Market Mechanisms in India’s Clean Energy Efforts - World...

October 2010ABPS Infrastructure Advisory Private Limited

Market Mechanisms in India’s Clean Energy

Efforts

Perform, Achieve and Trade Mechanism

Balawant JoshiDirector, ABPS Infrastructure Advisory Pvt. Ltd.

Practical Solutions to Real Life ProblemsABPS Infrastructure Advisory Private Limited

Agenda

Introduction to ABPS Infra

Energy Scenario in India

NAPCC & NMEEE

Proposed “Perform, Achieve & Trade” Scheme


Introduction to ABPS Infra


• Set up in Sep 2005 as start-up Consulting Organization by professionals, having wide range of experience in the energy and infrastructure sectors

• Promoted by Ajit Pandit, Balawant Joshi, Palaniappan M & Suresh Gehani

An Introduction to ABPS Infra

State Governments

Central Government

Industry Associations

Investors

Regulatory Commissions

Utilities (State and Private)

Developers

Financial Institutions

Regulatory &

Policy

Regulations development

Tariff determination

Market Mechanisms

Policy for Renewable energy

Rural Electrification

Diagnostic studies

Capacity Building

Corporate & Financial Advisory

Due Diligence

Financial Modelling

Counter Party Risk Assessment

Bid Process Management

Business Valuation

Contractual support

Renewable Energy

Resource Assessment

RPS and RPO

Feed-in tariff

Market Study

Investment Strategy

Project structuring

Project development

DSM & Energy

efficiency

Designing DSM Plans

Energy Audit

Life Cycle Assessment

Monitoring & Verification

End use energy efficiency improvement

Climate Change

Advisory

Climate Change Policy analysis

Carbon Footprint

Carbon Neutrality

CDM project development support

Emission Trading advice

Clients

Services


Acting as Country

Expert to BEE for IEA’s Global Initiative on Task XV – Network DSM

Advisor for addressing various issues Related to DSM measures and Energy Efficiency measures By Utilities

Energy Efficiency and Demand Side Management

Development of

National DSM Policy

Activities in DSM,

Load Study and Energy Conservation

Assistant to BEE to act as a Secretariat to Forum of Regulators

Assessment of Mandatory and Voluntary Trading in Energy Saving Certificate

Assistance in Design and development of DSM implementation strategy

Acting as

OA for Task XX & XXII

Branding of

EE & EEPS

MNRE/UNDP-GEF

Market Assessment of

SWH Systems

in Industrial Sector

Impact Assessment of KVAh metering in India

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Energy Scenario in India


Energy Imperatives for India

Over 487 million people without access to electricity (2005)

80.4% of the population is below the $2 per day level, and 34.3%below the $1 per day level (1990-2005).

India needs GDP growth of 8%plus over next 25 years to liftbottom 40% citizens to an acceptable level of economic & socialwell being which is not possible without increased energy use.

Source : Presentation, Prime Minister’s Council on Climate Change, October 2009

India must be able to pursue accelerated social and economic development. Development is also an imperative for adaptation (i.e. actions to cope with climate change e.g. in agriculture, health, to tackle sea-level rise, disaster

mitigation, risk financing etc.)


India Energy Demand Supply Scenario

Year Commercial EnergyNon Commercial

EnergyTotal Primary energy

2011-12 496 169 665

2016-17 665 177 842

2021-22 907 182 1089

2026-27 1222 184 1406

2031-32 1651 185 1836

Total Primary Energy Requirement (mtoe)

Crude Oil Natural Gas Coal Hydro Nuclear RenewableNon-

commercial Total

486 104 1022 13 76 2 185 1888

Total Primary Energy Supply in FY 2031-32 (mtoe)

Both Demand Supply scenarios are for 8% GDP growth rate asper Integrated energy Policy Report


NAPCC

National Initiatives towards

Climate Change & EE


India’s response to Climate Change

Honorable Prime Minister of India unveiled National Action Plan on

Climate Change (NAPCC) on June 30, 2008.

NAPCC identifies measures that promote India’s development objectives

while also yielding co-benefits for addressing climate change effectively.

