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Financing Energy Efficiency at MSMEs

BUREAU OF ENERGY EFFICIENCY MINISTRY OF POWER, GOVERNMENT OF INDIA

The World Bank

Global Environment Facility


Financing Energy Efficiency at MSMEs Project Background The Micro, Small and Medium Enterprises (MSMEs) sector in India plays a significant role in terms of balanced and sustainable growth, employment generation and development of entrepreneurial skills. However, when compared to larger Indian industrial enterprises, the MSME sector is characterized by relatively lower productivity and general high use of outmoded technologies resulting in lower Energy Efficiency (EE) and energy intensity figures. Despite recent reductions in overall energy intensity in India, the MSME sector has fallen behind larger Indian industries in terms of technology up-gradation and EE. The Indian MSMEs not only face the market barriers typically seen in energy efficiency projects globally, but additionally India-specific financing barriers such as accessing adequate and timely financing on competitive terms, particularly longer tenure loans, collateral free loans, working capital loan etc. The Reserve Bank of India (RBI) statistics show that the year-on-year growth rate of local Indian bank credit to SMEs fell from 35.6% in 2007 to 7.4% in 2008, even while the overall year-on-year growth rate of bank credit to industry (including large corporations) increased from 24.9% to 30.2% over the same period. Given the existing market barriers observed in India, there is a need to systematically support the development of a large number of EE investment proposals under a programmatic approach to aggregate demand for EE investment in MSME industrial clusters and to create a sustainable mechanism for identifying, preparing and financing these proposals at the local cluster level.

BARRIERS FOR FINANCING EE AT MSMEs Gap in understanding of EE among stakeholders

Imperfect information about EE among MSMEs

Higher Transaction Cost

Lack of information among banking sector stakeholders

Lack of performance guarantee for available energy efficient equipments

PROJECT APPROACH Project design include marketing, development, and technical scoping with financing solution

Technical Assistance to increase knowledge on the technical, policy & regulatory aspects of market to allow improved understanding of sector risks

Standardization and enhanced familiarity by key stakeholders of identified EE investments among units with similar characteristics (Cluster approach)

Technical Assistance efforts delivered over a longer term to build a sufficient level of knowledge, acceptance, trust and ultimate demand for EE goods & services


Project Objectives The “Financing Energy Efficiency at MSMEs” project is part of the Global Environmental Facility (GEF) Programmatic Framework (2010-14) for Energy Efficiency in India with an objective to increase demand for energy efficiency investments in targeted MSMEs clusters and to build their capacity to access commercial finance.

ANKLESHWAR

FARIDABAD

Chemical Cluster 1200 Units Main Fuel: Gas/ Electricity

Mixed Cluster 2000 Units Main Fuel: Electricity/ Oil

The project aspires to address the current gap in the understanding between energy auditors and bank loan officers, and demonstrate a viable mechanism of synergic tie-up between MSMEs, energy auditors, financial consultants/chartered accountants, local industrial or MSME associations and local bankers. The GEF implementation agency for this project is the World Bank, and the two executing agencies are the Bureau of Energy Efficiency (BEE), Ministry of Power, Govt. of India and the Small Industries Development Bank of India (SIDBI).

KOLHAPUR Foundry cluster 350 Units Main Fuel: Coke/Electricity

PUNE

TIRUNELVELI

Forging Cluster 150 Units Main Fuel: Furnace Oil/Electricity

Lime Kiln Cluster 100 SME Units Main Fuel: Charcoal/Electricity

Five clusters under GEF - WB MSME project

Project Components Implemented as part of the larger MSME energy efficiency programme of the BEE, the project will engage in focused efforts in 5 targeted clusters to increase demand for energy efficiency products and services and mobilize a large group of “decision –ready” units in partnership with local industrial associations, energy professionals, local service providers and leading vendors of energy efficiency equipments. These energy efficiency demand creation activities will then be linked with the lending programmes of various financial institutions in the specific cluster. Based on the findings of project-supported energy audits, enlisted units shall receive support in preparation of bankable Detailed Project Report (DPR) / application documentation in a format acceptable to the banks to process the loan applications under current or new lending schemes and hand-holding support in reaching financial closure for identified investments. The project consists of the following three main components.

