Finance not the key challenge for catalyzing MSME energy efficiency

 The MSME sector is reported to have a total of US$51 billion in total credit lines and available funding, however, only 36% of this credit has been utilized, according to presentations on the MSME sector during a side-bar conversation on promoting energy efficiency in MSMEs at the Delhi Sustainable Development Summit on Friday.

This suggested that addressing non-financial barriers was more important for government and development institutions to catalyze the uptake of the energy efficiency equipment and programmes. Some non-financial barriers discussed include: high level of perceived risk to business operations, low capacity for change, low level of awareness, high transaction costs, and a lack of cluster-level data or benchmarks to support decision making.

Dr. Ajay Mathur, Director Bureau of Energy Efficiency (BEE), reaffirmed that a 50% partial investment risk guarantee mechanism was under consideration at BEE to address some of these challenges for MSME entrepreneurs.  

Also in attendance to the side-bar conversation were panelists Mrs. Veena Joshi (SDC), Mr. Hideaki Domichi (Vice Minister, Senior Vice President JICA), Girish Sethi, (Director MSME Industry Sector at TERI), Mr. H Hamanaka (Chairman IGES), Mr. Pradeep Monga  and Mr. Jean-Yves Grosclaude (AFD). Additional delegates included NTPC, PTC, GIZ, Shell, and UNIDO.

Within this space, SIDBI is a point of call for financing schemes in the MSME sector to promote energy efficiency and clean production. In 2008 to 2010, Phase I of the JICA-SIDBI Financing Energy Efficiency scheme installed 2700 energy efficient projects in MSME units across different sectors. Phase II commenced in 2011, and supports the adoption of renewable energy (where 50% of energy generated is consumed by the MSMEs themselves) and the adoption of an approved list of energy saving equipment.

Others schemes include a KfW-Energy Efficiency Scheme support to investment in energy measures that can significantly reduce greenhouse gas emissions, which demand emissions reduction of at least 3 tonne of  CO2 per year for each 1 Lakh rupees of loan. KfW separately funds a innovation programme for clean technologies. The World Bank GEF India-MSME Energy Efficiency program pitched US$ 9.05 million over four years; while a  two-year regional energy efficiency programme South Asia by GIZ recently concluded in 2013 after working on capacity development and knowledge exchange. Separate finance for technology upgradation and modernization are also available for Indian MSMEs, some of which are specific to sectors such as textiles, food processing and leather.

In tracking this space, Sustainability Outlook notes that MSMEs seeking credit for sustainability and energy related initiatives typically look for government / development institutional funding and banks for debt funding. Sustainability Outlook has reviewed reports which suggest future financial instruments for sustainability interventions will likely include: specific green loans, equity assistance from boutique private equity players investing in innovative technology plays, revolving funds for technology, green bonds, and increased participation in capital markets through the BSE-SME index. These instruments promote a broader view of sustainability interventions than just facilitating project finance for efficiency programs.

Practitioners of MSME energy efficiency projects have noted that it remains much easier to implement equipment replacements under an efficiency program than to implement complex, process based changes that take a wider view of the interlinked consumption of water, energy and resources. ‘Equipment replacement’ vs. ‘process based transformation’ efficiency projects will require different types of financing, policy, performance measurement, and capacity building support.

Off the record, practitioners commented that, while new energy efficiency technologies can replace older counterparts, it is difficult to remove older (inefficient) technologies from the market. Inefficient technologies, spares and parts are re-deployed elsewhere as MSME culture is lean and seldom inclined to replace assets prematurely (or otherwise dispose of assets unnecessarily). This applies particularly when upgrading motors and boilers, where most of the savings are made, and any replaced equipment will be re-purposed even if it has a marginal potential for re-use.  

One opportunity discussed at the Summit was the imperative for enabling the local supply chain of fabricators and suppliers to support resource management transformation in MSMEs and clusters. BEE predicts that local supply chains will increasingly play an important role in raising awareness, disseminating success stories of technology upgrades, , providing a skilled workforce to maintain new technologies, and setting up a take-back system to bring old technologies out of market and into clean recycling chains.

Sustainability Outlook believes that setting targets and providing tangible evidence of efficiency gains, at a low overhead cost, is the key challenge when engaging with MSMEs. For this, a consistent framework and tools for developing baselines would ease the perceived reporting cost burden.  Similarly, policies (such as ‘Perform Achieve Trade’) and financial instruments (such as green loans) need to take note of a changing risk and return profile for multi-year efficiency programs as opportunities for savings get increasingly complex to realize, after all of the ‘low hanging fruits’ have been accessed and ‘quick wins’ have been made. 

Image Credits: epSosDe, Neng