Financing Lighting Market Transformation

January, 2011

CONFIDENTIAL DRAFT FOR DISCUSSION

Structure
WHAT WHY HOW WHEN

CONFIDENTIAL DRAFT FOR DISCUSSION

WHAT?

CONFIDENTIAL DRAFT FOR DISCUSSION

Current Market Scenario

India and other South Asia are amongst the fastest growing regions in the world Fast growing population, urbanization and industrialization require additional installation of power generation facilities Their increased demand will put a further strain on these power generation facilities. C Currently li hti consumes 18% of t t l power tl lighting f total generated in the country.

CONFIDENTIAL DRAFT FOR DISCUSSION

Current Market Scenario (contd.)

Majority of the market is dominated by ICL and fluorescent lamps. The market share by lamps manufactured is given below Incandescent Lamp 63% Fluorescent Lamp 14% CFL 21% Other Lamps (LEDs) 2%

Technologies that are slated to replace conventional lighting are CFLs and LEDs.

CONFIDENTIAL DRAFT FOR DISCUSSION

CFL lighting in India

The CFL lighting story is often seen as a success story by the GOI, where policy interventions led to increase in CFL production from 20 million lamps in 2003 04 to 255 million in 2009-10. 2003-04 2009 10. The GOI was also successful in reducing the cost by almost 50% It led to the establishment of major CFL manufacturing companies and other support infrastructure in India. Some of the major companies that have production facilities in India are Osram, Phillips, Havells. D t a strong manufacturing base in I di CFL manufacturing Due to t f t i b i India, f t i would enjoy significant economies of scale, and increasing manufacturing capacity would further bring down the price of CFL lamps.

CONFIDENTIAL DRAFT FOR DISCUSSION

CFL lighting in India (contd.)

Therefore, CFL lighting is amongst the fore-runners to replace ICLs in India. Disadvantages - H Di d t However, one of th major disadvantages of f the j di d t f CFLs is the generation of toxic waste in their disposal as they contain mercury. The average mercury content in CFLs is 4mg.

CONFIDENTIAL DRAFT FOR DISCUSSION

LED lighting in India

Currently all the demand for LED lighting is imported into y the country. There are around 10 million street lights in India that can be replaced with LED lights*. A few pilot projects have been setup to explore the feasibility of LED street lighting, however very few visible efforts have b ff t h been d done i th i d in the indoor LED li hti market. lighting k t

*Lighting industry Report

CONFIDENTIAL DRAFT FOR DISCUSSION

LED - Challenges
Technology
The technology to manufacture the LED chip is possessed by only a few companies who are reluctant to setup manufacturing companies, bases in South Asia to protect their intellectual property rights.

Cost
This exclusivity of the technology along with existing import taxes leads to the high cost.

Standards
Absence of national technical standards for testing and verification of LED technology and specifications , which apart from constraining its penetration, lends itself to import of substandard LED devices.

CONFIDENTIAL DRAFT FOR DISCUSSION

LED - Opportunities
Safety
LEDs do not generate toxic waste with their disposal

Efficiency
LEDs have a higher luminous efficacy as compared to CFLs; hence they consume less electricity, reducing costs and GHG emissions. (An estimate from LED street lighting projects in other countries puts the estimated reduction in electricity at p y 50%)

Life
LEDs typically have operating lives of 50,000-60,000 hours as compared to 10,000 hours for CFLs, thereby reducing Life cycle costs.

Strength
LEDs are sturdier and can withstand mechanical shock and rugged conditions unlike their fragile CFL counterparts. This is counterparts quite suited to conditions of rural India and South Asia where damage and losses can occur typically due to rough handling

CONFIDENTIAL DRAFT FOR DISCUSSION

LED Action Items

Implement a standard for quality testing and verification of LED products in India; presently due to a lack of such standards some manufacturers state unrealistic specifications of their products. Given the potential of the Indian market, for LEDs to become cost effective it is important for local manufacturing to start on a large scale. Significant investments will be needed in R&D and in reducing packaging and manufacturing costs. The Government of India imposes overall duties close to 30% for LEDs imported into India. Reforms will be needed in the tax structure to ensure a favourable pricing mechanism for LED lamps.

