipment (e.g. CFLs)

• Revolving fund: To promote carbon finance

• Partial Risk Guarantee Fund: To provide commercial banks with partial coverage of risk

exposure against loans made for energy efficiency projects. The fund will charge a small

fee on all projects seeing the risk guarantee.

7.5 Power Sector Technology Strategy This strategy is aimed to enhance energy efficiency in power plants.

• Adopt energy efficient generation technologies in new plants including supercritical

boilers

• Enhance energy efficiency in existing plants

• Roadmap for IGCC demonstration plants

• Development of know-how for advanced super-critical boilers

• Road map for fuel shift

Other initiatives In addition to the above mentioned activities, following activities will

supplement the overall plan.

• Set up Energy Efficiency Services Ltd.: A public sector company is planned to be set up to

facilitate the progress and to address all the issues / barriers which impede investments

in energy efficiency projects. This company will be an implementing agency, while BEE

will concentrate on its quasi-regulatory role. In addition to being an implementing body;

this company will also function as consultancy organization, resource centre and an

ESCo

Strengthening of State Designated Agencies (SDAs): The scheme seeks to build

institutional capacity of the newly created SDAs to perform their regulatory and

facilitative functions in the respective states.

Strengthening of BEE: Government funding for infrastructure creation that is necessary

for BEE to implement 8 new projects/ schemes through the country with an allocation

from the XIth plan.

Awareness Programs: Information campaigns in schools, industry, commercial,

agriculture and domestic sector. National painting competition, Energy Award,

publication of Manuals and Codes for energy efficiency etc.

7.6 National Mission on Sustainable Habitat (NMSH) The NMSH focuses on sustainable buildings and is also a national mission under NAPCC. It aims

to make the habitat (i.e. living environment of humans) sustainable through enhancement of EE

in buildings etc.

The National Mission on Sustainable Habitat which is a component of the National Action Plan for

Climate Change will broadly cover the following aspects:

Extension of the Energy Conservation Building Code, which addresses the design of new and

large commercial buildings to optimize their energy

Better Urban Planning and Modal Shift to Public Transport. Making long term transport plans to

facilitate the growth of medium and small cities in such a way that ensures efficient and

convenient public transport.

Recycling of Material and Urban Waste Management A special area of focus will be development

of technology for producing power from waste. The National Mission will include a major R&D

programme, focusing on bio-chemical conversion, waste water use, sewage utilization and

recycling options, plasma conversion of waste of biological origin to liquid fuels that can

substitute for petroleum based fuels wherever possible.

Figure 2: National Mission on Sustainable Habitat

Strategies for Mitigation the objective

Promoting Efficiency in the Residential and Commercial Sectors

Water Supply, Wastewater and Solid Waste Management

Strengthening of Public Transport System through a Combination of Promotional,

Regulatory and Fiscal Measures

Reducing the Fuel Consumed per Passenger Travel through Modal Shift

A total fund requirement to complete the objective will be around 45,221 Cores.

7.7 12th Five Year Plan The 12th Five year plan calls for the use of energy–efficient technologies across the diverse

sectors of our energy economy. This also includes bringing in the concept of energy-efficient

lighting etc. on the roads.

7.8 Green Building Rating Systems and related initiatives This is specifically targeted at the building sector which is growing at a fast pace. The BEE has

developed a rating system based on the ”Star Labelling Program”, and the Indian Green Building

Council together with The Energy and Resources Institute (TERI) have introduced green building

rating system known as the Green Rating for Integrated Habitat Assessment Griha.

7.9 Barriers to Energy Efficiency in India There is a dire need for deploying energy efficient technologies and measures across all the

sectors in India. However, adoption of such measures and technologies remains limited largely

because of the barriers to large scale implementation of energy efficiency. Following is a brief

overview of these barriers:

Policy barriers

Institutional barriers

Barriers related to energy end-users and project developers

o High cost of energy efficient products

o Issue of split incentives

o Limited technical knowledge of energy efficiency

o Lack of external funds for energy efficiency

7.10 Outlined Financial Barriers Beyond doubt, finance plays a pivotal role in facilitating large scale implementation of energy

efficiency projects (including municipal lighting) and energy-efficient technologies. There is a

growing adoption of energy-efficient measures in India; however several barriers continue to

hamper sufficient financing of such projects and technologies. A brief overview of the key

barriers to financing energy efficiency projects is as under:

Lack of non-recourse finance for EE projects

Perceived difficulty in evaluating financial returns of EE projects

High transaction costs due to small project size

High project development cost

Risk perception of energy efficiency in comparison to conventional projects

Communication gap between financiers and project developers

Lack of knowledge and awareness of conventional lenders

Limited capacity of EE service providers

Lack of capacity of project hosts

Financial strength of ESCO’s

Experts believe that ESCO industry in India is still at a nascent level and lacks the necessary

financial strength. This limits the adoption of ESCO mode of financing to a significant extent.

