Can the Learnings from International Examples Make the Perform Achieve and Trade (PAT) Scheme Perform

Better for India

Perform, Achieve & Trade (PAT) scheme, promoted under the National Mission on Enhanced Energy Efficiency (NMEE), will help energy-intensive large industry units in India enhance cost effectiveness in terms of energy efficiency.

A Discussion Paper by Sanjay Dube Ritesh Awasthi Vivek Dhariwal

A Discussion Paper on India's Perform Achieve and Trade (PAT) Scheme

Executive Summary
esignated Consumers (DCs)1 account for 25% of the national gross domestic product (GDP) and about 45% of commercial energy use in India. Since 2000, industrial GDP has been growing at 8.6% annually and energy use in industry at 5.8%. The lower rate of growth of industrial energy use can be attributed to many reasons. It has been observed that in recent years, industry has been choosing state-of-the-art technologies, which are more energy-efficient. Also, there have been many in-house efforts made by the industry to become more energy-efficient. In order to further accelerate as well as incentivize energy efficiency, the Government of India is designing a Perform Achieve and Trade (PAT) Scheme. PAT is a market based mechanism to enhance cost effectiveness of improvements in energy efficiency in energyintensive large industries and facilities, through certification of energy savings that could be traded. The genesis of the PAT mechanism flows out of the provision of the Energy Conservation Act, 2001. The Ministry of Power (MoP) has notified industrial units and other establishments consuming energy more than the threshold in 9 industrial sectors namely Thermal Power Plants, Fertilizer, Cement, Pulp and Paper, Textiles, Chlor-Alkali, Iron & Steel, Aluminum and Railways in March, 2007 as DCs under PAT Scheme2. Table 1: Minimum annual energy consumption and estimated number of DCs in select sectors
Sector Aluminium Cement Chlor-Alkali Fertilizer Iron and steel Pulp and paper Railways (diesel loco sheds and workshops) Textiles Thermal power plants 3000 30000 Minimum annual energy consumption for the DC (tonnes of oil equivalent) 7500 30000 12000 30000 30000 30000 No. of probable DCs 11 83 20 23 101 51 8 128 146

Source: PAT Consultation Document, December 2010, Bureau of Energy Efficiency, Government of India

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A Discussion Paper on India's Perform Achieve and Trade (PAT) Scheme

Requirements of the EC Act for DCs

The Energy Conservation Act 2001, herein referred as the EC Act, enacted by the Government of India in 2001, provides for the overall framework for efficient use of energy and its conservation in India. The Act provisioned for various sectors to adopt measures for ensuring energy efficiency and also led to the formation organization such as the Bureau of Energy Efficiency (BEE). Identifying 15 energy intensive sectors as Designated Consumers, the Act provided regulations for these DCs to: 3 ? report of energy consumption to the Designated Authority of the State as well as to Bureau of Energy Efficiency Furnish (BEE). ? or appoint an Energy Manager who will be in-charge of submission of annual energy consumption returns of the Designate Designated Agencies and BEE. ? with the energy conservation norms and standards prescribed under section 14 (g) of the Act. Comply ? Purchase Energy Saving Certificates (ESCerts) for compliance to section 14 (g) in the event of default. The Act has been amended with the addition of new sub-section 14A to enable this and section 14A (2) allows such trading. EScerts are defined by adding a new sub-section 2(ma). ? Monitoring and Verification of compliance by Designated Energy Auditors (DENA) which will be prescribed the Government/ BEE under section 14A/13 (p) of the Act. ? achievement of the target set would entail issuance of ESCerts Excess under section 14A (1). ? for non-compliance being Rs. 10 lakhs and the value of nonPenalty compliance measured in terms of the market value of tones of oil equivalent by inserting a new section 26(1A).

BEE was made to be the overall regulator and dispute resolution agency and The Energy Efficiency Service Limited4 (EESL), a public sector undertaking to be the process manager. Perform Achieve and Trade (PAT) a result of the National Mission on Enhance Energy Efficiency (NMEEE) under the National Action Plan on Climate Change (NAPCC) is an ambitious project of GOI given its scale, complexities, timelines and absence of precedence. The design phase of PAT is the most crucial phase as it would largely ensure successful implementation and operation of the scheme. This paper discusses key design issues about boundary and target setting and performance of the scheme in the market. The paper also presents international case examples to suggest possible modifications in the current format of the PAT Scheme.

