Can ESCOS enhance competitiveness of Indian firms while creating green jobs

Various studies have estimated that the energy services market is India is north of Rs 1 trillion.

Two big and ambitious announcements in the last three months gives me genuine hope that energy efficiency, in general, and ESCOs in particular must play a major role in achieving the commitments made by the Honourable Prime Minister, Shri Narendra Modi at the COP26 in Glasgow. Two of them are part of the Panchamrit commitments: a) reduction of carbon intensity by 45% by 2030; b) reduction of 1 billion tonnes of CO2e by 2030; and the other and perhaps more significant is the target set by the Power Minister, Shri R. K. Singh, to save 150 mtoe by 2030. 

Various studies, including one conducted by the Alliance for an Energy Efficient Economy in 2017, have estimated that the energy services market is India is north of Rs 1 lakh crores or about 5-6% of the national energy savings target set by the Power Minister. This may seem a low share for ESCOs but barring EESL (turnover of Rs 1800 crores for FY 2020-21), India has not tasted much success in creating viable and dynamic ESCO market. 

I have three recommendations that can jump start the ESCO sector to capitalize on the significant tailwinds that has been generated as a result of the two announcements mentioned earlier:

1. Government should lead by example and create a pipeline of at least Rs 1,000 crores of EE projects through state PSUs within the next 6 months. This will achieve three objectives in one shot: a) Government of India will show that it has already initiated actions through the largest PSUs by asking them to develop a roadmap to reduce carbon  intensity by 50% by 2030; b) Since these PSUs are profitable and have high credit rating, large companies and private sector investors will see this as a positive signal and an invitation to build businesses for the long term. This is the template followed in two of the largest ESCO markets - US and China where governments led by example and sent clear signals to the private sector leading to ESCO businesses running into multi-billion dollars; c) This will have a spillover effect leading to many private sector enterprises embracing the ESCO model that they have been very slow to adopt for myriad reasons.

2. Following the Finance Minister’s call to adopt the ESCO model in the latest budget speech, the Government should modify the General Financial Rules (GFR) and taxation policies to make it easier for the PSUs to execute “Energy Services Performance Contract” and for the Indian energy companies to offer ESCO services. Similar to the government announcing targets for RE and now for hydrogen, this is the right time to kick-start the process to announce targets for ESCO projects. This is also the time to assess the potential for ESCO business to be included in the RBI's priority sector lending programme. In addition, Ministry of Finance should issue guideline to all government ministries that all building efficiency retrofits must be implemented through ESCO route and no capital investment will be available for this purpose - akin to MOF issuing a 'no car buying' rule many years back. Through this approach, Government does not need to spend on infrastructure improvement and can tap into concessional financing made available through initially, multi-lateral development banks and international financing institutions, followed by private sector capital as confidence grows and ESCO model starts to receive broad support. This also helps all the PSUs to help meet GOI’s COP26 commitments and positions India as a leader in clean technology along with creation of permanent, green jobs that is one of the major objectives of the government; b) Energy companies, be it large national and multi-national companies, distribution companies, will see this as a tremendous opportunity to offer a larger basket of services on the back of the energy efficiency technologies - hardware, software and services - to end consumers and help improve their bottom line and ESG targets that are increasingly being scrutinized by investors closely. Many private sector financial institutions are launching sustainability linked loans and products that will be tailor made for ESCO business model to flourish.

3. After indicating the intent to create a vibrant energy services sector in the country, government should ask for serious commitment from the private sector – energy services, energy management and distribution companies and financial institutions and investment firms – to support this government initiative through a public-private partnership model. While the entire ESCO industry will benefit from the measures that the Government will be taking, it will be important to ensure that “energy services performance contracts” are quickly signed and executed. Energy savings must be validated through rigorous and cost-effective measurement and verification plans developed using international best practices such as International Performance Measurement and Verification Protocol as this is the basis of performance contracts around the world. Energy savings certificates can be issued to the ESCOs akin to the PAT ESCerts that can be traded in carbon markets in the future.

Energy Efficiency is the cheapest, fastest and cleanest form of creating a sustainable roadmap for the country and by recognizing this first fuel, it is the time to make a strong and compelling business case by helping create an energy services ecosystem that will capitalize on the business opportunities waiting to be tapped, which can create as per AEEE’s discussions with ESCOs, 20 lakh clean jobs. Bold steps are required now in the ESCO space to achieve India’s commitments to reduce carbon intensity.

(Dr Satish Kumar is president of the Alliance for an Energy Efficient Economy. The views expressed are personal.)