Essay: Development Of Innovative Business Model

Executive Summary

As a student of MBA in Power Management from National Power Training Institute, I got an opportunity to do my summer internship at IREDA, which act as principal player to provide financial support to specific projects and schemes for generating electricity and/or energy through new and renewable sources and conserving energy through energy efficiency.

During the period of my internship, I got the opportunity to work on project named as ‘Financing Energy Efficiency:Development of Innovative Business Model’.

The mechanisms reviewed included tax incentives, subsidies, loan programs, and Energy Service Company (ESCO) performance contracts. An attempt was made to develop a business model for financing energy efficiency projects.

The main findings of this project include:

Conclusion 1. Mechanisms specifically designed to support financing of energy efficiency investments in India are limited.
‘ The most commonly available mechanism is Energy Service Companies (ESCOs),with active ESCOs identified in the country. While these ESCOs reportedly offer performance contracts, in practice significant barriers remain that prevent performance contracting from becoming a widespread and sustainable practice.
‘ The second most common mechanism is loan funds supported through donor funding.
‘ Most mechanisms rely heavily on donor support only. The financial sector continues to require both technical and financial support for the financing of energy efficiency projects.
Conclusion 2. Private sector financing of energy efficiency investments can be viable and profitable.
‘ With the right interventions and an adequate level of financial sector development,private sector financing of energy efficiency projects is possible in India.
‘ There is significant interest in developing and financing projects through performance contracts, but financial sector barriers continue to retrict growth in this area.

Conclusion 3. Availability of private sector financing will not be sufficient to encourage energy efficiency investments in all cases.
‘ Some businesses particularly small and medium size enterprises (SMEs) simply will not have the financial strength necessary to qualify for traditional loan financing,even with subsidized interest rates or guarantee funds.
‘ Some businesses will not choose to make energy efficiency investments, even if financing is available.Consequently,other policy options may need to be considered to promote energy efficiency among these businesses.
Conclusion 4. Financial mechanism should not be viewed in isolation from other programs to promote energy efficiency.
‘ Improving the availability of financial mechanisms for energy efficiency projects will not increase investment unless industry wants to invest.Programs to ensure adequate demand for energy efficiency financing may therefore be necessary before programs supporting financing mechanisms can be undertaken.
‘ Financial mechanisms aim to address different barriers to financing.Consequently,it is important to understand the specific barriers to financing in a given country first,before planning programs to improve financing availability.
‘ Policy of subsidized energy prices prevent proper valuation of energy costs and efficiency savings and therefore discourage the implementation of energy efficiency projects.

Recommendations

For financing of energy efficiency projects to be sustainable, several conditions must be met:
‘ Government policy should encourage efficiency improvements.
‘ Industry must have the technical know how and management systems to plan energy efficiency projects and evaluate their potential business benefits.
‘ The financial sector must be well developed and understand the potential for profit in energy efficiency projects and businesses.
Achieving these conditions requires action, not just from policy makers, but also from industry and the financial sector.

LIST OF FIGURES

Figure 1.1.3 Organization Structure
Figure 1.4.2 Background to this review
Figure 3.1.4 Partial Risk Guarantee Funds
Figure 3.1.4 Institutional Structure
Figure 3.1.4 Supervisory Committee
Figure 3.2 Barriers Faced by Energy Efficiency Financing
Figure 4.1.2 Recommendation

LIST OF TABLES

Table 1 Selection Criterion for Designated Consumers
Table 2 Financial Mechanisms to Facilitate Energy Efficiency Investments
Table 3 Project Cost
Table 4 Means of Finance
Table 5 Terms and Conditions

List of Abbreviations
BEE Bureau of Energy Efficiency
CCS Carbon Capture and Storage
CERs Carbon Emission Reductions
DCs Designated Consumers
ESCerts Energy Saving Certificates
ESCO Energy Service Company
GHG Green House Gases
GoI Government of India
HUDA Haryana Urban Development Agency
IREDA Indian Renewable Energy Development Agency
MNRE Ministry of New & Renewable Energy
Mtoe Million tonnes of Oil Equivalent
NAPCC National Action Plan for Climate Change
NMEEE National Mission for Enhanced Energy Efficiency
PAT Perform Achieve and Trade
PEPL Pranat Engineers Pvt.Ltd.
PFI Participating Financial Institution
PRGFEE Partial Risk Guarantee Fund for Energy Efficiency
SEC Specific Energy Consumption
SPE Special Purpose Enterprise
WEO World Energy Outlook

CHAPTER-1
INTRODUCTION

1.1 Organization Profile
1.1.1 About IREDA
The Indian Renewable Energy Development Agency was incorporated as a Public Limited Government Company in 1987 and is under the administrative control of the Ministry of New & Renewable Energy(MNRE),Government of India, with the mission:
‘Be a pioneering, participant friendly and competitive institution for financing and promoting self-sustaining investment in energy generation from Renewable Sources, Energy Efficiency and Environmental Technologies for sustainable development’.
‘ Indian Renewable Energy Development Agency Limited (IREDA) was established on 11th March,1987 as a Public Limited Government Company under the Companies Act,1956 and it promotes,develops and extends financial assistance for Renewable Energy and Energy Efficiency/Conservation Projects.
‘ IREDA has been notified as a ‘Public Financial Institution’under section 4A of the Companies Act,1956 and registered as Non-Banking Financial Company(NBFC) with Reserve Bank of India(RBI).
‘ IREDA’s mission is ‘Be a pioneering, participant friendly and competitive institution for finanacing and promoting self-sustaining investment in energy generation from Renewable Sources, Energy Efficiency and Environmental Technologies for sustainable development’.
‘ IREDA’s motto is ‘Energy for Ever’
Objectives:
1. To give financial support to specific projects and schemes for generating electricity and/or energy through new and renewable sources and conserving energy through energy efficiency.
2. To maintain its position as a leading organization to provide efficient and effective financing in renewable energy and energy efficiency/conservation projects.
3. To increase IREDA’s share in the renewable energy sector by way of innovative financing.
4. Improvement in the efficiency of services provided to customers through continual improvement of systems,processes and resources.
5. To strive to be competitive institution through customer satisfaction.

Quality Policy:
IREDA is committed to maintain its position as a leading organization to provide innovative financing in Renewable Energy & Energy Efficiency/Conservation and Environmental Technologies through efficient system & processes for providing total satisfaction and transparency to its customers. IREDA shall strive for continual improvement in the quality of services to its customers through effective quality management system.

Quality Objective:

I. Drive towards total customer satisfaction.
II. Continual up gradation of capability and improvement in the professional skills of employees.
III. Improvement in efficiency of services provided to customers.
IV. Continual improvement of systems,process and services.
All concerned shall implement the Quality Policy & Quality Objectives with full devotion & dedication to achieve IREDA’s Mission.

1.1.2 Business of the Organisation
IREDA is confined to provide financial support to specific projects and schemes for generating electricity and/or energy through new and renewable sources and conserving energy through energy efficiency.
Sectors & Financing Schemes
Sectors:
Solar Energy,Wind Energy,Hydro Energy,Bio Energy,Battery Powered Vehicles,Energy Efficiency and Conservation
‘ Project Financing
‘ Equipment Financing
‘ Loans for Manufacturing
‘ Market Development Assistance
‘ Energy Intermediaries
‘ Energy Centres
‘ Business Development Associates
IREDA Guidelines ‘ Loan Assistance
Indian Renewable Energy Development Agency, New Delhi, extends loan on soft terms through designated intermediaries for financing of installation of solar thermal devices.

Core Objective
Encourage large scale usage of low grade solar thermal devices and promote commercialization.
Introduce the concept of market orientation for successful implementation of the programme, resulting in direct interaction between users and manufacturers.
Ensure savings of electricity/fuel gas in domestic sector and other fuels such as oil/gas/coal etc.in commercial and industrial sector through large scale use of these devices.

Details of Scheme
Programme supports supply of solar water heaters,solar air heaters/dryers,solar timber kilns and solar stills for hot water,hot air and supply of distilled water respectively based on solar flat plate collectors and evacuated tube collectors.Solar steam cookings are also eligible.
Non-Government Organizations, co-operative societies, corporate bodies , institutions, industries,etc.are eligible for the programme.
Solar systems under the scheme must confirm the Bureau of Indian Standards specifications.
Cost of complete system determined depending on type and size of the system and other subsystems.

1.1.3 Organization Structure

1.2 Objective of the Project
The objective of the Project Report is:
1. Finding out the different financial mechanisms available in the market.
2. Analysis of the barriers faced by the available mechanisms.
3. Development of business model based on the correction of outcomes of the barriers faced.

1.3 Significance and Scope of the Project
Governments in most countries face challenges with respect to the sustainable development of their energy systems. These challenges include:
‘ Ensuring adequate supplies of energy in the long term to support economic development;
‘ Improving security of their energy supplies to reduce dependence on foreign energy sources;
‘ Providing a healthy, unpolluted environment for their populations; and
‘ Contributing to global climate change mitigation.

An important goal in meeting these challenges is to transition from a fossil-fuels-based economy to a less carbon-energy-intensive economy. The IEA energy technology Perspectives 2010 estimates that the investment required to halve the greenhouse gas emissions by 2050 is USD 46 trillion higher than the baseline scenario over the period 2010 to 2035 (IEA, 2010a). The reduction of energy consumption through improved energy efficiency (EE) represents a key strategy in these efforts, because EE provides the most cost-effective solution in the short to medium term for reducing energy demand/supply gap, enhancing energy security, and mitigating local and global environmental impacts. Many countries are introducing ambitious energy-saving targets.