The Energy Conservation Act 2001 has identified following 15 energy intensive sectors as 'Designated Consumers': aluminium, fertilizers, iron and steel, cement, pulp and paper, chlor - alkali, sugar, textiles, chemicals, railways, port trust, transport, petrochemicals, power and commercial buildings or establishments. 2 PAT Consultation Document, December 2010, Bureau of Energy Efficiency, Government of India 3 The Bureau of Energy Efficiency (BEE) is a statuary body set up by the Government of India to implement the Energy Conservation Act 2001. 4 In order to develop a viable ESCO industry, Ministry of Power has set up Energy Efficiency Services Limited (EESL), a Joint Venture of four public sector undertakings (PSUs); NTPC, PFC, REC and POWERGRID to facilitate implementation of energy efficiency projects. EESL will work as super ESCO and lead the market related actions of NMEEE.

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A Discussion Paper on India's Perform Achieve and Trade (PAT) Scheme

Some of the major recommendations which are discussed in greater details include:
Boundary Setting: For effective implementation of the scheme, it is advised that the unit or DC boundary for Specific Energy Conservation (SEC) under PAT should be determined based on 'activity' rather than 'gate to gate' definition which is suggested under the current format of scheme. It is also advised to define the activities falling under the purview of PAT SEC determination. Target Setting: Based upon the learnings from international examples, it is advised to have energy saving targets at industry, sector and DC level rather than adopting a cluster approach for target setting in a particular sector. Market Mechanism: The paper discusses the necessity and options for providing guidance on the price of Energy Saving Certificates (ESCerts). It stresses on the core task of setting proper targets that are neither too easy nor too strict. The paper also discusses about complimentary tools like auctioning, floor/roof prices of EScerts, and penalties for non-compliance. The paper also recommends protection measures for sectors and units based on international competitiveness and healthy outputs. The views expressed in this paper are of the experts at EVI and insights gained with the help of a series of discussions with industry partners, Government agencies and other stakeholders (exchange, traders, etc). EVI interacted with industry and industry associations to understand their preparedness for PAT Scheme and captured their views about the structure of the scheme.

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Perform Achieve and Trade (PAT) Scheme Overview

A Discussion Paper on India's Perform Achieve and Trade (PAT) Scheme

Perform Achieve and Trade (PAT) Scheme Overview

In response to the growing challenge of climate change, the Government of India (GOI) released the National Action Plan on Climate Change (NAPCC) in June 2008. Its objective is to achieve a sustainable path of development that simultaneously advances the economic and environmental objectives. The NAPCC enunciates eight key National Missions (Figure 1).

National Solar Mission

National Mission for Enhanced Energy Efficiency

National Mission for Strategic Knowledge for Climate Change

National Mission on Sustainable Habitat

NAPCC Missions
National Missions for Sustainable Agriculture National Wate Mission

Naitional Mission for a Green India

National Mission for Sustaining the Himalyan Ecosystem

Figure 1: NAPCC Missions

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A Discussion Paper on India's Perform Achieve and Trade (PAT) Scheme

The National Mission for Enhanced Energy Efficiency (NMEEE)

The National Mission for Enhanced Energy Efficiency (NMEEE) is a key component of the NAPCC and reflects GOI's increased emphasis on achieving energy efficiency in the Indian economy. In addition to a number of ongoing schemes and programs, the NMEEE has put in place four new initiatives to enhance energy efficiency in India (Figure 2).

