The EaaS Model: India’s Next Green Strategy?

By Abhik Chatterjee, Edited by Vaibhav Agarwal


The Indian Government's vision of leading a healthy, sustainable, and green lifestyle has been a relatively recent narrative in its domestic policy. Prime Minister Narendra Modi propagated "mindful and deliberate utilization" at the COP26 conference in Glasgow last December and reiterated that environmental degradation and climate change are the strongest negative externalities present in modern economies.

At the 2015 Paris Agreement, global governments set climate targets and goals to be achieved in the short and long terms. India, too, set three broad targets to achieve by 2030: to reduce the emissions intensity of its GDP by 33-35% from 2005 levels; to generate about 40% of cumulative electric power from non-fossil fuel energy resources, and to create an additional carbon sink of 2.5 to 3 billion tonnes through forest cover.


The Ministries of New and Renewable Energy (MNRE) and Environment, Forest and Climate Change (MoEFCC) and industries promoting the electric vehicle and Battery-as-a-Service schemes lead the way in achieving these targets. The Government's strong commitment to sustainable development has been mainly in renewables, energy audits, better waste disposal mechanisms, etc. According to a study by IndiaSpend before India's 2022 Budget release, India has installed 156.83 GW of electrical capacity from non-fossil fuel sources, putting it on track to reach 500 GW by 2030 (i.e. 40.1 of total capacity%). Renewable energy sources account for 26.5% of total power generation capacity – of which solar and wind contribute 12.4% and 10.2%, respectively.

In January 2022, an investment of ₹ 1,500 crores ($200 million) to the Indian Renewable Energy Development Agency was made. A green energy corridor project was also initiated to build infrastructure and connect renewable energy to power. The corridor initiative, which is expected to cost Rs 12,031 crore ($1.6 billion), will be aided by the Government to the tune of 33%.


While there is evidence of some progress, there is significant room for improvement and development. In the 2022 budget, the emphasis on climate change was greater than seen before. Finance Minister Nirmala Sitharaman placed climate action as one of the pillars of India's economic progress in the years to come. She briefly mentioned the role of energy in combatting climate change and referred to the Energy Service Company (ESCO) business model and the Energy-as-a-Service (EaaS) strategies.


Energy has always been sold as a service provided by different companies within the energy sector – primarily in the form of electricity, natural gas, LPG, or CNG in India. An ESCO provides comprehensive energy solutions to customers so that they can achieve energy efficiency. The ESCO model requires customers to invest some capital and own the equipment used in energy generation or collection, thereby bearing any performance risk. According to a Deloitte report, there is no scope for scalability and the flexibility to add retrofits or upgrades within the contractual period is difficult. The risk factors discourage many users from buying ESCO services, especially low-income groups. In India, power theft is not an uncommon sight.

The Energy-as-a-Service approach, on the other hand, provides end-to-end management of energy assets and services by adhering to demand-side factors too. It's market includes a combination of different energy supply options and integrates them across multiple sites. These energy-related offerings are bundled into one composite unit and sold to consumers on a subscription basis. On the supply side, strategic guidance across procurement, financing, operations, energy storage, and management and maintenance of a customer's complete energy portfolio constitute a significant portion of the newly-emerging EaaS market.

Under the EaaS model, ESCOs partner with an EaaS adviser that analyses a client's energy profile and advice on efficient use, procuring, and storing systems. Owners of large commercial and industrial buildings are the primary target audience for this system, i.e., corporates that utilize large amounts of energy for prolonged periods. These consumers – or subscribers - do not have to own energy-efficient infrastructure and assets. The service provider makes all the capital investment in the project and manages the equipment on behalf of the customer. Through energy supply and performance contracts, the EaaS model reduces upfront and installation costs on the demand side and transfers investment risk to the producers. As a result, the provider incurs the equipment cost and is motivated to maintain these assets.



What makes the EaaS an attractive model is that creditworthy yet cash-strapped customers can profit from EPC arrangements since they do not require engineering expertise, capital, and other resources to create their energy arrangements. This makes it a viable service for lower-income groups to avail in the near term.

