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Business Model for Scaling Up Super-Efficient Appliances
A Deep Dive on Ceiling Fans in India
14 February, 2022
Dhruvak Aggarwal and Shalu Agrawal

Suggested citation: Aggarwal, Dhruvak and Shalu Agrawal. 2022. Business Model for Scaling Up Super-Efficient Appliances: A Deep Dive on Ceiling Fans in India. New Delhi: Council on Energy, Environment and Water.

Overview

This study proposes a business model to scale up the demand for energy efficiency in one of the most commonly used household appliances: ceiling fans. Based on an assessment of the economic case for super-efficient (SE) ceiling fans and gaps in existing business models, this study proposes a demand-side business model that can help the super-efficient fans market to break out of the current low equilibrium of demand and supply. The study also discusses strategies to target such interventions towards low-income consumers, which would have positive spillover effects on the discoms’ financial health and their ability to provide quality electricity services.

Key Findings

  • India has made substantial progress in promoting energy-efficient lights, ACs and refrigerators. However, out of the 90 per cent households that use  ceiling fans, only 3 per cent currently use energy-efficient fans. Their adoption  is concentrated in large urban centres like Delhi and Mumbai, and among higher-income households.
  • The most energy-efficient ceiling fans in the market today consume 50 per cent less energy than conventional fans. Transforming the entire residential ceiling fan stock and the annual market toward super-efficient fans can save 15 per cent of India’s residential power consumption annually.
  • The annual market for super-efficient fans in India stands at INR 12,000 crore (USD 1.64 billion), while the total addressable market in the residential sector is about INR 1.42 lakh crore (USD 20 billion).
  • The total addressable market size is 476 million fans. This includes 410 million ceiling fans already in use in households and an unfulfilled demand of 66 million.
  • While super-efficient fans can save enough money on power bills to pay for themselves in 4-6 years, the payback period at current market prices (~ INR 3,000) is not attractive for most consumers. At the prevailing electricity tariffs, prices need to drop by half for the payback period to be attractive for most consumers.

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Dhruvak Aggarwal
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“Beyond just making energy-efficient technologies affordable, business models must now focus on building trust in these technologies across the supply chain. That is the only way to capture and retain benefits of energy-efficiency at scale.”

Executive Summary

In a climate-constrained world, energy efficiency can be an effective compass to identify solutions that could yield carbon, energy, and resource savings. The International Energy Agency (IEA) projects that 40 per cent of the emission cuts required to reach global climate goals would come from energy efficiency (Fischer 2021). In developing countries like India, energy efficiency is much more than a climate imperative and can unlock diverse developmental opportunities.

India has achieved near-universal access to electricity in recent years, but there remain gaps in power supply reliability and quality (Agrawal, Mani, Jain, et al. 2020). One way to plug these gaps is to ameliorate the financial disincentive for power distribution companies (discoms) to supply reliable electricity in areas with low revenue recovery. This can be achieved by enhancing energy use efficiency among poorly served, low-income households (Phadke et al. 2019).

There exists a vast scope for scaling up super-efficient appliances, particularly lights, fans, and televisions (TVs), which form the bulk of the appliance inventory in India (Agrawal, Mani, Aggarwal, et al. 2020). But challenges like high upfront cost, limited availability in local markets, and low awareness of benefits hold consumers back from actively adopting efficient variants (Chillayil and Kottayil 2021). This study focuses on scaling up super-efficient variants of one of the most commonly used household appliances: ceiling fans.

The business case for super-efficient ceiling fans

Conventional fans use induction motors and consume about 75 W at top speed. Superefficient (SE) fans, using brushless direct current (BLDC) motors and improved fan blade design, use 28-35 W at top speed. Manufacturers of these fans in India include newer players such as Atomberg, Halonix Technologies, Oceco and Ram Ratna Electricals, as well as incumbents in the fan industry such as Havells, Orient Electric, Crompton and Usha.

