Indias Energy Saving Certificate Scheme for Energy Efficiency

Introduction Bali Action Plan (BAP) was adopted in the 13th COP in Indonesia, 2007. BAP called for a comprehensive process to enable the full, effective and sustained implementation of the Convention through long-term cooperative action up to and beyond 2012. BAP called upon all developed and developing countries to consider Nationally Appropriate Mitigation Actions(NAMAs), the developing countries being supported and enabled by technology transfer, financing and capacity-building. BAP was formulated in response to the findings of the Fourth Assessment Report of the Intergovernmental Panel on Climate Change which warned that delay in reducing emissions increases the risk of more severe climate change impacts. The 15th and 16th COPs at Copenhagen and Cancun respectively led to the developing countries including India declare their NAMAs. The 17th Conference of Parties at Durban is expected to see a substantial amount of developments in Nationally Appropriate Mitigation Actions (NAMAs). The linked issue of Monitoring Reporting and Verification will also take center stage. India announced the reduction of carbon intensity of GDP by 20% to 25% of 2005 levels by 2020 in Copenhagen1. It claimed to do so, armed with its National Action Plan of Climate Change (NAPCC)2 consisting of eight missions launched in 2008. One of these eight missions is the National Mission for Enhanced Energy Efficiency (NMEEE). Indias official stand however is that the modalities for integration into international mechanisms of the Missions is under deliberation and that India is working out the costs of specific policy options3. The Perform Achieve and Trade (PAT) scheme - announced as part of NMEEE, is a market based mechanism which aims at enhancing energy efficiency in selected industrial sectors. As per the emerging blueprint of the scheme, specific energy consumption (SEC) targets are to be fixed for large energyguzzling installations around the country and credits called Energy Saving Certificates or ESCerts issued for those exceeding their energy saving goals. The credits can then be sold to installations which fail to meet their required cuts, thereby, over a period of time, enabling the formation of a new market-based mechanism. The PAT Scheme is divided into various phases which may be described diagrammatically as follows:

Target Setting Phase By March 2011

Target Achieve Phase April 2011 to March 2014

M&V Phase April 2012 and beyond

Trading Phase After M&V phase

However, it needs to be borne in mind that a number of deadlines mentioned in the diagram above have been postponed to a later date by the nodal agency due to unavoidable delays. e.g. the monitoring and verification phase of the PAT Scheme was to start in April 2011 but is now slated to begin only in second half of 2011 at the latest. Most recent reports state that the notification for the PAT scheme will be announced by the 30th of September 2011. The coordinating body Bureau of Energy Efficiency, with the assistance from German agency GTZ ( now GIZ), plans to cover 560 odd installations in eight sectors thermal power stations, cement, iron and steel, fertilizers, aluminum, chlor-alkali, paper and textiles. Together they account for 40 per cent of Indias primary energy consumption (please see table below).

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Available at: http://unfccc.int/files/meetings/cop_15/copenhagen_accord/application/pdf/indiacphaccord_app2.pdf NAPPC available online at: india.gov.in/allimpfrms/alldocs/15651.doc 3 Mr. R.R.Rashmi, Joint Seretary, MoEF

Sector Power Iron and steel Cement Fertilizers Textile Aluminium Paper Chlor Alkali Total

Million tons oil equivalent (mtoe) 160.30 36.08 14.47 11.95 3.50 2.42 1.38 0.43 230.53

Share of energy use (%) 69.5 15.7 6.3 5.2 1.5 1.0 0.6 0.2 100

The Bureau expects that around 5% energy savings or 10 million tons of oil equivalent by 2015. Besides, it claims the scheme would aid in energy security, technology up gradation and lowering environmental impacts. BEE has identified various sectors and industrial units within them which are major energy consumers. These units are referred to as Designated Consumers (DCs). A large numbers of DCs are located in Tamil Nadu followed by Rajasthan and Chhatisgarh. Originally the eight entities belonging to the Indian Railways were also listed, which were later removed considering the public value of the railways for the masses. Original figure of 714 DCs is likely to be revised to 4774.

