Build Forward Better: Incentivising Energy Efficiency in Cooling

Build Forward Better: Incentivising Energy Efficiency in Cooling The COVID-19 pandemic has shed light on the significance of space cooling with many working from home and looking for thermal comfort to ensure productivity. (PTI)

“Efficient and climate friendly cooling is a crucial piece of the climate and sustainable development puzzle. We need cooling to protect vulnerable populations from heatwaves, keep vaccines viable and workforces productive” – UN Cooling Policy Synthesis Report.

The pandemic has shed light on the significance of space cooling with many working from home and looking for thermal comfort to ensure productivity, and the need for robust cold-chain infrastructure for the vaccine.

In the upcoming summer months, many citizens will look to modes of cooling their spaces, giving air conditioner sales a significant boost. According to ICAP, India’s air conditioning market has been growing at 13% per year since 2010 and the demand for air conditioners is expected to grow by 11–15% per year over 2017-2027 period.

After the brief impediment the AC and refrigeration industry faced in 2020 due to COVID-19, the next five years are expected to witness considerable rise in their sales. More air conditioners directly translate to more GHG emissions, which India is battling against as party to the Paris Agreement and the Montreal Protocol to mitigate the adverse impact of climate change and phasing out of super pollutants like HCFCs and HFCs.

India has taken exceptional strides in the fight against climate change, becoming one of the first countries to have a comprehensive and integrated National Cooling Action Plan. Launched in March 2019, India Cooling Action Plan explicates India’s vision in reducing the refrigeration and its associated energy, emissions demands, along with building capacities of R&AC service technicians by 2037-38.

Although refrigerant leaks from air conditioners contribute to a very small percentage of the world’s total carbon emissions, due to their high Global Warming Potential (GWP), the gases trap hundreds or even thousands of times as much heat in the atmosphere as carbon dioxide, significantly exacerbating global warming. Moreover, the Kigali Amendment to the Montreal Protocol has emphasised the need to use energy-efficient cooling equipment to ensure energy security.

Hence, the growing demand for ACs calls for immediate actions to increase market penetration and promote the sales of Super-Efficient Air Conditioners (SEACs) that use low-GWP refrigerants. According to TERI analysis, a Super-Efficient Air Conditioner (SEAC) (ISEER 5.4) leads to savings of around Rs 5,000/year compare to 3-star AC (ISEER 3.5) and about 35% less indirect CO2 emissions.

Refrigeration and Air Conditioning (RAC) sector makes the major part of the cooling sector, and the highest demand for the same will be in developing countries, including India. Based on TERI analysis, the installed AC stock in India is projected to reach up to 124 million room ACs in 2030, compared to the estimated 30 million in 2017. ACs have various components, including compressors, heat-exchangers, controllers etc., for which India relies heavily on several countries, primarily China and Thailand.

Import statistics suggest very little local value addition from component manufacturing perspective in the air-conditioners manufacturing in India. The pandemic caused disruption of supply chains and slowed down imports of AC components, highlighting India’s heavy dependence in meeting the domestic demand for the air-conditioners. PM Modi had stated last year that India imported more than 30% of its domestic demand for ACs.

According to the Ministry of Commerce and Industry, 2.9 million ACs were imported in 2018-19. In order to encourage domestic manufacturing and export competitiveness, government initiatives Make in India and Atmanirbhar Bharat were launched, under which one of the focus areas is supporting AC manufacturing in India.

This was further bolstered by Union Budget 2021, which includes a 15% hike on the customs duty levied on compressors used in air conditioners and refrigerators, surging the price of the final products up by 2.5% from April 1, 2021.

Production-Linked Incentive (PLI) scheme worth Rs 6,238 crore for White Goods (air conditioners and LEDs) will come in effect from April 1, 2021, which will grant incentives of 4-6% to eligible investors on incremental sales of goods manufactured in India.

The recently released TERI’s cooling sector perception study shows that over 90 per cent of the consumers for cooling products look at the energy efficiency rating of the appliance but the cost is always of paramount importance. While the latest developments are in line with the Make in India and Atmanirbhar Bharat programmes, the duty hike may threaten the already low sales of the SEACs as the price sensitivity will force consumers to opt for the more affordable, albeit lower efficiency ACs, impeding faster penetration of the SEACs into the market.

Moreover, the PLI scheme does not include any provision for incentives based on the energy efficiency of the sold goods. Consequently, there may be no push for the manufacturers to invest in the development of the more efficient, but more expensive technology in the homeland, restricting indigenous industry innovation.

To take the brunt of the high costs away from the consumers, direct incentives in the form of subsidies and additional benefits like after-sales services, and indirect benefits by reducing the costs for the manufacturers will help promote the sales of SEACs.

Furthermore, incentivising AC retailers and manufacturers for the sales of ACs based on the efficiency rating will encourage to address the growing cooling demand while keeping in line with the Kigali Amendment and climate change commitments. This can be done in various ways – by increasing the incentives for SEACs under PLI scheme, by providing financial discounts on bank interest or in the form of fiscal concession as tax breaks.

In the past, Bureau of Energy Efficiency under the Market Transformation for Energy Efficiency (MTEE) scheme, planned to facilitate accelerated market transformation for super-efficient appliances by providing financial stimulus innovatively at critical point/s of intervention.

Employing innovative business models to lower the upfront costs of the SEACs, while simultaneously highlighting their cost benefits can give their sales the much-needed boost. Super-Efficient AC Program (ESEAP) was launched by the EESL in the year 2020, with the aim to deploy a total of 250,000 super-efficient air conditioners across India with an investment of around Rs 200 crore.

The recent Cooling needs assessment report by SEforALL states “The implications that cooling demand has for electricity grid, climate change, clean air, economy, well-being, and workforce development are currently not fully understood. An underestimation of the scale may contribute to a lack of ambition in policy, infrastructure and technology development, and could ultimately have far-reaching social, economic and environmental consequences”.

Thus, enabling policy framework, with focussed industry-driven approach and contingent of affordability to develop import substitutes that are cost-effective, pollution free and climate friendly ACs is the need of the hour. While meeting India’s cooling demand, it is crucial to choose the sustainable path and ensure that the pace of facilitation for innovation in India and the current policies are aligned with the country’s environmental goals and technology development is encouraged.

Disclaimer: Manjeet Singh is Associate Fellow, TERI and Madhur Bhargava is Project Associate, TERI. Views expressed are personal.

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