What Is Energy Savings Based Market Mechanism In India?

Energy Savings Certificates (ESCerts) are market-based instruments introduced by the Government of India under the Energy Conservation Act 2001, to reduce energy consumption and promote energy efficiency in energy-intensive industries. ESCerts allow companies that achieve firm energy savings beyond their legal obligation, to get Certificates that can be traded.

ESCerts operate on a market-based mechanism, where certificates are issued to companies that overachieve their energy savings targets. These certificates can then be traded on exchanges and allow companies that find it expensive to implement energy-efficiency measures to buy ESCerts to meet their mandated energy savings obligations. This creates a market for energy savings with industrial units having implemented energy efficient measures being incentivized through tradable certificates.

Table of Contents

Background

The Perform, Achieve and Trade (PAT) Scheme was introduced by the Government of India on 1st March 2002 under the provisions of the Energy Conservation Act, 2001. It is implemented by the Bureau of Energy Efficiency (BEE).

The key objectives of the PAT scheme are:

To mandate energy efficiency improvements in energy intensive industries
To reduce energy intensity in identified sectors

To promote competition among industrial units to save energy

The PAT scheme was formally launched on 30th March 2012 by the Minister of Power. Notification of targets for 478 industrial units across India was done under the Energy Conservation Act, 2001 [1].

Key Players

The key players in the PAT scheme are:

Bureau of Energy Efficiency (BEE): BEE is the regulatory body spearheading the PAT scheme. It sets energy efficiency standards and targets for designated consumers, develops procedures for monitoring and verification, issues Energy Savings Certificates (ESCerts), and maintains registries of designated consumers and ESCerts (https://beeindia.gov.in/en/programmes/perform-achieve-and-trade-pat).

Designated Consumers: These are large energy-intensive industries and facilities identified by the BEE as ‘designated consumers’. They are given specific energy consumption reduction targets under PAT. Some examples are steel, cement, fertilizer, and textile companies (https://www.iea.org/policies/1780-perform-achieve-trade-pat-scheme).

ESCerts Exchange: This is the market-based system where ESCerts are traded. Designated consumers who exceed their targets can sell their excess ESCerts to purchasers who can use them to meet their PAT compliance requirements (https://saathee.beeindia.gov.in/Common/BEEContent?MID=2&SMID=26).

Applicable Sectors

The Perform, Achieve and Trade (PAT) scheme covers energy-intensive sectors in India. Initially, it included 8 sectors – Aluminium, Cement, Chlor-Alkali, Fertilizer, Iron & Steel, Pulp & Paper, Textiles, and Thermal Power Plants. In 2016, the scheme was extended to include Refineries, Railways and Electricity Distribution Companies (DISCOMs) [1].

The inclusion of new sectors was based on an extensive study conducted by the Bureau of Energy Efficiency (BEE). The study analyzed the energy consumption patterns and savings potential across various sectors. Based on the findings, Refineries, Railways and DISCOMs were identified as major energy consumers with significant scope for improvements [2].

Currently, these 11 sectors account for major industrial energy consumption in India, making them critical targets for efficiency gains under the PAT scheme.

Working Mechanism

The Perform, Achieve and Trade (PAT) scheme works through a market-based mechanism to enhance cost effectiveness of improvements in energy efficiency in energy-intensive large industries and facilities. The Energy Conservation Act empowers the Bureau of Energy Efficiency (BEE) to notify energy intensive industries and facilities as ‘designated consumers’. These designated consumers are given mandatory targets for reducing their Specific Energy Consumption (SEC) within a specific timeframe. The SEC reduction targets are distributed among the designated consumers and each consumer is required to reduce their SEC by a given percentage.

To help the designated consumers achieve their SEC reduction targets, the PAT scheme utilizes tradable Energy Savings Certificates (ESCerts). ESCerts are issued to those designated consumers who exceed their given SEC reduction targets. One ESCert is issued for every metric ton of oil equivalent (MTOE) of energy saved by a designated consumer beyond their target. ESCerts can then be traded on power exchanges. Designated consumers who fail to meet their SEC reduction target need to purchase ESCerts to comply with their mandated target. This incentivizes the overachievers while creating a revenue stream to fund energy efficiency projects for underachievers. Overall, it is a market-based mechanism to promote energy conservation across energy intensive sectors.

The ESCerts are issued by Central and State Designated Agencies based on audited and verified energy savings claimed by designated consumers. The entire process is regulated by the Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commissions. The first PAT cycle resulted in energy savings of 8.67 million tonnes of oil equivalent (MTOE), exceeding the overall target of 6.68 MTOE. Over 4 lakh ESCerts were issued during the first PAT cycle. The market for ESCerts is expected to grow further as more cycles of PAT are implemented across additional sectors.

Source: Perform Achieve and Trade (PAT) Scheme Introduction

Benefits

The energy savings based market mechanism in India provides some important benefits for participants and help align incentives to enable energy savings:

Energy savings: By financially rewarding participants who reduce energy usage below a set baseline, the mechanism incentivizes and enables more energy savings across sectors. Companies and participants can invest in energy efficiency measures knowing they will directly benefit from the energy savings.

