WRI Publications Feed: New Ventures

Power to the People: Investing in Clean Energy for the Base of the Pyramid in India

Maggie Barron — Fri, 01 Oct 2010 12:52:23 -0400

Executive Summary

India, a rapidly emerging economy with the world’s second largest population, is facing a surging energy demand. Its rural Base of the Pyramid (BoP) consists of 114 million households, representing 76 percent of India’s rural residents and almost 60 percent of the country’s total population. Despite their low income, these households constitute a significant consumer market for the energy services and products required to provide daily necessities such as cooking and lighting. Using the most recent available expenditure data (2004/2005), we estimated that India’s rural BoP consumers spent INR 224 billion (US$4.86 billion) per year on their energy needs.

What is the Base of the Pyramid?

The Base of the Pyramid (also referred to as the Bottom of the Pyramid) refers to the estimated 4 billion people around the world who are poor by any measure and have limited or no access to essential products and services such as energy, clean water, and communications. Globally, people in this socioeconomic group earn US$1 to US$8 in purchasing power parity (PPP) per day. Yet these households often pay higher prices than wealthier consumers do for lower-quality goods and services because of uncompetitive markets.

Since this report focuses specifically on rural India, we define the rural Indian BoP market as households in the bottom four expenditure quintiles (based on data from the National Sample Survey Organization) that spend less than INR 3,453 Indian rupees (US$75) on goods and services per month. This definition represents a market of 114 million households, or 76 percent of the rural population.

In 2005, approximately 45 percent of India’s rural BoP households still did not have reliable access to electricity and relied on kerosene for lighting, and more than 85 percent of rural BoP households mostly used conventional free or inexpensive sources of fuel, such as firewood and dung, for cooking. These fuel sources, however, are not only harmful to users’ health but also contribute to pollution and environmental degradation.

A growing number of Indian companies see a market opportunity in providing rural BoP households with access to alternative cooking and electricity solutions and consequently are developing clean energy products and services for this market.

“Clean energy” refers to products and services that produce energy from renewable resources and emit fewer greenhouse gas emissions than does energy from conventional fuel sources. The lack of a reliable supply of power from the electricity grid and the availability of free and inexpensive fuels, such as wood and kerosene, are key influences on this market. In this report, we focus on two areas in this growing, high-potential market: clean energy electricity systems and clean energy cooking and light products. We examined a representative selection of companies selling solar lanterns, solar home systems, energy-efficient cookstoves, and electricity generated from decentralized sources, including small hydro power plants and biomass gasifier systems.

About this Report: Informing Investors

The goal of this report is to inform investors about the market potential of the clean energy industry serving India’s rural BoP market, by looking at its opportunities, challenges, and potential paths to growth. The purpose of our report is to present an overall picture of these growing clean energy sectors, rather than to provide investment advice on individual companies.

The potential opportunity for investors in the Indian clean energy market for the rural BoP is significant. We estimated the aggregated potential market for the four sectors studied in this report to be INR 97.28 billion (US$2.11 billion) per year, including INR 94.06 billion (US$2.04 billion) for decentralized renewable energy services and INR 3.22 billion (US$70.1 million) for energy products per year.

Our analysis shows that clean energy services and products may require an upfront investment three to ten times greater than that for conventional energy sources such as kerosene and firewood, which often are subsidized or free to India’s rural consumers. Yet despite these and other drawbacks, the average annual gross revenue of the companies profiled in this report has grown 36 percent since 2004.

On the Frontiers of Finance: Scaling up Investment in Sustainable Small and Medium Enterprises in Developing Countries

Tim Herzog — Fri, 28 Aug 2009 14:24:09 -0400

Report Contents

Why invest in sustainable SMEs?
Financing sustainable SMEs in developing countries: An overview
Investor challenges
Bridging the finance gap: Recommendations

What Are Sustainable SMEs?

This report defines sustainable SMEs as those whose core business produces a triple bottom-line return—that is, social, environmental, and financial gains—and therefore contribute to dynamic, healthy economies and societies. Such enterprises tend to be of two types: those that use natural resources responsibly, such as organic agriculture, sustainable forestry, and ecotourism; and those that offer substitutions or solutions for otherwise resource-intensive products or services, such as clean technology, renewable energy, and new materials. In this report, SMEs refer to enterprises that are legally formed and operate within the formal economy. As defined by the International Finance Corporation (IFC), a small enterprise employs between five and 49 people, and a medium enterprise employs between 50 and 250 people.

Sustainable SMEs: The Future for Emerging Economies

Small and medium enterprises (SMEs) play a critical and well documented role in both developing and industrialized economies. They drive innovation, spur economic growth, create jobs, and facilitate the provision of goods and services.

Sustainable SMEs are those that manufacture and market environmentally friendly products and/or serve low-income communities and generate additional benefits for society and the environment. Financing such value-added businesses in emerging economies makes sense for both business growth and sustainable development. In developing countries, however, sustainable SMEs face major barriers to growth and success, most notably access to finance and business development support.