1.4 Introduction
The Energy Conservation Act 2001, herein referred as the EC Act, enacted by the Government of India in 2001, provides for the overall framework for efficient use of energy and its conservation in India. The Act provisioned for various sectors to adopt measures for ensuring energy efficiency and also led to the formation organization such as the Bureau of Energy Efficiency (BEE).

1.4.1 Importance of energy efficiency in industry
Energy demand is growing significantly in our country due to rapid industrialization.Indeed, the eight most energy intensive industrial sectors – iron and steel,aluminium,cement production, pulp and paper,chlor-alkali,fertilizers,textile and power(thermal)- account for approximately 54 percent of all industrial energy consumption in the country.As a result, the industrial sector is one of the major contributors to greenhouse gas (GHG) emissions and this will likely continue as Asia’s energy use and related CO2 emissions rise by an estimated 50+ per cent by the year 2030. Unfortunately, however, large amounts of energy consumed by industry in Asia are used inefficiently because of lack of awareness about proper energy management and weak energy policies and measures.In fact,studies indicate that as much as 23 percent of industrial end-use energy is wasted as the result of inefficiencies.Finding ways to increase energy efficiency in the industrial sector in India is therefore critical because the global climate and the region’s energy security depend on it. A key tool to achieving this goal is to ensure that funding exists to pay for industrial investment in energy efficiency.Such mechanisms are reviewed in this report.

1.4.2 Background to this review
In response to the growing challenge of climate change, the Government of India (GOI) released the National Action Plan on Climate Change (NAPCC) in June 2008. Its objective is to achieve a sustainable path of development that simultaneously advances the economic and environmental objectives.
The Action Plan enunciates the following principles.

‘ Protecting the poor and vulnerable sections of society through an inclusive and
sustainable development strategy sensitive to climate change

‘ Achieving national growth objectives through a qualitative change in direction
that enhances ecological sustainability, leading to further reduction in emissions
of GHGs

‘ Devising efficient and cost-effective strategies for end-use demand-side
Measures

‘ Deploying appropriate technologies for both adaptation to and mitigation of the
adverse effects of emissions of GHGs extensively as well as at an accelerated
pace

‘ Engineering new and innovative forms of market, regulatory, and voluntary
mechanisms to promote sustainable development
NAPCC outlines eight missions:
1. National Solar Mission
2. National Mission for Enhanced Energy Efficiency
3. National Mission on Sustainable Habitat
4. National Water Mission
5. National Mission for Sustaining the Himalayan Ecosystem
6. National Mission for a Green India
7. National Mission for Sustainable Agriculture
8. National Mission on Strategic Knowledge for Climate Change

National Mission for Enhanced Energy Efficiency
The National Mission for Enhanced Energy Efficiency (NMEEE) is a key component of the NAPCC and reflects GOI’s increased emphasis on achieving energy efficiency in the Indian economy.
In addition to a number of ongoing schemes and programs, the NMEEE has put in place four new initiatives to enhance energy efficiency in India.

These initiatives are as follows:

‘ Perform, Achieve, and Trade (PAT) – A market-based mechanism to make
improvements in energy efficiency in energy-intensive large industries and facilities more cost-effective by certification of energy savings that could be traded

‘ Market transformation for energy efficiency (MTEE) by accelerating the shift to
energy-efficient appliances in designated sectors through innovative measures
that make the products more affordable

‘ Energy efficiency financing platform (EEFP)- A mechanism to finance DSM
programmes in all sectors by capturing future energy savings

‘ Framework for energy efficient economic development (FEEED) or developing
fiscal instruments to promote energy efficiency

NMEEE Goals:
‘ Market-based approaches to unlock energy efficiency opportunities,estimated to be about ‘ 74,000 Crores.
‘ By 2014-15:
1. Annual fuel savings in excess of 23 million toe
2. Cumulative avoided electricity capacity addition of 19,000 MW
3. CO2 emission mitigation of 98 million tons per year

Perform Achieve and Trade
A market-based mechanism to make improvements in energy efficiency in energy-intensive large industries and facilities more cost-effective by certification of energy savings that could be traded.
The PAT framework has been developed considering the legal requirement under EC Act, 2001, situation analysis of designated consumers, national goal to be achieved by 2013-14 in terms of energy saving and sustainability of the entire scheme. The PAT scheme is involved in order to incentivize industry to achieve better energy efficiency improvements than their specified SEC improvement target in a cost-effective manner. The additional certified energy savings can be traded with other designated consumers who could use these certificates to comply with their SEC reduction targets. The Energy Savings Certificates (ESCerts) will be traded on special trading platforms to be created in the two power exchanges (IEX and PXIL).The guiding principles for developing the PAT mechanism are Simplicity, Accountability,Transparency, Predictability, Consistency, and Adaptability. The PAT frameworkincludes the following elements:

1. Methodology for setting specific energy consumption (SEC) for each DC in the baseline year.

2. Methodology for setting the target to reduce the Specific Energy Consumption (SEC) by the target year from the baseline year.

3. The process to verify the SEC of each DC in the baseline year and in the target year by an accredited verification agency.

4. The process to issue energy savings certificates (ESCerts) to those DCs who achieve SEC lower than the specified value.

5. Trading of ESCerts

6. Compliance and reconciliation of ESCerts

7.Cross-sectoral use of ESCerts and their synergy with renewable energy

Selection Criterion for Designated Consumers
The selection criterion for designated consumers has been stated in Table 1.This criterion has been established based on the detailed survey analysis of Bureau of Energy Efficiency.
Industry Sector Annual Energy Consumption Norm to Become DC(Mtoe) No. of identified DCs
Aluminium 7,500 10
Cement 30,000 85
Chlor-Alkali 12,000 22
Fertilizer 30,000 29
Pulp & Paper 30,000 31
Power(Thermal) 30,000 144
Iron & Steel 30,000 67
Textile 3,000 90
Railways Under assessment 8
Total 478
Source:PAT Notification, Ministry of Power

Major Steps in PAT Mechanism:
1. Target setting Phase
2. Target achieving Phase
3. Measurement and verification Phase
4. Trading Phase
CHAPTER-2
RESEARCH METHODOLOGY

2.1 Research Methodology

Step 1-Research Design
This study is an exploratory research to understand the concept of energy efficiency, the current framework of energy efficiency financing in India and international experiences in the area. The study attempts to look at the future aspects of energy efficiency in India.

Step 2-Universe and Survey Population
The universe in this case consists of the energy efficiency financing projects in different states of India as well as in the world.

Step 3-Sample
The sample taken consists of few projects in India.

Step 4-Collection of Data
Information was gathered from a wide range of sources, including existing reports on financial and economic mechanisms for energy efficiency, evaluations of existing incentives and financial assistance programs throughout the world, websites with information on specific country financing and incentives programs and policies.The key documents, websites and research reports used in this review can be found in the bibliography section of this report.

Step 5-Analysis Pattern
Data analysis is done by comparative study of handling similar issues between India and other nations across the world.

Step 6- Preparation and dissemination of report

CHAPTER-3
FINANCIAL MECHANISM AVAILABLE
&
BARRIERS FACED

3.1 Financial Mechanisms to Facilitate Energy Efficiency Investments
There are a wide range of financial and economic mechanisms or instruments that may be implemented to facilitate investment in energy efficiency projects as listed in Table 2. These mechanisms have an impact on investment decisions or on an entity’s ability to invest by helping to reduce the overall costs of the energy efficiency investment (easing the decision to invest) or by facilitating financing of the investment (reducing barriers to and costs of commercial financing).

Tax Policy ‘ Taxes
‘ Tax Incentives
Subsidies ‘ Subsidies (non-tax)
Lending Programs ‘ Bank Loans
‘ Soft loans / revolving loans
‘ Guarantee funds
‘ Energy efficiency ‘Bank Windows’
ESCOs ‘ Guaranteed savings
‘ Shared savings
‘ Pay from savings
‘ Other
Table 2.

This section will provide a description of the financial and economic mechanisms most commonly in use to support energy efficiency investments, discuss the advantages and disadvantages of each of the mechanisms, highlight specific barriers to their use and discuss the circumstances under which the different mechanisms might best be used.

3.1.1 Tax Policy
Government fiscal policy, namely taxes and tax incentives, can help generate demand for energy efficiency improvements.This section describes role of taxes and tax incentives in facilitating investment in energy efficiency and discusses likely industrial response to taxes and incentives.

