Best Practice Manual for Investment in Ground Source Heat Pumps in India

About the Financing Investment in Clean Energy Platform Under the European Union (EU) – India Clean Energy and Climate Partnership (, which was agreed at the EU-India Summit in 2016 and confirmed in 2017, 2020 and 2021, the EU Delegation to India is developing the “EU-India Financing Investment in Clean Energy Platform (FICEP)”. The objective of FICEP is to encourage investment in the field of energy efficiency and renewable energy systems in India and the EU. FICEP is expected to act as a catalyst for investments and is intended to inform and connect various actors in the energy sector, including initiators and innovators, project promoters and entrepreneurs, project developers and the European and Indian financing community. The platform will monitor the investment trends (from the EU to India and vice-versa) and will assess the potential for investments in energy efficiency and renewable energy, the investment gap and the main barriers for this gap. It will
look at the possible solutions to address the most relevant barriers. The platform will look into policy and regulatory barriers and solutions and would enable policy-level discussions and act as a platform for research. It will create a framework tool / manual to assist project developers/entrepreneurs in creating bankable and market-ready proposals. It will also provide a comprehensive compendium of Central & State policies, programmes and initiatives in the EU and India. The platform would also facilitate business-to-business (B2B) collaboration, by linking European and Indian energy efficiency and renewable energy businesses and connecting them to the financial actors and knowledge on the platform. The platform will have an IT component, supporting all these objectives.

Ground source heat pump (GSHP) market in India and Europe
India’s demand for space cooling in buildings is projected to increase 11-fold by 2037-38, owing to rapid expansion of the building sector together with the increase in disposable income and, more importantly, an increasing need for cooling as temperature rises. India’s current cooling supply mix is dominated by Hydrofluorocarbon (HFC) refrigerant-based technologies which are the major contributors to space-cooling-related direct and indirect GHG emissions. According to the Global Cooling Prize report2 the direct and indirect GHG emissions from RACs alone could contribute to a 0.50C increase in global warming by 2100. To address the rising cooling-related emissions, India has launched the India Cooling Action Plan (ICAP) in 2019 which envisions to reduce, against the business-as-usual scenario, cooling demand across sectors by 20% to 25% by 2037-38, reduce refrigerant demand by 25% to 30% by 2037-38, and reduce cooling energy requirements by 25% to 40% by 2037-38.
This is set to increase the demand for low carbon cooling technologies which have the potential to reduce the cooling demand, refrigerant demand, and cooling energy requirements. Ground Source Heat Pumps (GSHPs) is one such low carbon cooling technology which is a scalable, efficient and financially viable with tested and successful demonstrations in the Europe and elsewhere globally. GSHPs use the earth’s relatively constant temperature between 16 – 24oC at a depth of ~6m to provide heating, cooling,
and hot water for residential and commercial buildings. GSHPs harvest heat absorbed at the earth’s surface from solar energy. As temperatures within the earth remain relatively stable compared to seasonal changes in ambient air, GSHPs use water-to-water or water-to-air approaches to treat this stable thermal environment as a heat source in the heating season and a heat sink in the cooling season.

Schematic of variants of GSHP and the sub-soil temperature profile demonstrating availability of stable
temperature at higher depths

The GSHP market is driven by multiple drivers. The green building market in India is growing at a significant rate and is projected to reach $40 billion by 20253.Low carbon cooling solutions could help achieve significant energy savings (in the range of 35-40% when compared with conventional cooling systems), so end users aspiring to achieve high energy performance building and green ratings are increasingly opting for these technologies to achieve additional credits for their green building certification submission. The need for energy efficient and profitable operations and reduction in
GHG emissions is widely recognized by the corporate sector, which see GSHP as a viable technology to achieve their targets. Corporate sustainability commitments are another key driver for the adoption of low carbon cooling as industries adopt these solutions in their manufacturing facilities via sustainability initiatives. The growth in the GSHP market can also be attributed to the year-round stability of cooling output at higher energy efficiency, longer service period, expected availability of financial incentives from the government and indirect benefits for certain end users (such as hotels, hospitals, etc.). In terms of supply chain, the Indian GSHP vendors and installers are dependent on import of High Density Poly Ethylene (HDPE) pipes, a key component of a GSHP installation. However, backed by Make
in India and Atmanirbhar Bharat initiatives, the Indian manufacturers have expressed an interest in developing domestic manufacturing facilities to reduce the dependence on import. This would also bring down the capital investment of GSHP systems, making them competitive with conventional cooling systems.

