Unique scheme for energy efficiency

SAURABH KUMAR

The Power Ministry had notified units consuming more energy in paper and
some industries.

India's Perform, Achieve and Trade Mechanism creates a market for energy
efficiency through tradable certificates.

As the sun was setting on the previous fiscal year, the Ministry of Power
and Bureau of Energy Efficiency (BEE) were quietly resurrecting a historic
regulation for accelerating energy efficiency in the industrial sector. The
set of notifications issued on March 30, 2012, requires 478 industries to
achieve reductions in specific energy consumption by an average of 5 per
cent during the next 3 years. This scheme is the first of its kind in a
developing country.
PERFORM, ACHIEVE, TRADE

The Perform, Achieve and Trade (PAT) mechanism, as the scheme is called,
requires notified industries to invest in energy efficiency and reduce at
least 5 per cent of input energy cost for self and public good. The savings
in the first three years of the scheme are estimated at 9.8 million tonnes
of oil equivalent of energy or approximately 9000 MW of avoided thermal
power capacity, without compromising on the industrial output.

The direct benefits for the participating industries in this period is
reductions in input costs related to energy of approximately Rs 30,000
crore at the current oil prices.

Needless to add, this will significantly enhance global competitiveness of
industry while simultaneously reducing India's overall GHG emissions. The
PAT scheme is the flagship scheme of the National Mission for Enhanced
Energy Efficiency (NMEEE), which is one of the 8 national missions
announced under the National Action Plan on Climate Change (NAPCC) by the
Prime Minister in June 2008.

The thrust of NAPCC is towards development of multi-pronged, long-term, and
integrated strategies for achieving key goals of sustainable development,
while balancing the concerns of climate change.

The scheme builds on the provision of the Energy Conservation Act that
empowers the Central Government to notify energy-intensive industries and
mandate them to report their energy usage, appoint Energy Managers, and
adhere to targets for energy efficiency.

The Ministry of Power had, in 2007, notified units consuming energy more
than the prescribed benchmark in 9 industrial sectors — namely Thermal
Power Plants, Fertilisers, Cement, Pulp and Paper, Textiles, Chlor Alkali,
Steel, Aluminium and Railways. The present notification requires the 478
listed industries amongst the 9 industrial sectors to achieve the target
for Specific Energy Consumption (SEC) by 2015. SEC, as defined under the
scheme, is the energy used for generating a unit of output.
ENERGY EFFICIENCY

The scheme is unique in many ways, particularly from a developing-country
perspective. Firstly, it creates a market for energy efficiency through
tradable certificates, called Energy Saving Certificate (ESCerts) by
allowing them to be used for meeting targets. These certificates can be
issued to any of the 478 industries who are able to exceed their respective
notified target, the value of the certificate being the excess achievement,
more than the target set. The beneficiary industry could trade this
certificate to any of the rest of the entities (of the 478) that is unable
to meet its target, as buying ESCerts has been allowed as sufficient
fulfilment of compliance requirement without any penal action.

Thus, the scheme, by allowing the use of market-based instrument in the
form of ESCerts, incentivises to over-achieve at the individual industry
level, while simultaneously making sure that the overall goal of improving
energy intensity is achieved in the most economical manner. This innovative
mechanism to encourage compliance is a significant departure from the
command and control regime, while promising to be more efficient,
transparent, and inclusive.

Secondly, the rules promulgated take note of the fact that the scheme,
particularly its market creation goal, needs to align with the investment
decision-making processes of the private sector. In order to make sure that
industries take a considered decision of making investments for achievement
of specified targets or purchasing ESCerts, the certainty of adequate
numbers of ESCerts being available as well as their price needs to be known
much earlier than the end of the compliance period.

Under normal circumstances, both these parameters would be known at the end
of the compliance period of 3 years. The rules notified allow intermediate
issue of ESCerts after every year, based on partial fulfilment of targets,
and thereby enable sufficient liquidity of ESCerts in the market at the end
of the first year itself, allowing for decision by the remaining actors to
purchase them for compliance. This will create the critical mass for market
for ESCert to function.
SIMPLE, TRANSPARENT

Thirdly, the monitoring and verification protocol of the scheme culls out
the best from similar schemes around the globe, simultaneously making it
simple, transparent and effective. The targeted reduction of SEC is
measured on a gate-to-gate basis, by measuring energy usage per unit of
output. The simplicity of approach will not only make the exercise robust,
but will also encourage companies to comply due to reduced cost of
compliance.

Fourthly, the rules outline the monitoring and verification mechanism by
inviting reputed agencies having adequate technical knowledge and having
energy auditors certified by BEE. The eligibility conditions, the manner of
their appointment, have been elaborated in the rules, making them
transparent and credible at par with global standards. It also includes a
liability clause for the monitoring and verification agencies to guard
against frivolous certifications.

Fifthly, the scheme assimilates several competing issues seamlessly under
its domain. Being an energy intensity reduction (or energy efficiency)
scheme, it doesn't present any restriction on the expansion of capacity. It
may be mentioned that an energy or emission cap scheme would have needed
reduction in energy use, and thereby the output from the baseline.

The added incentive of ESCerts and its attendant additional monetary
benefits enhances the attractiveness of implementing energy efficiency. The
overall reduction in energy use enhances efforts towards energy security,
reducing GHG emissions, while simultaneously taking the industry on a
higher growth path.

The scheme has been a result of extensive consultations, both at the policy
level as well as with the industries, and addresses most of the concerns.
PAT scheme has all the traits to become a benchmark for design and
implementation of policies and measures, particularly when the need for
aligning of competing incentives of various actors exists. It also
highlights an innovative approach of introducing market-based instruments
to encourage compliance. Successful implementation of the scheme could
serve as a model for upcoming and existing environmental regulations in a
transparent and economically efficient manner.

(The author is Programme Officer, OzoneAction Programme, United Nations
Environment Programme, Bangkok.)

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Gopinath S
Chief Executive
nRG Consulting Services, Bangalore
http://in.linkedin.com/in/gopimysore
http://nrgcs.blogspot.com/
+91 99161 29728