This blog post originally appeared in The Hindu Business Line.
The next phase of this market based trading system must learn lessons from the PAT Cycle 1 and design better policies.
The Perform, Achieve and Trade (PAT) Scheme is a programme launched by the Bureau of Energy Efficiency (BEE) to reduce energy consumption and promote enhanced energy efficiency among specific energy intensive industries in the country.
In the first cycle of this scheme from 2011-14, 478 energy-intensive units from eight large industrial sectors, namely thermal power plants, fertilisers, cement, aluminium, pulp and paper, iron and steel, textiles, and chlor-alkali were given specific energy reduction targets to be achieved.
Those that overachieved the targets were awarded Energy Saving Certificates or ESCerts, each equal to 1 metric tonne of oil (MTOe).
Those unable to meet their assigned targets were required to purchase ESCerts (from the overachievers) through a centralised online trading mechanism hosted by the Indian Energy Exchange (IEX).
Cumulatively, this was meant to achieve an energy savings of 6.68 MTOE by the end of 2014-15.
India has committed to a 20-25 per cent emission intensity reduction target as compared to 2005 levels in its Nationally Determined Contributions (NDC) as per the Paris Agreement. According to the BEE, PAT Cycle 1 has achieved more than 30 per cent of this targeted energy saving, along with an almost 2 per cent reduction in emissions. This involved a cumulative investment of ₹24,517 crore in energy efficient technology by the industries included in PAT Cycle 1.
A total of 38,50,000 ESCerts were awarded to 306 facilities for overachieving their targets, and 110 facilities were directed to purchase 14,50,000 ESCerts for not achieving their targets. With Cycle 1 being completed, this is an opportune moment to evaluate the experience of the scheme, so that future versions of PAT benefit from the learnings of PAT Cycle 1.
BEE was understandably keen to seek greater buy-in from industries in the early days of PAT, and would be expected to ratchet up the targets and add more sectors in future versions. PAT Cycle 1 had to establish data collection protocols and baselines, in addition to setting targets. Once this was done, industries had to compile their annual data.
At the end of Cycle 1, during the monitoring and verification stage, anomalies in the data were addressed. Examples of anomalies included changes in power mix, fuel mix, market demand and unforeseen shutdown.
This resulted in changes in baselines and targets due to the normalisation carried out to overcome errors for a few industries. This could be one more reason for overflow of ESCerts in the market; the other one being the low targets established during Cycle 1.
For PAT Cycle 2, even if targets are more stringent, allowing the ESCerts earned in Cycle 1 to be utilised would inject inefficiencies in the system. And if the targets aren’t ratcheted up, we could see more over-achieving of targets, and a failure of this market-based trading mechanism.
ESCert’s trading effectiveness
When trading began, more than 30,00,000 ESCerts were available against a demand for 14,50,000 ESCerts by the companies. At the outset, it was assumed that each ESCert would cost around ₹10,000, as 1 MTOe is the average price of coal, oil, gas and one unit of electricity for the industrial sector.
However, when trading started in September 2017, the opening price of 1 ESCert was ₹1,200, almost 10 times lower than expected As more industries registered on the trading site, the number of ESCerts available for purchase steadily increased. The low demand ensured that the price gradually declined. By November 2017, the price was as low as ₹200.
The industries that achieved their target invested ₹24,517 crore in energy-efficient technology. In comparison, companies that didn’t achieve their targets spent a mere ₹100 crore as compensation for non-compliance.
The absence of a floor value attached to the trading of ESCerts, allowed some energy-intensive industries to continue to deprioritise investing in energy efficiency.
Cumulatively, those who didn’t achieve their targets were able to continue to delay investments in energy efficiency, and those who achieved their targets failed to gain supplementary finance. This situation needs to be fixed in PAT Cycle 2.
Secondly, it was stated that facilities that didn’t achieve their targets would be liable to pay an additional penalty of ₹10,00,000 if they failed to purchase ESCerts. In the case of continued failure to meet targets, further penalties would be levied.
However, there is no clarity on enforcement or timelines for defaulters to make these applicable.
Thirdly, bringing more transparency and clarity in the trading mechanism and regulations will build confidence amongst industries, and control liquidity interactions and balance in the system.
India could learn from similar efforts in other countries including, Italy’s 2017 rules for white certificate trading to control effective obtainment of energy savings; liability for the implementation of energy efficiency interventions, stricter rules to calculate the baseline energy and associated energy savings. This is expected to maintain the liquidity and stability of the white certificate in market.
In conclusion, while PAT Cycle 1 was a good start, one expects to see Cycle 2 benefit from the lessons and experience of Cycle 1, while also lessons from similar efforts in other countries attempting to enhance their energy efficiency, and to design future policies in an effective and efficient manner.