Energy efficiency as a policy priority

Energy efficiency has the potential to deliver the twin goals of energy security and Greenhouse Gas (GHG) mitigation to the increasingly climate-constrained scenario. A report by McKinsey Global Institute (2008) emphasises the virtues of investments in energy efficiency, which, as negative cost opportunities, offer high returns and short payback.

The report estimates that $170 billion of annual investments in energy efficiency till 2020 could not only provide the investors an attractive return of 17 per cent, but could generate energy savings ramping up to $900 billion annually, in addition to contributing more than half of the potential GHG mitigation globally, with almost 65 per cent of these opportunities existing in major developing countries, including India and China.

CLEAN DEVELOPMENT

The Bureau of Energy Efficiency (BEE) estimates that investments of $18 billion (Rs 74,000 crore) in energy efficiency could potentially reduce electricity consumption in India by 75 billion KWh, which is approximately 15 per cent of total electricity consumed. In monetary terms, this could help achieve energy and cost savings to facility owners of Rs 30,000 crore annually (@ Rs 4 per KWh). As a result, simple payback of energy efficiency investments is no more than 2½ years in addition to the enduring pecuniary benefits to the facility owners of continued energy savings. BEE also suggests that the investment could reduce GHG emissions by around 100 mt of CO{-2} every year, thereby enhancing the attractiveness of investments if it leverages carbon finance, which could provide an additional Rs 3,500 crore at the current low prices of carbon of € 6 per tonne.

Despite the attractive economics, a host of policy barriers, market inefficiencies and failures, intricate linkage of investment returns on patterns of consumer behaviour, inadequate formation and awareness amongst stakeholders, have together impeded investments in energy efficiency. The incentive of carbon finance under the Clean Development Mechanism (CDM), too, has been unable to attract adequate levels of investment as per an assessment by UNEP in 2010. In the first decade of 2000, according to the assessment, private sector investment in energy efficiency under CDM were no more than $4 billion (or approximately $400 million per annum), notwithstanding the high carbon prices prevalent during that period, at times almost three times the current levels.

Scaling up of investments to unlock the potential would, therefore, require concerted efforts in a creating policy environment that rewards energy-efficient choices, encourages innovation by industry, and incentivises consumers as well as businesses for investment in energy efficiency. Such policy and regulatory instruments must address barriers to energy efficiency financing in such a manner that investments are mainstreamed in commercial lending operations of banks and financial institutions.

MONITORING

Energy efficiency cannot be measured directly. It requires a complex set of monitoring and verification (M&V) protocols and processes to confirm the savings and the financial returns thereon. This constitutes the primary barrier for low levels of enthusiasm of commercial lenders in this seemingly attractive economic activity. The elusiveness in determining energy savings due to several factors, including on M&V, could potentially disrupt project returns, and adversely impact the persuasiveness of the business model to the commercial lenders. Investment returns being contingent on future cash flows from energy savings makes many lenders classify them as unsecured, thereby limiting their exposure in compliance with the regulatory requirements.

The next set of barriers affecting energy efficiency financing emerges from the inextricable linkage of energy savings with consumer behaviour, weather patterns, energy price fluctuations, etc. Most of these factors are extraneous to the project boundary.

ENERGY SERVICE

The third issue is on account of inadequacy of supply chain, starting from availability of technology suited for local conditions and its affordability, insufficient capacity to identify, develop, implement, and maintain energy efficiency projects, absence of incentives for stakeholders, etc. Absence of Energy Service Companies (ESCOs) that provide a comprehensive package replete with technical, managerial, and financial wherewithal necessary to implement and maintain energy efficiency projects, adds to the woes.

Another important barrier is the absence of incentives to promote investments in energy efficiency. On the contrary, energy efficiency investments are further hit by split incentives arising out of situations where actors likely to invest in energy efficiency are different from those who could reap the ensuing financial benefits due to energy savings. An owner of a building or a building developer may not have any incentive to invest in energy efficiency, particularly when the main purpose is to sell or rent the building. Inadequate capacity to appraise energy efficiency investments in commercial banks and financial institutions presents another set of barriers. Comprehending the vastly different business model, with its attendant risks, is usually something that banks and financial institutions aren't equipped to deal with.

Global experience of overcoming these barriers provides a handy tool for policymakers in India. Many countries have used a combination of risk guarantee funds, dedicated energy efficiency finances, training, and capacity building of banks and financial institutions, creating a cadre of skilled manpower and promoting development of ESCOs, programmes to attract private investments by mandating energy efficiency in government facilities, enhancing public awareness and understanding to encourage private investment in the energy efficiency market.

Fiscal incentives, in the form of rebates on taxes, electricity bills, and discounts on energy efficiency equipments, have helped in sustaining these nascent markets, and helped in mainstream commercial finance therein.

India has initiated several measures in this regard. The certification of energy managers by BEE has helped create a cadre of more than 10,000 professionals in the past few years. Promotion of ESCOs by accreditation and rating undertaken by market rating agencies, announcement of Partial Risk Guarantee Fund, and Venture Capital Fund by BEE, are steps in the right direction. The efforts to accelerate the creation and sustenance of private sector interest could be well served by tax rebates for ESCOs, duty reduction of energy-efficient equipments, etc. The Union Budget 2012 could demonstrate the government's resolve of preferring energy efficiency.

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

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