3.1.1.1 Taxes
The primary role of taxation is to raise government revenue. A secondary, but not insignificant, role of taxation can be to discourage behaviors in order to promote societal values (e.g., taxation of cigarettes that reduces smoking), as well as to help correct market imperfections (e.g., taxation of toxic emissions) by forcing better internalization of the costs of particular behaviours. Taxes on the consumption of fuels (e.g., petroleum or gasoline) or taxes on the harmful by-products of using certain types of fuels (e.g., emissions from coal fired power plants) raise the cost of consumption of those fuels and help internalize the environmental costs associated with that consumption. The result is:
‘ A decline in the demand for the product being taxed. Increased revenue for the state
‘ Decreased pollution impact from use of the product and reduced incidence of detrimental health impacts.
Taxes are effective in promoting energy efficiency in cases where:
‘ The level of taxation is sufficiently high to induce the desired change. If the level of tax is set too low, then energy users will simply pay the tax without changing their consumption patterns.
‘ Demand, either for the energy source being taxed or the products made using that energy source, is sufficiently elastic that increased prices will affect purchasing behaviour. If energy costs cannot be passed on to buyers of a product, industry will have a strong incentive to reduce energy costs to stay competitive.
At the same time, there disadvantages to the use of taxation as a means to promote improved energy efficiency:
‘ Taxes, particularly on fuel, can have a disproportionate impact on vulnerable populations, such as the poor.
‘ The threat of higher taxes can generate public opposition, which may ultimately hinder efforts to encourage greater energy efficiency.
‘ If the level of tax is too high, energy users may be encouraged to evade the tax.
‘ If the demand for the goods produced by a given industry is inelastic, industry will easily be able to pass along increased energy costs in increased product costs. Consumers will simply pay the additional cost and industry will not reduce its energy use.
‘ Taxation is a relatively indirect means to induce greater investment in energy efficiency improvements. Higher energy prices may reduce consumption, but may not have sufficient impact to induce efficiency investments by industry, particularly if the cost of changes needed to achieve greater efficiency is greater than the cost increase imposed through taxation.
3.1.1.2 Tax Incentives
Tax incentives (or tax relief) use the reward of reduced taxes to encourage desired behavior. Tax incentives tied to energy efficiency investments essentially reduce the cost of the energy efficiency improvement, which will serve to encourage more businesses to make that investment (thereby increasing demand for energy efficiency projects).Tax incentives are, therefore, a type of subsidy
representing a transfer of wealth from one group (society at large) to another group (investors in energy efficiency). To facilitate implementation, tax incentives for energy efficiency investments are typically tied to specific equipment purchases – e.g., a list of equipment identified in advance by the government providing the subsidy. Sometimes, subsidies are tied to investment in equipment that meets a defined set of parameters. Such programs are more complicated to implement, since independent evaluations of whether a particular piece of equipment meets the criteria are necessary to monitor compliance with the program.
There are a number of ways in which tax incentives can promote investment in energy efficiency:
a) Accelerated depreciation. These types of incentives allow businesses to more rapidly depreciate the costs of their investments in energy efficiency technologies. The effect of more rapid depreciation is to reduce a business’s taxable income as compared with use of normal depreciation during the depreciable life of the equipment purchased. The reduced tax burden effectively reduces the cost of the equipment, making it a more attractive investment option.
b) Tax deductions. Under this type of incentive, businesses are allowed to deduct some or all of the cost of investment in energy efficiency technologies from their annual profits. The savings accrued to the business is equivalent to the amount of tax the company would have paid on the amount of the deduction. If a company pays 30 percent corporate income taxes, for example, then the savings generated by allowing a deduction of the full cost of energy efficient equipment would be 30 percent of the cost of the equipment.
c) Tax credits. Tax credit systems allow a business to reduce its total tax liability by some or all of the cost of an investment in energy efficiency. Tax credits typically generate more savings to business than tax deductions or accelerated depreciation, since they represent an absolute reduction in the amount of taxes paid, while tax deductions and accelerated depreciation only reduce the amount of
taxable profit and therefore reduce taxes only by a percentage of the cost of the investment. In addition, the savings associated with a tax credit are more directly tied to the energy efficiency investment.
d) Tax reductions. Under a tax reduction incentive, taxes on paid on the purchase of energy efficiency equipment, such as VAT or import duties, are reduced. In developing countries, reduction of import duties can be significant, as domestic sources of energy efficiency technology may be limited, and standard duties on imported equipment may be a substantial barrier to their use.
3.1.2 Non Tax Subsidies
An energy efficiency subsidy can be broadly defined as ‘public funds given directly to the party implementing an energy efficiency project.’ As discussed above, tax incentives are a particular type of subsidy, since reductions in taxes represent a transfer of public funds (in the form of lost government revenue) to the person or entity receiving the tax benefit.Non-tax subsidies (also referred to as
‘grants’) are a more direct means of making that transfer of funds and can be provided to businesses that invest in energy efficiency improvements in a
variety of ways:
‘ As a fixed payment for an eligible investment.
‘ As a percentage of the total value of the investment (usually capped at some level).
‘ As an amount linked to the amount saved in energy or energy costs (a performance-based approach, as discussed above).
No examples of active subsidy programs in India for the financing of energy efficiency projects were found. IREDA does offer subsidies for audits and other services related to the development of loan proposals for its loan program.
3.1.3 Lending Programs
Once the decision has been made by a business to implement an energy efficiency improvement project, it will generally be necessary to obtain outside funds to cover the investment, for all but the lowest cost alternatives. Traditionally, businesses use bank financing to fund a range of funding needs, from covering working capital requirements to major investments in expansions or acquisitions. This section discusses bank loans and barriers to their use, along with several approaches for overcoming them.
3.1.3.1 Traditional Bank Loans
Businesses needing to make a substantial investment, for example in a plant expansion, will typically approach a bank for a loan covering that investment. In determining whether to grant a particular loan, banks will consider a number of issues including:
‘ The credit history of the applicant, including whether the applicant has a history with the particular bank involved.
‘ The applicant’s current financial strength.
‘ Whether the applicant has sufficient assets to pledge as collateral for the loan.
‘ The likely impact of the investment on the applicant’s profitability.
‘ Any risks associated with the investment that could affect the ability of the applicant to repay the loan.

3.1.3.2 Soft Loans and Revolving Funds
‘Soft’ or public loans use public funds to offer loans at interest rates that are usually below the market rates for energy efficiency investment loans. A soft loan, because it is supported by public funds, is a subsidy of the costs of a bank loan for energy efficiency projects. By reducing the costs of borrowing, soft loans seek to encourage investments in energy efficiency that might otherwise not be implemented due to high financing costs. Often more complicated to set up than a traditional subsidy, however, soft loan programs are generally less broadly used.
Soft loans are often associated with ‘revolving funds’ where repaid loan funds are cycled back into the fund for relending for a new project. Money in the revolving fund is fully dedicated to energy efficiency lending (in some cases, revolving funds lend for a variety of environmental projects, including energy efficiency projects). Revolving funds are typically publicly supported, through subsidized interest rates or through partial or full public funding of the principal investment; monies
for the fund may come from dedicated taxes on energy sources (e.g., fuel taxes, utility surcharges.Operation of the fund itself may be set up in cooperation with commercial banks. Such an arrangement allows evaluation of loan applications, monitoring of loans, and collection of loan payments to be managed by commercial banks that have existing expertise in these areas.Government offices, as a consequence, do not need to become bankers to administer the fund.
These types of loan funds offer a number of advantages:
‘ Involving the commercial banking industry uses existing financial institutions and expertise and keeps governments out of the banking business.
‘ Establishing the fund solves the problem of lack of bank interest in making energy efficiency loans by providing dedicated public funds. Involving banks in fund administration introduces them to energy efficiency lending and familiarizes them with these types of projects.
‘ Lower than market interest rates make energy efficiency investments more attractive to potential loan applicants.
3.1.4 Partial Risk Guarantee Funds
A PRGF is a risk sharing mechanism lowering the risk to the lender by substituting part of the risk of the borrower by granting guarantees ensuring repayment of part of the loan upon a default event.
Guarantees a maximum 50% of the loan (only principal). In case of default, the fund will:
‘ Cover the first loss subject to maximum of 10% of the total guaranteed amount
‘ Cover the remaining default (outstanding principal) amount on pari-passu basis upto the maximum guaranteed amount
Participating Financial Institution (PFI) shall take guarantee from the PRGFEE before disbursement of loan to the borrower. The Guarantee will not exceed ‘300 lakhs per project or 50% of loan amount, whichever is less .Maximum tenure of the guarantee will be 5 years from the date of issue of the guarantee.
Guarantee Mechanism:

Institutional Structure:

Supervisory Committee:

Processing and Guarantee Fees
‘ Processing fee: 0.25% of the maximum guaranteed amount applied
(Payable at the time of application)
‘ Guarantee fee: Upfront fee of 1% of the amount guaranteed
(Payable after approval and before signing of contract)

Eligible Projects for Guarantee facilities
‘ Seek to achieve demonstrable energy savings and mitigation in emissions of greenhouse gases
‘ Propose a viable method to monitor and verify energy and green house gas emission savings
‘ Be a new project, not refinancing existing projects or any outstanding obligations of the Eligible Borrower
‘ Use viable technology and be developed with competent energy audit/feasibility studies
‘ Project must be implemented by BEE empanelled ESCO on performance contracting mode
‘ Project must complies with environmental, health and safety standards.

3.1.5 Energy Service Company Performance Contracts
Energy Services Company (ESCO) Performance Contracts are innovative financial arrangements that combine the design and implementation of energy efficiency projects with financing and the guarantee of performance (i.e., the customer is guaranteed that he/she will get energy savings out of the project). Significant support for the development of ESCOs and performance contracting in Asia has been provided by the World Bank, financed through GEF. The Asian Development Bank and the U.S. Agency for International Development and other bilateral donors also have provided support for the development of ESCOs and performance contracts. This section will describe ESCOs and the types of performance contracts generally available.

3.1.5.1 What is an ESCO?
An ESCO is a private company that provides comprehensive energy efficiency services or load reduction services to its clients.Historically, ESCOs grew out of traditional fee-based energy services companies (i.e., auditors) and building contractors. Some ESCOs are ‘supplier ESCOs.’ These types of ESCOs manufacture specific equipment and provide performance guarantees for that equipment alone.There also are ESCOs that were created by utilities (these are rare) that are generally related to utility Demand Side Management (DSM) programs. Under DSM programs, utilities work with their customers to reduce energy use or shift use to non-peak periods, thereby reducing the need for greater generating and transmission capacity on the part of the utility and reducing energy bills for the consumer.

