Financing India’s Sustainable Cooling Technology Transition

Innovative business models can reduce upfront costs and expand the market for sustainable cooling

The need for sustainability in cooling in India received a boost with the country’s recent decision to ratify the Kigali Amendment, and the cabinet’s nod to the Prime Minister’s climate elixir (Panchamrit¹). However, expanding climate-friendly cooling access requires technology development at scale and feasibility studies through business pilots, both of which require sizable financial resources.

Some of the biggest roadblocks in the development and uptake of sustainable cooling technologies include an inadequate financing ecosystem for entrepreneurs; cost of capital for manufacturers; lack of a research and development ecosystem; want of customer and investor awareness; and high upfront costs of efficient cooling appliances or services for consumers.

Let us take an example closer to home. According to CEEW’s analysis, 75 per cent of AC buyers wanted to purchase a high-star-rated energy-efficient AC. Despite this, only 14 per cent actually ended up buying one, citing higher upfront costs as the deterrent.

What can be done to bridge this finance gap and increase access to sustainable and affordable cooling?

1. Adopt innovative business models

Adopting innovative business models can alleviate the cost of cooling for the end consumer by either reducing prices of energy-efficient products or financing upfront costs.

For example, cooling-as-a-service (CaaS)² frees the end user from purchasing or managing cooling systems, and savings in the operational costs of energy-efficient cooling systems leads to profits for service providers and affordability for end users.

Demand aggregation programmes through on-bill financing (OBF) models like the UJALA (LED lighting)³ scheme can help in driving down the cost for the end users. In the OBF model, consumers can pay the cost of the appliance through instalments deducted from the monthly electricity bill. This reduces the upfront cost of purchase.

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In a country like India where the government publicly procures 20 percent of its GDP⁴, green public procurement of low-GWP (global warming potential) refrigerant based ACs or energy efficient fans and air coolers can be beneficial.

Dealer financing is another option, in which the retailers provide lower interest loans to potential customers, either through their own capital or by partnering with a third party financial institution. As observed in CEEW’s study, this model can create new markets for mainstream manufacturers of cooling appliances by transforming potential consumers into confirmed users of energy efficient cooling through easier access to low-cost credit.

2. Increase access to private equity for manufacturers

As mentioned earlier, the cost of capital in India remains high. The recent CEEW study on financing sustainable cooling found that start-ups in the cooling sector are too small to qualify for debt financing, and domestic investors consider these business models inherently risky due to the perceived low credit worthiness of the end users served.

Loan products, which specifically address the peculiarities of cooling markets, and well-designed risk guarantee instruments extending to technical and commercial risks must be introduced. The World Bank offers a de-risking facility in sustainable cooling, through its partial risk-sharing facility for energy efficiency that has catalysed collateral-free finance from Indian banks⁵.

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Innovative financing instruments such as cooling bonds, issued by urban local bodies⁶, can also help raise money to increase access to affordable cooling.

3. Strengthen access to finance for MSME vendors and manufacturers

MSMEs in the HVAC sector are an integral economic pillar of India’s cooling transition⁷. To improve technology diffusion and up-gradation in HVAC manufacturing, debt-linked support in the form of soft loans can help SMEs acquire new machinery and undertake process upgradation to bring their manufacturing units up to the mark.

Technological upgradation will help in improving processes and quality consistency. Nearly 40 per cent MSMEs in India lack access to formal sources of finance⁸.

The Union government’s Raising and Accelerating MSME Productivity (RAMP) Scheme aims to enhance MSME access to subsidised credit for the purpose of technology upgradation, acquisition, and development. It also aims to provide faster resolution of payment disputes for MSMEs, which will help increase the flow of working capital.

4. Attract finance for green buildings

The recently amended Energy Conservation and Sustainable Building Code gives greater power to states to enforce standards of energy efficiency and sustainable building materials on both residential and commercial buildings. Its mandatory and universal rollout will be a strong policy signal to attract international finance for energy-efficient building enhancements.

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Incentivised loans to developers and homebuyers based on a building’s green rating can help leverage India’s USD 1.4 trillion green building market⁹. Despite adequate liquidity in this space, the effectiveness of linking low-risk investment to certified green buildings is yet to be established.

As India nears the beginning of the HFC phase-down under the Kigali Amendment, timely demand-side and supply-side financing measures can accelerate India’s sustainable cooling transition with significant gains for both people and the planet. Such interventions must be targeted at all stakeholders across the value chain, including manufacturers, consumers, retailers, service providers, and financial institutions.

Bhuvan Ravindran is a Research Analyst at the Council on Energy, Environment and Water (CEEW), an independent not-for-profit policy research institution. Send your comments to [email protected]

Bhuvan RavindranAuthor

Research Analyst