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Get Ready to Perform, and Then Earn

Ritu Gupta
The much awaited PAT scheme might see the light of the day soon
India has become the first developing country to adopt an energy efficiency trading scheme that uses marketbased mechanism on targeted energy intensive industries or designated consumers (DC) through various incentives and penalties. Called the perform, achieve and trade (PAT) scheme, it aims to balance development and economic gains with climate co-benefits. PATs goal is to strengthen energy security, reduce energy deficit and enhance global competitiveness of Indian industries. It also plans to contribute to the carbon dioxide reduction by 26 million tonnes by 2015. Under the scheme, almost 714 industrial units across the country in nine sectors cement, thermal power plants, fertilizers, aluminium, iron and steel, chloralkali, pulp and paper, textiles and railways will be given targets for their reducing energy consumption. The companies that better their targets will be allowed to sell energy-saving credits to those failing to meet the required cuts. The energy-efficiency certificates can be traded on power exchanges and the India Energy Exchange. Some of the key companies covered under PAT are NTPCs coal-fired super thermal plants, Tata Steels Jamshedpur plant, Hindalcos Belgaum and Raigad aluminium units, ITCs Bhadrachalam paper unit, RILs Naroda and Patalganga textile units, ACCs Chaibasa cement unit, Balcos aluminium plant in Korba, Grasim Industries Nagda unit, and IFFCOs Paradip unit. PAT is part of the New Delhi-based Bureau of Energy Efficiency (BEE)-initiated National Mission on Enhanced Energy Efficiency. The BEE is setting up the overall framework for the scheme and Energy Efficiency Services Limited (EESL) will work as an implementation and monitoring agency for the entire scheme. The nine sectors falling under PAT account for 65% of the industrial consumption in the country. According to government sources, the estimated size of the entire scheme is about `700 billion or approximately $16 billion, and it will lead to 98 million tonnes of GHG mitigation. Indeed, the scheme is at the centre of government policies meant to achieve the domestic goal of reducing carbon intensity by 2025% from the 2005 levels by 2020. It is exclusive in several ways, particularly in developing nations. It is the first nationwide legislation that provides legal and institutional framework for problems on energy conservation and energy efficiency. It also marks a significant departure from the traditional command-and-control regime and combines the energy, environment and the economy. The scheme was notified on March 30, 2012, and, according to experts, has already faced hurdles, with only a few companies submitting their road maps for energy reduction. Only time will tell if PAT is able to grab the attention of entrepreneurs who matter when energy efficiency is concerned. Industry experts, however, are hopeful that the scheme will soon bear fruits. If the industries plan well and invest, it wouldnt be difficult to meet goals. We find that progressive companies are aggressively pursuing energy efficiency opportunities and will not have cost liability in PAT scheme. These companies will actually gain from selling EScerts, says an analyst of Emergent Ventures India, a climate and clean energy consultancy firm. Intricacies of the Scheme The schemes first three-year phase is from 201114, with the energy use per unit of production targets set over a 200810 baseline. Monitoring and verification would occur at the end of each year, with overachieving entities allocated bankable energy saving certificates (ESCerts), with each representing 1 tonne of oil equivalent. Power plants and steel plants are the key targets of PAT; large plants in these

Graphic source: Climate Connect

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Financial Vision, Volume 1/Issue 2/March 2013 Mr S. Garnaik, chief economist with the BEE, said that the PAT scheme broadly covers 477 DCs. A study by the New Delhi-based Confederation of Indian Industry (CII) shows that the textile sector has the highest number of DCs at 225 (32%), followed by power plants at 131 (18%), cement at 104 (15%), iron and steel at 98 (14%) and pulp and paper at 94 (13%). These five sectors together constitute 92% of the total DCs. The regional spread of DCs is also uneven. Tamil Nadu, Maharashtra, Gujarat and Rajasthan are the most important states for the PAT scheme with 345 DCs (48 per cent) belonging to them. According to Mr Garnaik, baseline energy audit for the various DCs was to be completed by Nov Dec 2011. The audit was then to be reviewed by sectoral experts. The 477 DCs consume 164 million tonnes of oil equivalent (MTOE) and that PAT scheme aims saving 6.6 MTOE by the end of first PAT cycle. The validity of the ESCerts will be for 2 PAT cycles, and their floor price will be near to one-third of market value of equivalent oil, said Mr Saurabh Diddi, economist, the BEE. However, their prices will be completely determined by the market forces and there will be no government intervention to limit the movement of prices, either upward or downward. The specific energy consumption (SEC) reduction targets for the energy-intensive units would be compiled on a gate-to-gate approach, with targets being nonnegotiable. As there is a large bandwidth in specific energy consumption in all sectors, the unit-specific targets would be a percentage reduction of current SEC as a ratio of the best in that particular sector. As per the BEE, it is not feasible to define a single norm or standard unless there is significant