Energy Efficiency Financing Platform (EEFP) A mechanism to finance DSM programmes in all sectors by capturing future energy savings

Perform Achieve and Trade (PAT) A Market based mechanism to enhance cost effectiveness of improvements in energy efficiency in energy intensive large industries through certification of energy savings that could be traded

National Mission for Enhanced Energy Efficiency (NMEEE)

Market Based Transformation for Energy Efficiency (MTEE) Accelerating the shift to energy efficient appliances in designated sectors thorugh innovative measures that make the product more affordable

Framework for Energy Efficient Economic Development Developing fiscal instruments to promote energy efficiency

Figure 2: Initiatives under NMEEE

The Indian Government, as a policy tool towards meeting the objectives of NMEEE, has identified an Energy Efficiency Trading Scheme - Perform Achieve and Trade (PAT) which is to be in the national interest, easing the pressure on the powersector infrastructure and reducing the need for primary energy resources. The PAT aims to enhance cost effectiveness of improvements in energy efficiency, through certification of energy savings that could be traded. The EC Act, 2001 has identified 15 large Energy Intensive Industries for energy efficiency improvements in India. Section 14 (e) and 14 (g) of the Act empower the central government, on the recommendations of Bureau of Energy Efficiency (BEE), to prescribe energy consumption norms and standards for energy intensive industries. These energy intensive industries are named as Designated Consumers (DCs) in the EC Act. Out of the 15 Designated Consumers, nine (Aluminium, Cement, Chlor-Alkali, Pulp & Paper, Fertilizers, Power Generation Plants, Steel, and Railways) are covered under the PAT Scheme. Table 2 lists the minimum energy consumption thresholds for each sector for inclusion in the PAT mechanism.

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A Discussion Paper on India's Perform Achieve and Trade (PAT) Scheme

How will PAT work? Each DC will be given Specific Energy Consumption (SEC) target to meet over a period of three years. Any additional saving will qualify for earning Energy Saving Certificates (ESCerts), which could be traded, with DC's who could be short of targets. This trade can be made bilaterally or through exchange. Impact of PAT According to Government of India, the estimated size of Table 2: Minimum Energy Consumption Thresholds for DCs this entire scheme will be about 700 Billion Indian Rupees Minimum energy consumption for designated consumer or approximately 16 Billion US Dollars and will lead to 98 (in tons of oil equivalent per year) for inclusion in PAT million tons of GHG mitigation. BEE is setting up the Aluminium 7500 overall framework for the scheme and Energy Efficiency 30000 Services Limited (EESL) will work as an implementation Cement and monitoring agency for the entire scheme.
Chlor-Alkali Fertilizer Pulp & Paper Power Iron & Steel Textiles 12000

PAT Timelines First target period of PAT is scheduled to start in April 2011. Each target period is planned to be of three years. March 2014 would thus mark the conclusion of first target period. At the end of each target period, DC's performance on SEC reduction will be assessed by third party auditors who will submit their verification reports to EESL. Verification and allotment of the first target period would be completed post which the trading/delivery will start on exchanges.

30000 30000 30000 30000 3000

Source: PAT Consultation Document, December 2010, Bureau of Energy Efficiency, Government of India

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Analysis of PAT Design

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Analysis of PAT Design

The design phase of a cap and trade scheme is the most critical phase as it largely ensures successful implementation and operation of the scheme. Though, there will always be changes based on the learning in the both implementation and operation phase, a better design would prevent major modifications ensuring continuity and faith in the scheme. There are three areas which need to be carefully addressed for a better design of a cap and trade mechanism namely boundary setting, target setting and market mechanism. In this section we would grade the approach adopted by PAT scheme in the areas of boundary, target and market based on clarity, comprehensiveness and robustness.

1. Boundary Normally the boundaries are defined at three levels in a well designed cap and trade mechanism. a. Industry - Sectors that are covered under the scheme. PAT scores average in this aspect. While, the scheme covers few energy intensive sectors with significant energy saving potential it also covers sectors like chlor alkali with limited units and possibly limited potential. The nine sectors covered under PAT have been selected from 15 energy intensive sectors identified in The EC Act 2001. There is no justification given for inclusion of sectors like chlor alkali and textile, and exclusion of sectors like chemicals, sugar, transport, petrochemicals etc. b. Unit - Individual units that are covered under the scheme. PAT scores high on this aspect by defining threshold energy consumption for units to be included under the scheme. The Table 2 in the previous section lists threshold energy consumption for different sectors. c. Activity - Activities at individual units covered under the scheme PAT scores low on this front. PAT's 'gate to gate' boundary definition leaves too much room for interpretation. The 'gate to gate' definition of boundary for SEC calculation is untenable and likely to lead to several complications. For example SEC for a cement plant with onsite quarry is likely to be different from a plant without a quarry. Likewise, the SEC of a plant with an onsite waste treatment unit will be different from a plant treating the waste offsite. The current boundary definitions do not speak about the recovery of limestone from an onsite quarry or waste treatment on site is an activity covered under PAT or not.