3.1.5.2 What is Performance Contracting?
Performance contracting involves an ESCO providing energy savings to a customer for a fee. The level of the fee will depend on the amount of savings that the ESCO’s improvements are able to generate for the customer. It is the linkage of performance and payment that defines performance contracting. As a consequence, all performance contractors are ESCOs, but not all ESCOs offer performance contracts.
In a case of performance contracting, the ESCO will perform an energy efficiency audit and develop recommendations and designs based on the audit.The ESCO will then secure financing for the project (upon agreement with the customer concerning recommendations).That financing typically will be based on the stream of energy cost savings that are expected as an outcome of implementing the recommended changes. The ESCO then implements the project. The ESCO assumes the risk of performance of its recommendations. If the changes do not produce savings, then the customer does not pay the ESCO. Typically, all costs associated with the project – beginning with the audit and design – are bundled together, so the customer does not incur any costs until the stream of savings begins. The appeal of performance contracts is that the customer incurs almost no upfront costs for its energy efficiency investments – all payments come out of energy savings.

3.1.5.3 Types of ESCO Projects
There are a number of ways that ESCO Performance Contract projects can be structured. The differences in structure have some fairly substantial impacts on how many projects a given ESCO can take on and the types of customers who can avail themselves of ESCO services under a performance contract. The following three models are the most commonly used:
a) Guaranteed Savings. Under a guaranteed savings project, the ESCO completes an audit, develops recommendations and designs, makes arrangements for project financing, and implements the project. Key features of a guaranteed savings arrangement include the following:
‘ It is the customer who actually borrows the funds and takes on the obligation to repay the loan, not the ESCO. The ESCO usually helps identify financing and facilitates the loan application process.
‘ The ESCO guarantees that the stream of savings from the project will be sufficient to cover the loan payments. If minimum savings targets are not met, the ESCO must pay the customer the
difference, thus providing the customer with the funds necessary to repay its bank loan. If the savings minimums are exceeded, then the customer pays the ESCO a percentage of the savings. The ESCO therefore assumes the performance risk, while the bank takes the credit risk.
‘ The customer taking out the loan is subject to the same evaluation as for any other loan, and the loan will appear on the customer’s balance sheet. Consequently, a project funded in this manner also will be subject to the customer’s own internal evaluation process for any capital investment and therefore compete against other investment.

b) Shared Savings. Under a shared savings scheme, the ESCO finances the project itself, either from its own capital or by borrowing from a bank. Key features of this approach include:
‘ The ESCO assumes both the performance risk and the credit risk associated with the project.
‘ The customer generally must pay a higher percentage of the project’s savings to the ESCO than for a ‘guaranteed savings’ project.
‘ If bank financing is used, the bank typically receives rights to the stream of payments as security for the loan or takes a security interest in any equipment that is installed as part of the project.
‘ The customer does not have to borrow,so the project will not appear on the customer’s balance sheet.Also,from the customer’s perspective the project will be treated as new equity and usually will not be subject to the customer’s internal investment criteria.

c) Pay From Savings. This type of arrangement is a subset of guaranteed savings projects. Under this arrangement, the payment schedule depends on the level of savings. If savings are greater than anticipated, repayment will be faster. If savings are lower than expected, the contract can be extended to allow the ESCO to recover its agreed payment. A related arrangement is the ‘first out’ model, in which the ESCO receives all energy cost savings until it has received its agreed payment. Generally, this arrangement is lower risk for the ESCO, since it receives its full payment more quickly than under the traditional guaranteed savings approach.

Other models
While the above models are the most commonly used, other models may also be appropriate. In a review of its own energy efficiency portfolio, the World Bank notes that typical Western ESCO models may not offer the best alternatives in the developing world, although an arrangement that allows off-balance sheet financing (shared savings) would be ideal for industry with limited investment capacity. The World Bank specifically lists the following additional models (generally running in order of higher service/higher risk to lower service/lower risk options) and recommends that a variety of approaches should be considered in promoting ESCOs:

d) End-Use Outsourcing. In this type of project, the ESCO assumes responsibility for the operation and maintenance of the equipment and/or systems it installs and then sells the output (such as steam, heating/cooling, or lighting) back to the customer at an agreed price. Any costs for equipment upgrades or repairs are typically also the responsibility of the ESCO, although ownership of the equipment usually remains with the customer. This model is also sometimes referred to as chauffage or contract energy management.

e) Equipment Supplier Credit. In this arrangement, an equipment supplier designs and implements the project, and is responsible for confirming that performance and energy savings match customer expectations. The customer pays for the equipment either on a lump-sum basis after installation or like other performance contracting arrangements, over time, usually from the estimated energy savings. The customer receives ownership of the equipment immediately.

f) Equipment Leasing. Equipment leasing is similar to supplier credit in that the supplier receives fixed payments from the estimated energy savings to cover equipment purchase and installation. However, the payments are made as a ‘lease to own’ arrangement, and the supplier retains ownership of the equipment until all the lease payments, and any transfer payments, are completed.

g) Technical Consultant. Under this type of arrangement, the ESCO conducts an audit, recommends changes, and assists with implementation. The ESCO receives a performance-based fee, which may include penalties for lower energy savings and bonuses for higher savings. Alternatively, the ESCO may conduct an audit, design the project, and either assist with project implementation or advise the customer for a fixed, lump-sum payment.

3.2 Barriers Faced by Energy Efficiency Financing
Financing EE may not appear to be much different than financing other types of investments such as facility or business expansion or modernisation,new product development, or sales and marketing.
Certain characteristics of EE projects, however, are unique and negatively influence their attractiveness to LFIs as candidates for lending. These characteristics can be grouped under five major types of financing barriers :
1. Availability of funds for investing in EE projects.
EE projects reduce energy costs over time, thereby improving the ‘bottom line’
of enterprises, but they do not increase the ‘top line’.As a result, it can be difficult for corporate or government executives and managers, as well as bankers and other members of the financial community.
2. Information, awareness and communication.
LFIs generally are not familiar with EE technologies and erroneously perceive EE projects as more complex than their traditional lending, and as initiatives that require expertise, effort and cost to identify and implement. A knowledge gap exists between the organizations developing and implementing EE projects and the beneficiaries (project hosts) and bankers in LFIs.
3. Project development and transaction costs.
The average size of an EE project is small relative to typical LFI loans, thereby making EE projects less attractive to bankers. They are often fragmented, with high transaction costs, and fall below the minimum value that many banks are willing to consider. EE projects typically have a higher proportion of ‘soft costs’ (project design and development) than traditional LFI loans, and therefore a lower proportion of securitizable assets. Aggregators who could create scaled bankable opportunities are often lacking. The ‘top line’ refers to gross revenues of the enterprise, while the ‘bottom line’ is the net profit. These factors make such projects difficult to finance using a project financing approach from the LFI perspective.
4. Risk assessment and management.
In many cases, the assets financed have little or no residual value, because EE is often in effect an integrated engineering project with energy savings not guaranteed, which makes the assets unusable as collateral against a bank loan. Although the EE industry has developed measurement and verification (M & V) protocols for EE projects ,the knowledge and information about these procedures and protocols are not widespread, particularly among bankers. Also, an insufficient number of trained professionals are available to implement the M & V standards and protocols. Different countries adopt different guidelines regarding M & V. Also different engineering companies develop and use their own proprietary models for M & V. As a result, bankers often do not trust the estimated benefits from EE projects, because they are technical in nature and derived from non-transparent and non-standardized models. This also makes it very difficult to appraise EE projects.
5. Lack of capacity

Significant capacity limitations exist with respect to project developers and energy services companies (ESCOs), project hosts (energy users), and LFI loan officers and risk managers.

These barriers create a mismatch between the current lending practices of LFIs and the financing needs of EE projects, making EE lending discouragingly difficult. LFIs typically provide asset-based lending rather than project financing and limit the debt amount to 70%-80% of marketable asset value.
LFIs also do not normally finance projects based on the ‘cash flow’ resulting from the energy savings. Typically they are not familiar with the unique characteristics of EE projects and have limited internal capacity to properly appraise the risks and benefits of EE projects. LFIs also do not usually recognize the potentially large business opportunity in EE lending and, therefore, do not have the management commitment or the organizational structure to finance EE projects on a large scale.