Such a poor financial strength further limits ESCO’s ability to find funding sources. ESCO’s

more often than not lack collateral or strong borrower balance sheets to offer financing. On

the other hand, the banks and financial institutions also lack experience in lending to ESCO’s

terming the business as risk prone.

Chapter 8: Energy-Efficiency Financing

Instruments in Indian Context

Several financial instruments have been used to address the existing barriers to EE financing in

India. Some of these instruments have been introduced recently and some are still in a design

phase. Some of the existing instruments were introduced for implementing policies such as the

NMEEE, the EC Act and regulatory directives introduced at the local level. The existing

instruments and mechanisms for EE can be broadly classified as follows:

Debt based financing mechanisms for EE

During the last several years, bilateral donors and multi-lateral institutions have

supported the creation of innovative financing options for EE projects in India. This

support has largely been in the form of debt via specific lines of credit through Indian

banks and FI’s. Some of it has also been in the form of technical assistance.

JICA-SIDBI Financing Scheme for Energy saving projects in the MSME sector

IREDA Energy efficiency Financing Scheme

IREDA implemented a scheme for financing RE and EE projects via soft loans during

the earlier years with the support of the World Bank (USD 0.97 billion). The credit line

offered equipment financing, project financing and loans for RE/EE manufacturing

in the industrial, commercial and municipal sectors. However, the take-up of

financing for EE projects was quite limited.

ADB supported project on Industrial energy efficiency

Energy Conservation Commercialisation (ECO-I) Program of USAID

USAID provided funds to the ICICI bank to on-lend EE projects. Finance was offered

for up to 50% of the project costs at a commercial interest rate. The first ESCO

shared savings project for energy-efficient municipal street lighting was

satisfactorily completed way back in 2005.

ICICI Bank lending for Energy Efficiency

KfW Credit line for Energy Efficiency (for MSME’s)

GOI supported EE-debt-financing-Technology Innovation fund (for MSME’s)

Commercial EE Financing Programs

There is not a clear demarcation of specific EE lending by banks and the financial

institutions is not available. Normally banks include EE projects in their overall

portfolio and use general lending criteria and requirements to evaluate EE projects.

Table 8 gives a brief mention of the banks involved in energy efficiency loan financing

schemes:

Table 8: Banks involved in energy efficiency loan financing schemes

Name of Bank EE Programme State Bank of India

Energy efficiency loan scheme for MSME’s

Green Home loan scheme

Canara Bank Energy saving loan scheme for SME’s

Union Bank of India

Energy efficiency loan scheme for small and medium enterprise

Yes Bank EE Lending for SME’S, agriculture, commercial and industrial

sectors

8.1 Equity Financing for Energy-Efficiency in India In general, equity funds are offered by venture capital or private equity funds to finance

entrepreneurial endeavours for development and/or deployment of new EE technologies. There

are some instances of equity funds set up by the public sector for financing ESCO project or

investments in ESCO’s. Public equity funds are designed to partner with private sector venture

funds to leverage their expertise and resources. A good example of this is the proposed BEE

Venture Capital Fund for Energy Efficiency (VCFEE).

8.2 Case specific examples of private equity funds Green India Venture Fund Green India Venture Fund (GIVF) has been set up with a prime objective of investing in the

companies setting up the CDM projects and other commercially available viable

projects/businesses. The fund capital is around USD 53.33 million with a Green Shoe option. The

IFCI venture capital fund will contribute a sponsor contribution of 10% towards the fund capital.

The balance would be raised from other FI’s/banks/companies/multi-lateral agencies including

foreign investors. Lighting is included as one of the key segments for investments under GIVF

along with Renewable energy, energy storage etc.

