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Do low targets hamper energy efficiency?

The Statesman
By Professor  
Mitakshara Goyal, ARMIN ROSENCRANZ

The ‘Perform Achieve and Trade’ (PAT) mechanism, introduced by the National Mission for Enhanced Energy Efficiency (NMEEE), has been panned by analysts. The government seems to focus on the scheme’s net energy savings of 8.67 Mtoe, considering it as a success. Analysts believe that the scheme didn’t achieve high energy savings because of its low targets.

The PAT scheme is a regulatory instrument to reduce specific energy consumption in energy intensive industries. It works with a market-based mechanism that certifies tradable energy savings.

Energy reduction targets are assigned to Designated Consumers (DCs) for a three-year cycle. This eventually creates a market for energy efficiency through tradable certificates, called Energy Saving Certificates (ESCerts), by allowing them to be used for meeting energy reduction targets. These certificates can be issued by any of the 478 industries that are able to exceed their respective notified target.

The beneficiary industry can trade this certificate with any of the other entities (of the 478) that is unable to meet its target. Buying ESCerts has been allowed as sufficient fulfillment of the compliance requirement. This sale and purchase transaction has been recognised by the recently amended Energy Conservation Act and is a motivating factor for several industries.

The first cycle commenced with nine industrial sectors as designated consumers, namely Aluminium, Cement, Chloralkali, Fertilizers, Iron and Steel, Pulp and Paper, Railways, Textiles and Thermal Power Plants.

The flexibility of the PAT scheme to allow an obligated entity to purchase ESCerts for compliance offers an economically efficient path for achieving the overall target set for the scheme. However, this fluidity of ESCerts allows developed industries to merely purchase these credits rather than introducing measures to conserve energy. The idea of achieving an overall target limits the likelihood that each industry would conserve energy individually rather than purchasing compliance from overachieving energy conservers.

The added incentive of ESCerts and its attendant monetary benefits enhances the attractiveness of implementing energy efficiency while providing an escape mechanism for the large industries. Such industries may adhere to the scheme by merely purchasing ESCerts from complying industries.

The targets for each industry are based on the emissions and their potential to conserve energy. As pointed out by Shubhasis Dey, the energy efficiency program manager at Delhi-based non-profit Shakti Sustainable Energy Foundation, the lack of experience and the mistrust between the government and industries plays an active role in setting lenient targets for industries to achieve. Thus, each industry effortlessly meets the facile thresholds representing energy savings.

In 2017, the trade transactions of the ESCerts commenced at the rate of Rs 1200 each at the first session with a total of 10,904 being traded. The mismatch of the demand and supply of the certificates seems wide as the bids to buy were 50,904 while the ones to sell were 239,644. The escalating supply in comparison to the diminishing demand led to the collapse in the prices of ESCerts.

Such a price collapse disincentivises industries from making energy efficiency investments, as the cost of such investments cannot be recovered by them through the trade of ESCerts at such low prices. The certificates should be ideally traded at Rs 10,000 in order to recover costs incurred by the industries. In such a scenario, the industries prefer to purchase low-cost ESCerts rather than making energy efficient investments. This nullifies the whole idea of the PAT scheme. Large industries with the largest emissions bank on the rest to make investments and subsequently trade certificates, evading compliance mechanisms.

The only available recourse for complying industries having excess ESCerts is to hold on to their ‘bankable’ credits which can be traded in subsequent cycles. Assuming the targets imposed on industries would be challenging, the consequent rise in the prices of the credits would be a substantial incentive for complying industries. CII, a Delhi based industry association, highlighted the pressing need for the government to manage the oversupply by increasing the targets in Phase 2 and setting a floor price for the certificates being traded to realise better prices.

While the first PAT cycle assigned the target of 6.689 MTOE by the end of 2014-15 for 478 designated consumers from the aforementioned nine energy intensive sectors, there was an over-achievement of 30 per cent by the complying industries. Drawing from the results of the first cycle, the second cycle of the PAT scheme imposed a higher target of reducing energy consumption by 8.869 MTOE for 621 energy consumers.

The second cycle’s 621 designated consumers came from 12 sectors – petroleum refineries, railways, and electricity distribution companies, in addition to the nine sectors included in the first cycle. These consumers account for 45 per cent of India’s industrial energy use.  Considering the over-achievement and the potential of the industries, these targets seems realistic and at the same time challenging enough to keep the demand and prices of the credits sustainable.