In Search of the Midas Touch: Financing Climate-friendly Cooling Solutions

On 12 March 2024, I was honoured to present at the Regional Training on Developing and Financing Sustainable Energy Projects. This event, jointly organised by ESCAP, ACEP, and Energy Foundation China, aimed to bolster support for ESCAP Member States, particularly those that have completed SDG7 roadmaps or national cooling action plans. The training sought to enhance understanding among government officials responsible for implementing SDG7 roadmaps and national cooling action plans in target countries such as Cambodia, Indonesia, Laos, Pakistan, Thailand, and others. Its primary focus was equipping participants with the knowledge and tools necessary to mobilise technical assistance and financing for sustainable energy initiatives.

I explored potential financing strategies for three pivotal recommendations outlined in the India Cooling Action Plan (2019), each targeting distinct levels of intervention:

1. Driving the widespread adoption of 5-star labelled fans (appliance-level intervention)
2. Promoting the wider penetration of climate-responsive built spaces to make indoors thermally comfortable through passive design (building-level intervention)
3. Supporting not-in-kind cooling technologies like district cooling (urban-level intervention)

Driving the widespread adoption of 5-star labelled fans (appliance-level intervention)

EESL has earned legendary status for spearheading India's LED revolution with its UJALA programme. LED lighting technology boasts impressive efficiency, surpassing incandescent fixtures by over 80% and CFLs by more than 70% while lasting 3 to 20 times longer. However, before UJALA, the widespread adoption of LEDs faced a significant hurdle due to their steep initial costs, particularly in a price-sensitive market like India, where LEDs were priced 35 to 40 times higher than less efficient alternatives. The UJALA programme, launched by the Honourable Prime Minister of India in 2015 and implemented by EESL, utilised the 'demand aggregation -> bulk procurement -> pay-as-you-go' model to unlock the substantial energy and emissions-related benefits of LED lighting. This approach played a pivotal role in reducing the price of LED bulbs by over 80%, dropping from $3.8 in 2013 to $0.8 in 2016. According to the UJALA dashboard, EESL has distributed approximately 370 million LED fixtures. The impact extends beyond direct distribution, with a staggering 3.8 billion LED fixtures sold in India, representing ten times the quantity distributed through UJALA. As a result, LED lighting now dominates 75% of India's lighting market. This success story underscores a crucial lesson: a well-timed government intervention can catalyse broader market transformations, leading to significant societal and environmental benefits.

Can India’s LED success be repeated for BLDC fans? In India, cooling extends beyond air conditioning, with ceiling fans a deeply ingrained socio-cultural norm. According to the India Cooling Action Plan, approximately 0.5 billion fans were in use during 2017-18, and this number is projected to grow to 1.25 billion by 2050. This surge in fan usage presents a significant opportunity to conserve energy, with estimates suggesting that by 2050, as much as 25 TWh of electricity could be saved, even with conservative projections. With the widespread acceptance and extensive usage of ceiling fans in India, there is considerable potential for adopting more energy-efficient technologies such as BLDC fans. BLDC fans are 50%-60% more efficient than AC motor fans. However, they typically come at a higher upfront cost, approximately double that of regular fans. Despite the higher initial investment, the long-term cost savings associated with BLDC fans are substantial. With an additional upfront investment of around $18 and an annual cash flow of $12-15 (discounted at 5% annually) from energy bill savings, a BLDC fan can pay for itself in as little as 1.3-1.6 years. Initiatives like EESL's Energy Efficient Fan Programme (demand aggregation -> bulk procurement), launched in November 2023 to distribute 10 million BLDC fans, present an opportunity to halve the payback period by driving down the extra investment to $10. This underscores a clear opportunity for manufacturer-led pay-as-you-go models to trigger broader market transformations by 2030.?

Promoting the wider penetration of climate-responsive built spaces to make indoors thermally comfortable through passive design (building-level intervention)

Bancolombia-IFC issued green bonds in Colombia to fund green building projects. These bonds were allocated to projects that meet stringent criteria, including a minimum reduction of 20% in energy, water, and embodied energy in materials compared to conventional buildings based on design parameters. In another example, the National Housing Bank-AFD entered the green bond market through its SUNREF programme in India. These bonds were specifically directed towards financing affordable green housing initiatives. The eligibility criteria for these projects include achieving Gold/Platinum IGBC or 4/5-star GRIHA ratings. However, both these programmes focus on the combined efficiency of buildings achieved through passive and active means, which doesn’t protect the envelope from being traded off.?

Creating innovative financing solutions to build better buildings with passive design features is becoming increasingly important, as the Mivan technology is taking over buildings higher than 10-12 storeys. Mivan construction technology is a method that utilises durable aluminium formwork for constructing walls, columns, beams, and slabs. It is highly modular in nature and employs the same formwork for all floors, integrating steel reinforcement into the formwork before pouring concrete for building components. The technology offers numerous benefits, particularly rapid construction, with a 70% reduction in construction time. It also improves durability and enhances earthquake resistance. Additionally, it allows for reduced wall thickness, thereby increasing the carpet area in high-rise buildings. However, it relies solely on reinforced cement concrete, lacking thermal insulation, which results in thin concrete sections conducting heat and reducing thermal efficiency. The walls possess poor thermal characteristics, with a high U-value, leading to increased reliance on air-conditioning in hot climates and, consequently higher energy consumption, greenhouse gas emissions, and global warming.

