The Power Ministry had notified units consuming more energy in paper and some industries.
As the sun was setting on the previous fiscal year, the Ministry of Power and Bureau of Energy Efficiency (BEE) were quietly resurrecting a historic regulation for accelerating energy efficiency in the industrial sector. The set of notifications issued on March 30, 2012, requires 478 industries to achieve reductions in specific energy consumption by an average of 5 per cent during the next 3 years. This scheme is the first of its kind in a developing country.
The Perform, Achieve and Trade (PAT) mechanism, as the scheme is called, requires notified industries to invest in energy efficiency and reduce at least 5 per cent of input energy cost for self and public good. The savings in the first three years of the scheme are estimated at 9.8 million tonnes of oil equivalent of energy or approximately 9000 MW of avoided thermal power capacity, without compromising on the industrial output.
The direct benefits for the participating industries in this period is reductions in input costs related to energy of approximately Rs 30,000 crore at the current oil prices.
Needless to add, this will significantly enhance global competitiveness of industry while simultaneously reducing India’s overall GHG emissions. The PAT scheme is the flagship scheme of the National Mission for Enhanced Energy Efficiency (NMEEE), which is one of the 8 national missions announced under the National Action Plan on Climate Change (NAPCC) by the Prime Minister in June 2008.
The thrust of NAPCC is towards development of multi-pronged, long-term, and integrated strategies for achieving key goals of sustainable development, while balancing the concerns of climate change.
The scheme builds on the provision of the Energy Conservation Act that empowers the Central Government to notify energy-intensive industries and mandate them to report their energy usage, appoint Energy Managers, and adhere to targets for energy efficiency.
The Ministry of Power had, in 2007, notified units consuming energy more than the prescribed benchmark in 9 industrial sectors — namely Thermal Power Plants, Fertilisers, Cement, Pulp and Paper, Textiles, Chlor Alkali, Steel, Aluminium and Railways. The present notification requires the 478 listed industries amongst the 9 industrial sectors to achieve the target for Specific Energy Consumption (SEC) by 2015. SEC, as defined under the scheme, is the energy used for generating a unit of output.
The scheme is unique in many ways, particularly from a developing-country perspective. Firstly, it creates a market for energy efficiency through tradable certificates, called Energy Saving Certificate (ESCerts) by allowing them to be used for meeting targets. These certificates can be issued to any of the 478 industries who are able to exceed their respective notified target, the value of the certificate being the excess achievement, more than the target set. The beneficiary industry could trade this certificate to any of the rest of the entities (of the 478) that is unable to meet its target, as buying ESCerts has been allowed as sufficient fulfilment of compliance requirement without any penal action.
Thus, the scheme, by allowing the use of market-based instrument in the form of ESCerts, incentivises to over-achieve at the individual industry level, while simultaneously making sure that the overall goal of improving energy intensity is achieved in the most economical manner. This innovative mechanism to encourage compliance is a significant departure from the command and control regime, while promising to be more efficient, transparent, and inclusive.
Secondly, the rules promulgated take note of the fact that the scheme, particularly its market creation goal, needs to align with the investment decision-making processes of the private sector. In order to make sure that industries take a considered decision of making investments for achievement of specified targets or purchasing ESCerts, the certainty of adequate numbers of ESCerts being available as well as their price needs to be known much earlier than the end of the compliance period.
Under normal circumstances, both these parameters would be known at the end of the compliance period of 3 years. The rules notified allow intermediate issue of ESCerts after every year, based on partial fulfilment of targets, and thereby enable sufficient liquidity of ESCerts in the market at the end of the first year itself, allowing for decision by the remaining actors to purchase them for compliance. This will create the critical mass for market for ESCert to function.
Thirdly, the monitoring and verification protocol of the scheme culls out the best from similar schemes around the globe, simultaneously making it simple, transparent and effective. The targeted reduction of SEC is measured on a gate-to-gate basis, by measuring energy usage per unit of output. The simplicity of approach will not only make the exercise robust, but will also encourage companies to comply due to reduced cost of compliance.
Fourthly, the rules outline the monitoring and verification mechanism by inviting reputed agencies having adequate technical knowledge and having energy auditors certified by BEE. The eligibility conditions, the manner of their appointment, have been elaborated in the rules, making them transparent and credible at par with global standards. It also includes a liability clause for the monitoring and verification agencies to guard against frivolous certifications.
Fifthly, the scheme assimilates several competing issues seamlessly under its domain. Being an energy intensity reduction (or energy efficiency) scheme, it doesn’t present any restriction on the expansion of capacity. It may be mentioned that an energy or emission cap scheme would have needed reduction in energy use, and thereby the output from the baseline.
The added incentive of ESCerts and its attendant additional monetary benefits enhances the attractiveness of implementing energy efficiency. The overall reduction in energy use enhances efforts towards energy security, reducing GHG emissions, while simultaneously taking the industry on a higher growth path.
The scheme has been a result of extensive consultations, both at the policy level as well as with the industries, and addresses most of the concerns. PAT scheme has all the traits to become a benchmark for design and implementation of policies and measures, particularly when the need for aligning of competing incentives of various actors exists. It also highlights an innovative approach of introducing market-based instruments to encourage compliance. Successful implementation of the scheme could serve as a model for upcoming and existing environmental regulations in a transparent and economically efficient manner.