SMEs can be more energy-efficient

Saurabh Kumar | Updated on November 15, 2017

Foundry, brick, glass and textiles are energy-guzzlers among SMEs.

The government must address the SMEs' reluctance to change.

The MSME (micro, small and medium enterprises) sector accounts for about 45 per cent of India's manufacturing output and 40 per cent of exports. As per the Annual Report of the Ministry of MSME, the 29 million MSME units provide direct employment to about 70 million persons. The sector holds immense promise in fostering creativity and innovation in products and processes, given that the investment in setting up units is relatively low and uncomplicated.

Further, SME sector is characterised by the presence of a large number of firms producing similar products, using similar technology in a physical cluster. The existence of SME clusters enables efficient use of human resources, in particular the local pool of skilled labour. It is estimated that around 3,000 SME clusters of different sizes exist in India. Some of them are very large, like the Panipat cluster that accounts for about 70-80 per cent of woollen blankets produced in India, the Tirupur cluster producing around 80 per cent of cotton hosiery, etc.


The present era of liberalisation and globalisation has been posing renewed challenges for SMEs. Increased competition in global markets, coupled with inadequate investments in technology upgradation, new product development and innovation has been threatening Indian SME competitiveness. Continued reliance on obsolete technologies and processes is adding to their woes.

Ninety per cent of the units, as per the Ministry of MSME, are proprietorship concerns, which are limited in their managerial skills as well as amenability to new ideas. Inadequate information about technology development, markets and other related issues add to the problems. Exchange of information between units is rare due to perceived concerns of competitiveness.

SME units are reluctant to change and seek external technical assistance, particularly when it entails transition from time-honoured practices, additional investments and temporary dislocation/disruption of manufacturing.

Access to commercial financing at reasonable rates is a problem, making a large portion of these units rely on costly informal sources of financing. This, in turn, reduces the viability of new investments.

These barriers have limited the replication of new technologies in the SME sector, even after several project demonstrations have proved their efficacy, particularly for energy-intensive SMEs.


Many SME clusters are highly energy intensive in their operations. Foundry, brick, glass, textiles are examples where energy costs make up a large proportion of input costs to the entrepreneur. In most of these sectors, there is immense potential to increase efficiency in energy use.

Several studies by national and international agencies have revealed a minimum potential of 15-30 per cent energy savings in these energy-intensive units. Harnessing this potential would lead to enhanced cost competitiveness of SMEs. However, due to the reasons listed above, replication of success stories has been extremely limited, making a case for a concerted government-led intervention that addresses the barriers effectively.

It is essential to overcome the reluctance of SMEs in carrying out a technology needs assessment, undertaking an energy audit study, developing a bankable project and engaging related stakeholders in the entire value chain, starting from technology providers to commercial banks to the local technicians. As a first step, investment grade energy audit assessments need to be prepared that include techno-economic feasibility of investments in new technologies and its economic benefits. Financial incentives in the form of project development assistance to SME units in developing these bankable reports would be necessary.


The policy package would need to align incentives of other stakeholders like technology providers, local artisans, commercial banks. Amongst these stakeholders, several programmes have revealed the importance of the local artisans and technicians, also known as Local Service Providers (LSPs), in nudging units for technology-related investment decisions. LSPs have the advantage of well-established credibility with SME units, and have been providing owners support for training of workers, erection and commission of equipment, technical back-up support services, including servicing and troubleshooting.

The local-level delivery actors include various service providers like fabricators, consultants, consultancy organisations, masons, etc. Their influence on decision-making by SME units is very high. Moreover, their opinions can help replication in a cluster as the number of LSPs in a cluster is usually limited. Knowledge management to foster interaction and exchange of information between different stakeholders must be an integral part of the package.


There are several schemes being implemented by various government agencies for enhancing energy efficiency in certain energy-intensive SME clusters. Prominent among them is the BEE programme for energy efficiency upgrade in 35 selected energy-intensive SME clusters, and the Technology and Quality Upgradation (TEQUP) scheme of Ministry of MSME.

The BEE scheme has been under implementation since 2008, while the revised TEQUP has been taken up recently. The BEE scheme targets preparation of investment grade energy audit reports, apart from knowledge management, information dissemination, capacity building, engagement of technology providers and LSPs.

The TEQUP, on the other hand, seeks to encourage and support energy efficiency as well as product quality certification. The scheme also focuses on additional spin-offs for the MSME sector through clean development mechanism (CDM).

An innovative concept of cluster-based carbon credit aggregation centres (CCAs) has been planned under the scheme to initiate MSMEs to CDM benefit.

The scheme intends to partly fund 300 investment grade audits in about 30 identified clusters, and then support implementation by providing 25 per cent capital subsidy through SIDBI or other commercial banks. Aggregation of CDM projects could provide additional revenues that would make the project investments attractive.

The two schemes compliment each other well, and also have all the necessary ingredients to make effective and replicable energy efficiency technology interventions. However, a Central Institutional Mechanism (CIM) needs to be evolved that coordinates activities of MSME and BEE, while at the same time engaging with the commercial banks at cluster level.

Capacity building of banks for undertaking techno-commercial appraisal of energy efficiency projects at cluster level needs to be undertaken by the CIM. In order to enlarge the pool of finances available under the comprehensive package, the National Clean Energy Fund, expected to be capitalised to over Rs 6500 crore by 2011-12 as a result of levy and collection of cess on coal (@ Rs 50 per tonne), could be leveraged. Further, the energy efficiency investments would pay back in a finite duration, and a part of the returns could be collected in a revolving fund that would sustain financial incentives and promote technology replication.

As per an assessment by BEE, the total potential of electricity savings in the industrial sector is close to 18 billion units annually. At a conservative level, the potential savings in SME sector would be around 20 per cent of the potential i.e. 3.6 billion units of electricity. The comprehensive programme during the XII plan could result in annual cost savings to SMEs of around Rs 2000 crore. This will go a long way in enhancing cost competitiveness of SMEs.

(The author is Programme Officer, OzoneAction Programme, United Nations Environment Programme, Bangkok.)

Published on January 11, 2012

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