A typical energy service company identifies and evaluates energy-saving opportunities in industrial units, commercial complexes, hospitals, municipalities and utilities, among others, by using energy audit tools and recommends a package of improvements that can pay for itself through the resultant savings.

The ESCo will guarantee that savings would meet or exceed annual payments to cover all project costs, usually over a period of seven to 10 years. If savings do not materialise, the ESCo pays the difference and not the client or the company implementing the project. ESCo services are comprehensive and savings are guaranteed through implementation, monitoring, measurement and verification.

India has a small but growing community of ESCo entrepreneurs who have emerged over the past few years. As energy costs are steeply rising, managing energy costs has become a critical factor in profitability.

Some of the country's first ESCo demonstration projects implemented under performance contracting and guaranteed savings financial arrangements by ESCos and energy efficiency consultants are:

• A project to build energy-efficient lighting retrofit for New Delhi Municipal Corporation's Palika Kendra, implemented by DSCL ESCo Ltd, has resulted in 48 per cent load reduction from 264 to 138 kilo Watts.
• A demand-side management programme for Ahmedabad Electric Co, managed by Asian Electronics Ltd [Get Quote], resulted in projected savings of 5.04 million kW/year (Rs 30.24 million a year). The total project cost was Rs 75.25 million.
• A 135-room five-star hotel in Hyderabad saved Rs 33 lakh (Rs 3.3 million) in a year on electricity and oil costs -- 25 per cent of the hotel's annual energy bill -- thanks to EE measures implemented by Shri Shakti Alternative Energy Ltd.
• A Rs 307 lakh (Rs 30.7 milion)-project designed by an ESCo for Airports Authority of India for IGI Airport is expected to result in annual savings of Rs 386 lakh (Rs 38.6 million) -- a return of investment of Rs 125 per cent.

The small number of ESCos that have emerged in India have come through after surmounting several barriers. Some of India's early entrants in the ESCo business have implemented projects in countries like China, Pakistan, Indonesia, Kenya, and their project planning and financial structuring skills are highly sought after in the global market.

ESCos typically do not have large assets to bank upon. Therefore, while they have the technical capability to identify and custom-design projects that deliver energy saving, they are often unable to convince their clients, investors and bankers about the certainty of delivering the savings.

To strengthen this business model, United Nations Environment Programme and the World Bank, with funding from UN Foundation, have been implementing a technical assistance project since 2002 for developing financial intermediation mechanisms for energy efficiency investments in India, China and Brazil, known as the Three-Country Energy Efficiency project.

Project partner UNEP-URC (UNEP Risoe Centre on Energy, Climate and Sustainable Development, Risoe National Laboratory), Denmark, recently organised an International Cross Exchange in Beijing in April, to bring together recent ESCo experiences and their practitioners from Brazil, India and China.

In each of the partner countries, a core group has been formed to steer this programme, with representation from major stakeholders including banks, financial institutions, industry associations and ESCos.

The Indian Renewable Energy Development Agency, a Government of India financial undertaking, hosts the India secretariat of the project.

The 3CEE project supports ESCo market development through sharing of experiences relating to projects, financial models and contracting systems. In India the project has organised discussion forums for ESCos, banks and FIs.

The project has initiated studies to develop appraisal methodology; financial structuring for EE projects and has assisted banks in evolving new EE financing schemes and security mechanisms. Demonstration projects have been taken up in specific industry clusters.

These activities have stimulated the market for energy efficiency projects in India, and banks now consider energy efficiency and ESCos a potentially attractive line of investment.

A significant achievement for the 3CEE project is that three of the participating commercial banks have designed and launched schemes specifically targeted at EE projects. State Bank of India [Get Quote], Canara Bank [Get Quote] and Union Bank of India [Get Quote] have launched and are implementing different EE loan schemes targeted at small and medium enterprises.

However, such efforts by banks have to be coupled with initiatives to strengthen the ESCo business so that available funds can be tapped and projects multiplied.

With the enactment of Energy Conservation Act in 2001, and the Central government's commitment to reduce energy consumption in select government buildings by 30 per cent over the next five years, ESCo business has got a boost. Overcoming conventional barriers to such business and effecting a market transformation holds the key to its further success.

With the enforcement of the Kyoto Protocol, potentially attractive business opportunities have emerged for ESCos, who can design and execute a number of clean development mechanism projects.

To achieve international credibility in the CDM market, the Indian ESCos and EE consultants have to gain expertise in financial engineering and excel in risk-taking and timely project delivery. For those who persevere in this emerging competitive market the returns can be highly attractive.

The fourth Cross Exchange of ESCos was held in Beijing last month, with experts from the three countries participating.  Based on the lessons learnt from the Cross Exchange, the Indian ESCos drafted an action plan that highlighted the following:

• To bring to the attention of Indian regulatory agencies utility-driven demand side management programmes -- such as those in Brazil -- that could benefit Indian utilities by reducing the peak demand for electricity. Utility-ESCo partnership was a significant force in driving Brazil's EE business.
• To examine the scope for creating an agency in India to guarantee investments in ESCo projects, similar to China National Investment & Guarantee Co Ltd. In China, the EMCo (Energy Management Co) commercial loan guarantee programme was set up with GEF funding of $22 million. I&G has guaranteed about 10,000 projects worth 230 billion Yuan (around $ 30 billion) until March 2005.
• The ESCo associations in China and Brazil are playing a major role in promoting EE business in collaboration with government agencies, utilities, and banks. Indian ESCos are keenly interested in setting up an alliance or coalition in the near term and to work towards an association of ESCos in the longer term to promote vibrant growth of the ESCo business.
• Some ESCos are willing to pool resources for a corpus fund to act as a guarantee fund by contributing up to 10 per cent of the above corpus. The ESCos would discuss and debate these issue within the ESCo community, and with banks, FIs and other EE stakeholders to evolve a consensus.

Globally, ESCos have enjoyed significant government support. They could lobby with the Indian government for fiscal incentives on par with other key sectors. To create a demand-pull for EE services, some fiscal supports needed are: income-tax rebates on payments made to ESCos or EE projects; service-tax exemption on energy audit fees and on ESCo's share of savings; and deprecations benefits and a five-year tax holiday for

ESCo projects on par with those enjoyed by new power projects.

Energy saved through ESCo projects offsets the need for setting up new power plants. Growth in ESCo business activity would yield additional revenue to the government and create employment. Further, energy efficiency is the most effective tool for mitigating climate change in the foreseeable future.