Beyond energy efficiency: How India’s secondary steel scheme can work for MSMEs

Indian secondary steel producers are still working to improve their energy efficiency; however, plants can often become more efficient without becoming low-carbon, and scope for emission reduction diminishes as efficiency improves. Hence, the next gains must come from measures beyond energy efficiency.

Secondary steel accounts for ~47% of India’s steel production and relies heavily on coal-based direct reduced iron (DRI). The upcoming National Strategy for Sustainable Secondary Steel (NSSS) can help the sector move beyond energy efficiency by supporting decarbonisation measures that face financial and technological barriers.

Build on existing schemes

Several programmes support cleaner, more energy- and resource-efficient production in micro, small, and medium enterprises (MSMEs), but fall short in other aspects. The Assistance in Deploying Energy Efficient Technologies in Industries and Establishments (ADEETIE) Scheme offers interest subvention, energy audits, and reports for upgrades in steel re-rolling and other clusters but excludes coal-based DRI kilns and induction furnaces, the main emission sources. The Scheme for Promotion and Investment in Circular Economy (MSE-SPICE) encourages scrap metal recycling but has sanctioned loans to only 14 units since its launch in 2023. The Green Investment and Financing for Transformation (GIFT) Scheme offers risk-sharing and interest subvention on loans up to INR2 crore (USD207,000) for micro and small units, and the Zero Defect Zero Effect (ZED) Scheme benchmarks quality and environmental standards.

IEEFA’s review of efficiency programmes found that effective delivery of these schemes remains a problem.

Where MSMEs face investment gaps

MSMEs face distinct barriers in three areas that the NSSS should target:

a) Renewable energy: The Ministry of Steel estimates that 43% renewable energy penetration sector-wide would reduce emission intensity from 2023-2024 levels by 7.5%. A recent study found that steel units procuring 10 megawatts of group-captive solar could obtain electricity at a tariff 34% below the grid and recover their equity within two years. With payback period that short, the barriers are upfront capital and regulatory complexities, including group-captive ownership and consumption rules, Green Open Access approvals and charges, inter-state transmission costs, and state-specific banking rules. 

b) Material efficiency: One tonne of scrap steel can save up to 1.1 tonnes of iron ore and cut greenhouse gas emissions from raw material consumption by ~58%. A sectoral modelling exercise shows that 30% scrap with 50% renewable electricity can reduce intensity by 28%. Yet, despite the Steel Scrap Recycling Policy and the End-of-Life Vehicles Rules, scrap collection and processing remain fragmented, informal, and of inconsistent quality. Use of iron ore pellets can reduce consumption by ~20% and lower emissions intensity by ~12%. While pellets have gained traction in some DRI clusters, further uptake is constrained by availability, higher costs, and plant-level operational challenges, particularly among smaller units.

c) Process efficiency and alternative fuels: Automated process control for preheating, energy monitoring, and management systems saves up to 12% energy, and hot charging and direct rolling add further gains, but MSMEs lack finance for these upgrades. Biochar could cut emissions by up to 1.19tCO₂/tonne of crude steel, and gas-based steelmaking emits 30% less; however, biomass supply and affordable gas remain constrained. Hydrogen-based ironmaking is the longer-term route but depends on cheaper hydrogen and new infrastructure.

Designing the NSSS

The steel secretary indicated last year that NSSS would reward year-on-year (YoY) emission cuts,  ruling out upfront capital subsidies. However, paying only for results leaves small units stuck. They must invest first, and banks seldom lend against future government payments. 

IEEFA proposes two kinds of support, matched to technology risk: Guaranteed loans with interest rebates paid on verified emission cuts for proven technologies, and milestone-based capital grants for first-of-a-kind technologies. 

a) Results-linked finance for proven technologies:

Small units struggle to finance proven technologies such as renewable power, higher scrap use, pellet switching, and waste heat recovery. The NSSS could guarantee part of a commercial loan and pay its incentive as an interest rebate once the emission cut is verified. Cluster projects, such as group-captive solar, could borrow the same way through a special purpose vehicle (SPV) convened by a renewable energy developer or industry association, with SECI’s demand aggregation model as a potential intermediary, backed by portfolio guarantees and first-loss cover. NSSS-funded guarantees could also back loans for organised scrap processing, giving MSMEs a steadier supply of sorted, tested scrap. The government pays only for verified cuts or when a guaranteed loan defaults, and the National Institute of Secondary Steel Technology already verifies plant emission intensity under the Green Steel Taxonomy.

b) Milestone grants for first-of-a-kind technologies:

First-of-a-kind technologies, such as hydrogen use in rotary kilns and vertical shaft-based DRI, are different. There are no results to pay for until someone builds them. Here, a small grant window would be critical, with funds released in stages for design, commissioning, and verified performance. The European Union Innovation Fund pays up to 40% of its grant against milestones before a plant starts operating, and the rest against verified emission cuts, and is now adapting the approach for smaller firms.

Whichever route the NSSS takes, units and projects should meet three high-level conditions:

First is energy efficiency. The NSSS’s support should go only to units that meet the benchmark, ideally confirmed by a Bureau of Energy Efficiency (BEE)-accredited audit. Units that fall short should first use ADEETIE or similar state schemes.

Second is no new coal lock-in. The NSSS should not finance new or expanded coal-based capacity. Pellets or waste heat recovery should qualify only if they deliver a minimum cut in emission intensity, and only until a set end-date. After that, support should move to fuel switching and electrification. 

Third is quality. Units should hold at least a ZED Bronze certificate. It covers product quality, process control, and energy management. The Ministry of MSME subsidises these costs. This keeps the NSSS money away from units that cannot make consistent, saleable steel, where emission cuts are hard to verify.

Designed this way, the NSSS would build on existing schemes rather than duplicate them, pay for real carbon cuts, and put public money where MSMEs cannot finance on their own.

This article was first published in ET Energyworld.