In India, Energy Service Companies and local governments are teaming up to increase energy efficiency and save money.
With India’s energy demand expected to more than double by 2030, there is a pressing need to develop innovative ways to conserve energy. As major energy consumers, local governments in India are key players in promoting and implementing energy conservation measures and technologies.
Enter Energy Service Companies (ESCOs), which provide energy efficiency-related services on a performance contracting basis, instead of the traditional fee for service model. Municipalities in several states across India are partnering with ESCOs to implement energy conservation measures. The trend for municipalities to use the ESCO model began within the last decade as a way to save both energy and money without the up-front costs of typical energy efficiency investments.
In 2001, DSCLES, one of the first ESCOs in India, worked with the New Delhi Municipal Council on a high-efficiency electrical lighting pilot project that now saves 252,000 kWh per year. The project produces savings of INR 20 (50,000 $US) and 149 million tones of avoided CO2 emissions per year. DSCLES financed the initial investment of IRN 30 lakhs (75,000 $US), which means the project’s payback period is approximately 18 months.
Asian Electronics replaced approximately 12,000 tube lights at Sachivalaya Complex for the government of Gujarat, Gandhinagar, which reduced the lighting load by 64% without sacrificing illumination levels.
The Gujarat Urban Development Company (GUDC) intends to implement energy efficiency programs in street lighting and water pumping systems in 150 municipalities across the state through performance contracts. In response, ESCOs from throughout India have submitted project proposals, which will be evaluated based on the ESCO’s capabilities and the total energy savings. GUDC is requiring a minimum energy savings of 20% for both water pumping and street lighting projects.
In the state of Tamil Nadu, a municipal energy efficiency program partnering with ESCOs is underway in 29 cities.
ESCO projects follow either a guaranteed savings model and/or a shared savings model. In a guaranteed savings model, the customer provides financing and the ESCO guarantees the performance of a project. The ESCO is paid a fixed fee if the guaranteed savings is achieved through the upgrade. In the shared savings model, an ESCO provides financing through its own funds or a loan, and the client and ESCO share the energy savings based on a predetermined ratio. For municipalities, the shared savings model offers an avenue for energy efficiency projects without the upfront investment. In the end, the savings from these projects lead to a payback period of 18 to 24 months.
The appeal of the shared savings model for government energy conservation projects is clear. ESCOs guarantee a percentage of savings, thus taking away the performance risk from the municipality. And since ESCOs provide project financing, municipalities avoid financial risk as well.
State and municipal government efficiency projects so far are just the tip of the iceberg. According to data from the Indian Ministry of Power, the investment potential for energy savings in municipalities amounts to 325 million $US with annual savings of 3.7 billion kWh.
As part of the Accelerating Clean Energy Markets in India (ACEM) project, WRI is analyzing the ESCO industry in India. Powering Up: The Investment Potential of Energy Service Companies in India gives a comprehensive overview of the Indian ESCO industry and its investment potential. The report will be released later this month.