For the purpose of setting the baseline previous five years data was used and the arithmetic average was taken. Specific Energy Consumption (SEC) was computed using the following formula following the principle of gate to gate accounting for a facility: SEC= Total energy input to the plant boundary/Quantity of the Product
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Graphic Source: Climate Connect based on data provided by BEE 2 info@climate-connect.co.uk London I New Delhi

Climate Connect, 2011

Assessment of absolute energy saving at the end of 3 years (2011-2014) will be based on the following formula: Energy Saving = P base year (SEC base year SEC target year) Energy Saving Certificates (ESCerts) will be issued by a Central Registry in case a facility exceeds reductions from baseline in target year (2014). The ESCerts will be traded among the designated industrial facilities on the following two exchanges: Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL). Lower targets for good performers Best performers will have to improve efficiency by 1.5 per cent. The target goes up to seven per cent as inefficiency increases. The Bureau states that good performing industries will get low targets and poor performing industries will get high targets. So, the targets will not result in uniform energy intensity within the sector. The legal update In August 2010, Parliament passed the amendment to incorporate PAT in the Energy Conservation Act 2001. The power ministry announced on January 2011 that electricity regulators in each state will ensure that defaulters are penalized. Industrial units will be penalized Rs 10, 00,000 (approx US$22,000) for noncompliance and an additional fine of Rs 10,000 (US$220) for each day of default. This penalty will be over and above the monetary value of oil equivalent for energy target missed, the price for which is yet to to be announced. The state electricity regulatory commissions (SERCs) that came into existence after power sector reforms were brought about through the Electricity Act of 2003, have been entrusted as acting for adjudication. In May 2011, the Bureau communicated that they have finalized the efficiency norms and sent to the Ministry of Law for notification under the Act. Benefits of the scheme According to a recent report by HSBC5 the scheme to boost demand for energy efficiency products and services across the eight affected sectors. The BEE estimates that capital investments of INR208bn (cUSD4.6bn) will be needed in the first phase between 2011 and 2014. This will deliver annual energy savings of 6.7mtoe, worth around USD2bn per annum. It is estimated that Indias total industrial efficiency market stood at USD 5.5bn in FY2009-10. Including PAT, we forecast that this segment will grow at a CAGR of 15% over the current decade6. As stated earlier companies that exceed their energy saving targets will be able to trade the surplus. Estimates suggest the size of this energy saving (ESCert) trading market could be around USD200m by the end of Phase I. It is expected that trading will start in late 2012 once ESCerts (1 ESCert = 1 mtoe of energy savings) are issued to Designated Consumers (DC), which overachieve their targets based on a review of their first years performance. BEE is still finalizing the details of the trading system, including whether an ESCert floor price is needed and the document is expected sometime in September, 2011. Over 70% of the targeted savings are expected to come from just two sectors: thermal power as well as iron and steel. Analysts believe that energy-efficient solutions for these sectors will offer the maximum investment opportunity, including process control and automation technology, efficient motors, pumps, boilers, waste heat recovery, insulation material, variable frequency drives, blade fans, condensers, as well as capacitor banks.

HSBC Global Research, Climate Investment Update,, 2011 Investing in Indias climate economy, 28 January 2011 3 info@climate-connect.co.uk London I New Delhi

Climate Connect, 2011

The BEE estimates that the implementation plan of NMEEE in five years will lead to savings of about 23 million tons of oil equivalent (MTOE) of fuel, avoid capacity addition of over 19,000 MW, and reduce emissions of carbon dioxide reduced by 98.55 million tons annually7. PAT Scheme aims saving 6.6 MTOE by the end of first PAT cycle (2014). The graph given alongside, estimates cost savings to various sectors under PAT till 2014. It is notable that the potential for cost saving is highest for thermal power sector8.