3.2.1 Barriers to ESCOs in developing countries
‘ Most independent ESCO s have a small capital base and have difficulties accessing project funding from commercial financial institutions (FIs). Once their capital is tied up in a project, they can do no more lending, and therefore a way of recycling capital is needed, such as through bond issuances.
‘ The concept of project financing for ESCO projects is not commonly accepted by FIs in developing countries.
‘ EE projects are generally small relative to other investment projects being considered by the FIs, and they also have a relatively large proportion of ‘soft costs’ that cannot be easily collateralized.
‘ Due to the immaturity of the EE market in developing countries, costs of project development are relatively high, and most small ESCO s find it difficult to finance project development costs.
‘ The ESCO model is new in developing countries and, due to the limited experience with successful ESCO projects, ESCO s have not yet developed good credibility with energy users.
‘ The FI’s staff typically has limited knowledge and understanding of EE projects and the ESPC concept. Also, FIs perceive EE projects (incorrectly) as inherently more risky than other investments.
The combination of high project developments costs, limited access to long-term and low-cost project financing, high equity requirements for project financing, and lack of credibility with customers has led to what may be considered a ‘market failure’ with respect to the ESCO industry’s ability to implement EE on a large scale.
3.2.2 Barriers to Use of Bank Loans
In theory, businesses should be able to obtain bank loans for investments in energy efficiency projects.There are, however, substantial barriers to obtaining financing for energy efficiency projects,especially in developing countries and particularly for SMEs. These barriers include:
‘ Banks lack understanding of the value of energy efficiency projects
Bankers often lack the technical knowledge necessary to adequately value the contribution that an energy efficiency project can make to the profitability of a loan applicant. As a consequence, loan applications for energy efficiency projects may receive unfavorable reviews by bank officers.
‘ Banks tend to favor investments focused on expanding production
Related to their lack of knowledge about the value of energy efficiency projects, many banks simply favor investments aimed at increasing the production of a company. The role of reduced production costs generally (including reduced energy costs) in business performance is poorly understood.
‘ Energy efficiency projects are considered ‘high risk’
Energy efficiency projects often involve the use of innovative technology. Bankers are reluctant to make loans for technology that they consider untested or less likely to produce predicted cost savings and associated productivity gains, since this represents a higher risk option to banks than loaning funds for other purposes.
‘ Energy efficiency projects can have long payback periods
Banks are uneasy about lending for projects with lengthy payback periods, as this increases default risks.
‘ Collateral requirements
Energy efficiency projects are often not ‘asset-based;’ i.e., they do not involve traditional assets, such as land or buildings, that the bank could take possession of, in the event that loan applicant fails to repay the loan. Consequently, the bank may decline to fund the project. Even where a bank is interested in making a loan for an energy efficiency project, alternative collateral requirements (commitment of land or structures as security) may be prohibitively high, especially for SMEs.
‘ Energy efficiency projects are too small
Many energy efficiency projects are simply too small to get attention from banks, which prefer making larger loans. Transactions costs, as a percentage of the loan amount, are significantly smaller for larger loans.
‘ Loans for energy efficiency projects have higher transactions costs than other loans
Because they are often for new or unusual technology or techniques, loan applications for energy efficiency projects require greater scrutiny and specialized attention from loan evaluators relative to more traditional loan applications covering factory expansions, acquisitions, and so forth.This makes the transactions costs associated with these loans even higher than for other similar-sized loans.
‘ Banks lack trust in consultant information included in loan applications
Banks may lack confidence that the technical information that is included in support of the application, particularly regarding the performance of innovative technology, is accurate and unbiased. This adds to banks’ conclusions that energy efficiency loans are too high risk, since the bank would need to base its lending decision, in part, on technical conclusions that the bank may not trust.
‘ Businesses lack the capability to develop strong loan applications
Loan applicants themselves ‘especially SMEs ‘ may lack the capacity to put together a loan application that will satisfy the bank.
‘ Banks often prefer to loan to applicants with whom they already have established banking relationships
Loan applications from businesses with a ‘track record’ at a bank represent lower
risks for the bank. Also, banks may be more willing to make small loans to existing customers, as this is seen as part of a larger package of services being provided to that customer.

CHAPTER-4
BUSINESS MODEL

4.1 Development of business model
The business model is based on the detailed study of different barriers faced by energy efficiency projects.It describes various steps that can be taken to promote energy efficiency financing. The development of approaches to overcome the financing barriers can deliver immense benefits from the implementation of EE projects, such as expanded markets worth billions of euros for LFIs, increased competitiveness of economies, and significant CO2 emission reductions. Businesses and industrial enterprises (small, medium and large) will
benefit from reduction in their energy bills, leading to increased profitability. So will households, giving them more money to spend elsewhere.
4.1.1 Programs to Address Barriers
Given the substantial barriers to traditional bank financing of energy efficiency investments, a number of programs have been developed that seek to address some, or all, of the barriers. Many of these programs are intended to provided subsidies and other support to the banking industry to allow it to develop the capacity necessary to offer energy efficiency loans on their own. This section discusses several of these approaches: ‘soft loans,’ guarantee funds, and energy efficiency ‘bank windows.’
a) Soft Loans and Revolving Funds
‘Soft’ or public loans use public funds to offer loans at interest rates that are usually below the market rates for energy efficiency investment loans. A soft loan, because it is supported by public funds, is a subsidy of the costs of a bank loan for energy efficiency projects. By reducing the costs of borrowing, soft loans seek to encourage investments in energy efficiency that might otherwise not be implemented due to high financing costs. Often more complicated to set up than a traditional subsidy, however, soft loan programs are generally less broadly used.
Soft loans are often associated with ‘revolving funds’ where repaid loan funds are cycled back into the fund for relending for a new project. Money in the revolving fund is fully dedicated to energy efficiency lending (in some cases, revolving funds lend for a variety of environmental projects, including energy efficiency projects). Revolving funds are typically publicly supported, through subsidized interest rates or through partial or full public funding of the principal investment; monies for the fund may come from dedicated taxes on energy sources (e.g., fuel taxes, utility surcharges).Operation of the fund itself may be set up in cooperation with commercial banks. Such an arrangement allows evaluation of loan applications, monitoring of loans, and collection of loan payments to be managed by commercial banks that have existing expertise in these areas. Government offices, as a consequence, do not need to become bankers to administer the fund.
The public funding involved makes loan money available for energy efficiency projects that is currently not available strictly through the private sector. Thus, energy efficiency projects seeking funding through the revolving loan fund do not need to compete against more traditional investments for bank funding. Finally, the public funds provided to commercial banks are usually provided at zero or well below market interest rates. This enables the banks in turn to provide loans for energy efficiency projects at rates below market. In return for receiving public funds, banks can be asked to assume some or all of the risk of repayment associated with the loans.
These types of loan funds offer a number of advantages:
‘ Involving the commercial banking industry uses existing financial institutions and expertise and keeps governments out of the banking business.
‘ Establishing the fund solves the problem of lack of bank interest in making energy efficiency loans by providing dedicated public funds. Involving banks in fund administration introduces them to energy efficiency lending and familiarizes them with these types of projects.
‘ Lower than market interest rates make energy efficiency investments more attractive to potential loan applicants.
Revolving funds address many of the problems and barriers associated with bank financing for energy efficiency projects, with the implication that the decision to make the investment at the firm level has already been made. As a consequence, revolving funds are most appropriate where adequate demand exists for energy projects as the result of market conditions and government policy, but where the financial market still requires incentives to respond.

Revolving funds, however, do not necessarily address all barriers to bank financing of energy efficiency projects. Revolving funds do not, for example, address such issues as:

‘ The availability of collateral.
‘ The ability of applicants to develop adequate proposals.
‘ Accessibility for companies like SMEs, which often face greater difficulties in obtaining bank financing due to their weaker financial positions, lack of credit history, and/or inability to supply adequate collateral.

b) Guarantee Funds

Guarantee funds help cover the credit risks associated with financing energy efficiency projects with a medium to long term. In such schemes, public or donor funding is pledged (usually up to a ceiling level) to guarantee some of the risk of principal repayment for these loans. Typically, the loan recipient pays an annual fee (usually 1 to 3 percent of the total outstanding balance on the loan) to the guarantor in order to obtain a guarantee for the loan. As a consequence, guarantee funds can help alleviate the barriers to energy efficiency lending that are associated with collateral requirements, the higher risk nature of new technologies, and the risk of longer-term lending. In some cases, guarantee funds are earmarked for groups with greater difficulty in getting loans, such as SMEs. Like revolving funds, guarantee funds can be helpful in building the capacity and willingness of banks to offer energy efficiency loans by subsidizing risks until the banks become familiar with the market and can manage the risks on their own.
Guarantee funds tend to work best in the following situations:
‘ Where the banking sector is fairly well-developed and liquid (i.e., where available lending capital is not an issue), but where the risks (or perceived risks) of energy efficiency loans is the primary barrier.
‘ Where there is sufficient market demand for loan financing. Guarantees marginally enhance the credit of a loan applicant by reducing risk, but cannot solve fundamental problems within the banking sector or assist loan applicants with more significant credit issues.
‘ Guarantee funds may be used in conjunction with loan funds, in cases where the banking sector capacities require support in addition to risk mitigation.

c) Energy Efficiency ‘Bank Windows’

Energy efficiency ‘Bank Windows’ are bank programs that specialize in making energy efficiency loans and reaching out to potential customers for those loans. In typical arrangements, bank staff are trained to evaluate and understand energy efficiency project risks, specific energy efficiency loan products may be developed, and outreach programs for particular industry segments ‘ e.g., SMEs ‘ may be implemented. Once in place, these programs reduce transactions costs for both the customer and the bank, make offering such loans less risky for the bank, and in turn, help facilitate financing.

d) Non ‘ Tax Subsidies

No examples of active subsidy programs in India for the financing of energy efficiency projects were found. IREDA do not offer subsidies for audits and other services related to the development of loan proposals for its loan program.
Subsidies should be available for SMEs who lack in financing and will power to go for energy efficiency projects.
4.1.2 Recommendation
Formation of Special purpose Enterprise to overcome the barriers faced by ESCOs should be encouraged.
Importance of SPE:
‘ Responsible for proper dissemination of information among the stakeholders about new schemes and policies in Energy Efficiency Sector.
‘ Responsible for technical and financial training to stakeholders.
‘ Can act as fund manager to acquire funds from financial institutions and private equity players.
‘ Power to accept and reject the project proposal based on credit rating of ESCOs.
‘ Promotion of PPP through angel investors investment.

CHAPTER-5
CONCLUSION

5.1 Case Study:HUDA Panchkula Street Light Project
‘ The project was for replacement of street lighting fixtures with energy efficient fixtures and monitoring its performance and maintenance in Panchkula area of HUDA.
‘ The business model is as follows:
‘ ESCO will bring in the initial investment for replacing the existing street light points.
‘ ESCO will also undertake the maintenance and replacement of such points.
‘ The performance and energy saving assessment of new fixtures will be conducted by the technical committee and a maximum energy saving projection will be arrived at.
‘ ESCO and municipal body will share the power savings.
‘ An ESCROW account will be set with the main banker of the municipal body to manage the monthly power sharing between the two parties for the tenor of the contract.
Project Cost
The project cost has been stated in table 3

Table 3
Means of Finance (With Break up)
There are different ways for financing a project,it can either be equity or debt.For the corresponding case the means of finance has been shown in table 4.