Of the 90 per cent of Indian households using ceiling fans, only 3 per cent use energy-efficient variants (Agrawal, Mani, Aggarwal, et al. 2020). As per CEEW’s India Residential Energy Survey (IRES), the adoption of energy-efficient fans, though low, is concentrated in large urban centres like Delhi and Mumbai, and among higher-income households. In India, ~40 million ceiling fans are sold annually, of which less than three per cent currently comprise SE models. This puts the potential annual market for SE fans at INR 12,000 crore (~USD 1.64 billion). The total addressable market for SE fans in India’s residential sector stood at an estimated 476 million (~INR 1,42,800 crore or USD 20 billion) as of 2020. This includes 410 million ceiling fans already in use in households and an unfulfilled demand of 66 million.3 Figure below illustrates the direct and positive spill over effects from scaling up SE fans in India.

India presents a huge opportunity for energy and emissions savings through super-efficient fans

 India presents a huge opportunity for energy and emissions savings through SE fans

Source: Authors’ analysis based on Agrawal, Shalu, Sunil Mani, Karthik Ganesan, Abhishek Jain, and Johannes Urpelainen. 2020. “India Residential Energy Survey (IRES) 2020 Data.” New Delhi: Council for Energy, Environment and Water; Frost & Sullivan (2018) and stakeholder interactions.

The monetary savings accrued through energy savings are shared between the consumers, the discom, and the state government, depending on the tariff structure in vogue in each state. For example, in Uttar Pradesh (UP), rural domestic consumers and those below a “lifeline” consumption threshold receive tariff subsidy from the state government, over and above an implicit cross-subsidy. As per our estimations, replacing one conventional ceiling fan with an SE fan in all of the domestic consumers’ home could save INR 1,573 crore (USD 215 million) in subsidies for the state government and INR 270 crore (USD 37 million) in cross-subsidies for the state’s discoms.

By switching from a conventional to an SE fan, an average residential consumer would save ~INR 500 (USD 7) per year. These savings are adequate to recover an SE fan’s current average retail cost (~ INR 3,000 or USD 41) in six years, which is lower than a fan’s technical life (10-15 years) but not attractive enough. The payback period is even higher for low-income consumers paying a subsidised electricity tariff, as shown in Figure ES2. SE fans currently occupy a small share of the fans market, implying untapped economies of scale. Achieving these economies would reduce fan prices, thereby improving the payback period. We observe that a drop in the retail prices of SE fans by half would make the payback period attractive (three years or less) for consumers paying INR 6 per kWh and above. Consumers paying lower tariffs would need further financial support to bring down the payback period to under three years (e.g., consumers paying INR 4 per kWh would need support of INR 500).

Source: Authors’ analysis.
Note:
1. The coloured lines show how the payback period would change for consumers paying various power tariffs as SE fan prices reduce. The current retail price is around INR 3,000 (USD 41), while the price discovered in EESL’s latest bulk procurement rounds is INR 2,400 (USD 33). SE fans would be competitive with conventional fans at INR 1,000 – 1,500 (USD 14-21).
2. “Delhi” refers to the National Capital Territory of Delhi.
3. Tariff ranges vary among Indian states. For example, in Uttar Pradesh they are in the range of INR 3-7 per kWh, while in Maharashtra they are INR 1.12-11.71 per kWh.

Barriers to scale-up of super-efficient fans

Under the Unnat Jyoti by Affordable LED for All (UJALA) programme implemented by the Energy Efficiency Services Limited (EESL), nearly 370 million LED bulbs have been distributed across India since 2015 (MoP 2021). However, efforts to distribute energy-efficient ceiling fans (50W) under UJALA met with limited success, with uptake of only 2.4 million units (MoP 2021). More recent schemes by discoms in Delhi and Haryana have also seen subdued consumer interest. Our assessment of these models, based on stakeholder consultations, suggests four critical barriers to the scale-up of SE fans:

i. Difficulty in maintaining an efficient logistics chain: While the UJALA programme worked well for LED lamps, the ceiling fans programme faced damaged inventory during storage and transportation and leakages in revenue recovery from sales. This was due to reliance on distributors hired on an ad hoc basis for the programme, who were not trained in handling relatively complex appliances like ceiling fans.

ii. Gaps in providing reliable last mile support and services: Since consumers require deeper technical support while purchasing fans, such as an understanding of the features, installation support, repair and maintenance support, etc., the distribution channels used during UJALA were not as effective. Inadequate technical support led to a much lower sales rate, which caused the warranty period of inventory to expire before the actual sale, leading to further losses to EESL.

iii. Lack of awareness about replacement programmes and the benefits of super-efficient fans: This has resulted in low uptake of discoms’ own replacement schemes. Messaging channels and methods have been unable to create an organic demand among consumers for SE fans.

iv. Lack of flexible financing options for consumers: Previous business models have not provided financing and purchase options to end-consumers at scale. The on-bill financing (OBF) model proved too risky for demand aggregators (DAs) due to information gaps in inventory management and challenges in recovering the cost of appliances via power bills.

