Author : Vivan Sharan

Originally Published 2011-07-23 00:00:00 Published on Jul 23, 2011
Under the PAT scheme, the market based mechanism created for achieving energy efficiency seems to be inherently flawed. While the market for energy efficiency is about 74,000 crores, it is unlikely that this potential can be tapped by the mechanism envisioned.
The Market for Energy Efficiency in India - No PATS on the Back Yet
India ratified the Kyoto Protocol (linked to the United Nations Framework Convention on Climate Change) on 26 August, 2002 as a Non Annex 1 Party. This implied that being a developing country, it did not have to commit to an emissions reduction target (assigned amount) for the first commitment period - 2008 to 2012. Given the continuing financial squeeze in the post crisis developed world, it is unlikely that a second commitment period would be agreed upon in December 2012. This would in turn imply that locally adopted reduction targets would become the norm.

India has chosen to focus on energy efficiency rather than emissions reduction - a subtle but important distinction for an economy in transition. The positive correlation between energy use and economic development is well documented, and in recognition of this, India has bargained accordingly in international forums.  In the Convention of Parties meeting held in Copenhagen in 2009, India made a voluntary commitment to reduce its emissions per GDP to 20-25 percent from 2005 levels by 2020.  This commitment does not specify that the country will change patterns of fuel use or submit to mandatory emissions reduction targets - therefore allowing the growing economy room to manoeuvre.

The country's tryst with energy efficiency effectively began in March 2002, with the setting up of the Bureau of Energy Efficiency under the provisions of the Energy Conservation Act (2001). The explicit mission of the Bureau is to institutionalise energy efficiency in the country. The Act mandated the setting up of specific energy consumption targets for 15 large energy intensive industries. The Indian government has recognised in principle that along with the recent shift in emphasis from services driven growth to manufacturing driven growth, it is important to promote efficient energy use to simultaneously address resource scarcity and climate change. 

The National Action Plan on Climate Change (NAPCC), released by the Prime Minister's Council on Climate Change in June 2008, mandated the setting up of 8 missions to address climate change - wherein the National Mission on Enhanced Energy Efficiency (NMEEE) was explicitly set up to give the Bureau of Energy Efficiency some teeth.  The Union Cabinet approved the NMEEE on June 24, 2010 with the explicit goal of saving 23 million tonnes oil equivalent of fuel. The flagship scheme of the Mission - the Perform Achieve and Trade scheme (PAT) is being instituted in order to execute the NAPCC mandate of creating "a market based mechanism to enhance cost effectiveness of improvements in energy efficiency in energy intensive large industries and facilities, through certification of energy savings that could be traded".

Out of the 15 large industries that are identified by the Energy Conservation Act (2001), nine are covered under the PAT scheme (Aluminium, Chlor-Alkali, Pulp and Paper, Cement, Fertilizers, Thermal Power Plants, Steel, textiles and Railways). The industries identified as "Designated Consumers" by the Ministry of Power (notices served in March 2007) account for approximately 45% of the commercial energy consumed in the country and account for about 25% of the GDP. Further, in the first cycle of the PAT scheme (2011-12 to 2013-14), eight sectors are required to participate (railways has been excluded in first cycle) with an overall target reduction of approximately 10 million tonnes oil equivalent.

Having identified the base year as 2010, the Bureau of Energy Efficiency in consultation with the Ministry of Power is currently struggling to set specific energy consumption targets as mandated by section 14 of the Energy Conservation Act (2001) for the Designated Consumers (the original launch date for the scheme was set for April 2011).  Designated consumers who are able to meet their specific targets, within the stipulated time period, would be entitled to receive Energy Saving Certificates (ESCerts) from the Bureau of Energy Efficiency which could then be traded bilaterally (on two power exchanges - IEX and PXIL) with other consumers who are not able to meet their targets.

Under the PAT scheme, the market based mechanism that is being created for achieving energy efficiency in the country seems to be inherently flawed. While according to government estimates, the market for energy efficiency is about 74,000 crores, it is unlikely that this potential can be tapped by the mechanism envisioned. At the outset, the pricing of the ESCerts is vague and not purely determined by market forces. Rather the pricing is going to be "based on crude oil price" according to the consultation document for the scheme. It can be argued that this makes the market mechanism highly vulnerable to existing global financial instabilities which should not ideally dictate the performance of the underlying sectors.

Unlike international cap and trade schemes, the PAT scheme focuses on energy efficiency targets rather than overall emissions targets. This means that the scheme will remain unique and isolated from the global "carbon markets", and will not attract any interest (or money) from outside India. Further, there is no emphasis on fuel use - which is in harmony with the Government of India's growth plans (and not necessarily bad for the country), but this does create a moral dilemma as there is no incentive mechanism for switching from dirty fuels like coal to cleaner fuels like natural gas. 

The Bureau for Energy Efficiency envisions that eventually ESCerts will be mutually substitutable with Renewable Energy Certificates (RECs) - that are traded in power exchanges between renewable energy generators and electricity consumers (voluntary market and distribution companies). It is unclear if this is ever going to be achievable, since RECs are partly priced according to average power purchase costs - where the prices for the underlying fuel sets (for electricity generation) have little to do with the global price of oil.

The punishment for Designated Consumers that are not able to meet their specific targets (through efficiency improvements or by buying ESCerts) is minimal. Defaulters have to make an upfront payment of Rs. 1 lakh along with paying what they would normally pay to buy the requisite certificates to meet their targets. This is clearly not incentive enough for large industries to push themselves too hard for meeting their specific efficiency goals.

Finally, market based mechanisms, meant to promote energy efficiency and mitigate climate change, need to be inherently inclusive. Inclusion must extend to both the global and domestic investment community and to enterprises of every scale (not just large industries). While the country necessarily needs to rely on conventional fuels for increasing energy intensive production capacities while it plays catch up with the developed world, it also needs to draw out a truly sustainable roadmap. International experience suggests that market based schemes financed by discretionary government spending, and lacking credible incentive structures, are in the long term, likely to fizzle out without palpable impact.

(Vivan Sharan is an Associate Fellow at Observer Research Foundation, New Delhi)

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Vivan Sharan

Vivan Sharan

Vivan was a visiting fellow at ORF, where he supports programmes on the ‘new economy’. Previously, as the CEO of ORF’s Global Governance Initiative, he ...

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