Global Environment Fund It is basically a private investment fund that invests in businesses providing cost-effective

solutions to the environmental and energy challenges. The fund is dedicated to clean

technology, emerging markets and sustainable forestry. Global environment fund has

satisfactorily raised the USD 104 million South Asia Clean Energy Fund (SACEF). Following are the

key investors in this fund:

Asian Development Bank (USD 16 million of seed capital)

US Overseas Private Investment Corporation (OPIC)

International Finance Corporation (IFC)

Wells Fargo

Japan Bank for International Cooperation (JBIC)

8.3 Energy saving performance contracting (ESPC) in India ESPC’s and ESCO’s came into being in US during the late 1970’s as a result of energy crisis and the

rapid increase in oil prices. An ESPC involves providing an energy consumer or host facility a

range of services related to adoption of energy efficient products, technologies and equipment.

The services provided may also include financing of the EE upgrades so that the host facility has

to put up little or no capital. In turn, the host facility pays for the services from the money it saves

from reduced energy consumption. In several cases, the compensation is dependent on the

demonstrated performance i.e. in terms of EE improvement etc. Hence it creates a system

where the services and equipment can be paid from the actual energy cost savings. The ESPC is

usually implemented by the service providers more commonly known as ESCO’s.

Specific approaches to ESPC Within the ESPC, there exist two basic types of agreements i.e. shared savings and guaranteed

savings. In both these models, the ESPC offers a complete range of implementation services and

generates energy and cost savings.

For the shared savings model, the ESCO finances the project with a bank loan. The host facility makes no investment and shares the achieved savings with the ESCO as per a prescribed formula.

In case of the guaranteed savings model, the ESCO offers a performance guarantee and the host facility provides the project financing –at times with a bank loan. Following which, the ESCO is paid for the services offered upon the satisfaction of the performance guarantee.

8.4 BEE-Public Sector ESPC Approach The Bureau of Energy Efficiency (BEE) in cooperation with Asian Development Bank (ADB)

launched the Energy Efficiency Enhancement Project (EEEP) in 2003 to create innovative

approaches to encourage the development of a sustainable EE market in India. It mainly involved

the development of a financial mechanism to encourage participation of ESCO’s in

implementation of EE projects in the public sector. Thus EEEP developed an approach for

applying the ESPC model in the public sector. Following few are the salient features of ESPC

approach by BEE:

The financing model involves an ESCO, a financing institution, equipment suppliers and the host public agency.

Payment security mechanism is in place

8.5 Case specific example-Municipal ESPC Projects Municipalities in India known as urban local bodies (ULBs) spend over 50 percent of their

operating budgets towards energy costs. Reducing these costs through implementation of EE

measures can thus contribute significantly to the financial viability of such bodies. A number of

studies and energy audits have pointed out the large potential for improvement in EE and

reduction of energy costs by the ULBs through optimum pumping systems design, upgrading or

replacement of street lighting, and improved operational procedures. However, the

implementation of such measures by ULBs has been constrained by their limited technical

knowledge about EE options and lack of available capital.

A number of municipal street lighting projects have also been implemented by ULBs using the

ESPC process. These have either involved replacement of existing mercury vapour lamps with

efficient fluorescent tube lamps (T-5 lamps), or installing controls on lighting circuits. Municipal

street lighting programs have resulted in significant energy savings by using a shared-savings

model.

8.6 BEE Venture Capital fund for Energy Efficiency (VCFEE)

Venture Capital Fund for Energy Efficiency The VCFEE is part of the Energy Efficiency Financing Platform (EEFP), which is being established

under the NMEEE. It aims at creating a market for EE in India by making innovative policy and

regulatory regimes, launching financing mechanisms, and business models. Following is the

eligibility criteria for projects for funding under the VCFEE mechanism:

The project should seek to achieve demonstrable energy savings and mitigate emissions

of the greenhouse gases and project sponsors/participants must offer a viable method

to monitor and verify the same.

It should be a new project and not takeover of an existing project.

It should use viable technologies to be developed after energy audit/feasibility studies.

The investment part of the fund shall be up to five years with the option of an early exit.

Table 9 sums up the key aspects of the VCFEE as under:

Table 9: Key aspects of the VCFEE

Program Title Venture Capital Fund for Energy Efficiency

Sponsoring Agency Bureau of Energy Efficiency (BEE), Ministry of Power

Type of Program Venture Capital Fund

Implementing Agency

BEE

Objectives To provide equity financing for EE projects or companies specifically

related to the following:

Financing for incubation of the new EE technologies

Technology transfer leading to local manufacturing

Project financing for the last mile equity

Sectors Targeted Industrial, Commercial and municipal

Barriers addressed

High risk of new technologies

Perceived low return on investments

Limited equity availability for EE projects

Financing mechanisms

Co-invest in companies or projects.

Fund will provide last minute equity support to specific EE projects.