A simple way to look at it is to think of this energy subscription like a Netflix account. As account holders, we pay a registered fee every month to access all forms of content on the platform – films, TV series, documentaries, etc. Netflix categorizes content for our benefit and gives us suggestions based on preference. The company owns the website, the domain, and the infrastructure needed to run it. Hence, it is incentivized to maintain a seamless, transparent platform where all operations are "behind the curtain", i.e. users do not need to knowhow the platform works. The EaaS model utilizes the same concept in energy and sustainability. It ensures that streamlined, cost-effective solutions are provided to customers. Practices like retrofitting and energy audits are often adopted and advise reducing carbon emissions while keeping efficiency constant.

The model could be an innovative method for India to progress in generating solar power. The Government has committed ₹19500 crore worth of Production-led Incentives (PLIs) to ensure the generation of 280 GW of solar capacity by 2030. Through plans to manufacture high-efficiency solar modules and integrate solar photovoltaic cells with polysilicon units, the Budget lays some groundwork for India's 2030 targets.

In January 2021, Infosys and British energy giant BP have partnered to develop an EaaS for large cities and campuses. The mix of Infosys's advanced digital capabilities and BP's energy expertise will allow them to apply the model efficiently in all Infosys campuses in the near term. Infosys and BP aim to go carbon neutral in 2020 and 2050, respectively.


With the Budget's significant stimulus towards infrastructure and the aim of transitioning into a circular economy, the EaaS model could provide a game-changing mechanism to optimize energy efficiency, reduce the carbon footprint and make incremental steps to control climate change. However, the Budget does not explicitly allocate funds to set up or retrofit such infrastructure; it simply makes a passing statement to "promote" energy-saving measures through the model.


The issuance of green sovereign bonds marketed towards Environmental, Social and Governance(ESG)-focused funds proves to be a method to generate public funds for climate action purposes. The Finance Minister specified that all proceeds would be deployed exclusively in public sector projects and initiatives with positive environmental and climate benefits. This would boost India's green market, which, according to Business Standard, has issued more than 1 trillion USD worth of bonds since 2007.


ESG Funds invest in ESG compliant organisations that aim at sustainable growth. Such companies have business models that can navigate the sustainability requirements, work to reduce the economy's carbon intensity, and provide investors with fixed income payments and good returns in the long term.


The Budget also alludes to ten newly formulated action plans for ten different sectors—these plans concern end-of-life vehicles, electronic waste, toxic and hazardous industrial waste, etc. Addressing cross-cutting issues of infrastructure, reverse logistics, retrofitting, and integration with the informal sector are some of its chief aims. These goals can be met in the near term if adequate public policies are drafted in Parliament regarding the responsibilities of energy producers and their innovation facilities.


Some of the other measures mentioned by the Finance Minister include projects on coal gasification, coal conversion to industry-productive chemicals, and the promotion of agroforestry to create a larger carbon sink. These measures, and others, reflect how environmental action is of particular economic concern from a policy perspective. It is, however, concerning that no specific budget allocations in the realms were started by Mrs. Sitharaman. As the Parliament works on a bill for carbon trading in India alongside other climate-related policies, only time will tell if the Government and other stakeholders follow through on all these climate commitments.



References:

·Bornstein, Justine. Energy-As-a-Service the Lights Are On. Is Anyone Home? Deloitte, 2019.

·Cleary, Kathryne, and Karen Palmer. “Energy-As-a-Service: A Business Model for Expanding Deployment of Low-Carbon Technologies.” Resources for the Future, 8 Dec. 2019, www.rff.org/publications/issue-briefs/energy-service-business-model-expanding-deployment-low-carbon-technologies/.

·Deshpande, Tanvi. “Budget2022: India’s New Climate Pledges Await Funding Push.” Www.indiaspend.com, 29 Jan. 2022, www.indiaspend.com/climate-change/budget2022-indias-new-climate-pledges-await-funding-push-800521. Accessed 21 Feb. 2022.