NAPCC is comprised of eight core “national missions” running through

2017 and will help in bringing better planning, management and

developmental strategies and cleaner technologies

Increased attention towards energy efficiency at a policy level is visible

with “National Mission on Enhanced Energy Efficiency (NMEEE)” as one

of the missions under NAPCC


Principles of NAPCC Protecting the poor through an inclusive and sustainable development strategy,

sensitive to climate change

Achieving national growth and poverty alleviation objectives while ensuringecological sustainability

Efficient and cost-effective strategies for end-use Demand Side Management

Extensive& accelerated deployment of technologies for adaptation& mitigation

New and innovative market, regulatory, and voluntary mechanisms forsustainable development

Effective implementation through unique linkages – with civil society and public-private partnerships

International cooperation for R&D, technology transfer and global IPR regime

NAPCC seeks to promote sustainable development through enhanced demand for clean technologies by creating stringent specifications such as ECBC, norms for industries etc and creating a market for new

technologies e.g. solar application , urban transportation system etc.


Core Missions Under NAPCC (1/2)

• Increased share of solar in the energy mix

• Decentralized distribution of energy

• Creation of more affordable, more convenientsolar power systems and storage

• Clean technologies involved: Solar Thermalpower generation, solar photovoltaicgeneration etc.

National Solar Mission

• Enhance cost effectiveness of improvements inEE in energy-intensive large facilities

• Shift to energy efficient appliances throughinnovative measures

• Mechanisms for financing DSM programmes&other fiscal instruments

• Clean technologies involved: efficient lighting,VFD, clean coal technology etc.

National Mission for Enhanced Energy Efficiency

• Extension of application of EnergyConservation, Building Code, incentives for re-tooling existing building stock

• Recycling of materials and urban wastemanagement; technology development forpower from waste

• Better urban planning and modal shift topublic transport

National Mission on Sustainable Habitat

• Focus on conservation of water, minimizingwastage and ensuring equitable distribution

• Recycling of waste water in urban areas• Adoption of new technologies such as low

temperature desalination for coastal cities• Optimize existing irrigation systems• Clean water purification technology

National Water Mission


Core Missions Under NAPCC (2/2)

• Sustaining and safeguarding the Himalayanglacier and mountain eco-system

• Understand whether and the extent to whichthe Himalayan glaciers are in recession

• Observational and monitoring network for theHimalayan environment: to assess fresh waterresources and health of ecosystem

National Mission for Sustaining Himalayan Ecosystem

• Afforestation of 6 million hectares

• Coverage of degraded forest land

• Enhancement of ecosystem services including

carbon sinks

• Involvement of communities in Forest

protection & afforestation

National Mission for a Green India

• Develop new varieties of crops capable ofwithstanding extreme weather:

• Orient agriresearch to monitor& evaluateclimate change& recommend changes

• Convergence and integration of traditionalknowledge and practice systems, informationtechnologies and biotechnology

National Mission for Sustainable Agriculture

• Funding of high quality and focused researchinto climate change

• Study impact on health, demography,mitigation patterns and livelihoods

• Establish network of dedicated climate changerelated units in academic scientific institutions,Set up Climate change research fund

• Private sector initiatives through venturecapital funds

National Mission on Strategic Knowledge for Climate Change


National Mission on Enhanced Energy Efficiency

The basic tenet of the mission is to ensure a sustainable growth by an appropriate

mix of 4 E’s namely- Energy, Efficiency, Equity and Environment.

Promote development objectives, while also yielding co-benefits for addressing

climate change effects.

By 2014-15 NMEEE to ensure,

Annual fuel savings in excess of 23 million toe

Cumulative avoided electricity capacity addition of 19,000 MW

CO2 emission mitigation of 98 million tons per year

NMEEE is expected to create a regulatory and policy regime to foster innovative

and sustainable business models to unlock the market for energy efficiency which

is estimated to be around Rs. 74,000 crores.


Action Plan Under NMEEE

Action plan under the National Mission for Enhanced EnergyEfficiency seeks to implement four major initiatives.