Over the past decade, specialized financial intermediaries—generally, those that are international, often with a non-profit organizational structure—have emerged to provide finance and business development support to sustainable SMEs in the developing world. This investment community has grown significantly in recent years, along with the rising interest in green investment, clean technology industries, and market-based approaches to poverty reduction and sustainable development.

On the Frontiers of Finance provides an overview of the current landscape, lending practices, and principal challenges of financial intermediaries providing capital to sustainable SMEs in developing countries. The objective is to help stimulate greater and more effective sustainable SME investment by better understanding how the sector can best be supported and expanded.

Investment Leaders Survey

In 2007, WRI and Boston College, with support from the International Finance Corporation (IFC), gathered together and interviewed 20 leading sustainable SME investment fund managers from Africa, Asia, Eastern Europe, and Latin America. Our discussions focused on challenges, opportunities, best practices, and pathways to sectoral growth, which forms the basis of this report. Section 3 and the appendix are overviews of these funds and their investment models.

In reporting our findings, we have divided the interviewees into two broad categories:

Blended Capital Intermediaries—investors with a primary focus on creating positive economic, social, and environmental impact by supporting sustainable SMEs and generating financial returns for investors. These are mostly non-profit entities with an international focus, and tend to be based in the U.S. or Europe;
Venture Capital Funds (VC Funds)—investment vehicles that are for-profit, commercial entities that provide market returns. This report examines VC funds in developing countries, those that are tapping into opportunities in green or socially oriented markets, such as cleantech funds.

Our survey revealed the intermediaries face three major challenges: raising funds for what remains an outlying frontier of the finance and development mainstream; justifying to the intermediaries’ investors the high costs of technical assistance for businesses; and finding ways to capture the “added value” of positive social and environmental impacts both cost effectively and consistently across the sector.

Recommendations

Improve Capital Allocation: Educating commercial investors and grant funders about the business models and performance of SME financial intermediaries, combined with high standards of accounting transparency among the intermediaries would greatly improve the efficiency of the fundraising process. Compiling information about the financial viability and success of different intermediaries and highlighting the growing track record of commercially viable investments is crucial in order to attract further capital to the sector.
Promote Financial Innovation: Long-term approaches and innovative thinking focused on system-wide barriers are needed to move the sector toward the status of both a recognized investment class and a strategic priority area within the development community. Sector-wide initiatives, angel investor networks and experimentation with social stock exchanges are efforts in the right direction that need to be supported and where successful, replicated and scaled.
Capture the Triple Bottom Line: As more investors and donors enter the impact investing space, they will focus even more on demonstrable results and measurable effects. Smart, comparable metrics would facilitate the investment decision-making process by providing a clear picture of which intermediaries’ activities are best aligned with the priorities of impact-driven donors and investors. For this reason, comparability is paramount when measuring and communicating impact. Dedicated resources and a collaborative effort among leading intermediaries, investors, donors, and other stakeholders is required to move toward a shared standard methodology for impact measurement and reporting. Over time, aggregate results will help validate and evaluate the efficacy of the enterprise development community’s market-based approach to socioeconomic and environmental issues.

Both development and investment trends are leading major advances in sustainable SME financing. The scale and speed of these advances are not, however, meeting either the demand of local entrepreneurs or the urgency of the social and environmental challenges facing the world. Opportunities to achieve development and environmental goals while delivering financial returns are being missed.

We hope this report will inspire investors, financial intermediaries, the philanthropy and donor community, and enterprise development organizations to increase capital flows and improve capital deployment to sustainable SMEs in developing countries.

Powering Up: The Investment Potential of Energy Service Companies in India

Tim Herzog — Wed, 22 Apr 2009 13:34:03 -0400

Publication Sections

Overview of India’s ESCO Industry
Summary of Findings
Summary of Recommendations
Data and Information Sources

An ESCO is “a company that provides energy-efficiency-related and other value-added services and for which performance contracting is a core part of its energy-efficiency services business” (definition from Lawrence Berkeley National Laboratory and the National Association of Energy Service Companies).

We describe lessons from the ESCO industries in Brazil, China, and the United States and analyze factors that could either contribute to or hinder the growth of the Indian ESCO industry. We also assess the industry’s growth potential and look at three case study examples. Last, we summarize the key issues and opportunities and make recommendations to increase the industry’s attractiveness to investors.

Our ultimate aim in driving greater investment in the ESCO industry is to reduce greenhouse gas emissions and contribute to a more sustainable development in India and across the world.

Against a backdrop of national concern about climate change and rising oil imports, interest in implementing energy efficiency initiatives has been increasing in India’s government, business, and investment sectors. Both government policies and efforts by multilateral and bilateral organizations to conserve energy across a wide range of sectors have contributed to new domestic and international energy efficiency companies to serve this market. This expansion over the last half decade has in turn led to investors’ interest in funding the energy efficiency sector. The potential for energy savings is enormous: an estimated 183.5 billion kWh per year, based on reports prepared by the Asian Development Bank and the Indian Bureau of Energy Efficiency (BEE).