Table 4

Terms & Conditions of Proposed Loan
For the securitization of loan financial institution proposed some terms and conditions on the borrower so that in case of default they can secure the money through security.The terms and conditions has been stated in table 5.

Table 5

5.2 Conclusion
The main findings of this project include:
Conclusion 1. Mechanisms specifically designed to support financing of energy efficiency investments in India are limited.
‘ The most commonly available mechanism is Energy Service Companies (ESCOs),with active ESCOs identified in the country. While these ESCOs reportedly offer performance contracts, in practice significant barriers remain that prevent performance contracting from becoming a widespread and sustainable practice.
‘ The second most common mechanism is loan funds supported through donor funding.
‘ Most mechanisms rely heavily on donor support only. The financial sector continues to require both technical and financial support for the financing of energy efficiency projects.
Conclusion 2. Private sector financing of energy efficiency investments can be viable and profitable.
‘ With the right interventions and an adequate level of financial sector development,private sector financing of energy efficiency projects is possible in India.
‘ There is significant interest in developing and financing projects through performance contracts, but financial sector barriers continue to retrict growth in this area.
Conclusion 3. Availability of private sector financing will not be sufficient to encourage energy efficiency investments in all cases.
‘ Some businesses particularly small and medium size enterprises (SMEs) simply will not have the financial strength necessary to qualify for traditional loan financing,even with subsidized interest rates or guarantee funds.
‘ Some businesses will not choose to make energy efficiency investments, even if financing is available.Consequemtly,other policy options may need to be considered to promote energy efficiency among these businesses.
Conclusion 4. Financial mechanism should not be viewed in isolation from other programs to promote energy efficiency.
‘ Improving the availability of financial mechanisms for energy efficiency projects will not increase investment unless industry wants to invest.programs to ensure adequate demand for energy efficiency financing may therefore be necessary before programs supporting financing mechanisms can be undertaken.
‘ Financial mechanisms aim to address different barriers to financing.Consequently,it is important to understand the specific barriers to financing in a given country first,before planning programs to improve financing availability.
‘ Policy of subsidized energy prices prevent proper valuation of energy costs and efficiency savings and therefore discourage the implementation of energy efficiency projects.

Bibliography
‘ http://beeindia.in/content.php?page=schemes/schemes.php?id=8
‘ http://beeindia.in/content.php?page=miscellaneous/designated_consumers.php
‘ http://www.powermin.nic.in/JSP_SERVLETS/internal.jsp
‘ www.cleantech.com
‘ www.business-angels.de
‘ www.worldenergyoutlook.org
‘ www.cea.nic.in
‘ www.pranat.in
‘ www.3countryee.org
‘ The Bulletin on Energy Efficiency,Vol.6,Issue 4-6

Annexure 1: Project Uptech for Energy efficiency (SBI EE Scheme)
The Bank is implementing Technology Upgradation Programme in 22 number of
industry Clusters and in most of the cases the measures taken to upgrade the
technology has resulted in reduction of consumption and cost of energy. This
has been considered as an additional advantage of the programme. However,
recently the concept of ‘Energy Efficiency’ has been developed and promoted
by World Bank and UNF-UNEP (United Nations Foundation – UN Environment
Programme) as part of efforts to save environment and reduce global warming
due to the effect of Green House gases. The international agencies now desire
that the commercial banks in India should involve themselves in promoting and
financing energy efficiency projects and have launched the following
programmes.
i) Energy Conservation and Commercialisation Project(ECO) by USAID,ICICI & Min. of power.
ii) UNF / UNEP / World Bank TA Project ‘Development of Financial
Intermmediation mechanism for EE investments in developing countries.
The second programme aims at, ensuring greater involvement of commercial Banks in financing of energy efficiency projects in these countries. The first workshop under the programme was held at Goa in January 2002 and our bank participated in that. Based on the deliberations there, the Indian group has finalised their action points as follows
a. Information compilation
b. Institutional delivery plan
i. Towards top management commitment
ii. Towards rolling out/ schemes outline
c. appraisal system
d. Financial structure
Our Bank is working on action point ‘b’ and concept paper has been finalized (Flag A). The proposed Project Uptech is also part of this action plan. For action points ‘a’ and ‘c’, IREDA has finalised main features of term of reference (TOR) and are in the process of finalising the consultant.
Our Bank is participating in the deliberations at various forums, seminars on ‘Efficiency Projects’ and our experience in this field as mentioned above especially cluster approach is appreciated by the World Bank and UNF-UNEP.
The Government of India has also passed Energy Conservation Act 2001 in October 2001, which will enforce energy efficiency measures in various fields. In view of these developments, we propose to launch an Uptech project to promote ‘Energy Efficiency’ measures in small and medium enterprises financed by the Bank.
2.Project Focus
Energy is consumed in every sphere of life and as such’Energy Efficiency’measures are useful everywhere. The industrial activity consumes more energy,which is harnessed from following sources.
i) Electricity
ii) Solid Fuels-Coal, coke, lignite, Wood, biomass like bagasse etc.
iii) Liquid fuels’Petrol, diesel, furnace oil, kerosene
iv)Gaseous fuels’LPG, CNG, biogas, propane,
The Energy Efficiency measures, culminates in reduction of energy consumed by the enterprise per unit of production, which is beneficial to the industry in the following ways.
i)Improves competitiveness by reducing cost of production due to saving
in power consumption.
ii)Reduces pollution and hence environment friendly.
iii)Energy saved is as good as additional energy generated and hence energy conservation is a measure to meet increasing energy demand in an era of severe shortages.
The energy is used in machinery like boiler, generators, air supply systems, etc. to produce utilities. These are common to various industries. Hence, the methods adopted to use energy more efficiently in these machines are applicable to various industries. The following methods are widely accepted for ‘Energy Efficiency’ measures
‘ Co-generation.
‘ Waste Heat Recovery.
‘ Use of ‘Energy Efficient’ Boilers, air compressors, air conditioning system, electric motors.
‘ Proper design and maintenance of electrical supply system.
‘ Use of improved lighting equipment and scientific design of lighting arrangement.
Apart from these the use of improved versions of equipment / machinery and introducing automation of production process also result in energy saving. The use of renewable energy like solar, wind, biomass can also be adopted to reduce cost of energy. The project envisages, inducing units in SME sector, to adopt these methods.
The EE projects will generate additional cash flows, but need loans, which may not be adequately
secured. This will call for a different approach to financing EE projects on the strength of
improved cash flows in future. The new approach demands a combination of financial and
technical skills on the part of entrepreneur and financing agency. This combination of skills may
get developed after a long experience. Hence the Project Uptech will need a person in executive
grade as leader and demonstrate the benefits of multidisciplinary skills to the Bank.

Methodology of Implementation
The project will be implemented in the following Circles where there is good scope for energy saving in respect of SME sector.
i)Ahmedabad ii)Bangalore iii)Chennai iv)Hyderabad v)New Delhi vi)Mumbai (viii) Patna
Duration of project will be 3 years, which may be extended if required.
CCO of each Circle will execute the project with the help of a suitable officer having an engineering qualification and experience in consultancy services. The services of existing officers in consultancy cells/Project Uptech can be used. He will also have linkages with Project Uptech, Development Banking Department, Mumbai, Consultancy services cell at LHO, external consultants, R&D Institutions, Engineering Colleges etc.
The circle will identify10 units enjoying finance under sole banking arrangement which satisfy following criteria and are interested in adopting ‘Energy Efficiency’ measures.
i) Investments in Plant and Machinery are less than Rs.10 crore as at the date of last Balance Sheet.
ii)Credit Rating – SB1 TO SB4.
These 10 units will be assisted in the following manner to implement ‘Energy Efficiency’ projects.
i) The consultant will be selected jointly by the unit and CCO of the Circle from the list of consultants available with petroleum Conservation Research association (PCRA), Indian Renewable Energy Development Agency(IREDA),ICICI, State level energy development agencies. The services of Institutes like National Productivity Council (NPC), Tata Energy Research Institute (TERI) can be used.
ii)The consultants will conduct energy audit and prepare detailed project report (DPR).
iii)The DPR will be appraised by consultancy services cell for techno-economic aspects.
iv)The bank will finance the project as per financial package detailed below.
4.Financial Package
The cost of Energy efficiency project has following components
i. energy audit charges
ii. Consultancy fees for detailed project report (DPR)
iii. Consultancy charges for implementation of project
iv. Cost of plant & machinery including the cost of retrofitting /renovating /modification of existing items, misc. assets for establishing monitoring system.
v. Charges for monitoring the energy efficiency on long term basis.
The Energy Efficiency projects result in additional cash flow due to savings of energy and this is the crucial parameter in success of the project rather than additional assets generated. Hence the norms for adequacy of security available in EE project needs to be liberal. The appraisal of security aspects of financial package of the project should be done after taking this into consideration. The project has three distinct stages of implementation. The finance will be sanctioned in two stages.
Stage1:- Energy Audit &preparation of detailed Project report:
In the first stage the unit is studied to explore the scope of energy saving and improving energy efficiency and a detailed plan is worked out outlining various steps to be undertaken, investments required and likely benefits. The cost involved is the consultant’s charges for these studies namely Energy Audit and detailed Project Report (DPR). We propose to extend grant under scheme for financing energy efficiency projects as detailed below
Purpose:-
To finance cost of energy audit and detailed project report. Financing pattern
a. Grant from TDISCF 50% of the cost subject to a maximum of Rs. 50,000/-

b. Borrower’s contribution Balance amount
Scheme of grant for energy efficiency projects
In case of energy efficiency projects the units will need incentives to encourage to take initial steps of i) energy audit which will lead to in depth study of units operations & processes for saving the energy and ii) detailed project report (DPR) giving action plan. Hence we propose to provide grant of 50%of cost of energy audit and DPR subject to maximum of RS. 50,000/-, to each unit selected under the Project Uptech to meet part of these expenses.
Sanctioning Authority : CCC of the circle
Documentation : Letter of agreement from borrower
The Consultancy Cell will scrutinize the DPR and if the venture is found acceptable, the project will be financed as under:
Stage 2: Acquisition/ Modification/ renovation of plant and machinery and establishment of monitoring system
Purpose
To finance cost of Plant & machinery including cost of renovating /modification of existing items, misc. assets for establishing monitoring system, fees of consultant / contractor for implementation and monitoring of the project by consultants.
Financing Pattern MTL
Quantum 90 % of cost subject to maximum of Rs.100Lacs and minimum of Rs.2lacs
Interest SBIMTLR
Tenure
Security
Sanctioning Authority Documentation
Documentation