Limited to a maximum of 15 % of the total equity required, via special

purpose vehicle or USD 0.32 million, whichever is less.

Total Funding USD 15.37 million

8.7 Partial Risk Guarantee Fund for Energy Efficiency (PRGFEE) The Partial Risk Guarantee Fund for Energy Efficiency (PRGFEE) has been set up under the NMEEE,

with the key objective of leveraging commercial financing for EE in the country. This fund is

expected to promote EE financing by commercial banks by providing a risk sharing facility that

will offer partial risk guarantee to Participating Financial Institutions (PFIs). It will guarantee a

maximum of 50 percent of the loan (only principal) provided by a PFI. In case of default, the fund

will cover the first loss up to a maximum of 10 percent of the total guaranteed amount, and cover

the remaining default (outstanding principal) amount on a pari-passu (equal footing) basis up to

a maximum guaranteed amount. Following is the basic eligibility criteria for participating in the

PRGFEE:

Any commercial bank, FI or bank-owned leasing company in India may participate.

Eligible borrowers for individual projects include BE-empanelled ESCO’s or joint ventures

including ESCO’s.

Eligible projects under the PRGFEE for which PFIN can apply for a guarantee, it could be

credit facilities extended by PFI to ESCO’s for EE projects.

Support under PRGFEE will be limited to the government buildings and municipalities in

the first place.

The guarantee will not exceed US 0.49 million per project or 50% of the loan amount

whichever is less. Table 10 sums up the key features of the PRGFEE as under:

Table 10: Key features of the PRGFEE

Program Title Partial Risk Guarantee Fund for Energy Efficiency (PRGFEE) Sponsoring agency

Bureau of Energy Efficiency, Ministry of Power

Type of Program

Risk Sharing Fund

EE/GHG goals Part of the overall implementation strategy of the NMEEE

No specific targets for GHG goals specifically for PRGFEE are

available

Expected savings of around 23 million tons of oil equivalent of fuel

Estimated avoided capacity addition of over 19000 MW

Estimated Reduction in emissions of carbon dioxide by 98.55 million

tons per annum

Sectors targeted

Government buildings and municipalities

Barriers addressed

Limited commercial EE financing

Perception of high risk associated with EE projects

Lack of collateral or guarantees to eliminate repayment risk

Major Activities

Organising and coordinating the competitive bidding process for the

selection of the project

Coordinating the signing of the guarantee

Project appraisal unit

Agreement between the PFI’s and BEE

Preparing progress reports and statement of accounts on the

operation of the fund and providing these to the fund’s steering

committee

8.8 National Clean Energy Fund The National Clean Energy Fund (NCEF) is a fund created in 2010-11 using the carbon tax - clean

energy cess - for funding research and innovative projects in clean energy technologies of public

sector or private sector entities, upto the extent of 40% of the total project cost. Assistance is

available as a loan or as a viability gap funding, as deemed fit by the Inter-Ministerial group,

which decides on the merits of such projects.

Upon recommendation by NCEF, the final approval is given by the Minister of the concerned nodal

Ministry (which initially approved and decided to take the project submitted by the public or

private entity to NCEF) if the project cost is below Rs. 150 Crore; by Minister of Finance and the

Minister of the concerned nodal Ministry if the project cost is between Rs. 150 Crore and 300

crore; and by the Cabinet Committee on Economic Affairs if the project cost is above Rs. 300

Crore.

The National Clean Energy Fund (NCEF) is a non-lapsable corpus under the Public Accounts of

India. It is created through a levy of clean energy cess of INR 0.50 per ton on coal produced

domestically and imported into India. The formation of NCEF was announced in the Union Budget

2010-11, and the cess came into effect in July 2010. As of March 31, 2012, NCEF had collected

cumulative revenues of INR 43.15 billion (USD 698 million), and is expected to collect a further INR

38.64 billion (USD 625 million) in FY 2012-13. The NCEF was created for funding research and

innovative projects in clean energy technologies. As per the guidelines, NCEF assistance cannot

exceed 40 present of the total project cost. Under this fund, the participating organisations

need to make a minimum financial commitment of 40% of the project cost. Till now, projects in

excess of USD 56.63 million have been sanctioned. Table 11 presents the key characteristics of

NCEF as under:

Table 11: Key characteristics of NCEF

Program Title National Clean Energy Fund Sponsoring agency Ministry of Finance Type of Program Fund Implementing Agency

Ministry of Finance

Start date/end-date

July 2010-ongoing

Key Objectives Funding research and innovative projects in clean energy technologies Type of Technologies targeted

Integrated community energy solutions, smart grid technology,

renewable applications with solar, wind, tidal and geothermal

Advanced solar technologies, wind energy technologies etc.