Reduced emissions: By driving energy savings, the market mechanism also results in reduced greenhouse gas emissions associated with energy production and usage. This helps India meet its climate change mitigation commitments and environmental goals.

Lower energy costs: For participating companies and organizations, implementing energy savings measures lowers their energy bills and costs. The financial rewards from energy savings certificates provide further monetary benefits. This makes energy efficiency investments more commercially attractive.

Results and Impact

The PAT scheme has resulted in significant energy savings and avoided carbon emissions since its launch in 2012. As per official data, the scheme led to energy savings of 31.67 million tonnes of oil equivalent (MTOE) in its first cycle from 2012-2015. This resulted in avoided carbon emissions of 98.55 million tonnes CO2. In the second cycle from 2016-2019, energy savings of 53.74 MTOE were achieved, resulting in avoided emissions of 170 million tonnes CO2.

The energy savings certificates (ESCerts) mechanism has been crucial in driving these results. By the end of PAT Cycle II, over 120,000 ESCerts had been issued to compliant industrial units that overachieved their targets. Over 95,000 ESCerts have been traded on the markets so far. The average price of ESCerts traded has ranged from ₹800-2000 per tonne of oil equivalent.

Key energy intensive sectors like iron & steel, cement, fertilizer, aluminum and textiles have seen significant improvements under PAT. For example, the iron & steel sector reduced its energy intensity by 2-4% annually. The cement sector achieved savings of around 20 million tonnes of CO2 in PAT Cycle I alone (Source: Impact of PAT Scheme and initiatives in Textile Sector).

Overall, the PAT scheme has catalyzed investments of over ₹1 lakh crore in improving energy efficiency. It has established robust systems for data collection, auditing and verification of industrial energy usage. The scheme has put India at the forefront of market-based mechanisms for reducing industrial emissions globally.

Challenges

The PAT scheme has faced some key challenges since its implementation. One major issue has been around compliance. Many designated consumers have struggled to meet their specific energy consumption reduction targets mandated under PAT. Factors contributing to this compliance gap include lack of access to finance for investing in energy efficiency measures, as well as lack of technical capabilities and expertise.

According to a report by the Asian Development Bank Institute, over 40% of designated consumers failed to meet their PAT targets during the first compliance cycle from 2012-2015. This improved marginally to around 30% non-compliance during the second cycle from 2016-2019. However, compliance issues clearly remain a persistent struggle.

The compliance challenges often stem from a lack of technical know-how and capabilities among industrial units covered under PAT. Many older manufacturing facilities in India were not designed with energy efficiency in mind. Retrofitting these sites to reduce energy intensity requires specialized technical expertise that is not always readily available. There is a need for greater access to technical training and consulting to improve compliance.

Recent Developments

The Perform, Achieve and Trade (PAT) scheme was launched in 2012 and is currently in its 8th cycle (PAT VIII) which started in April 2022. The PAT cycle is 3 years long with the compliance period ending on March 31st of the 3rd year.

Some key developments in recent PAT cycles include:

PAT VI (2019-2022): 670 new designated consumers from 10 sectors were added. The target was reduced by 3.12% compared to PAT V. Amendment to include building sector.
PAT VII (2022-2025): Inclusion of refineries, airports and railways as new sectors. Target set at 17.7 Mtoe, around 30% reduction over PAT VI target.
PAT VIII (2022-2025): Petrochemicals and additional sub-sectors included such as textiles and infrastructure. Target set at 25.12 Mtoe, around 12% higher than PAT VII.

Other amendments in recent PAT cycles include changes in threshold limits, inclusion of default baseline option, and modifications in compliance and penalty norms.

Overall the PAT scheme has been expanding to cover more sectors and tightening energy efficiency norms over successive cycles. The target reductions reflect rising ambition and stringency of the policy (Latest Update, PAT-Recent Developments).

Future Outlook

The PAT scheme has significant potential for further development and expansion in the coming years. Some key areas of focus for the future include:

Enhancing stakeholder participation: There are opportunities to increase participation from wider industry stakeholders, beyond just the designated consumers. This could involve establishing better frameworks for monitoring, reporting and verification (MRV), and exploring innovative funding mechanisms like green bonds to support investments in energy efficiency.^[1]

Covering more sectors: Currently PAT focuses on large energy-intensive industries. Going forward, there is scope for expanding coverage to include smaller industrial units, commercial buildings, transport sectors and municipalities. This would help widen the impact of PAT across India’s economy.^[2]

Increasing ambition of targets: The SEC reduction targets under PAT cycles could potentially be made more ambitious over time. This would drive higher absolute energy savings and emission reductions. Dynamic target setting frameworks aligned to sectoral decarbonization roadmaps could be explored.

If such enhancements are undertaken in a phased manner, the PAT scheme can emerge as an economy-wide market-based instrument for pushing the frontiers of energy efficiency improvement in India.

^[1] https://beeindia.gov.in/en/perform-achieve-and-trade-pat-0

^[2] https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1811051