5-7 years including maximum moratorium period of 1 year
i)Primary-Assets proposed to beacquired
ii) Collateral – Extension of charge on the assets provided as security for the existing advance including extension of guarantee cover where available
As per scheme for delegation of financial powers
As applicable for SSI/C&I units depending upon the market segment
As applicable for SSI & C&I units depending upon the market segment

If the MTL exceeds Rs. 100 lacs the balance portion of the project cost of stage
2 will be financed under Banks usual scheme on the normal terms and conditions.
5.Other Activities
The Other activities that will be undertaken as part of the Project Uptech for energy efficiency project will be as follows
i)Conduct of seminars / workshops on’Energy Efficiency’ projects for borrowers of the Bank.
ii)Conduct of training programme for Bank staff in appraising and financing of ‘Energy Efficiency’ project.
iii)Support to Research Institutes, consultants, equipment manufacturers,engineering colleges, technical institutes for development of’Energy Efficiency’ or energy saving technology / machinery like the following two examples.
a) System for gasification of rice husk and using the gas produced for electricity and heating, in a rice mill
b) System for using gas produced from effluent treatment plant in a sago-manufacturing unit for electricity and heating

iv)Development of panel of engineers/ auditors/ consultants for’Energy Efficiency’ projects on all India basis, based on our experience with consultants selected by CCOs of LHOs Circle.
Registration fees – It is proposed to charge a nominal registration fee of Rs.10, 000/- per unit as a token of their commitment to project. Anticipated drawings from the Technology Data and Information Services Centre Fund
The aggregate expenses for the project period of 3 years have been placed tentatively and on broad terms and allowing for inter-flexibility, at Rs.90 lakh as under.

1)Payment to research institution, consultants for Rs.30 lakh’Energy Efficiency’ related Studies, sponsoring R&D.
2)Conduct of seminars,training programmes,Rs.30 lakh workshop on ‘Energy Efficiency’ project. Launch expenses – Rs.5 lakh per Circle
3)Scheme of grant for energy efficiency projects Rs.30 lakh
The actual expenses will be incurred on an activity specific and need based approach and will be authorised by Project Uptech, Development Banking Department, Mumbai for item1. The expenses under items 2&3 will be authorised by CMC and CCC of the circle respectively within the ceiling of Rs.5 lacs for each item.
6.Benchmark for Project Success
The project is expected to achieve the following basic benchmark within a period of 3 years.
1) Each Circle should have financed at least 10 ‘Energy Efficiency’ projects. Thus 60 such projects would have been funded.
2) The energy efficiency projects are immensely useful to SME sector to survive in the globalised economy and the benefits will be visible in a short period. The additional advances to the 60 projects will be around 20 crores in a span of 2 years.
Once the benefits of such projects in from of saving energy costs are established, more such projects are expected to come resulting in a spurt in advances to SME sector.

Annexure 2: Loan Scheme for Energy Savings for SMEs (Canara Bank EE Scheme)
1. PURPOSE:
Canara Bank’s loan scheme is for acquiring energy saving equipment or adopting energy saving measures in SMEs.
2. ELIGIBILITY:
The loan is available for Small and Medium Enterprises with investment in plant and
machinery of less than Rs 10 crore and having a turnover upto Rs 100 crore. The cost of
energy should constitute atleast 20% of the production cost. The units should get an
energy audit report done by an approved energy consultant or auditor. The applicant
should be a catergory S-1 or S-2 borrower, and be dealing exclusively with Canara Bank.
3. MARKETING:
A. Branches or offices while processing the credit proposals have to scan the Balance sheet and P & L accounts of borrowing enterprise and if it is found that the cost of energy (Electricity, oil, gas, coal or any other similar form of energy) incurred by the unit is substantial (not less than 20% of cost of production), then such firms could be educated to go for energy saving equipments under the scheme.
B. Units located in states where cost of electrical energy is substantially high, could be targeted for this scheme.
4. QUANTUM OF LOAN/ MARGIN (TERM LOAN):
Quantum of loan: The total quantum of loan should not exceed Rs. 1 crore or 90% of the
project cost whichever is lower. The project cost could include the cost of energy
auditing and consultancy, energy saving equipments, software, cost of effecting
modifications to the existing machinery etc. The cost of the project should be realisable
in 3 to 5 years. Project should have a minimum DSCR of 1.5. The Margin is 10% of the
project cost.
5. Security/ Insurance/ Inspection/ Follow up/ Service Charges/ Delegation of powers for Sanction/ Disbursements etc: As per existing guidelines of Canara Bank . Eligible loans upto Rs.25 lakh granted to SSI units to be covered under CGFSI.

6.RATE OF INTEREST: 1% less than the prevailing rate applicable for loans of similar tenure.
7. REPAYMENT: Depending on savings effected but should not exceed 5-7 years. Suitable repayment schedule may be fixed depending on savings effected in cost.
8. MORATORIUM: A suitable initial moratorium can be considered for repayment, if necessary. However such period should not exceed 6 months.
9. GRANT FROM IREDA:
1. IREDA, at present, gives a grant of Rs.25,000 upto a Project Cost of Rs. 1 crore to each of the project for covering partial cost of energy audit.
2. This grant scheme would cover an initial 100 projects received by them on a first come first served basis.
3. Bank will share with IREDA the following documents:
a) Copy of energy audit report.
b) Copy of bills / receipt issued by energy auditor / consultant.
c) Progress report / monitoring report of the projects funded using IREDA’s subsidy / grant.
d) Energy saved / expected to be saved post commissioning of all such projects.
Applications for grant from IREDA to be routed through SSI Cells of the respective
Circle Offices. SSI Cells may submit such grant request to IREDA with specified
documents along with a copy to SSI Division, HO, Bangalore. The grant from IREDA is
subject to their terms & conditions and the Bank does not accept any liability on this
count.
10. GRANT FROM THE BANK: An additional grant of 25% of cost of energy audit
and consultancy, with a maximum of Rs. 25,000 will be released by the Bank for the first
50 applicants.
11. ENERGY AUDITORS: Energy auditors or Consultants from the approved Panel
(List of approved Energy Auditors Consultants will be supplied to CO by HO) will assess
the scope for energy conservation measures, suggest suitable investments of hardware
(and/or software where applicable) and estimate the quantum of energy possible to be saved. The auditor / consultant would also quantify the average Net savings possible under different capacity utilisation. The report should be acceptable to the unit and to the Bank and the unit should be willing to effect changes / modify processes / install new equipment as suggested. The energy saving equipments Supply Company to whom the borrower would place orders on sanction of loan should also accept the report and confirm the findings. Branches are required to insist on this report from the entrepreneurs / units before processing the loan proposal.
The fee of the energy auditor or consultant may be met by the unit and reimbursement of eligible grant may be claimed from the Bank / IREDA on sanction of loan. The energy auditor or consultant shall undertake to successfully implement the scheme with appropriate coordination with vendors in the field. The energy auditor or consultant should also undertake to provide feed back on an yearly basis on the energy saved consequent to implementation of the project during the period of the loan.
12. CLASSIFICATION/ REPORTING:
A. Loans to be classified under SSI-Priority or Non-Priority depending on category of the borrower.
B. Irregularities or overdues etc are to be reported in respective PRR statement.
13. PROGRESS REPORT:
Progress in the implementation of the scheme to be reported to respective SSI Cells of
Circle offices at calendar quarters as per the format furnished by the Bank with in 15 days
from the closure of the quarter. Circle to consolidate the same and submit to SSI Division, PC Wing, HO immediately.
INCENTIVE FOR PROMOTING THE ENERGY SAVINGS SCHEME:
A grant has been introduced with a view to encourage enterprises to undertake energy efficiency projects and it is reflection of the Bank’s commitment to the cause.
‘ A grant of 25% of the cost of energy audit and consultancy, with a maximum of Rs.25,000 will be released to the first 50 units by the Bank. – The applicant unit should approach the Bank for release of Grant at the time of applying for credit facilities under the scheme. No overdues should be there in other accounts and dealings should be satisfactory.
‘ In case of group concerns, each unit may be taken as a separate entity.
‘ Branches of the units should not be treated as a separate entity.
‘ Circle/branch to ensure that no grant for the said purpose has been released to the
party earlier.
‘ The grant would be available only to the units which avail the credit facility from the
Bank.
‘ Application for grant may be submitted by the Branches to SSI Cell of the respective
Circle in the format provided by the Bank.
‘ The SSI Cells of Circle Office may submit the format duly recommending to SSI
Division, HO for release of grant.
‘ SSI Division, HO, Bangalore on receipt of duly recommended proposals for release
of grant from the Circles, place the same to competent authority after scrutinising the proposal for sanction / permission to release the grant.
‘ Circles on receipt of sanction / permission from SSI division, HO, Bangalore for release of grant will convey to respective branches with an advise to release the grant to respective borrowers / units by debiting to ‘ General Charges – Misc A/c ‘
‘ The power to release the grant shall remain with HO.