A market based mechanism to enhance cost effective EE improvements inenergy-intensive industries and facilities, through Tradable Energy SavingsCertificates. (Perform Achieve and Trade(PAT))

Accelerating the shift to energy efficient appliances through innovativemeasures to make the products more affordable. (Market Transformation forEnergy Efficiency)

Creation of mechanisms that would help finance DSM programmes in allsectors by capturing future energy savings. (Energy Efficiency FinancingPlatform (EEFP))

Developing fiscal instruments to promote energy efficiency namelyFramework for Energy Efficient Economic Development (FEEED)


Proposed “Perform, Achieve &

Trade” (PAT) Scheme


Energy Efficiency Legislation in India

The Energy Conservation Act, 2001, overcomes some market barriers by enabling:

Setting of minimum energy standards for, and affixing energy consumption labels onappliances and equipment and promulgation of Energy Conservation Building Codes

Energy use monitoring, verification and reporting by large energy users, and theestablishment of energy consumption norms for these consumers and creation of cadreof Energy Management professionals in the country

EC Act, provides a legal mandate for energy-efficiency regulations for industry

Identifies 15 sectors as energy intensive industries & establishment


Generally, competition drives industries to go for energy efficiency, but……

Industry is risk averse to take up early adoption of new technologies

In developing countries, where new-plant addition rates are high,

Capacity expansion is often is more profitable than investment in energyefficiency

Financially depreciated plants – which are older and less efficient – cancompete with newer plants which have to be more efficient

It is necessary to have ‘Compliance’ scheme to incentivise industry toundertake energy efficiency measures

However, it is not easy to develop ‘Compliance’ scheme for energyintensive industries

Driver for PAT Scheme


PAT Scheme

On 12th March 2007, Government of India notified minimum energyconsumption for following nine industrial sectors and notified theindustries qualifying these criteria as “designated consumers”.

Consumers satisfying the above criteria were identified and notified as Designated Consumers.


Overview of PAT Scheme

Specific Energy Consumption (SEC) reduction targets for 714 energy-

intensive units which are Designated Consumers under the EC Act, 2001

Targets would be percentage reduction of current SEC

Percentage reduction requirement based on:

Current SEC as a ratio of the best in the sector

Mix of fuels used

SEC measurement and verification by BEE through accredited auditors

Issuance of Energy Savings Certificates (ESCerts) to those designated

consumers who exceed their target SEC reduction

Trading of ESCerts with designated consumers who are unable to meet

their target SEC reduction


48

49

4

75

75

32

127

30

241422

4868

18

3210

4

5

10

8

4

16

PAT Scheme Coverage

78% (558) of these 714 consumersbelong to cement, iron & steel,power plant and textile sectors

9, 1%

104, 15%28, 4%

25, 3%

98, 14%

131, 18%94, 13%

225, 32%

Alumunium Cement Chlor-Alkali

Fertilizer Iron & Steel Power Plant

Pulp and Paper Textile

Sector Wise Spread of 714 Consumes Regional Spread of DC’s

AP - 17 installations out of 48belong to Cement sector,

CG - 33 installations out of 49belong to Iron & Steel sector,

TN - 80 installations out of 127belong to Textile sector,

UP - 22 installations out of 49belong to Pulp & Paper.


Sectoral Spread of Designated ConsumersTop Ten States in terms of more number of designated consumers

0

20

40

60

80

100

120

140

Textile

Pulp and Paper

Power Plant

Iron & Steel

Fertilizer

Chlor-Alkali

Cement

Alumunium


Estimated Energy Consumption by DCs Total energy consumption by all designated sectors excluding railways - 273.36 MTOE

Total energy consumption by all 714 DCs under proposed PAT scheme - 181 MTOE

‘Thermal Power Plant’ is considered as one of the designated sectors, which is also

supplying electricity to the other designated sectors. Total Energy Consumption with

& Without Thermal Power Plant is provided below,

14.35, 5.25%5.15, 1.88%

29.82, 10.9 %1.77, 0.65%

42.46, 15.5%

28.15, 10.3%

0.57, 0.21%

151.10, 55%

Energy Consumption in MTOE (With Thermal Power Sector)

Cement Paper and Pulp FertilizersAluminium Iron and Steel TextilesChlor Alkali Thermal Power

Total MTOE273.3

8.6, 9.53%3.1, 3.42%

17.9, 20 %

1.1, 1.18%

42.5, 47 %

16.9, 19 %

0.3, 0.38%

Energy Consumption in MTOE (Without Thermal Power Sector)

Cement Paper and Pulp FertilizersAluminium Iron and Steel TextilesChlor Alkali

Total MTOE122.26


Estimated Energy Saving Potential for 714 DCs ‘Total Energy Consumption by Designated Sectors Excluding Thermal Power Sector’

(122.26 MTOE) with respect to TPES (565.93 MTOE) is 21.6%.

