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Radhika Khosla’s Blog

Power Blackout Shines Spotlight on Energy Efficiency Potential in India

Radhika Khosla

Posted August 8, 2012

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Last week’s power outages in India left 10% of the world’s population without electricity. The extreme heat of the summer of 2012 and the delayed arrival of the Indian monsoon led states to overdraw power from the grid, contributing to the worst grid failure in history. Hotter summers are a trend we are seeing across the world this year. In the US, July 2012 was the hottest month on record in 117 years. The summer 2012 North American heat wave led to more than 82 heat-related deaths and extreme heat in the D.C. area led to power outages that left millions of people without electricity for days. Such extreme heat events will continue to occur and become more frequent as a result of climate change. As we saw in India last week, extreme heat imposes shocks to the electricity grid with potentially catastrophic consequences. To save lives, it’s critical that we accelerate clean energy solutions to mitigate climate change. Chief among the range of solutions is energy efficiency. Banks can play a key role in unleashing the energy efficiency market by offering financial incentives to building owners and developers to help overcome the higher upfront cost of energy efficiency measures.

Energy efficiency loan financing can be an attractive lending option for the banks. In the US, efficiency financing is proving to be a stable, low risk investment with low default rates and large-scale potential, a trend that leading US financial institutions are picking up on. In India, with an investment of $10 billion (Rs. 55,000 crores) in energy efficiency improvements, the economy could save more than 183.5 billion kilowatt hours of energy each year; this means the investment would be recovered in energy cost savings in the first year itself, assuming the lowest Indian tariff levels.

The Indian efficiency financing market holds immense untapped potential for banks and customers. Three key ways to accelerate the building energy efficiency market in India are as follows.

  • To kick start the market, the Bureau of Energy Efficiency’s Partial Risk Guarantee Fund, which lowers the banker’s risk of lending to clients for efficiency improvements, should be used to showcase successful projects. This will increase banker confidence in repayment of the loan by the customer. Banker confidence is important because, once installed, an efficiency measure (or “asset”) cannot be reused or resold and thus banks are hesitant to venture into this new market opportunity of unsecured lending.
  • Lenders and real estate developers should look for opportunities to aggregate energy efficiency projects to meet the project size requirements of banks. Currently the real estate market in India is fragmented, which limits efficiency projects from reaping the benefits of economies of scale. With a fragmented market, small-scale efficiency projects can have high transaction costs and may not qualify for financing because commercial banks have minimum levels of project size. Energy efficiency aggregator and energy service companies (ESCOs) can help create portfolios of efficiency projects for banks to invest in.
  • Thirdly, a concerted effort among champion real estate developers who implement energy efficiency, power utilities, energy efficiency service and technology providers, and financial institutions is needed to increase awareness among consumers about the benefits of implementing advanced energy efficiency measures.

While efficiency measures can help reduce energy consumption and help avoid catastrophic events like last week’s power outages, the market for energy efficiency in India is still in its early stages. Banks and financial institutions are thus crucial to catalyzing efficient building construction. With the opening of India’s real estate market to Foreign Direct Investment in 2005, new opportunities for efficiency financing are available to real estate developers. Financial institutions need to take the lead in working with developers to create innovative finance products for energy efficiency, thus allowing India’s energy efficiency finance sector to realize its potential while reducing energy consumption and costs for all stakeholders.

Co-authored by Amir Kavousian, NRDC MAP Fellow

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