Many developing countries, such as India, are hungry for energy and cannot get enough of it, because they are cultivating and creating industries. But efforts over the last 20 years to build new electricity generating capacity to supply this demand have not gone according to plan, and India for some years has been searching for other ideas to satisfy its needs.
Tamil Nadu, in the South Eastern corner of India, is perhaps the hungriest of India’s 28 states. With a population of 66 million, it is the hub of all sorts of industrial activity, the most urbanised state and home to the largest number of businesses – from car manufacturing to textiles to electronics. Yet a brief glimpse at this ambitious state’s energy statistics illustrates all too clearly the predicament it faces.
France, with a population of 62 million people, produces 118 gigawatts (GW) of power each year. Tamil Nadu, by comparison, produces 9.5 GW. “The state has an electricity shortage” says Sudha Setty, South Asia Program Manager at the Alliance to Save Energy (the Alliance), a US based energy efficiency NGO that runs projects in India. Enormous investments need to be made, not only into industry, but into utilities that themselves suffer from undercapacity.
For Tamil Nadu’s energy hunger is accompanied by a thirst: there is not enough water to fulfil everyone’s needs. “The state supplies 85% of people’s water demand, mainly through household connections or public fountains,” says Raj Kumar, Senior Manager at the Tamil Nadu Urban Development Fund (TNUDF) which invests in infrastructure projects. Many Tamil Nadu inhabitants may only enjoy a few hours a day of running water. Only if state authorities spend more on water pumping and water treatment facilities will water be available to everyone 24 hours a day.
“Typically Indian municipalities are facing the challenges of acute water shortage, increasing population and rising power tariffs. At present only about two-thirds of the urban population has direct access to clean, affordable and reliable water services,” explains Sudha Setty – emphasising the need for ample services as the economy develops.
Incomplete sanitation, a waste management infrastructure that is not entirely fit for purpose or inefficient water systems take a huge toll on the state’s overall welfare, generating higher social and health costs. Such conditions can raise the risk of diseases such as diarrhoea, typhoid and lead poisoning, for example. World Health Organisation statistics show that 700,000 people in India died of diarrhoea in 1999 due to unsafe water.
This is where a groundbreaking project funded by REEEP and managed by the Alliance, comes in. If a new pilot scheme is rolled out across the state, its local authorities will generate large amounts of money that can be reinvested in worthwhile projects.
Power bills typically represent 40-60% of the total costs of running the water plants and this acts as a constraint on further investment. Since the local authorities cannot cut Tamil Nadu’s appetite for energy, they are going to rip out the antiquated machinery that consumes excess amounts of it – its inefficient pumping stations. In its place they will put in new motors, pumps and pipelines.
But to get the ball rolling, project managers have had to overcome several problems. For instance, investment of this kind is a completely new experience for the local administrators and councillors involved. It means introducing a new culture. The administrators may never have paid much attention to the energy efficiency of their water facilities, while bids put out to tender for most other power projects have focused on fitting and maintaining equipment.
This culture is typical, not just of the individual administrators, but also of many of the municipal authorities as whole, most of whom are unaware of the benefits of combining water and energy efficiency. At the same time, there are a lack of policies and incentives at state level that encourage local authorities down this route.
Contractors are employed to replace street lighting, for instance, not to worry about how much energy it uses.
As a result, Setty, working alongside the energy service companies (ESCOs) managing the project, as well as TNUDF – the fund that provided the money, opted for the simpler scenarios to start with. TNUDF is a public-private partnership for the urban sector, owned by the Tamil Nadu government and three Indian financial institutions including a bank, a housing development finance company and an infrastructure leasing and financial services company.
Out of the 45 city authorities under consideration, they chose 29, all of whom had direct control over their street lighting. Any local authority that already ran outsourced, contract-based street lighting was initially excluded from the pilot. “There could have been a conflict of interest between the private contractors and the ESCOs that measure energy efficiency,” explains Raj Kumar, indicating that further programs will include the other municipal authorities once the pilot is completed.
Then there is the issue of financial management. To pay for the investment, it is necessary to work with the ESCOs that can finance the projects; the use of these ESCOs for water investment is, indeed, a unique feature of this program. The ESCOs will run the project on the condition that efficiency targets are met and maintained. The local administrators would have to get used to a new, intricate financial arrangement – performance based contracts – where the ESCO is guaranteeing that 30% of the energy will be saved.
“One of the main challenges of the project has been the adoption of a new procurement process in the form of energy performance based contracts for both street lighting and water pumping. In this type of contract the services and energy efficiency equipments costs are bundled into the project’s cost and are repaid through the generated savings in Rupees,” says Sudha Setty. To make the project size attractive for ESCO investments, the 29 towns were bundled and grouped in three zones. The ESCOs were selected through a transparent, competitive bidding process. Two ESCOs were selected and one was awarded two groups and one ESCO the third group.
National government authorities and many commercial and public sector organisations have long known about the benefits of saving energy in water supply networks and Watergy – a campaign launched 10 years ago by the Alliance – has been heavily promoted. But in India, there has been less awareness at a local level, while local councils could not afford the expense. At a state level, the government was keen to go ahead because of perceived reductions in energy and operating costs, better environmental conditions, better operation and maintenance, educational benefits and preserved capital funds.
Yet it is not the state’s overall approval that has been the most decisive factor in the success of the project but the introduction of ESCOs to municipal projects. The REEEP project in Tamil Nadu has focused on financing and education. While the administrators and councillors did not initially know much about the issue, Sudha Setty suggests that they came on board relatively easily after a number of brainstorming sessions and other workshops had been arranged. “Once they were aware of the benefits they openly accepted the projects,” she states. However, she argues that “it is key to have support from top government officials and officials in the field to successfully undertake and implement the program.”
Both Sudha Setty and Raj Kumar hope that the cash released through the project will be used to increase other investment. However, as Setty emphasises: “It is up to the municipality to decide how to use their savings. They can either use the savings to invest in similar projects or for any other essential service augmentation or other community benefit projects.”
As the pilot phase develops, it is clear these savings are substantial. According to Raj Kumar, they will amount to approximately 40.9 million rupees per annum, or US $800,000 – including a parallel street light energy saving project. To this are added major savings in operational and maintenance costs. If that is reproduced through a rollout all over the state, as he and his colleagues hope, it will make a significant contribution to increased services.
The project and its scale-up are part of REEEP’s international mandate to replicate successful energy efficiency models. REEEP and the Alliance previously worked together on energy efficiency in the water sector in South Africa. REEEP also previously funded an ESCO street lighting project in Madhya Pradesh. “We are pleased to contribute to the transfer of successful energy saving models to cities in Tamil Nadu,” states Dr. Marianne Osterkorn, Director General of REEEP. “We look forward to the day when other Indian States can benefit from the learning generated in this important project.”
The region’s electricity utility has been supportive of the project from day one as the state has a power crisis. Sudha Setty explains: “The electricity board is a part of the project committee and they are a willing part of this project. They can also use the freed up energy to supply to other needy customers or add new customers,” she asserts.