Barriers addressed Availability of financing both grants for demonstration and soft

loans for large projects for faster diffusion of RE and EE

technologies

Financing Mechanism (s)

Viability gap funding or loan up to 40% of the project cost

Eligibility Criteria Individual/consortium of organisations in the

government/public/private sector

Project must be sponsored by a ministry/department of the

government

Project should not have availed any other benefits

8.9 Usage of fund Any project/scheme relating to Innovative methods to adopt to Clean Energy technology and

Research & Development are eligible for funding under the NCEF. An indicative list of such

projects is as follows:

Projects supporting the development and demonstration of integrated community

energy solutions, smart grid technology renewable applications with solar, wind, tidal

and geothermal energy;

Projects in critical renewable energy infrastructure areas such as Silicon

Manufacturing;

Projects which result in replacing existing technology in energy generation with more

environmentally sustainable approach;

Projects related to environment management, particularly in the geographical areas

surrounding the energy sector projects;

Renewable/Alternate Energy: This would include advanced solar technologies,

geothermal energy, bio-fuels from cellulosic biomass/algae/any waste, offshore Marine

Technologies (Wind, Wave & Tidal) & Onshore wind energy technologies, Hydrogen & fuel

cells.

Clean Fossil Energy: This would include power, oil, gas and coal technologies including

coal gasification, shale oil/ gas, lignite/Coal Bed Methane, advanced turbine and

technology for IGCC power plants, methane hydrates, enhanced recovery from

unconventional resources and fossil energy advanced research, carbon capture and

sequestration as also carbon capture and reformation.

Basic Energy Sciences: This would include energy storage for hybrid and plug-in electric

vehicles, solid state lighting, catalysis, biological and environmental research,

advanced computing, high energy and nuclear physics etc.

The Fund may also support pilot & demonstration projects for commercialization in the

relevant field.

Mission projects identified in the National Action Plan on Climate Change (NAPCC) and

projects relating to R&D to replace existing technologies with more environment friendly

ones under National Mission on Strategic Knowledge for Climate Change (NMSKCC).

The projects relating to creation of power evacuation infrastructure for renewables.

As at the end of September 2014, NCEF has recommended projects worth Rs. 18577 Crore.

Financial Year Projects recommended by NCEF (Project cost in Rs. Crore)

2011-12 573.05 2012-13 3276.11 2013-14 1477.65 2014-15 ( Uptil Sep 2014)

13250 (after certain sanctioned projects of previous years were downsized to include another project)

8.10 Other windows of opportunity Rajiv Awas Yojana The Ministry of Housing and Urban Poverty Alleviation of GOI put in place a Scheme known as,

”Rajiv Awas Yojana” (RAY) for the slum dwellers and the urban poor. Primary aim is to evolve a

slum free city plan with the following type of admissible components:

Development/improvement/maintenance of basic services to the urban poor- including

water supply, street lighting, sewerage, solid waste management and creation of

livelihood centres etc.

Convergence with health, education and social security schemes etc.

Specific set of guidelines have been formulated under this flagship scheme and street lighting

constitutes an important end-use requirement from several key considerations.

Jawaharlal Nehru National Urban Rural Mission (JNNURM) Significant objective of this mission driven scheme is to encourage reforms and fast tracked

development of identified cities. Pivotal thrust is to be on efficiency in urban infrastructure and

service delivery mechanisms, community participation and accountability of urban local bodies

etc. The main thrust of the sub-mission will be on the following few aspects:

Infrastructure projects related to water supply and sanitation Street Lighting Sewerage Solid waste management Urban transport and redevelopment of old city areas etc.

Financial Assistance under JNNURM The GOI has proposed substantial assistance via JNNURM over a seven year period. During this

period, funds shall be provided for proposals that would meet the mission’s requirements.

Following few are its core elemental considerations:

Financial assistance to be made available to the urban local bodies etc. which could

deploy these funds for implementing the projects by themselves or via special purpose

vehicles

Assistance under JNNURM is additional central assistance, which could be provided as a

grant (100% central grant) to the implementing agencies

Implementing agencies in turn are expected to leverage the sanctioned funds under

JNNURM so as to attract greater private sector investments through PPP mode that

enables sharing of risks between the private and public sector.

Street lighting is one of the identified sectors under this flagship scheme and such projects are

eligible for financial assistance under the sub-mission directorate for basic services to the

urban poor.

