Energy service companies -- also called Escos -- work like doctors. They examine a building or plant, figure out the energy leakages and then prescribe a solution for making it energy-efficient. Seen as a fringe activity a few years earlier, energy efficiency is increasingly becoming mainstream, as savings worth thousands of crores of rupees are possible, say industry officials and experts.
"The moment there is visible cash (from energy savings), it attracts the CEO’s interest," says G C Datta Roy, the chief executive of DSCL Energy Services Company Ltd, as he explains why savings are now being discussed at the board level. Until November last year, DSCL Energy -- the country’s leading energy services company -- was a subsidiary of the DCM Shriram group. It has since been acquired by Dalkia --- a euro 8.6 billion French energy services company, co-owned by Veolia Environment (66 per cent) and EDF (34 per cent).
Dalkia already has an Indian subsidiary, set up in 2008. "We went from zero to 1,250 people in India in less than two years," says Russell H Park, the managing director of Dalkia India Private Ltd. It currently manages and maintains heating, ventilation and airconditioning of buildings for some blue-chip companies.
The acquisition would help Dalkia to move from very basic building management contracts to performance contracts with guaranteed energy savings. Dalkia is also looking at leveraging the talent available locally to service other energy markets in Asia.
INCREASING COMPETITION
The number of Escos is set to double, as the energy efficiency products and services market --- estimated to be worth Rs 74,000 crore--- perks. There are currently 35 Escos recognized by the government’s Bureau of Energy Efficiency (BEE). The list includes companies like Honeywell Automation India, Blue Star Ltd, Thermax Ltd, Johnson Controls and Siemens Building Technologies Pvt Ltd.
A government-backed energy services company, Energy Efficiency Services Ltd (EESL), promoted by NTPC, REC, PFC and Powergrid, is also set to launch operations in the next few weeks. This is expected to be one of the larger players in the energy service market, which will implement energy efficiency projects directly and also function as a support cell to the smaller Escos.
"We will sometimes absorb performance risk, sometimes financial risk, and sometimes both, since we are also mandated to promote the Esco business," says Jiwesh Nandan, the CEO of EESL.
Given the funding constraints faced by many Escos -- bank finance is not easily available -- the government is also floating a Venture Capital Fund for Energy Efficiency (Rs 75 crore). In addition, a Partial Risk Guarantee Fund (Rs 95 crore), aimed at providing comfort to lenders in the energy efficiency market, is also being set up.
TIPPING POINT
The tipping point for the market is expected in 2011, when the groundwork being done now will start yielding projects worth billions of dollars, say industry experts. For starters, mandated energy savings will kick in for 714 identified units across nine sectors next year. These include power stations, cement, steel, fertilisers, aluminum, paper and textiles. Tradeable energy savings certificates will also become a reality next year.
Studies by BEE across the states have shown that savings in some cases are enough to wipe out energy deficits. "We expect to see more activity in the states," says the director-general of BEE, Ajay Mathur.
One of the biggest source of energy savings in the states is agriculture pumpsets. The Bangalore Electricity Supply Company, for instance, recently tied up with an Esco to replace 700 inefficient pumpsets in 29 villages across 11,000 acres.
MODELS THAT WORK
The typical model for an Esco is that it makes the initial investment and then gets paid from the energy savings generated. This so-called shared savings model is being followed in various central government and state government contracts. The typical payback time is about three years.
"I don’t think this shared savings model will pick up in India," says Roy. The reason is the poor legal framework, which leaves little recourse for the Esco if the client does not pay. Roy says the model that is working is the co-investment one, where the client and the Esco both invest to ensure savings. Payments to the Esco in this case are linked to energy saving milestones.
Newer models are also evolving as energy savings, seen as a midline activity rather than one impacting the bottom line or the top line, move into the radar screen of the CEO.