CONFIDENTIAL DRAFT FOR DISCUSSION

LED Government Stimuli

Due to lack of standard monitoring and verification of LED standards, the GOI suggests initially focussing on high use and bulk commercial applications like public lighting like streets and stadiums. Large coordinated retrofit projects are more economical than small-scale projects. To integrate LED lamps in households, the government has suggested integrating LED lighting under the second phase of the Rural Electrification programmes, where 5 million BPL households will be provided with one free LED source as against source, one CFL lamp. This will require additional funding of Rs 300 crore. Also it is expected that at first majority of the growth of the LED lighting market in India will take place in the commercial lighting sector, as the savings made will be larger owing to the higher tariff as compared to the domestic lighting tariffs.

CONFIDENTIAL DRAFT FOR DISCUSSION

WHY?

CONFIDENTIAL DRAFT FOR DISCUSSION

Why do we need energy efficient lighting

Reducing power consumption/energy efficiency Reducing green house gas emissions Employment
The GOI has earmarked numerous schemes that have set ambitious targets to replace ICL in India. These projects can provide substantial employment and opportunities for development for Indian industries.

CONFIDENTIAL DRAFT FOR DISCUSSION

Predicted savings in electricity by employing energy efficient lighting

2016

2021

2026

2031

Current Scenario

GWh/yr

73676

91092

107890

125601

Scenario by employing energy efficient lighting

GWh/yr

48874

53656

60618

70073

Savings in electricity

GWh/yr

24,801

37,437

47,272

55,528

Ref:ResidentialconsumptionofelectricityinIndia:Documentationofdataand methodology(2008) methodology (2008) *AssumingthatsaleofICLandmagneticballastsisprohibitedfrom2015

CONFIDENTIAL DRAFT FOR DISCUSSION

Street Lighting Technology Landscape

Technology Mercury Vapor
1940s Older,very commonwhite lightHID light HID technology High Low 24,000hours <60lm/watt <17lm/watt Yes $100 $100 $200

High Pressure Sodium

1970s Mostprevalent HIDlightsource forSL;orange for SL; orange light Low Low 24,000hours ~120lm/watt <54lm/watt Yes $100 $100 $200

Induction

Cosmopolis

LED

Commercializedin Description

1980s Whitelight electrodeless fluorescentHID fluorescent HID lightsource High High 100,000hours ~65lm/watt <54lm/watt Yes $300 $300 $600

2000s Whitelight metalhalide HIDsource HID source High High >24,000hours ~120lm/watt <86lm/watt Yes $300 $300 $600

2000s Whitelight, directional, solidstatelight solidstate light source High High >50,000hours 100120 lm/watt <90lm/watt No $250 $250 $1,000

ColorRendering InitialCost Initial Cost LampLife LampEfficacy FixtureEfficacy ContainsMercury? PriceRange(per Price Range (per SavingsPotential: unit)
FixtureOnly Fixture+CMS

68% 76%

50% 63%

16

CONFIDENTIAL DRAFT FOR DISCUSSION

Why is financing of energy efficient lighting important

Growth - Ambitious government projects and steady demand by private sector
These are driven by both need for reduction in GHG emissions and y energy efficiency targets. To integrate LED lamps in households, the government has suggested integrating LED lighting under the second phase of the Rural Electrification programmes, where 5 million BPL households will be provided with one free LED source. This will require additional funding source of Rs 300 crore.

Focus on local manufacturing

This calls for major increase in local manufacturing capacity. Example, a government scheme aims to replace 400 million incandescent lamps t h i t l illi i d tl with CFL lamps (the current domestic production is at 255 million lamps)

Social focused projects An important feature of government schemes is to provide lamps at a significantly lower price, the subsidy provided will have to be financed by bank loans or other g y government financing schemes. fi i h
CONFIDENTIAL DRAFT FOR DISCUSSION

Government Subsidy

HOW?

CONFIDENTIAL DRAFT FOR DISCUSSION

Areas for Financing

Project Financing
Many Planned Street Lighting Projects will require financing from either the Central or state governments or external financers.

R&D
Financing for support infrastructure like testing and standardisation facilities.

Manufacturing
Companies will also require funding to setup production facilities in India.

CDM
Banks and financial institutions will also have a major role to play in carbon trading if indoor LED distribution p j g projects are modelled along the lines of the Bachat Lamp Yojana. f
CONFIDENTIAL DRAFT FOR DISCUSSION

A government lighting scheme

The Bachat Lamp Yojana(BLY)
Under this scheme the GOI aims to replace 400 million incandescent lamps with CFL l ith CFLs. This is expected to save 6000 MW of electricity (potential cost savings of INR 24000 crore/annum), and an estimated CO2 reduction of 20 million tonnes. Households will procure CFLs which cost Rs 100 for Rs 15 (the ) y normal cost of an ICL). The balance cost is covered by investors who invest in this project. They are provided with CER certificates under the CDM which can be sold to developed countries who fail to meet their emission targets.

