CRISIL SME Tracker: Lack of bankable projects drives ESCO credit woes

With the Ministry of New and Renewable Energy having implemented a range of schemes to add 175 Gw of renewable energy capacity by 2022, the Bureau of Energy Efficiency (BEE), an undertaking of the Ministry of Power, has also been working in tandem to increase the energy efficiency of the Indian economy.

According to the BEE, the investment potential for energy efficiency projects in the country stands at Rs 1.50 lakh crore, concentrated in the residential, industrial and agricultural sectors. With energy saving companies (ESCOs)1 having tapped only five per cent of the market, a lack of bankable projects has hamstrung the growth of the market in its nascent stages.

CRISIL's experience of grading more than 200 ESCOs has revealed that financial institutions have been selective in funding such projects on account of their reservations about the methodologies on which the execution and measuring of energy savings is achieved in these projects. The industry being at a nascent stage, there is a lack of standardised contracts, agreements and measuring scales which are difficult to ratify on account of a general lack of data, due to insufficient measuring, metering and recording practices. 

With such uncertainties, it is difficult to predict the possible cash flows that the project might generate. To aggravate the situation, project hosts2  are reluctant to utilise their internal funds for energy efficient projects, and are more comfortable infusing requisite funds towards existing business growth. As a result, there are only a handful energy savings projects that have been made bankable. 

CRISIL believes that eliminating the barriers to funding ESCO projects must start with lenders working closely with independent energy auditors to identify bankable energy saving projects and ring-fence the cash flows. In addition, enhancing the expertise and understanding of lenders towards more nuanced technical and financial appraisals of projects will lead to the identification of many more ESCO projects, eventually achieving the energy saving potential of the country.

Data source: Ministry of New and Renewable Energy, and Bureau of Energy Efficiency 

1-ESCOs  are energy saving companies which are engaged in installation of energy saving projects with targets of improvement in efficiency as well as energy savings. They work in varied business models across industries, most prevalent of which are performance guarantee and deemed energy savings models.

2-Project hosts are the companies where ESCO projects are 

being installed.