Trading details The validity of Energy Saving Certificates will be for 2 PAT cycles. Mr.Saurabh Diddi, Economist, BEE also stated that the floor price for ESCerts will be near to 1/3 of market value of equivalent oil. But wheres the hitch The concept of unit-level benchmarking per se has attracted quite a lot of unease among policy makers worldwide. For example, SEC could vary widely across two units making the same product but with different manufacturing processes; among vintage of plants (old and new); the plant size, its capacity utilization levels, on grade of raw-materials used and even the extent of system boundaries selected. A typical case could be in Thermal Power Plants which accounts for a major share of energy used and where the output depends on multiple factors like the calorific value of coal used, the design of plant, the plant load factor (demand) and its rated capacity. However, considering Indias circumstances and a longer view, will the scheme help shift towards the cleanest process and plant size is a question to be clearly examined. To compound to the issue, a number of out-dated public sector factories are to be clubbed with their private competitors. During the course of time, it could so emerge that due to wide performance variations, the public-sector units predominantly end-up buying credits generated from the private entities. Counter attempts by the BEE to soften targets for public-sector units would only create doubts about fair-play, lower the price of the certificate, or even upset the scheme altogether. Second, as the scheme is devised on energy consumption alone, the benefits gained from CO 2 emissions due to type of fuels is ignored. Thus units may not be able to claim their due for using a low-carbon but expensive fuel like natural gas. It may be argued that use of such fuels depends on its availability and the necessary infrastructure, but discounting the higher environmental benefit may only harm the long-term promotion towards low-carbon fuels. Third, an upfront indicative price-band and mechanisms for price stability is still not announced so as to generate early market interest and build-up of resources. Financial returns on such investments would be calculated according to ESCert prices. The financial models will require long term price forecasting and hence both short term and long term prices. However, there is no mention of ascertaining its price range in PAT yet for the first and subsequent target periods. There is also no information on whether the regulations will allow EScerts to be traded in the secondary market that may enable financing from financial intermediaries.
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PAT Consultation Document, BEE, 2011 In house research by Climate Connect 4 info@climate-connect.co.uk London I New Delhi

Climate Connect, 2011

Fourth, the potential issue of double counting with international carbon credits is to be clarified. BEE states that through PAT, it is only concerned about the resulting energy savings attribute for the country. The issue of carbon credits is for the UNFCCC to decide. Hence, while the PAT scheme will definitely add to increased monitoring and verification of energy use in Indian industries - which is welcome, its influence on generating industry or market interest and the required energy savings is still uncertain. India at Durban India along with the other emerging economies of Brazil, South Africa and China (BASIC group) has called for an extension of the Kyoto Protocol. Ministers of the four nations completed their talks to finalize a stand for the Durban conference in Inhotim, Brazil and released a joint statement. The ministers "reaffirmed that the Kyoto Protocol is a cornerstone of the climate change regime" in the statement on the 27 th of August 2011. Earlier, at the second Petersberg Dialogue on climate change that was held in Berlin on 3-4th of July 2011, to evolve political consensus on key deliverables for success at Durban and the outcomes of the Cancun climate conference India had proposed a five pronged strategy: ensure actual disbursement of fast start finance that was promised at Cancun; preserve the structure of the Kyoto Protocol and its second commitment period; work on content before deciding legal form of NAMAs; agree on the modalities of the Review (of a global goal) based on the process of monitoring reporting and verification; and resolve pending issues from Cancun such as equity, IPRs and trade India is expected to be under increased pressure from other parties at COP17 in general and the developed countries in particular. These countries would like India and other advanced developing countries such as China to take up emission reduction targets. India has already stated that it would take up binding targets only when projects are financially and technologically supported by the developed countries. There exists a deadlock as the developed countries would prefer to see the arenas where their funding might be utilized. The energy efficiency scheme offers an avenue for the Indian government to showcase at the Durban Conference. India has entered into a MoU with Japan to conduct Feasibility Studies for energy efficiency in steel and lighting sector. These feasibility studies are being conducted under the Bilateral Mechanism Carbon Offset scheme that Japan is developing as a likely Post 2012 market mechanism. The feasibility studies are being carried out to identify scope of Japanese technologies in helping reduce emissions in developing countries and to develop an understanding of the Monitoring Reporting Verification mechanism. Apart from developments in the PAT Scheme, India has made significant advances in terms of establishing the Renewable Energy Certificates trading mechanism. Apart from this under the National Solar Mission India has called for batch 2 of phase 1 and bids for 350 MW PV capacity under solar mission have been invited.

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Climate Connect, 2011

5 info@climate-connect.co.uk

London I New Delhi