Energy saving potential for each designated sector is estimated by dividing the differencebetween the existing SEC and best practice SEC by the existing SEC of that sector (asshown in table below) and is 12.5% of existing total consumption of designatedconsumers to be covered under PAT scheme.

Sectors Average Specific Consumption

(TOE/tonne) Energy Saving Potential (%)Existing Best Practice

Cement 0.084 0.0706 16%Paper and Pulp 0.678 0.505 26%Fertilizers 0.897 0.760 15%Aluminium 1.440 1.10 23%Iron and Steel 0.788 0.600 24%Textiles* 0.0005 Not Available ------Chlor Alkali 0.257 0.213 17%TPP** 2703.9 2432.20 10%

It should be noted that it may not be financially viable to to achieve this potential.


Institutional Framework for PAT Scheme

3. Designated Consumers

Industry-A

Industry-B

6. Accredited Verification

Agency Energy Audit

2. Market Governor

Recommendation for Issue of

ESCerts

Issue of ESCerts

1. Policy Governor & Compliance Driver (Bureau of Energy Efficiency)

Set Compliance Directives

5. Transfer Agent /

Depositories

4. Stock Exchange 4. Trading Platform


Roles of institutionsSr No Institution Role Responsibility Authority Agency

1 Policy Governor and Compliance Driver

Compliance assurance through incentives and automatic penalties

Reduce conflict of Interest;

Accredit independent 3rd

party Energy auditors

Sets Compliance benchmarks; Resolve disputes through collaborative approach with petition process

Bureau of Energy

Efficiency (BEE)

2 Market Governor Ensure publicly available data

Maintain centralized data administration; strong quality assurance

level playing field; Issue of ESC

EESL

3 Industry Undertake energy efficiency measures; appoint accredited 3rd

party energy auditors

Maintain compliance with set energy efficiency benchmark

-- Designated Consumers

etc

4 Trading Platform Maintain data of traded prices, traded volumes and trends.

Create efficient and transparent market for trading

safeguard market integrity and enhance transparency

Power Exchanges,

5 Transfer Agents / Depositories

Hold the ESC in electronic form.

Provides services related to transactions in ESC.

-- KARVY, CAMS,

NSDL, CDSL6 Third Party energy

Auditors-- Audit industry energy

savingsRecommendation for the issue of ESCerts

Accredited Auditors


Key Design Challenges


Methodology for setting SEC Norm for each DC

Methodology for setting up SEC norm in the base year and target year

“Sectors” (e.g. steel, cement, paper) are everywhere characterized by great diversity interms of: Scale, Technology pathways, Technology vintages, Project boundaries, Typeand quality of inputs/resource endowment , Product diversity

Differential targets for different Designated Consumers on a gate-to-gate basis

For thermal power plants and fertilizer plants, the SEC targets to be harmonised withcurrent tariff setting context – CERC and Ministry of Fertilizer to undertake this

Target setting methodology that combine the use of historical performance factors(installed technology, production) places the installation into one of multiple bands(Gold, Silver, Bronze, Tin), and then uses a benchmark approach to set targets withinthose bands.

It is recognized that some sectors may have only one band and that others may havemore than one. However, the banding approach may present problems over time asthere is no provision to move the less efficient companies “up” the banding structure.

Data for baselines currently being collected by BEE


Unit Boundary for PAT Scheme: Gate to Gate Methodology

Industry BoundaryEnergy Input

Coal, Oil & GasElectricity Purchased

Production Delivered

PAT Proposes differential targets for different Designated Consumers on a gate-to-gatebasis. Inside industrial boundary DCs are free to use energy the way they want, only theenergy input other than non conventional and final production will be verified in gate to gateapproach. However for thermal power plants and fertilizer plants, the SEC targets to beharmonized with current tariff setting context – CERC and Ministry of Fertilizer

SEC Target As Energy per unit of product


Setting SEC Norms - Process Not feasible to define a single

norm/standard unless there is asignificant homogeneity amongst unitsin a sector

Energy Efficiency improvement targetswould have to be almost “UnitSpecific”.