Best Practices for Raising Funding in the Sector
Financing Instruments in Line with Sector Requirements The primary pathways for funding macro and micro trends in the GSHP sector are usually stage based. Along their growth path, companies are presented with several paths that can be widely categorized as equity, debt, and non-dilutive financing. Within each of these broad categories, there are subcategories of particular importance for the sector
players as their success and sustainability is often determined by an ability to match appropriate funding to a specific stage of development15. Presented below are different stages at which capital can be obtained by such players and what are typical milestones attached to each stage.

Stages of fund raising for a company

This figure presents the typical milestones companies in the sector target to achieve as they move along the financing curve16. Both debt and equity are required to finance the start-up and growth capital needs of early-stage energy access businesses. Investment funds find the sector appropriate for equity financing, due to the high-risk/high-growth nature of the companies, the need for multiple rounds of financing, and the potential for a trade sale and, generally, for scaling up and business expansion, equity is more appropriate than debt financing. For working capital financing, including for import, inventory, and stocking, manufacturers prefer to use debt. However, companies’ on-ground experience will
often depend on their ability to accomplish the business, market, and organizational milestones with or without external funding. With technology innovation, typically more, riskier funding is needed to complete the prototype, run the pilot, and set up manufacturing processes. As a result, technology companies have a tendency to raise funds from equity investors until that stage.

Collaboration with Europe
Collaboration on Financial Front
The European institutions can be engaged in the Indian GSHP sector through foreign institutional investment (FII) route whereby equity financing and, to some extent, debt could be accessed through impact investors, venture capitalists and European funds targeting the GSHP as well as clean cooling sector in India. These ecosystem financiers could provide commercial investment to early-stage enterprises and pilot demonstration projects, thereby supporting innovation in this sector. The essence of this best practice manual is to provide such investors with an understanding of what the basic requirements of providing debt and equity instruments to Indian enterprises are. Further, funding
through bilateral and multilateral organizations by the means of alternative financing, such as results-based financing, risk guarantee funds, and design-stage grants, could de-risk potential investments and herald growth in the GSHP sector. Furthermore, a scope of collaboration between donor agencies and private financial institutions (such as impact investors, venture capital firms, banks, non-banking financial companies (NBFCs), etc.) could be explored to extend financial support to companies and demonstration projects through innovative financing mechanisms. Financing structures such as blended finance help mitigate investment risks by distributing financial risk across multiple instruments (such as equity, debt and grants, etc.). Such financial instruments could be critical for the development and expansion of GSHPs.

Stakeholders Consulted
The manual attempts to capture views of several stakeholders including technology providers and installers in India, subject matter experts, strategic think tank – active in GSHP, research institutions and financial institutions. The development team identified and consulted several technology providers to understand the current state of the technology and its market in India, growth potential, barriers and challenges and potential solutions, success stories. With a view to capture the progress and status in the European market and the factors leading up to the growth, the team consulted established European think tanks. Finally, to understand the perspective of lenders, their position in the market and willingness to venture into this technology, the team consulted leading lender in India. The consulted stakeholders are as follows.

In terms of financing from financial institutions, concessional lines of credit are available for banks/development financial institutes to provide low-cost finance building energy efficiency (new built and retrofit). As such GSHP technology solutions are not yet financed as a stand-alone application but rather as a mix of energy efficiency strategy. According to subject matter experts, the primary reason for absence of institutional investors is the ticket size of such projects. Such investors are interested in ticket size of € 40-50 million, which may not be possible for stand-alone GSHP projects and a demand aggregation of such scale may be impractical. For large corporations/industries, the low-cost finance is provided based on the assessment of their balance sheets while for small businesses and homeowners, it depends on their creditworthiness and the use case of the finance.

Source:CECP EU

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