Energy efficiency: The road to MSME recovery

The Covid-19 pandemic has forced the sector to take a hard look at costs. Savings in energy expenses can become a pillar of renewed competitiveness. It is time for a dedicated policy for energy efficiency in the MSME sector.

Energy efficiency: The road to MSME recovery
Economic recovery cannot happen if MSMEs cannot prosper.

By Hemant Mallya & Arunabha Ghosh

Millions of micro, small and medium enterprises (MSMEs) form the core of India’s non-agricultural economy. Accounting for 90% of industrial units, in FY19 they contributed 45% of total industrial value addition and almost half of exports (worth Rs 11.1 lakh crore). Structural problems in the financial sector and a countrywide lockdown have dealt a terrible blow: halted production, low/no sales, and dried up credit. While small businesses across the world might be suffering on similar counts, there is a third, more chronic, ailment for MSMEs in India: high energy costs. If MSMEs have to survive—and thrive—the road to recovery must pass through a transition to efficient and clean energy.

The sector is ridden with contradictions. It is large enough to consume about 30% of energy delivered to formal industrial units. Yet, only 48.2% of MSMEs use electricity as the primary source of energy; 38.6% do not rely on any formal power source at all.

For these enterprises, energy costs are high relative to costs that industries face in other major economies. On a purchasing power parity basis, India pays five times the power price of US industry; two-and-a-half times China’s. Consequently, energy accounts for a significant share of total input costs, ranging between 10% and 25% for energy-intensive industries. In a highly price-sensitive domestic market and highly competitive export market, expenditure on energy squeezes profit margins.

So, there should be a clear case for improving energy efficiency, right? Wrong. Despite pockets of interventions, there has been no wide-scale uptake of energy-efficiency measures. Of approximately 400 energy-intensive MSME clusters, only two studies have mapped energy consumption in 96 clusters. The Technology and Quality Upgradation (TEQUP) scheme for MSMEs had a budget less than 1% of the overall budget of the Development Commissioner-MSME (DCMSME) during the 12th Five Year Plan. And 70% of this tiny allocation remained unspent.

The biggest challenge is the lack of access to formal credit. Enterprises rely on informal and personal finances for over 50% of capex and 60% of opex. Energy-efficiency investments tend to have high upfront costs. Low (or perceived low) creditworthiness of many MSMEs remains a barrier to adopting measures, which could otherwise help their bottom line. Market conditions matter: MSME units competing with larger enterprises are three times more likely to carry out an energy-efficiency audit and three-and-a-half times more likely to invest in energy-efficient technologies (EETs).

Another hurdle is limited awareness. A CEEW survey of 429 MSMEs in 11 clusters in eight states found that only 45% were aware of EETs relevant to their sector.

The lack of awareness stems from wilful or unwitting ignorance of energy consumption across industrial processes. Enterprises tend to only look at monthly energy bills and overall energy consumption without correlating the data with specific equipment efficiency or energy intensity of output. They often have no monitoring tools or energy-efficiency practices, nor any data on performance benchmarks of EETs used for different industrial processes in each sector. Yet, precisely measuring energy consumption increases the odds of investment in EETs nearly six-fold.

Thirdly, there is high turnover of trained operators who have the awareness and the skills to apply energy-efficiency measures. Difficulty in retaining workers or skilling new ones puts energy efficiency low on the list of priorities.

Fourthly, there is no clear roadmap at a policy level. The Ministry of MSMEs allocated only Rs 13 crore during 2012-17 for surveys and its research wing. By contrast, the Ministry of Statistics and Programme Implementation allocates Rs 80 crore annually for the Annual Survey of Industries database to collect information on formal sector enterprises (which includes formal MSMEs). Since 99% of MSMEs fall in the informal category, this is a major blind spot: the last MSME census was conducted in 2005-06. We cannot manage what we don’t measure.

The Covid-19 pandemic now forces the sector to take a hard look at costs. Savings in energy expenses can become a pillar of renewed competitiveness. A first step would be to designate the DCMSME for all energy-efficiency mandates for MSMEs. The Energy Conservation Act (ECA) empowers the Bureau of Energy Efficiency for ‘designated consumers’. Most firms, however, given low levels of energy consumption, remain outside the ECA’s purview. It makes sense to delegate MSME-related energy efficiency to the DCMSME, which can leverage its network of district offices.

Next, develop a dedicated information system. We call it the MISHRII (MSME Information System for Holistic and Real-time Identification, Incentives and Support). The idea is to develop a nationwide, centralised online platform to identify and track enterprises and their employees.

The MISHRII would allow for a systematic and customised approach to collecting information on energy usage metrics. It would be cross-linked with power utilities and the Goods and Services Tax Network, for fuel and product output information, respectively. This information can be used to benchmark enterprises for energy efficiency against their peers. The MISHRII could also be used to communicate information on EETs, incentive programmes, enable trainings, and track improvements over time.

The MISHRII can be used to build a credit history of enterprises, allowing them to become a part of the formal banking network. It can also be used to generate ‘intent-to-pay’ metrics, which rely on diverse alternative data, such as timely payments of utility bills, cash conversion cycle of businesses, sector-specific risks, payment of taxes, etc. Such information gives insights into the potential creditworthiness of enterprises, in turn allowing them to borrow capital to invest in EETs.

Finally, develop a roadmap to identify opportunities and remove hurdles. It is time for a dedicated policy for energy efficiency in the MSME sector. There should be mandatory energy audits for firms with more than Rs 25 crore turnover (along with monetary support from the Ministry of MSMEs with a sunset clause). Mandating disclosure of energy consumption for large companies would also help MSMEs in their supply chain become more energy-efficient. Dedicated pilots and technology demonstration platforms at a cluster level would increase awareness. Moreover, larger clusters should support incubation hubs to develop practical innovations that respond to the needs of MSMEs. If public sector banks adopted innovative financial mechanisms, using intent-to-pay as a metric, many enterprises could meet the criteria of creditworthiness. Easier borrowing would also help promote distributed renewal energy generation in MSMEs clusters.

Economic recovery cannot happen if MSMEs cannot prosper. While the temptation might be to dilute standards, the sector can seize this moment to become more sustainable, with lower energy footprint and sharper economic edge.

Mallya is senior programme lead and Ghosh is CEO, Council on Energy, Environment and Water. They are authors of ‘Jobs, Growth and Sustainability: A New Social Contract for India’s Recovery’
Twitter: @GhoshArunabha

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First published on: 17-06-2020 at 05:35 IST