The market potential for energy savings companies (ESCOs) in India is great, yet barriers still stand in the way of the industry's growth.
Listen to the full podcast interview:
In April 2009, WRI released "Powering Up: The Investment Potential of Energy Service Companies in India," a study that examined the potential of India’s Energy Service Company (ESCO) industry. The authors found that with an investment of US$10 billion dollars in energy efficiency improvements, India’s economy would see benefits of up to 183.5 billion kilowatt hours in energy savings. The publication is part of ongoing research on Accelerating Clean Energy Markets in India.
In this interview, WRI Ella Delio gives some background on ESCOs in India, and describes how this industry can overcome its most significant barrier to growth--a lack of access to finance:
Q: How big is the potential for energy savings through energy conservation efforts in India?
A: The potential for energy savings in India is tremendous. With an investment of $10 billion dollars, India can realize 183.5 billion kilowatt hours of savings annually. That is 36% of their annual electricity consumption. And a key element of realizing this potential is the Energy Services Company industry.
Q: What is an energy service company?
A: An Energy Service Company, or an ESCO, is a company that provides energy efficiency related services, and operates on an energy performance contract. Which means that their revenues are earned based on the amount of energy savings that they produce for the client. The majority of ESCO projects have payback periods of two years, and on average, the clients of ESCO's save around 20-25 percent of their baseline energy costs.
Q: How big is the ESCO Industry in India?
A: In India, the ESCO industry has grown tremendously over the past five years. From 2002-2007, the compounded annual growth rate was 96%, and it is estimated that in 2008 the growth rate was 62%. This high growth rate is due to rising energy costs, to the desire of enterprises to increase their cost competitiveness, and due to the greater procurement of energy services from government agencies in India. Despite this high growth, though, in the past five years, India's industry is still relatively small to other emerging economies such as Brazil and China. In India, in 2007, the annual revenues of the industry was $18 million US dollars, while in Brazil, for the same year, the industry revenue was $280 million US dollars -- which is 15.5 times more than that of India's.
Q: What are the barriers to growth of the ESCO industry?
A: One of the primary barriers to the growth of the ESCO industry is the lack of access to financing for the energy service companies. WRI's analysis shows that there are attractive investment opportunities to fund ESCO's, especially among debt investors such as commercial banks in India, and one of WRI's recommendations is for these banks to pilot financial products targeted at ESCO's and their energy efficiency projects. In fact, WRI is currently in talks with several national Indian banks to explore this option. And we hope that by the end of June 2009 we will have an agreement with at least one of these banks to pilot such a financial product.
There are other barriers to the growth of the ESCO industry, such as the lack of a strong national industry association for ESCOs, as well as the lack of confidence of the prospective clients in the ESCOs. And we provided recommendations to address these barriers in our new report called "Powering Up," and we hope that all those who have listened to this video today, and are interested in learning more about the investment potential of the ESCO industry in India will download the report from the WRI website.