Indian entrepreneur calls on investors to take a chance on energy efficiency
Over the past several decades India’s long-standing democracy, and liberal economic policies have helped to generate unprecedented levels of investment. Yet while Indian firms successfully attract significant foreign and domestic capital, most investors target companies with high revenues, a proven business model, and an existing market with high potential for growth. Given that the industrial and commercial building energy efficiency market is less well known, and therefore riskier, capital for innovators in this field is scarce.
Energy service (ESCO) business owner Milind Chittawar knows this dilemma very well. In 1993 Milind established SEE-Tech Solutions, one of the country’s first payment for performance energy service companies in his home state of Maharashtra. “When we started, we were one of the very few ESCOs operating in India. I guess you could say we were pioneers in a way,” explains the former engineer.
Since then Milind and his team have taken just about every course and certification available in the field of energy efficiency. Their hard work has certainly paid off and is demonstrated in some of their more well-known projects. These projects include a long running partnership with the Taj Hotel Group, for whom SEE-Tech helped to reduce overall energy costs by 20 per cent across 15 hotels saving the group nearly USD 980,000 per year. Other projects include public sector telecommunications company, MTNL which SEE-Tech helped to reduce its energy bill by 10 percent, the equivalent of nearly USD 90,000 on average per year, per facility.
After nearly three decades in the field, Milind is keen to share his insights and suggestions to accelerate the growth of the ESCO market in India. Below are three key recommendations Milind has for the international development community, the Indian government, ESCOs as well as equity and debt financiers to encourage more investment into India’s large industrial, cold storage and commercial building energy efficiency market.
1) You need to persevere
If you want to do something new or innovative in the field then you have to make it happen. That responsibility comes to you. In the past, attracting financing for energy efficiency projects in India was simply impossible. A big reason for this was because there were no success stories. So, we decided to try and change this. First, we carefully selected two customers, one in the public sector and one private sector company which was the Taj Group of hotels. I then went to our bankers, but they were confused. They assumed that I needed finance to expand my own facility. But I said no, I want money to be invested into my clients’ businesses. Unfortunately, no one in the banking system at that point in time knew about any energy performance contracts. It was a tough sell. So, we decided to go with a financing product that the banks already knew well: financing against collateral. We used our company’s commercial property as collateral. Of course, this is not ideal, it was a risk, but we had to prove a point. As we began generating results and expanding to new projects, demand for our services grew and our credit rating improved.
2) Don’t limit ‘energy efficiency’ financing to ESCOs only, let it be for industries as well
For industrial and commercial energy efficiency to be successfully scaled-up it must be able to attract mainstream finance. Frankly speaking, multilateral agencies are often disconnected to what is happening and needed on the ground. This is problematic when they formulate and advise the national government on related energy efficiency investment and finance policies.
In India there are typically three key challenges for ESCO in businesses: contract enforcement, availability of equity and mechanisms for providing guarantee in a guaranteed savings energy performance contract. The World Bank’s Partial Risk Sharing Facility for Energy Efficiency (PRSF) and schemes like the Bureau of Energy Efficiency’s Partial Risk Guarantee Fund for energy efficiency (PRGFEE) have been able to facilitate financing for a few energy performance contracting projects in the country. However, in these donor driven models ESCOs have to play the role of refinancers wherein they face problems of recovery especially in a scaled-up business scenario. Meanwhile, systemic challenges of accessing equity and weak contract enforcement remain.
In my view the key lies in making use of local financing infrastructure that already exists and is already well understood by most stakeholders instead of just relying on government or multilateral development banks. This would involve creating a larger role for Non-Banking Financial Companies which are typically more accessible for Indian businesses. Why not connect with local financing facilities offered by NBFCs which are already focusing on equipment financing for example?
3) The root cause of our challenge is contract enforcement, not a lack of capital
Finance is now available if you look for it, and in India there are NBFCs available which are willing to provide capital without collateral. Therefore the real challenge is not the availability of finance but ensuring payment after the investment has been made. There is scepticism and a lack of respect for contracting in India. According to the World Bank’s ease of doing business contract enforcement indicator, India ranks 163 out of a total of around 190 countries. So, as you can imagine, ESCO business owners worry about their clients not paying them back. This to me, is the biggest issue and is a root cause of why industrial and commercial building energy efficiency have been slow to take off. However, this problem is constantly overlooked by international development organizations which only focus on the availability of capital to ESCOs and collateral guarantees. We need to do more work and awareness raising around how payment for performance can actually be ensured.
Throughout the month of November, the Accelerator is sharing a series of interviews which explore the barriers and solutions for financing energy efficiency in key industrial countries. Through this series, the Accelerator hopes to inspire and equip industry practitioners to take the first step towards achieving better energy results.
Read our interview with South Africa’s finance expert, Nadia Rawjee, about financing the country’s energy transition and the recommendations shared by Egyptian banker and finance consultant, Hoda Sabry.
Read more about how the Accelerator is working to mobilise finance and investment for industrial energy efficiency: Our work