One subsector within the energy efficiency industry that can help deliver both energy savings and financial returns in India is the specialized energy service company (ESCO) industry.

In other emerging countries, ESCOs have made significant contributions to energy efficiency programs and local economies. In Brazil, such companies produce annual industry revenues of USD 344 million (2008), and in China, USD 121 million (2006). In both countries, the industry is growing at double-digit rates.

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Summary of Findings

India’s ESCO industry has grown steadily and significantly over the past five years; we estimate a compounded annual growth rate of 95.6 percent from 2003 to 2007. Our data and analysis indicate that this still young industry has a high investment potential for debt investors (see below for Data and Information Sources). The majority of ESCOs’ energy efficiency projects have payback periods of less than two years, and ESCOs save clients an average of 20 to 25 percent on baseline energy costs. Currently, opportunities for equity investment in India’s ESCO industry are generally limited to direct investment in the larger energy service companies, most of which are vendor ESCOs – those ESCOs affiliated with or owned by an equipment or control manufacturer. Larger energy service companies (revenues of USD 0.2 million and above) report no problems with funding projects, although some of their clients may still have some difficulty when clients are providing the financing.

Smaller ESCOs, however, have had difficulty because they lack the collateral to meet bank requirements. Moreover, some prospective clients are unwilling to finance, or cannot obtain financing for, ESCO projects owing to a lack of confidence in energy service companies’ capabilities and/or reluctance to take risks. A particular concern raised by prospective clients was the industry’s domination by “vendor” ESCOs that are technology biased (i.e., offer only one technology and suite of products), rather than providing comprehensive energy management services. Another barrier that we found was Indian banks’ lack of engagement. In order for ESCO clients to be able to obtain market-rate financing for energy efficiency projects, banks must recognize the savings potential that an ESCO’s involvement can offer.

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Summary of Recommendations

WRI’s analysis indicates that the following actions can help the ESCO industry become more attractive to investors and realize its market potential:

For equity investors, banks, and other financial institutions:

Pilot financial products targeted at ESCOs and energy efficiency projects.
Include an energy efficiency and an ESCO component in existing credit guarantee funds for small- and medium-sized businesses.
Invest in ESCOs with good credit ratings (banks) or high revenues/growth rates (equity investors), and explore other financial support mechanisms (banks/other financial institutions).

For government:

Consider the clean energy sector to be a priority for the banking sector.
Follow through on the 2001 Energy Conservation Act’s mandate to create state energy conservation funds.
Create energy efficiency mandates related to the 2008 National Action Plan on Climate Change.
Develop and approve monitoring and verification protocols for energy efficiency, especially for projects undertaken by government agencies, such as water pumping and street lighting.

For energy service companies:

Establish a strong, inclusive national association to increase the industry’s credibility, to lobby for its needs, and to coordinate other organizations’ efforts to support its growth.
Focus on developing technical skills in a few industries or technology streams in order to build expertise and increase value to customers.
Develop cogeneration and captive power generation capabilities to expand opportunities for projects in these untapped sectors.
Utilize enterprise development and investment facilitation programs that can provide business advisory services and access to investors.

For enterprise development programs:

Provide business advisory and investment facilitation services to ESCOs and work with banks to develop pilot products to finance them.

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Data and Information Sources

The information and data used for this publication were derived from three sources: (1) a survey that WRI conducted among ESCOs in India; (2) interviews of selected ESCOs, financial institutions, ESCO clients, prospective ESCO clients, and government entities; and (3) secondary sources. WRI’s survey included only those ESCOs that have had at least one client contract in hand and met the aforementioned ESCO definition. Based on these criteria, we identified twenty-six ESCOs, twenty-four of which responded to the survey.

The ESCOs which responded to our survey are as follows:

Asian Electronics Ltd.
Blue Star Ltd.
Dalkia
DSCL Energy Services Company Ltd.
EL PRO Energy Dimensions
Encon Energy Management Services P Ltd.
Energetic Consulting Pvt. Ltd.
Energy Economy and Environment Consultants
Epic Energy Ltd.
Dynaspede
Five-M Energy Pvt. Ltd.
Honeywell Automation India Ltd.
Intesco Asia Ltd.
M.K. Raju Consultants P Ltd.
Optimumair Solutions Pvt. Ltd.
MITCON Consultancy Services Ltd.
Pranat Engineers Pvt. Ltd.
Rayon Applied Engineers
Win-Win
Salzer Electronics Ltd.
SEE-Tech Solutions Pvt. Ltd.
Sudnya
U V Krishna Mohan Rao Associates (UVKA)
Transparent Energy Systems

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China's Booming Energy Efficiency Industry

Tim Herzog — Thu, 08 May 2008 20:18:56 -0400