Clean Energy Finance and Investment Roadmap of India

Annex C. Concept note: Energy Savings Insurance

Conceptual framework of the ESI model

The Energy Savings Insurance (ESI) model was first developed by the Inter-American Development Bank (IDB) in 2014, with the support of Basel Agency for Sustainable Energy (BASE), to drive investments in energy efficiency projects. It has since been implemented in eight Latin American countries targeting small and medium enterprises (SMEs) among several sectors, notably healthcare, tourism, hospitality, and agriculture.

The ESI model is a de-risking package consisting of both financial and non-financial elements designed to build investor confidence in energy efficiency projects. It has four building blocks that support the identification and structuring of technically robust and bankable projects: standard contract, technical validation, energy savings insurance, and concessional financing.

• The standard contract establishes the responsibilities of the supplier in terms of supply and installation of equipment, corresponding guarantees, and the promised energy savings relative to a benchmark (established by the supplier using standardised methodologies). It also commits the customer to timely payments, access to facilities, and adequate maintenance of the equipment.

• The technical validation is carried out by an independent agency who evaluates and confirms the project’s technical potential to achieve the promised savings and verifies on site that the project has been built according to specifications approved in the initial evaluation. This actor also determines which party is entitled to compensation in case of disagreements on the achieved performance and actual savings generated by the project. The validator's roles are defined in the standard contract and its decisions are binding for both parties.

• The energy savings insurance is a performance warranty provided by the supplier to the customer for the committed savings in a period of time previously agreed between the two parties. If at any point in time, the project does not achieve the pledged savings, the insurance agency will financially compensate the client. The energy savings insurance is activated upon technical validation of the project, and is further backed by a reinsurance agency.

• Insured projects are financed with concessional credit lines usually set up by donor agencies and multilateral development banks. Lenders provide preferential terms under these credit lines, including preferential interest rates, grace periods and extended tenures.

Figure A C.1. Conceptual design of ESI

Source: (Micale, Stadelmann and Boni, 2015[1])

Notes: 1) In addition to the actors directly participating in the ESI model, regulatory agencies can play a role to oversee the various mechanisms involved; 2) In India, national development banks are also eligible to lend directly to clients.

Key barriers and potential solutions

Table A C.1. Four key barriers to the implementation of the ESI model in the Indian context

Key barrier	Experience from Latin America	Challenge for India	Potential solution(s) for India
High transaction costs for small projects	Transaction costs are relatively low (1.5%-2.5% of the project value on average).	The cost of insurance and the cost of validation services, which are to be paid by the client, can account for very high shares of project costs of MSMEs (typically around USD 5 000 – 300 000 in value)	Provide third-party validation services free of cost Offset the cost of insurance with donor funds
Insurance cost depends on credibility of technology provider	Insurance costs are ~1% of project value on average. Not a single claim has been made so far under ESI programs in any Latin American country.	The ability of an insurance company to offer a reasonably-priced energy savings insurance depends on its confidence in the technology provider’s product quality and its ability to pay any eventual warranty claims. Start-up or MSME technology provide without strong credit profiles or proven track records are thus unable to participate in the ESI model.	Engage a reputed technical validation entity (e.g., BEE’s certified Energy Managers / Accredited Energy Auditors / empanelled ESCOs) to freely certify technologies provided by MSME suppliers Engage credible energy service companies (ESCOs) with good credit profiles and track records (e.g. Energy Efficiency Services Limited) to act as intermediaries between MSME suppliers and clients.
Surety bonds not available in Indian market	The energy savings insurance product is structured as a surety bond i.e. tripartite legal contracts promising predefined compensation from a bank/insurance agency for clients in case suppliers break the contract.	Although surety bonds are well-established and widely used in other markets (particularly in public construction projects), they are not yet offered in India.	Pilot surety bond issuances, in line with 2022 regulation from the Insurance Regulatory and Development Authority of India (IRDAI), and build capacity of local financial institutions to offer them Explore potential alternative products that the market is already familiar with, such as conventional bank guarantees (unsuitable for start-up or MSME providers with poor credit profiles).
Difficulty validating energy efficiency performance	The standard performance contracts developed under Latin American ESI programs formulate performance guarantees in the form of energy savings parameters (e.g. guaranteed energy savings of 15-20% relative to an established or pre-defined baseline).	It can be challenging for the third-party technical validation agency to validate that the savings target has been achieved, particularly when there is a change in operating conditions (e.g. duration of equipment operation, electricity prices, etc.).	Transfer methodologies and learnings from international experience to validate energy efficiency performance Consider guaranteeing energy efficiency ratings rather than savings parameters

Implementation design and potential role of actors in India

The ESI model involves coordination between multiple actors and agencies. Potential roles for different actors in India are proposed as follows.

