A background note can be accessed here: India’s Energy Savings Insurance Roadmap Could Unlock the Next Phase of Industrial Energy Efficiency
The OECD roadmap argues that the principal barrier to industrial energy efficiency is no longer the availability of proven technologies, but the financial and performance risks associated with adopting them. To what extent should India's energy-efficiency strategy shift from promoting technologies to reducing investment risk?
India's energy-efficiency strategy should increasingly focus on reducing investment risk. India's industrial energy-efficiency challenge is increasingly recognised as a financing problem. Although commercially proven technologies are widely available, investment remains constrained by limited access to finance, driven by lenders' limited understanding of the holistic benefits of energy-efficiency projects and the lack of reliable performance data, both of which increase perceived risk. The OECD roadmap shows that these financing constraints stem principally from performance uncertainty, collateral requirements and limited lender confidence, even where commercially viable technologies already exist. The Bureau of Energy Efficiency (BEE) estimates the domestic market at ₹1,50,000 crore, yet Energy Service Companies (ESCOs) have captured only around 5 percent of this opportunity through approximately 130 empanelled firms, highlighting the scale of the financing gap.
By underwriting projected energy savings, Energy Savings Insurance (ESI), as outlined in the roadmap, reduces performance risk and can partially substitute for collateral requirements, improving MSMEs' access to commercial finance where viable projects would otherwise remain unfunded. For instance, the financial modelling for a forging unit in the Faridabad cluster estimates an internal rate of return of 12.26 percent with ESI and 12.05 percent without, with payback periods of 5.4 and 5.7 years respectively. At cluster level, the corresponding returns are 28.92 percent and 28.65 percent. The marginal improvement suggests that ESI improves project bankability more than project profitability.
Earlier mechanisms, including the Partial Risk Guarantee Fund for Energy Efficiency and the Small Industries Development Bank of India (SIDBI)'s Partial Risk Sharing Facility, focused on mitigating lender credit risk without addressing uncertainty around realised energy savings. The shortfall risk stayed with the enterprise, unquantified and uninsured, while public funds absorbed the lender's loss after the event. The roadmap instead establishes a sequence in which the same risk is defined, measured, priced and transferred. The standardised contract converts the projected savings into an obligation on the technology provider; an independent validation entity verifies the projections before installation and measures performance afterwards; the insurer prices the residual probability of shortfall and compensates the enterprise if savings are not achieved; part of that exposure is ceded to a reinsurer.
This determines how long public support must continue. A guarantee or subvention absorbs cost without anyone estimating the likelihood of underperformance, and therefore has no natural end point. A priced risk generates loss experience, allowing premiums to fall and the concessional layer to taper, which is why the roadmap treats its proposed credit guarantee as transitional. Policy should therefore prioritise the institutional foundations that make performance risk priceable, including standardised contracting and project preparation, accredited validation and measurement, insurance approval and reinsurance access, and a guarantee layer with a defined taper.
The proposed ESI framework combines insurance, standardised contracts, independent measurement and verification, and blended finance to create a market for energy-efficiency investments. How should policymakers ensure that these financial innovations evolve into a self-sustaining market rather than remaining dependent on public support?
The proposed ESI framework should be viewed as market infrastructure rather than a standalone financial product. By combining standardised energy performance contracts, independent technical validation, insurance-backed guarantees and commercial finance, it creates the institutional foundations for a functioning market. Its long-term success will depend on developing the institutional capacity, data systems and commercial participation required for the market to operate independently of sustained public support.
India's insurance market currently lacks historical performance and claims data to support actuarial pricing. Consolidating evidence from the Perform, Achieve and Trade (PAT) Scheme and Assistance in Deploying Energy Efficient Technologies in Industries and Establishments (ADEETIE) investment-grade audits into a national database would provide the empirical foundation needed for commercial underwriting. This evidence base would enable insurers to price performance risk more accurately, strengthening commercial underwriting and expanding market participation.
The willingness of the Insurance Regulatory and Development Authority of India (IRDAI) to approve an ESI product, together with discussions between domestic insurers and international reinsurers, indicates that the principal constraint is limited market maturity. Since more than 90 percent of enterprises in MSME clusters are micro-enterprises, project aggregation is essential to reduce transaction costs, improve risk diversification and create investment opportunities of sufficient scale for insurers and lenders.
Policy should focus on developing standardised contracts, independent verification systems, ESCO capacity and lender awareness, while enabling commercial finance to gradually replace concessional support as the market matures. The roadmap therefore treats public support as a transitional mechanism, with guarantees gradually giving way to commercially priced insurance as claims experience accumulates and the market deepens.
The roadmap positions industrial energy efficiency as a means of improving productivity, strengthening energy security, and supporting India's decarbonisation goals, particularly for MSMEs. How can India leverage this financing ecosystem to enhance industrial competitiveness while advancing its clean energy transition?
India should position industrial energy efficiency as a strategy that strengthens industrial competitiveness, enhances energy security and supports decarbonisation. It can achieve this by improving productivity, reducing operating costs and reinforcing the financial resilience of MSMEs. The projected investment requirement of ₹10–13.2 lakh crore by 2031 underlines the importance of mobilising private finance through credible risk-sharing mechanisms to scale these investments.
MSMEs account for approximately 25 percent of industrial energy consumption, which is projected to increase by around 50 percent by 2030. Technologies including IE3 motors, variable speed drives and waste heat recovery systems offer significant opportunities to improve resource efficiency while lowering production costs.
Although export-oriented manufacturers will increasingly face carbon-related trade measures such as the Carbon Border Adjustment Mechanism (CBAM), domestic productivity gains and cost efficiencies present a very strong economic rationale for scaling industrial energy efficiency across India's manufacturing sector. The independent measurement and verification framework proposed under ESI can also generate credible performance data that support both lenders' due diligence requirements and international buyers' increasing demand for verified sustainability performance.
Over time, verified energy-cost reductions can strengthen firms' debt-servicing capacity and creditworthiness, creating a virtuous cycle in which successful investments facilitate greater access to commercial finance while reinforcing India's long-term industrial competitiveness and clean energy transition.