Chapter 9: Other financing instruments

Syndicated loans It is granted to such companies that wish to borrow more money than a single lender is prepared

to lend in a single loan with a syndicate of banks each lending a portion of the principal sum.

Bond financing These are basically debt securities issued by the companies or governments with a fixed

lifetime. It entitles the holder to the repayment of the principal plus interest (repaid at the end

or in regular instalments during the lifetime of the bond). A bond is thus a debt security in which

the issuer is the borrower (debtor), the holder is the lender (creditor) and the coupon is the

interest. A good example of bond financing relevant to the energy efficiency is issuing municipal

bonds in procuring funding for municipal energy efficiency.

Forfeiting finance It is an innovative financing option which is primarily a form of transfer of future receivables

from one part (cessionary-an ECSO) to another (buyer-a FI). The original creditor (the ESCO) cedes

his claims and the new creditor (the FI) gains the right to claim future receivables to an FI in

return for a discounted onetime payment. Importantly, a cession of future receivables is not a

stand-alone financing option, but can serve as additional collateral for the FI.

Energy Saving insurance It is a formal insurance contract between an insurer and either the building owner for instance

or a third party provider of energy services. In exchange for a premium, the insurer agrees to pay

any shortfall in energy savings below a pre-agreed baseline. In totality, energy-savings insurance

can reduce the net cost of energy savings projects by reducing the interest rates charged by the

lenders and by increasing the level of savings through quality control. ESI is in wide use in Canada

and the US. However, in Europe, the global market of risk transfer is slowly growing up, but

insurance products like ESI are still limited.

Subordinated Debt Financing (mezzanine finance) The Subordinated debt financing at time known as Mezzanine financing is capital that sits

midway between senior debt and equity and enjoys features of both types of financing. Following

few are its important features:

Subordination refers to the order or priority of repayments and the subordinated debt is

structured so that it is repaid from the project revenues after all operating costs and

senior debt service has been paid.

Substantially more risky than senior debt since it is generally subordinate to senior debt

in terms of collateral rights and rights to cash flow.

Subordinated debt financing is generally made available from the insurance companies,

subordinated debt funds or finance companies etc.

Carbon Financing It generally refers to the purchase of project based greenhouse gas emission reductions. The

emission reductions are generally purchased through a carbon fund on behalf of the contributor

or by an Annex-I entity regulated under the UNFCCC’s Kyoto Protocol. Emission reductions are

purchased within the framework of the Kyoto Protocol’s Clean Development Mechanism (CDM)

or Joint Implementation (JI). In totality, the carbon finance provides a means of leveraging new

private and public investments into projects that reduce the greenhouse gas emissions.

Summary outlook on Energy Efficiency Energy efficiency is not a single market. Instead, it covers measures in a diverse range of end-

user sectors, end-use equipment and technologies. It comprises of a very large number of small,

dispersed projects with a dispersed range of decision makers. In cumulative terms, many EE

technologies are proven and economic: if, a) properly financed, b) the investment costs are paid

back over short periods from energy cost savings.

References 1. Low Energy Street lighting: making the switch-a market report by the UK Green

Investment Bank (February 2014)

2. Public-Private Partnership Stories India: Bhubaneswar Street Lighting-a report by International Finance Corporation (2013)

3. Same Energy More Power, Accelerating Energy Efficiency in Asia-a report by Asian Development Bank, 2013

4. Several Documents released by the Govt. of India Ministries/Departments/Autonomous Organisations on Lighting initiatives, production scenarios, programme dissemination etc.

5. Financing Energy Efficiency in India-a report by USAID under Asia Pacific Partnership on

Clean Development and Climate 2010

6. Framework for Implementing Energy Efficiency at utility level through ESCO-a presentation by EESL 2012

7. Financing Lighting Market Transformation-a report by Clinton Foundation under Clinton

Climate Initiative, 2011

8. EESL Toolkit for Street Light Energy Efficiency-EESL Report 2013

9. Energy Efficiency and the Finance Sector-a survey on lending activities and policy issues- report by UEP Finance Initiative 2009

10. LED Lighting Scenario in India-a report by Philips Lighting on behalf of ELCOMA 2013

11. Innovative Approaches to Financing Energy Efficiency in Asia- a report by USAID 2009

12. Numerous websites dealing with LED lamp dissemination, programme outreach etc.

13. Websites of Municipal Corporations implementing LED Street Lighting Programmes

14. Several Business magazines and newspapers