To actively promote passively cooled building designs, SBI-KfW has introduced a credit line totalling $277 million, dedicated to construction loans and sub-loans for homebuyers. These loans come with an interest subvention of approximately 0.5% per annum. Moreover, an investment grant of $11 million has been allocated to incentivise higher levels of building energy performance. The interest subvention is closely tied to the net heat gain rate through the building envelope and roof. This setup encourages the optimisation of windows and walls, thoughtful building orientation and layout, and external shading devices, among other strategies. While the programme is currently in progress, initial indicators suggest that its success will hinge, to some extent, on replicating the advantages offered by Mivan technology, particularly in terms of rapid construction times.

Supporting not-in-kind cooling technologies like district cooling (urban-level intervention)

Energy as a Service (EaaS) is an innovative model in which a third-party contractor assumes ownership and operation of energy equipment, taking full responsibility for generating energy savings. In this arrangement, the customer pays the service provider based on the actual savings realized, a concept known as pay-for-performance, which is determined through rigorous M&V. At the end of the contract term, the customer has several options: they can choose to purchase the equipment at its market value, extend the contract for continued service, or return the equipment. This flexibility empowers the customer to adapt to changing needs and circumstances. One of the key advantages of EaaS is its ability to shift financing and performance risks from the customer to the service provider. This means that the customer can enjoy the benefits of energy savings without having to bear the upfront costs or worry about equipment maintenance and performance, ultimately providing a hassle-free and cost-effective solution for energy management. Cooling as a Service (CaaS) is a form of EaaS.?

The India Cooling Action Plan recommends using not-in-kind cooling technologies such as district cooling systems (DCS). Shifting away from standalone room air conditioners and large centralised air-conditioning plants to district cooling systems, which provide chilled water as a utility service, can offer a range of advantages in dense urban areas such as townships and Special Economic Zones. The Gujarat International Finance Tech (GIFT) City SEZ, India’s first International Financial Services Centre (IFSC), is a living example of the many benefits of DCS, beckoning upcoming SEZs and townships to follow its example. Combining diverse load profiles allows DCS to operate at high plant load factors resulting in higher levels of energy efficiency and significant reductions in primary energy consumption, peak power demand, and greenhouse gas emissions. This demand aggregation also provides economies of scale that allow DCS to become cost-effective and utilise otherwise prohibitively expensive cooling technologies and thermal energy storage. DCS removes the burden of cumbersome and sometimes costly O&M, which isn’t implemented fully if left to individual AC owners or operators. The same applies to refrigerant management at the individual building level. DCS also frees up rooftop and basement space, which can be devoted to other activities. At the level of its whole service area, DCS reduces the urban heat island effect, promotes circularity, and improves aesthetics. GIFT City, with its DCS and other world-class infrastructure such as thermal energy storage, automated waste collection system, and underground utility tunnel, palpably embodies these and many other advantages of DCS. Installations in different parts of the world, such as France, Canada, Colombia, Malaysia, Egypt, Dubai, China, and Singapore, also testify to the benefits of DCS.??

India is particularly suited for DCS since much of its building stock is yet to be built and the benefits of DCS can be maximised if it is incorporated early in urban design in dense areas replete with mixed-use buildings. However, it is vital to establish trusted business models, whether public, private, or hybrid, that can attract investors, developers, and end-users. What basic building blocks might help fast-track the adoption of DCS in India in the next five years or so??

Perhaps the answer lies with India’s CGD networks. Under the Petroleum and Natural Gas Regulatory Board (PNGRB) Act 2006, PNGRB regulates the creation of City Gas Distribution (CGD) networks in specified Geographical Areas (GAs) of India. PNGRB is responsible for preparing standard bid documents, and license agreements, conducting the bidding process, and setting tariffs. The CGD sector has four distinct segments, i.e., compressed natural gas (CNG) as auto-fuel and pipelined natural gas (PNG), used in domestic, commercial, and industrial segments. At the end of the latest CGD bidding round, PNGRB successfully created 295 GAs of CGD covering 98% of the population and 88% of India’s total geographical area spread across 630 districts in 28 states/UTs. PNGRB successfully ensured demand for CGD, a key learning for DCS. GIFT City has ensured demand by mandating the use of DCS in buildings through the Development Control Regulations of the region. Upcoming townships and SEZs can be converted to the equivalent of CGD’s GAs for DCS. This should be supported by competitive bidding by utilities that will provide “cooling as a service”. CGD, too is implemented through a bidding model, which contains a non-compete period of 8 years. Though imperfect, learnings can be borrowed from CGD’s bidding model and bidding in other infrastructure sub-sectors so that market forces ultimately ensure rational bidding in DCS. Of course, here, the role of a regulatory body such as PNGRB, which lays down technical standards and protects the interest of consumers by ensuring fair trade and competition, cannot be overstated. In summary, guaranteed demand and regulated pricing ensured through competitive bidding overseen by a fair regulator can help scale up DCS in India. This does not imply that CGD’s features can be directly applied to DCS, but in a world where the window of climate action is small and closing, it is important to look sideways at adjacent sectors and import learnings from them.?

As countries strive to achieve their SDG7 targets and combat climate change, collaborative efforts between governments, financial institutions, and private sectors are paramount. By leveraging lessons learned, embracing innovative financing mechanisms, and adapting strategies from complementary sectors, we can propel the transition towards a more sustainable energy future, ensuring access to affordable and clean energy for all.