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Development Banks and Industrial Energy Efficiency in India

Development Finance Institutions (DFIs) were established in 1955 to provide funds to large, medium, and small industry in India. They finance new industrial projects as well as expansion, diversification, and modernization of existing industrial enterprises. In 1997-98, for instance, the Industrial Development Bank of India (IDBI) and the Industrial Credit and Investment Corporation of India, the two largest DFIs, provided $12 billion worth of financing. In recent years, DFIs have been active in managing and lending for industrial energy-efficiency and environmental projects. Because of their role in lending for industrial institutions, the DFIs are in a position to transform the market for industrial energy efficiency and environmental pollution-control activities.

We evaluated the potential role for IDBI in lending for energy efficiency and environmental pollution-control activities. The Asian Development Bank had provided IDBI a $150 million loan for the Industrial Energy Efficiency Project at the request of the Government of India to improve energy efficiency in the modernization and expansion of industry. The primary energy-efficiency criterion for selecting industrial projects was that the modernized or expanded plant show at a minimum an energy-efficiency improvement of 18%. In addition, a technical assistance project accompanied this line of credit to IDBI. This project formed the basis of our evaluation.

The project's main activities were to evaluate the investment potential for energy efficiency/environmental management (EE/EM) activities or projects in ten industrial sectors and to recommend ways to strengthen IDBI's institutional capacity, policies, and procedures for EE/EM lending on a regular and organized basis. The evaluation of these industrial sectors revealed an investment potential, with a payback period of less than four years, that exceeded $1 billion (Rs. 45 billion). The IDBI evaluation identified many areas where establishing an energy and environmental center would accelerate efficiency investments.

The consultant's team also conducted in-house seminars, overseas training programs, and site visits to steel, paper, and aluminum plants; organized outreach workshops for industry; and provided bibliographic information for the IDBI library.

The technical assistance project was managed by a U.S. company, Energy Resources International, with primary responsibility for the technical aspects covered by Berkeley Lab and Dalal Consultants and Engineers Ltd. of India. Indian sector specialists were hired to study the potential for energy-efficiency improvement and environmental management.

Findings of the project reveal a need to (1) use EE/EM indicators during IDBI's appraisal, approval, and monitoring of projects, (2) increase the EE/EM information resource base-in-house and out-of-house EE/EM experts, handbooks, and computerized data bases- that IDBI staff can access, and (3) increase awareness of EE/EM components among industrial borrowers. The sector studies show that there is at least a 20% lag compared to best practice for energy use and that a significant potential exists for investment in EE/EM activities. These activities include housekeeping measures such as improved lighting, variable-speed motors/drives, and improving power factor; installing co-generation and captive power generation units; and changing manufacturing processes to more efficient and less polluting ones. Potential for investment in each sector varies with the types of options identified in Table 1. These estimates are based on the cost-effective technical potential without taking into consideration the practical challenges or the current industrial stagnation.

Table 1. Energy-efficiency investment potential in India.
Sector Rupees (millions) $ (millions)
Aluminum 8,400 190
Cement 3,000 70
Chemicals (caustic soda) 5,000 120
Copper 250 6
Fertilizer 5,000 120
Iron and steel 10,000 240
Pulp and paper 5,000 120
Sugar 3,200 75
Textiles 9,000 200
Zinc 150 3

The factors that keep energy efficiency low vary among the sectors. A key barrier, however, is the institutional weakness in promoting energy efficiency and better environmental management. Some sectors, such as textiles, have research institutions that provide information on energy efficiency, and the Indian government has established the Energy Management Center and the National Productivity Council to study and promote efficient use of energy. The research and studies, however, have not been fully deployed into energy-efficiency projects.

Financial institutions, such as IDBI, are in a position to help industry overcome some of these key barriers. We recommend that IDBI establish a resource center for this purpose. It would have or be equipped to call upon the necessary technical expertise, collate and maintain data for industry to use, prepare handbooks for each industry sector, and publicize the importance of energy efficiency and environmental management, through the issuance of annual reports and by establishing awards for best practices.

— Jayant Sathaye, Ashok Gadgil, and Manas Mukhopadhyay

For more information, contact:

  • Jayant Sathaye
  • (510) 486-6294; fax (510) 486-6996
  • Ashok Gadgil
  • (510) 486-4651; fax (510) 486-6658

Manas Mukhopadhyay is with Dalal Consultants and Engineers.

This research is supported by the Industrial Development Bank of India.

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