Annexure 3: Scheme for financing EE projects (BOI EE Scheme)
1. Introduction
When specific energy consumption (units of energy consumed per unit of output) of a device or equipment is lowered by changing the technology deployed, it is termed as improving the energy efficiency. In the case of energy conservation, the main technology of the device or equipment remains unchanged but wastage of energy is minimized by plugging unproductive use of energy. This will also improve the overall energy efficiency of the system.

Three different types of energy efficient measures can be undertaken by an industrial undertaking. They are (in the increasing order of investment involved) :

a.Active or efficient in-house management of energy consumption through
improved maintenance and house keeping.
b. Replacement/Retrofit of selective equipment
c. Process Revamping
The impact of Energy Efficiency/conservation measures would be most visible in power-guzzling industries like Ferro Alloys, Steel Re-rolling mills and also in the industries which deploy traditional Prime-Moving Systems for their operations such as Sugar Mills, Yarn Mills, Oil Mills etc.

2. Purpose:
A Term Loan for financing the Small & Medium Enterprises for acquiring/adopting energy saving equipment and energy conservation measures.

3. Eligibility:

‘ All SME units where the saving on energy costs would be at least 150% of cost of servicing the proposed term loan (Interest, Installment, and other charges).
‘ SME units should possess energy audit report (to be obtained at their cost initially) issued by energy consultant/auditor. The consultant/auditor may either be accredited by Bureau of Energy Efficiency, PCRA etc. or must have carried out similar assignment for other reputed companies.
‘ New units can also be financed by way of a separate Term Loan for procuring equipment necessary for Energy Saving/Energy conservation, within the overall Term Loan for financing Plant & Machinery.
‘ In case of existing units, they should be exclusively banking with us satisfactorily for at least one year.
‘ In the case of units not banking with us, they should not have any loan liability with
other banks. We can additionally consider facilities by way of Corporate
Loans/Demand Loans to such Debt Free companies thereby having an absolute charge over their fixed assets.
‘ In case of units banking with other banks and desirous of availing this facility from
us, units in ‘standard’ category whose dealings are satisfactory can be considered on
merits and Bank’s usual terms and conditions.

4. Quantum of Loan
Upto 80 % of Project Cost, subject to a Maximum of Rs.1 crore. Project cost would include –
Consultancy/Management fees, cost of Energy Saving equipment, cost for effecting
modifications to the existing Plant & Machinery, re-engineering the manufacturing
process, and Interest during the implementation period. We shall also consider the cost of
energy audit as a part of the project cost once the unit gets the same done initially at their
expense and finds that there is scope for substantial reduction in the energy costs. Overall
Debt Equity of the unit (including this loan) should not exceed 4:1 for SSI and 3:1 for
Medium Sector units.

5. Repayment Period
Generally the proposed loan shall be repaid well within the currency of the existing Term
Loan, if any, sanctioned to the unit for acquiring the Plant & Machinery for our
constituents. In any case the repayment period should be within 7 years including
moratorium period of not more than 6 months. In deserving cases, where the investment for installing energy saving equipment is high, the repayment period can be extended upto 10 years. Average DSCR should be 1.3.
6. Rate of Interest & Processing Charges
1% less than the rate being charged for Term Loan, if any, sanctioned to the unit for acquiring the Plant & Machinery Minimum 9% pa.
Looking into the importance of the objectives of this product, Processing Charges are waived in respect of this product for our existing borrowers.
7. Security
Hypothecation of equipment purchased.
Extension of charge on existing assets, wherever available.
Energy Services Agreement (with ESCO) with Performance Guarantee by the ESCO, wherever the services of an ESCO are engaged. The ESCO should not have any charge on the asset/profit/saving having priority over Bank
Energy Audit Report indicating the saving of energy and calibrating the shares of Bank and ESCO, wherever the services of an ESCO are engaged.
Eligible Loans to SSI units to be covered under CGFTSI Scheme

8. Others
Insurance, Inspection, Disbursement of loan, Delegation of Authority to sanction the facility would be as per existing guidelines

9. Operation of the Scheme
Energy auditor/consultants will assess the scope for energy conservation measures,
suggest suitable investment and estimate the possible quantum of energy that can be
saved.
The auditor/consultant would also quantify the average net saving possible under different capacity utilization levels of the unit.
The report should be acceptable to the unit and to the Bank. The unit should be willing to effect the changes/modify processes/install new equipment as suggested.
The energy auditor/consultant should undertake to provide feed back on yearly basis on
the energy saved consequent to implementation of the project during the currency of the
loan.
Progress in the performance of this product is to be reported to Head Office SME-SBU on a Quarterly Basis.

Annexure 4: Financing Energy Efficiency Projects (BOB EE Scheme)
Eligibility norms:
‘ Financial assistance under the scheme to be extended to units in the SME sector
already financed by us and also to other units whose accounts are being taken
over by our bank as per extant policy guidelines.
‘ Actual cost of energy of the unit should be more than 20% of the total cost of
production.
‘ Energy Efficiency Programme is envisaged to result in reduction in energy cost,
at least by 10%, over a period of 3 years.
‘ TEV report of the EE project by an Energy Auditor/Consultant/ESCOs approved
by MNES/IREDA, recommends the project.
‘ Credit rating of the unit should be not less than our ‘BBB (new model)’ rating.

Purpose:
‘ For acquiring equipments/services and adopting measures for enhancement of
energy efficiency/conservation of energy.
Limit:
‘ Up to 75% of the total project cost, subject to maximum of Rs.1 crore. The
minimum limit shall be Rs.5 lacs.
‘ Project cost may include the following:
– Cost of acquisition/modification/renovation of equipment/software.
– Cost of alterations to existing machinery.
– Cost of structural/layout changes.
– Cost of energy audit/consultancy.
– Preparation of Detailed Project Report (DPR)

Rate of interest:
‘ BPLR (Floating rate) (10.50% pa at present, payable with monthly rests)

Repayment:
‘ Maximum 5 years, including moratorium, if any.

Security:
a) For sole Banking Accounts:
Extension of first charge on all fixed assets.
b) For Consortium/Multiple Banking Accounts:
First charge on equipments acquired out of loan and collateral, if any, with the total security coverage being not less than 1.25.
Processing fee:
‘ One time processing fee of 0.50% of loan amount with a minimum of Rs.2500
and maximum of Rs.10000.
Grant From IREDA:
‘ IREDA at present gives a grant of Rs.25000 for projects costing Rs.1 crore or
below to meet partial cost of Energy Audit. This grant is available for the first 100
projects (SME sectors only) approved by them.

Financial Ratios:
‘ Average DSCR : 1.50 (Minimum)
‘ Debt Equity ratio: 3:1 (Maximum)

Documents:
‘ Usual documents for Term Loans based on the security for the loan, may be
taken.
All other terms and conditions will be applicable as per usual terms for Term Loans for
SMEs.

Annexure 5: Calculation of ESCerts
For Thermal Power Plant Sector:
ESCerts to be issued after Year1=[{heat rate in the baseline year-(heat rate in the baseline year-heat rate notified for the target year)/3}-heat rate achieved in year1] x 80% x production in million kwh in the baseline year/10
Adjusted heat rate after year 1= heat rate notified for target year – (ESCerts issued in year 1/ production in million unit in the baseline year) x 10
ESCerts to be issued after year 2= [{heat rate in the baseline year-(heat rate in the baseline year-heat rate adjusted after year 1) x 2 / 3} – heat rate achieved in year 2] x 80% x production in million units in baseline year / 10
Adjusted heat rate after year 2= heat rate adjusted after year 1 – (ESCerts issued in year 2 / production in million units in the baseline year) x 10
ESCerts to be issued in target year= [{heat rate in baseline year – (heat rate in baseline year – heat
rate adjusted in year 2)} – heat rate achieved in the target year] x production in million unit in baseline year / 10
Total number of ESCerts issued in cycle = ESCerts(1st year +2nd year+3rd year)

For other Sectors:
ESCerts to be issued after Year1 = [{SEC in baseline year – (SEC in baseline year – SEC for target year) / 3} – SEC achieved after year 1] x 80% x production in the baseline year
Adjusted SEC after year 1 = SEC for target year – (ESCerts issued in year 1 / production in the baseline year)
ESCerts to be issued after year 2 = [{SEC in baseline year – (SEC in baseline year ‘ SEC adjusted after year 1) x 2 / 3} – SEC achieved in year 2] x 80% x production in the baseline year
Adjusted SEC after year 2 = SEC adjusted after year 1 – (ESCerts issued in year 2 / production in the baseline year)
ESCerts to be issued in target year = [{SEC in the baseline year – (SEC in the baseline year -SEC adjusted after year 2)} – SEC achieved in the target year] x production in the baseline year
Total number of ESCerts issued in cycle = ESCerts(1st year +2nd year+3rd year)
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