Bands of differential targets to becreated within sectors

Each DC mandated to reduce its SECby a fixed percentage, based on itscurrent SEC within the sectoralbandwidth


Energy Saving Certificates Vs Energy Usage Allowances

Energy Saving Certificates1. ESCerts issued match the objective of

scheme i.e. energy saving, rather thanenergy usage targets

2. Use of ESCerts, coupled with anintensity-based target, has led theGovernment of India to adopt an ex-post allocation of tradable certificates

Energy Usage Allowance1. EU-ETS uses emission allowances (EUAs),

rather than “emission reductions” as its unit2. Notable difference is in the volume of units in

circulation. Higher volumes lead to highermarket liquidity and less price volatility

3. Similar mechanism may be used in the formof Energy Usage Allowances


Ex-ante Vs Ex-Post allocation

• To create liquidity in the market forESCerts, and to create better pricesignal ESCerts could be allocatedEx-Ante. Either free allocation orauctioning process could be usedfor allocation of ESCerts.

• Additional advantage of ex-anteallocation (where the certificateshave value) is that they can be usedto underwrite investments in energysavings technology

• As currently envisaged, ESCertswill be issued at the end of the firstperiod of PAT scheme. As a result,no certificates will be available forspot trading , dampening themarket price signal.

• When certificates are issued at theend of the first period, there couldbe mismatch between the quantityof certificates issued and thequantity demanded byunderperforming sites

Ex-Ante Allocation Ex-Post Allocation


Verification and Issuance of ESCerts Verification by accredited verification agency or by energy auditors,

Issuance of ESCerts only after verification or self-declaration subject toverification process

Process of selection of verification agencies

Liability of verification agencies

Trading Process for ESCerts – bilateral and/or exchange

Compliance and reconciliation process for ESCerts


Compliance Driver - Penalty One of the primary concern for successful implementation of PAT Scheme was weak

penalty structure in case of failure to meet targets.

According to earlier legal provision penalty was:

“…..he shall be liable to a penalty which shall not exceed ten thousand rupees for each such failuresand, in the case of continuing failures, with an additional penalty which may extend to onethousand rupees for every day during which such failures continues:”

Recently (2010) the Government has modified the Act. The revised penalty provision is asgiven below:

If any person fails to comply with the provisions of clause (n) of section 14, he shall be liable to apenalty which shall not exceed ten lakh rupees and, in the case of continuing failure, with anadditional penalty which shall not be less than the price of every metric ton of oil equivalent ofenergy, prescribed under this Act.

Modified provisions are stringent and will ensure that industries take appropriate actions toachieve energy efficiency.


Other Design Challenges

PAT Scheme Coverage Despite inclusion of the eight sectors in the scheme, it covers only 700+ installations

across the country. Significant numbers of small, inefficient installations will not beincluded in the PAT scheme.

There is scope in the future to deepen the scheme to cover additional (smaller)installations within the energy intensive sectors covered by the PAT scheme, or tobroaden the scheme by including other sectors of the Indian economy especiallythose sectors which have already been identified as energy intensive but currentlynot part of PAT scheme

Banking of ESCerts Allowing full banking from Phase 1 to Phase 2 will ensure positive and smooth price

between phases. It will encourage the earliest possible adoption of energy efficiencytechnologies.

However, in case of overachievement in Phase 1, large volume of ESCerts from Phase1 that could reduce the actual performance in Phase 2


Linkage between REC and PAT Scheme Different denominated units – MWh for REC/ MTOE for PAT

Implications on the market price

Marginal cost of generation of certificate will be significantly different

Could have impact on price of certificates

Different registries for issuance and reconciliation

Different trading rules for these certificates

Monitoring and Verification protocols of the two instruments

Currently, one way link for RECs into PAT Scheme is being explored.


PAT – Current Status & Penalty Bureau of Energy Efficiency (BEE) to announce the target for Perform, Achieve and Trade

(PAT) scheme for energy efficiency in December 2010.

PAT Scheme to come into force with effect from April 2011

To familiarize & facilitate the industries to participate in PAT scheme, BEE would conductmeetings with the CEOs of Corporate houses in State in November & December 2010

Data Collection work and studies are underway for 8 industrial sectors.

Protocols for trading, monitoring and verification will be set up by December, 2010.

Notifications for Accredited Energy Auditors has been issued.


ABPS Infrastructure AdvisoryPractical Solutions to Real Life Problems

ABPS Infrastructure AdvisoryA-309, Kohinoor City

Kirol Road, off LBS MargKurla (West), Mumbai 400 070

Ph: +91 22 6124 0400/ 6124 0444Fax:+91 22 6124 0499

Email: [email protected]

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