Figure A C.2. Potential actors to engage to set up a pilot ESI programme in India

• Clients: The ESI program can be availed by both MSMEs and large industries. However, since MSME clients face higher transaction costs due to their typically smaller project sizes, some elements of the program may need to be subsidised for them (see Table AC1). Donor funding will play a critical role in subsidising these costs and ensuring that MSME clients can access the ESI program.

• Insurance agencies: Both local and international insurance agencies can be involved in the ESI program. Local insurance agencies can be engaged to provide ESI coverage to clients, given their familiarity with the market and possibly pre-existing client relationships. Re-insurance to the local insurance agencies can be provided by international agencies, such as Munich RE or Swiss RE, which have experience in this area.

• Technical agencies: Credible and well-established technology providers and technical validation agencies are necessary to build trust and keep insurance costs low. BEE’s certified or accredited energy auditors, managers, ESCOs (including EESL) or international certification agencies are good examples of potential technical validation agencies that can boost the credibility of energy-efficient technology providers, particularly in the case of start-ups or MSME technology providers.

• Financial institutions: Concessional credit lines under an ESI program run from donor agency to multilateral development banks (MDBs) to national development banks (NDBs) and eventually reach local financial institutions (LFIs), which in turn are best placed to lend to local clients. Appropriate NDBs and LFIs must be identified and empaneled in the ESI program in India, depending on the priority sectors to be targeted in the pilot phase (e.g. NABARD is well-placed to lend to clients in the agriculture sector, SIDBI for MSME sector, etc.).

• Donor agencies: Domestic and international donor agencies can support the implementation of the ESI model in India by providing funds for concessional credit lines, technical validation services, grants to offset insurance costs for targeted clients (e.g. MSMEs), or developing a standard contract contextualised for India. Interest of partners who have supported ESI schemes in other countries, such as the Climate Investment Facility’s Clean Technology Fund or the Danish Energy Agency, will need to be explored.

• Regulatory agencies: In addition to actors directly participating in the ESI model, regulatory agencies can play a role to oversee the various mechanisms involved. For example, IRDAI can regulate insurance companies in the provision and structuration of the ESI product (e.g. use of surety bonds vs bank guarantees) while BEE can supervise the technical agencies and monitor if energy efficiency objectives are being met.

• International partners: Learnings from international experience piloting the ESI model in Latin American and European countries can be transferred to ensure successful implementation in India. Organisations such as IDB and BASE can share knowledge and best practices, as well as resources developed for other countries (e.g. formats for standard contracts, guidance for technical validation, etc.) which can be built upon for the Indian context.

The following agencies can have an overarching role in the potential ESI program in India:

• Bureau of Energy Efficiency (BEE): As the statutory body for energy efficiency implementation in India, BEE could be involved in several technical and regulatory aspects of the ESI model. This would include coordinating regulatory approvals from IRDAI and seeking buy-in from local financial institutions regarding the use of specific insurance products (surety bonds, bank guarantees, etc.). BEE could also collaborate with international partners (e.g. IDB, BASE) to build on existing formats for standard performance contracts used in the ESI model and contextualise them for India. Further, BEE could utilise its latest energy-efficient technologies list (BEE, 2022[2]) to guide the third-party technical validation agencies within the ESI model.

• Energy Efficiency Services Limited (EESL): Given the barriers faced by MSMEs in accessing the ESI model, both as clients and as technology providers, EESL could leverage its position as India’s super-ESCO to bring down transaction costs. For instance, EESL could play the role of an intermediary between MSME clients and technology providers, such that its credibility can lower the costs of technical validation and insurance for both parties. Further, EESL can help scale-up this approach by training local ESCOs and building their capacity to perform similar functions. EESL has expressed interest in providing support to test or pilot the ESI model in India, potentially under the “Promoting market transformation for energy efficiency in MSMEs” scheme.

References

[2] BEE (2022), BEE’s List of Energy Efficient Technologies for Financing, https://beeindia.gov.in/sites/default/files/BEE%27s%20List%20of%20Energy%20Efficient%20Technologies%20for%20Financing%283%29.pdf (accessed on 30 September 2022).

[1] Micale, V., M. Stadelmann and L. Boni (2015), Lab Instrument Analysis: Energy Savings Insurance, Climate Policy Initiative, https://www.climatepolicyinitiative.org/publication/lab-instrument-analysis-energy-savings-insurance/ (accessed on 11 September 2022).