1

Building Capacity & Awareness

• Marketing & Outreach effort to clusters, Capacity Building of Industry Associations • Technical Assistance to energy professionals • Support to Financial Institutions • Support to MSMEs in accessing finance • Vendor Outreach, Enlistment & support

2

Increased Investment in Energy Efficiency

• Energy Efficiency related project development support such as Energy Audits / DPR preparation • Performance linked grants for demonstration of energy efficient technologies

3

Knowledge Management & Sharing

• • • •

Knowledge Portal Helpline Success stories and Case studies Policy inputs on Knowledge Management

GEF - WB MSME Project Components The project has significant scope for sustainability in Indian MSME context as the capacity built in major institutions and among key stakeholders will also support increased investment in energy efficiency in the 30 MSME clusters under the BEE national programme, and will support replication as MSME units become increasingly cognizant of the ultimate financial returns available from soft cost expenditure for EE investment identification and subsequent project commissioning.


Stakeholders' Perspective The key beneficiaries of the project includes participating MSME units who will realize the potential financial benefits from EE improvements; financial sector stakeholders from increased business opportunities such as increased EE lending; energy professionals & local service providers from the increased demand for their services and Industrial Associations enabling them to carry out EE related promotional & outreach activities in their respective clusters.

• General Awareness & Importance of Energy Efficiency • Assessment of EE Potential (1000 walk through & 500 Detailed Energy Audits) • Project Viability ( 500 Detailed Project Reports) • Demonstration Projects Micro, • Information on EE Financing Small & Medium Options Enterprises • Web portal and Helpline

• Information on sector / cluster specific options for EE • Enhanced analysis of EE project applications • Outreach on existing financing schemes • Capacity building of local branch offices of Banks & Financial Institutions

Financial Institutions

• Acquaintance with MSMEs modus-operandi & requirements • Enhanced energy audit skills w.r.t. MSMEs • Sector/cluster specific EE technology & Best Industrial Practices Energy • Training on preparation of bankable DPR's Professionals/ • Information on accessing finance Local Service for EE options Providers/ • Energy professional and vendor Vendors enlistment

Industrial Associations

• General Awareness & Importance of Energy Efficiency • Information on EE technologies • Project Monitoring & Evaluation • Institutional Capacity Building • Effective outreach to member units

Executing Agencies Bureau of Energy Efficiency:

Small Industries Development Bank of India:

The Government of India set up Bureau of Energy Efficiency (BEE) on 1st March 2002 under the provisions of the Energy Conservation Act, 2001. The mission of the Bureau of Energy Efficiency is to assist in developing policies and strategies with a thrust on self-regulation and market principles, within the overall framework of the Energy Conservation Act, 2001 with the primary objective of reducing energy intensity of the Indian economy. This is to be achieved with active participation of all stakeholders, resulting in accelerated and sustained adoption of energy efficiency in all sectors. More information can be obtained from www.bee-india.nic.in

SIDBI was established on April 2, 1990. The Charter establishing it, The Small Industries Development Bank of India Act, 1989 envisaged SIDBI to be “the principal financial institution for the promotion, financing and development of industry in the small scale sector and to co-ordinate the functions of the institutions engaged in the promotion and financing or developing industry in the small scale sector and for matters connected therewith or incidental thereto. More information can be obtained from www.sidbi.in

For any further information and clarification related to project activities, please contact

BUREAU OF ENERGY EFFICIENCY (Ministry of Power, Govt of India)

Sewa Bhawan, 4th Floor, R.K. Puram, New Delhi-110 066 Tel: 26179699 (5 Lines) Fax No. 011-26178328 / 26178352 Email: bee-wbpmu@beenet.in


Financing Energy Efficiency at MSMEs