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FEATURE STORY

India Second Renewable Energy Project Update

June 14, 2011

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Context

At the time of project design, India’s power industry was characterized by inadequate and inefficient power supply with peak capacity and energy supply shortages exceeding 20 percent and 10 percent respectively. On the demand-side, inefficient pricing and a variety of market and non-market barriers contributed to the overall inefficient use of energy.

The Government of India’s (GOI) response to the continuing power sector shortages was to provide additional support to states who were undertaking power sector reforms and to encourage entry of private sector investments in the sector. These reforms included unbundling of previously integrated State Electricity Boards (SEBs) and the establishment of independent regulatory agencies who worked at creating appropriate enabling environments to encourage private sector investment in power generation.

At the time of project appraisal, GOI support for energy efficiency was focused on provision of support for energy audits and information dissemination programs in the industrial sector by public sector institutions including the National Productivity Council, the Petroleum Conservation Research Association, the Industrial Development Bank of India (IDBI) and the Energy Management Center (EMC). These efforts lacked a unified approach to overcome market barriers to energy efficiency, especially on financing identified efficiency investments. The passage of the energy conservation act and the creation of the Bureau of Energy Efficiency (BEE) in 2001 was a major step forward by the Government in advancing its energy efficiency strategy and signified the beginning of a comprehensive approach to address this important topic.

Project development objectives

Augment power supply through environmentally sustainable Small Hydropower (SHP) investments

Mobilize private sector investments in renewable energy power projects

Promote energy efficiency and demand-side management (DSM) investments

Enhance and sustain improved end-use energy efficiencies with consequent reduction in carbon emissions

Project components

-The Small Hydro component: It was designed to finance 200 MW of small hydro capacity developed by the private sector. The target was revised to 153 MW after cancellation of US$26 million of IBRD proceeds which were unlikely to be utilized by the time of project closure . The project was designed to support a range of eligible small hydro project types including:

-Canal-based and dam toe schemes;

-Run-of-river schemes;

-Rehabilitation and/or upgrading of old plants;

-Use of tail ends of cooling water systems of thermal power plants; and,

-Stand alone micro-hydro sub-projects of up to 100kW each.

-The Energy Efficiency/Demand Side Management (DSM) component: was designed to provide financing for energy efficiency as a new line of lending business that would complement Indian Renewable Energy Development Agency Limited (IREDA) renewable energy financing activities.

-The Technical Assistance component: was designed to support IREDA’s efforts in the new area of energy efficiency by financing:

-Pre-investment activities to develop a sustainable pipeline of energy efficiency investments;

-Establishing in-house capacity within IREDA to appraise, supervise and promote energy efficiency services and schemes;

-Assisting participating states in promoting end-use efficiency including development of appropriate policy incentives; and,

-Training of public and private sector energy and industry officials and staff on energy conservation and DSM.

Achievements

The project was successful in augmenting power supply through environmentally sustainable small hydro investments and mobilizing private sector investments in renewable energy power projects. The World Bank has supported 45 sub projects with an installed capacity of 158.25 MW through the second line of credit. During the project a number of regulatory developments at the central and state levels occurred that now provide a good enabling environment for the development of Small Hydro Projects.

Out of the total capacity of 536.7 MW installed during the Tenth plan, this project directly supported 95.65 MW.

Initially, almost all small hydro projects were in the public sector in India. IREDA was a pioneer in fostering private sector based hydro development and, at present almost all such projects are developed by private sector developers.

The success of World Bank-IREDA funded schemes aroused greater interest from commercial banks, leading to the gradual emergence of a more competitive market for funding Small Hydro Project schemes.

The project was also successful in promoting energy efficiency and demand-side management (DSM) investments which further augmented power supply. Seventeen energy efficiency projects included in the portfolio at the time of project closure are in various stages of implementation, financed by the project and IREDAs own resources representing over 90 MW in additional capacity / avoided peak demand.

The Bureau of Energy Efficiency (BEE) was established as a statutory body under the Ministry of Power to plan, implement and monitor the various programs under the Act, including standards and labeling programs, certification and accreditation for energy managers/auditors, energy efficiency policy research, awareness and development and implementation of energy efficient building codes, among other activities.

Lessons Learnt

Technical assistance to commercial financial institutions is an important element of building institutional capacity to mainstream knowledge regarding clean energy market development

A predictable policy and regulatory environment is a critical precondition for private sector led renewal energy development

Economic valuation of renewable energy vis-a-vis conventional energy can provide significant policy and regulatory insights.

Providing grid extension up to the small hydro power plants based on an integrated basin development approach is one solution which should be considered when encouraging hydropower development.

Inherent risks in small hydro sub-projects like unforeseen variations in hydrology need suitable mitigation measures

Different energy efficiency business models should be tried out to allow maximum flexibility in achieving desired outcomes given the constant shifts in market conditions.


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