Figure 2. Minimum annual energy consumption and estimated numernumber of DCS in select sectors

two sectors have been notified as designated consumers (DCs). Specific targets will be assigned to each of the DCs, and those of which are unable to comply with the targets, either by their own actions, or through purchase of certificate, or both, are liable to penalty as provided in the law.

Barriers for industry to overcome Need equal level of awareness across management board to give priority to fund allocation for augmenting energy efficiency Lack of access to easy financing at attractive interest rate Long pay-back period Limited experience for certain energy-efficient technologies Constraints of plant shutdown and structural layout, in some cases Small companies need to hire external consultants to carry out audits and energy efficiency consultancy, which is an expensive proposition Perceived risks by the industry for PAT Companies may be penalized for energy efficiency improvements before the framework for ESCerts is put into place; also called as penalty for early action. ESCerts prices may be too low, which may not justify the companys investment. Apprehension of sudden increase in price of energy efficient equipment because of demand created by energy efficiency targets. This might lead to the closure of several plants. Inadequate incentives from the government for adopting energy-efficient technologies. Companies would like to reduce their risk exposure by sharing risk with energy-efficient technology suppliers, which are currently reluctant on sharing the risk of failure. Limited experience of energy-efficient technology suppliers in relevant sectors. In certain sectors availability of raw material is a constraint, as an energy-efficient equipment /machinery will not be helpful unless the particular raw material is not available.

 homogeneity among units in a sector, and energy efficiency improvement targets would have to be almost unit specific. Each designated consumer will be mandated to reduce its SEC by a fixed percentage over a three-year time-frame, based on its current SEC within the sectoral bandwidth. According to industry experts, as is with most policies, the devil of PAT may lie in its mammoth details. The sheer detail of work that would go into cataloguing the hundreds of industry units under PAT within a very short time (that has been specified) seems unrealistic. Many industry players are concerned about the pricing of ESCerts. An analysis by the CII cautions that the designers of PAT should be careful in structuring the market in a way such that prices are attractive. If they fall too low, they entire process runs the risk of being ignored by industrial stakeholders. Furthermore, it is also recommended that the penalties should be high enough to discourage any non compliance. BEE is of the cognizance that the current penalties do not deter DCs from non compliance and it has now indicated to work further on this issue, says Mr Sanjay Dube, vice-president for sustainability and climate

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advisory services at Emergent Ventures. According to Ms Shruti Bhatia of CII, for the industry to easily embrace PAT, an enabling framework should be first created which should include: soft capital at 2-3% interest rate, accelerated depreciation for energy efficient technology, zero custom duty on energy efficient product imports, and a gestation of 3-4 years before PAT is implemented. Furthermore, industry players feel that the administrative cost under PAT and transaction cost of issuing ESCerts, trading, and so on, should also be considered and should be kept as low as possible. It is yet to be seen whether the system would incorporate these suggestions. However, despite the complications and uncertainties, PAT remains an unparalleled investment in building a sustainable economy in India. The difficulties in implementation should not dissuade government and business from working together to find creative solutions as well as learning lessons from existing trading programmes in other countries. Efficiency is a new direction for Indias industry, and they will benefit their nation and the planet by taking the lead on it.

Ritu Gupta is a freelance journalist. She can be contacted at ritugup@gmail.com