IREDA Energy Efficiency Loan Fund • The Indian Renewable Energy Development Agency Ltd (IREDA), an ISO 9001:2000 certified entity, was incorporated as a Public Limited Government Company in 1987 under the administrative control of the Ministry of New and Renewable Energy (MNRE), Government of India. • IREDA is one of the largest DFIs specializing in renewable energy and energy efficiency in the world. • Since its inception, IREDA has played a critical role in opening the markets and in scaling up implementation of renewable energy and energy efficiency projects in India.
Objectives • IREDA had the following objectives: • 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. • To achieve this mission, IREDA is operating a revolving fund for development and deployment of new and renewable sources of energy and for energy efficiency investments providing financial support to specific projects.
P roject Description and Initial Results • Building upon the initial success of IREDA in lending for renewable energy, the World Bank extended a line of credit and GEF grant to IREDA for developing and financing energy efficiency and conservation projects (in addition to the continuation of financial support for small hydro projects) in 2001 through the Second Renewable Energy Project. • IBRD and IDA funds were on lent to private entities at commercial rates.
Grants Programme & Institution • GEF Established in 1992, the year of the Rio Earth Summit, the GEF(Global Environment Fascility ) Small Grants Programme embodies the very essence of sustainable development by "thinking globally acting locally". By providing financial and technical support to projects that conserve and restore the environment while enhancing people's well-being and livelihoods. • The International Development Association ( IDA ) is an international financial institution which offers concessional loans and grants to the world's poorest developing countries. The IDA is a member of the World Bank Group and is headquartered in Washington, D.C,United States. • IBRD (International bank for reconstruction and development) aims to reduce poverty in middle-income and creditworthy poorer countries by promoting sustainable development through loans, guarantees, risk management products, and (non-lending) analytical and advisory services.
IREDA Institutional Arrangements
IREDA and Energy Efficiency • The GEF grant component aimed to establish delivery mechanisms for energy efficiency services and equipment, to support implementation of DSM schemes, and to support the development of ESCOs in India through technical assistance and capacity-building efforts. • To operate efficiently as a centralized organization in a large country such as India, IREDA has built up in-house technical and financial expertise, but also relies on some outsourcing.
Continued…… • To assist in pipeline development, IREDA has built a network of business development centres and strategic allies throughout India, consisting of about 50 technical consultancy organizations, state nodal renewable energy agencies, local and national productivity councils, private consultancy organizations, NGOs, and technical institutions and agencies registered under the Societies Act. • IREDA provides them with training and some financial resources. In addition, they receive incentive payments upon loan disbursement and commissioning. • Although certain aspects of the energy efficiency business were new to IREDA’s project and technical services department, many of the issues involved in appraising energy efficiency and renewable energy projects are similar. Technical assessment of projects is done in house, although specialized consultancies are used on a case-by-case basis for certain larger projects.
Continued…. • IREDA has already established credibility in the energy efficiency financing market, building upon its successful track record in lending for renewable energy projects. • To date it has successfully financed energy efficiency and conservation projects in the following industries: sugar, paper, textile, steel/sponge iron, heavy chemicals, cement, power generation, and in electric utilities, including ESCO projects through performance contracting/revenue sharing. • IREDA has sanctioned (that is, obtained approval by its Board) 19 projects to date, totalling US$60 million, of which 11 have been fully commissioned (the loan agreement has been signed, the loan has fully disbursed, and the project has been completed).
Financing by IREDA • Average project size is large (US$4 million) as the majority of the current loan portfolio consists of large cogeneration and waste heat recovery projects. • However, IREDA has also financed several smaller loans for equipment replacement and (US$200,000–800,000), including motors, control systems, capacitors, lighting, pumping systems, and boilers. • IREDA offers a variety of terms and tenors, covering up to 70 percent of ESCO project costs and up to 80 percent of energy efficiency equipment costs, including soft-cost items such as energy auditing and detailed project report preparation. • Loan tenors vary from 6–10 years, and interest rates vary between 8–11.5 percent, which is roughly comparable to loans currently available in the commercial market. A rebate of 1–1.5 percent is provided if borrowers can furnish the security of a bank guarantee. • Other loan security measures commonly adopted include mortgage of immovable properties, hypothecation of movable assets, guarantees by promoters, use of trust, and retention or special accounts.
Pros and Cons of Public Sector DFI Approach • While IREDA possesses several advantages in providing finance for energy efficiency investments, its structure and operating procedures have produced several inherent disadvantages that have caused IREDA to lose market share to domestic commercial financial institutions, as interest rates have fallen, overall liquidity in the Indian financial market has increased, and experience has been gained in the successful implementation of energy efficiency projects (reducing their perceived risk). • As a result of these changes, IREDA has seen its overall portfolio shrink. IREDA’s loan procedures have been criticized as being too bureaucratic and cumbersome by potential loan recipients, especially SMEs that are seeking smaller loans and have less experience in dealing with financial institutions. • IREDA’s internal procedures in issuing new loan products are less flexible than those utilized by the domestic financial market participants. • While IREDA has been able to increase the variety and competitiveness of its loan products (with differing terms and tenors) and has attempted to streamline its procedures, it cannot match the offerings and flexibility of the broader Indian financial market.
Pros and Cons-Public Sector DFI Approach
Continued…. • IREDA had good success in developing a large pipeline of potential energy efficiency projects through its network of business development associates and through the implementation of certain GEF-sponsored TA activities. • But the success rate of translating these initially identified projects into actual signed loans was low. Initially, certain energy efficiency projects that were sanctioned and appraised, but had not yet signed loan agreements with IREDA, (were “shopped” by project sponsors to other commercial banks) using IREDA’s appraisal report to validate the actual investment risk—to obtain financing on more favourable terms. • Although this behaviour negatively impacted direct financing levels under the World Bank line of credit, it did demonstrate progress in meeting the overall World Bank project development objectives of stimulating energy efficiency markets. • IREDA has since changed its procedures, and now only provides the complete appraisal reports to clients upon loan signing.
Looking Ahead- The Challenges • IREDA’s main challenge is to properly position itself in the increasingly competitive Indian financial market for energy efficiency products and services. • IREDA will continue to work to increase the attractive-ness of its loan products by reducing its cost of funds and to improve and streamline internal procedures. • The World Bank is supporting IREDA in its efforts through several on-going consultancies. • Energy efficiency lending, especially for larger, capital intensive, technically complex projects, is expected to play an important role in IREDA’s future loan portfolio.
Externalities
When the market works as it should… • Recall: Adam Smith’s “invisible hand” of the marketplace leads self-interested buyers and sellers in a market to maximize the total benefit that society can derive from a market. But market failures can still happen.
EXTERNALITIES AND MARKET INEFFICIENCY • An externality refers to the uncompensated impact of one person’s actions on the well-being of a bystander. • Externalities cause markets to be inefficient, and thus fail to maximize total surplus.
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