CONFIDENTIAL DRAFT FOR DISCUSSION

Opportunities for financial institutions under the BLY

Provide financial support to manufacturers to increase their production capacity The current market price of a CFL is Rs 100 while consumers will be procuring them for Rs 15, the balance amounts to more than p g , USD 750 million which will be paid for by investors in the Bachat Lamp Yojana. These investors will be looking to financial institutions for support. Facilitate in the trading of CER certificates under CDM.

CONFIDENTIAL DRAFT FOR DISCUSSION

How can these projects be financed

Source
Central and State government funds

Description
Stimulus funds, state/provincial programs, municipal programs. Assistance could include partnership in government programs like the Bachat Lamp j Yojana, subsidies to manufacturers, reduction in excise and other indirect financial assistance

Remarks
There are government financing programs for both indoor and outdoor lighting. This includes schemes to make CFLs available at affordable rates to partnership in street lighting programs

External Financing through agencies and banks

Structured loans from institutional investors and private equity firms can provide for the capital investment required for major infrastructure projects.

In addition to infrastructure projects, these sources can provide for funding where the cost of the government subsidies are borne by lighting equipment distributors.

CONFIDENTIAL DRAFT FOR DISCUSSION

Source
Carbon Finance

Description
The resulting GHG emission reductions are used to obtain CER certificates under the CDM, they can then be sold to Annex 1 countries that fail to meet their emission targets.

Remarks
Carbon finance can be a steady p source of income to provide for the cost of projects. It is already being implemented in a few government schemes and can be applied to both indoor and outdoor lighting projects. Banks would have a major role to play in facilitating the trade of carbon credits

Microfinance/microcredit

Microfinance loans can be provided to rural entrepreneurs to sustain their business. E.gsusta t e bus ess g Women entrepreneurs who rent out solar lanterns on a daily basis. Further, Further loans can also be provided to people for whom lighting equipment is essential to their business, e.g. Night fishermen, fishermen artisans like weavers, weavers carpenters, etc.

Numerous Microfinance institutions operate in India and t e Sout s a the South Asian Region. eg o

CONFIDENTIAL DRAFT FOR DISCUSSION

Source
Utility Company

Description
Utility-based rebates, incentives, and on-bill finance programs

Remarks

Debt

Equipment leases, including: Capital l C i l leases Operating leases Tax-exempt lease purchases Structured finance Medium-term structured loans from commercial banks or other third party financiers

CONFIDENTIAL DRAFT FOR DISCUSSION

Project E ample Los Angeles Example:

140,000 citystreetlightfixturesreplaced
withLEDfixtures,andinstallationofremote monitoringsystem $57 millionprojectcost $10 millionenergyandmaintenancesavings (peryr) (per r) 40,500 t/CO2/yrinannualCO2 savings 7 yearpayback 5yearinstallationperiodtoallowcityto 5 year installation period to allow city to tenderinsmall,discreteincrements Projectultimatelyfundedwithcombination of7year,$40million loanat5.25% y ,$ providedbyLADWP;$3.5 millionfrom StreetLightingMaintenanceAssessment Fundand$0.24/kWh incentive
Project currently ongoing, with savings greater than anticipated and project costs lower than anticipated 25

CCIRole CCIassistedtheCityofLos CCI assisted the City of Los Angelesin:

Developingand
communicatingthebusiness i ti th b i casefortheproject Solicitinginformalfinancial proposalsfor offbalance proposals for off balance sheetsolution;proposals demonstratedstrongproject economicswhicheventually economics which eventually ledLAtoselffundproject Conveningstakeholders Bringingattentiontothe project
CONFIDENTIAL DRAFT FOR DISCUSSION

A Mechanism where energy savings pays for the cost of the equipment

A financier enters into an agreement with an ESCO/project implementer to provide energy efficient equipment to a customer and future repair and maintenance maintenance. The financier covers all equipment and project maintenance costs. The customer repayment is based on the energy savings and reduced operating expense p g After the expiration of the agreement. The customer has the option to purchase the equipment.
ESCO designs and installs the equipment

Customer

The 3rd party covers the entire project cost cost. The customer repays him on the basis of energy savings

ESCO

The 3rd party and the ESCO enter into a contract to pay for all installation and maintenance costs

3rd Party Financer

CONFIDENTIAL DRAFT FOR DISCUSSION

WHEN?

CONFIDENTIAL DRAFT FOR DISCUSSION