Applying Demand aggregation across value chains for Green Recovery

The ongoing COVID-19 pandemic has exacerbated societal and economic challenges. Micro, Small & Medium Enterprises (MSMEs) in India have been particularly hit by the pandemic, subsequent lockdown and exodus of migrant workers that followed the lockdown. While the economy is slowly opening, a key concern for MSMEs is that they may not be able to operate at full capacities. On the occasion of the 2nd edition of International Micro-, Small and Medium-sized Enterprises Day, we must find ways to unlock their potential to achieve the sustainable development goals and transition to low-carbon economy.

Role of MSMEs in India

India has the largest number of MSMEs in the world after China. Out of a total of 63.3 Million, 19.6 million MSMEs are manufacturing enterprises. In 2017, the share of MSMEs in India’s GDP was nearly 29%. MSMEs in the manufacturing sector consumed about one-quarter of the total energy in industrial sector. However, a more detailed breakdown of energy consumption data by sector is currently not available.

While large companies are in a better position to drive clean energy and energy efficiency measures, the puzzle has been missing a crucial piece – workable avenues for clean energy and energy efficiency measures across MSMEs. MSMEs will also play a key role in ensuring green recovery from current pandemic and we need strategies that will help them convert environmental challenges into business opportunities.

Clean Energy Transition in India

The industrial sector accounts for about 40% of the total electricity demand in India, making this sector critical to a successful energy transition.

India is also set ambitious climate and energy goals as specified in its Nationally Determined Contributions (33-35% emissions intensity reduction) and Renewable Energy (RE) goals (175GW by 2022). The Perform, Achieve and Trade (PAT) scheme covered some of the energy intensive industrial facilities, and has facilitated energy efficiency improvement of more than 8.67 MTOE (30% over-achievement against a target of 6.68 MTOE) overall as a part of its first cycle. Currently this scheme is in its fifth cycle and is expected to cover more sectors going forward.

Aggregation as an alternative solution

MSMEs face several barriers – from small individual size to single ownership of all the process and administrative structure. Hence, they are not able attract RE developers, energy efficient technology providers or financing institutions to get products designed for their needs. Demand aggregation can be leveraged to drive MSMEs for strategic collaboration. It typically involves pooling of demand across different entities, financing electricity generation and supply as well as marketing opportunities.

Aggregation brings key benefits for each stakeholder involved:

• Industries and corporates: Sharing of costs across multiple buyers improves cost-economic benefits and presents an opportunity to learn and share best practices between buyers.
• Clean energy technology providers: Entering into fewer larger contracts, as compared to multiple smaller contracts with different terms for a single project will help technology providers increase their marketing potential and streamline and simplify the modalities.
• Financial institutions: Improving bankability of projects, driving economy of scale among offtakers (and in turn reducing the cost of financing).

Demand aggregation amongst multiple corporates has already been demonstrated. In Europe, four major corporate renewable energy buyers came together to successfully aggregate demand and jointly sign multiple Power Purchase Agreements (PPAs) for wind power. Other examples like this include the LevelTen energy marketplace and the Bloomberg, Cox, Gap, Salesforce and Workday platform in North Carolina, USA.

Supply chain engagement programs are currently being undertaken by large corporates worldwide. Companies such as Apple, BT Group and IKEA are planning to facilitate their respective supply chains by persuading the suppliers to adopt RE initiatives. It is increasingly becoming the norm for companies to include consideration of emission reduction and the adoption of RE and energy efficiency measures within their supplier engagement programs.

WRI India’s effort

WRI India has worked with 4 aggregators to attempt to develop implementation pathways for emissions reduction through demand aggregation and clean energy solutions. Two of these aggregators were industrial cluster associations - Naroda Industrial Association (NIA) and Marathwada Association of Small-Scale Industries & Agriculture (MASSIA). We were also supported by 2 local partners - the Gujarat Cleaner Production Centre (GCPC) in Naroda and Eco Energy Management System (EEMS) in Aurangabad respectively. The two other aggregators were corporates – H&M and Godrej & Boyce (G&B).

We demonstrated a 4-step process for clean energy interventions:

• STEP 1: Identifying the aggregator, anchor partner and where necessary, a local partner.
• STEP 2: Data Collection to develop baseline GHG emissions and assess techno-commercial analysis of low carbon technology.
• STEP 3: Developing low carbon pathways by proposing clean energy measures.
• STEP 4: Identifying the potential for demand aggregation, and where feasible, channelizing clean energy procurement/deployment.

From our experience, we understand that demand aggregation for RE, particularly rooftop solar installations are relatively easier - we were able to demonstrably provide economies of scale and enabled MSME units to join forces. The situation was trickier with demand aggregation for energy-efficiency, since the equipment under consideration (e.g. motors) needed to be common across industries as well as in the combined ability to make the financial commitments. Aggregating demand also has a potential to reduce nearly 70,000 tCO2 equivalent in these aggregators.

WRI India intends to continue working on the issue of making demand aggregation and mainstreaming climate mitigation, particularly for Energy Efficiency (EE).

Green Recovery for MSMEs

MSMEs will need all possible support from the government - from payment of outstanding dues to extension of credit guarantees on incremental loans. However, these interventions need to be implemented in a climate-friendly manner allowing MSMEs to make a green recovery. The benefits of aggregation as demonstrated in the exercise conducted by WRI India can help build back better and deliver sustainable solutions by supplementing the Government of India’s relief measures announced for MSMEs on 13 May 2020.

The potential for scaling these interventions is significant. India has 213 Special Economic Zones (SEZs); 15,000 other industrial agglomerations; and at least 388 SME clusters. As part of the Recovery Plan for this sector, the MSME Ministry could consider aggregation model to solarise the MSME clusters. The Bureau of Energy Efficiency (BEE) should be working towards identifying the energy efficiency opportunities in the course to revival of the sector. As the country pursues its ambitious targets of 175 GW by 2022 and an emissions reduction intensity of 33-35% by 2030, while fighting the economic crisis brought about by the COVID-19 pandemic, it must leverage all available opportunities to lift the economy and implement clean energy interventions.