The business model for diffusion of super-efficient fans at scale

Drawing on the above insights, stakeholder consultations, a small survey of consumers in the Indian state of Uttar Pradesh and an assessment of other business models (Cash for Coolers programme in Mexico, and SELCO’s direct-to-consumer model), we propose a business model with the following features to increase the diffusion of SE ceiling fans.

1. Demand aggregation and bulk procurement for rapid price reduction in the retail price of SE fans.

2. A robust multi-channel distribution network to ensure last mile availability and servicing of SE fans. This would primarily include a partnership between the DA and original equipment manufacturers (OEM) to leverage the latter’s existing distribution and retail network. Online platforms (such as EESL Mart) can be utilised where consumers have already adopted online appliance purchases, such as in tier-1 and tier-2 cities (Pahwa et al. 2021). Fans can be sold through brick-and-mortar retail stores where distributors have established relationships with retailers. In other areas, OEMs, the DA and discoms can jointly identify and empanel strategic points of sale.

3. A management information system (MIS) for efficient coordination between the various actors and maintaining a transparent record of sales and inventory movement in real-time.

4. Innovative consumer engagement strategies led by discoms and the DA to create awareness about the programme and the product benefits among consumers, and other actors, such as retailers and local technicians.

5. Multiple payment options to make it easier for consumers to purchase higher-priced appliances like SE fans. These may include i) upfront payment via retailers, online platforms or channel partners, ii) OBF, enabled and managed via the MIS, and iii) third party financing options through partnerships with microfinance institutions (MFIs) and non-banking financial companies (NBFCs).

As observed for the UJALA programme for LED lamps, it may take a few rounds of bulk procurement by the DA to bring SE fan prices well below market prices and make them affordable for low-income consumers (Chunekar et al. 2017). To manage the demand risk, the DA should initially tap the middle- to high-income consumers concentrated in urban areas and increasingly target the low-income consumer segment as the product prices drop over time. Tapping nodes of aggregate demand such as social housing schemes, commercial buildings and institutional spaces (schools, health centres, government offices) could significantly boost the bulk procurement efforts in the initial phases and help reduce prices. A parallel provision of appropriate financial incentives by discoms and financing options could help bridge the affordability gap for low-income households until market transformation is achieved. These incentives could be:

• Rebates on purchasing super-efficient fans, which could be funded by monetary savings for the state discoms and governments associated with reduced energy consumption in the domestic sector. Alternatively, rebates could be financed through expenses allowed for discoms under Demand-Side Management (DSM) regulations. The model must be accompanied by a robust monitoring, reporting and verification (MRV) exercise to validate the energy (and hence, monetary) savings.
• Lower goods and services tax (GST) on super-efficient fan models for a predetermined period of 2-3 years. Ceiling fans currently attract a GST rate of 18 per cent. Bringing them to the 12 per cent slab would reduce the retail price by about INR 150. Reducing the slab further to 5 per cent would reduce the retail price by another INR 180, bringing the price down to about INR 2,670 (an 11% reduction).

The proposed business model can be extended to other commonly used appliances (such as lights, TVs), though with changes based on product characteristics, the extent of market transformation, and supply chain cost structure. Scaling up super-efficient appliances can have spillover effects beyond the electricity value chain and it can give a boost to the domestic manufacturing industry, associated high-skilled jobs, and economic value addition. Insights and the model proposed in this study could be adopted by other developing countries facing similar aspirations and constraints to devise their own energy-efficiency interventions. Besides energy and emissions savings, such interventions would enhance living standards by enabling access to reliable energy services at lower costs.

BUSINESS MODEL COMPONENTS FOR SUPER-EFFICIENT FANS

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