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2. Target - Like boundary, a well designed cap and trade would have clear target on three levels: a. Industry - Total energy saving to be realized in given time via this scheme, across all sectors. PAT scores low on this front. We are not aware of any comprehensive study that has been conducted on the overall energy savings to be realized through the implementation of PAT scheme. b. Sector - Total energy saving to be realized in given time in a particular sector via this scheme. PAT scores low on this front. The overall industry saving potential to be realized through the scheme could be distributed across sectors based on energy saving potential in each of them. Another option is to arrive at the energy saving to be realized in each sector and then sum them to arrive at the overall energy saving to be realized through the scheme. In either case it is necessary to study the energy saving potential in each sector. We are not aware of any comprehensive study that has been conducted on the energy saving potential across sectors for PAT. c. Unit - Energy saving to be realized at each individual unit in a given time via this scheme so that it contributes to meeting the sector and industry energy saving target. PAT scores average on this front. PAT clustering approach for setting unit level targets score high on clarity. The approach however scores low on comprehensiveness due to boundary definition issues. It also scores low on robustness and it fails to reward or penalize DCs for good or bad performance across processes.

3. Market - In order to have an effective cap and trade or market mechanism that aids desired reduction in energy use, it is necessary to have targets that are neither too easy nor too difficult to achieve. It is necessary to ensure participation in the markets through proper definition of penalties. To provide guidance and to enhance faith in the market the regulator can also look at the options for credit auction or minimum guarantee price (both roof and floor). PAT scores low on this front. a. We are not aware of any study that has been conducted so far on the price variability of ESCerts based on the targets being set. If the targets are too easy there are chances of market collapse, thus eroding trust. If they are too difficult they would prompt default. b. The penalties defined in the EC Act 20015 are inconsequential and would not deter DCs from non compliance. However, BEE recognizes this and is in the process of developing a structure for imposing financial penalties for noncompliance. c. The current PAT mechanism also does not plan auction of EScerts nor does it define any floor or roof price for ESCerts.

The financial penalty provided in the Act amounts to INR 374,000.0 per year if a designated consumer fails to comply with the specific energy consumption reduction requirement.

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Recommendations

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Recommendations
Framework
1. Two Tier Structure It is recommended that a two tier structure be adopted with extensive involvement of sector or trade association in base lining and target setting. A case of Climate Change Agreements (CCAs) of UK can be referred for adopting this approach (Please Refer to Box 1 for introduction to CCL and CCA). The Climate Change Agreements (CCAs) have successfully adopted and perfected this two-tier structure. There is a Box 1: Climate Change Levy and Climate Change Agreements sector-level agreement between the Department of Energy and The UK Government set itself a domestic objective to reduce emissions of carbon dioxide (CO2) by 20% on 1990 levels by 2010. As a result, a range of policies for reducing greenhouse gas emissions were introduced. Climate Change, UK (DECC, UK) Major components of this programme are the Climate Change Levy (CCL) and Climate Change Agreements and the sector/trade associations (CCAs) announced with the 1999 Budget and introduced in April 2001. (known as an umbrella Climate Change Levy (CCL) agreement), and individual The CCL is chargeable on the industrial and commercial energy supply of consumers in the following sectors: agreements between DECC and Industry, Commerce, Agriculture, Public and service sectors. the operator of the facility (known The CCL does not apply to supplies used by domestic consumers, by charities for non-business use or by very as underlying agreements). The small firms using domestic levels of energy (roughly equivalent to the energy used by a six-bedroom house). sector association agrees with CCL is charged on taxable energy supplies and includes: Electricity, Natural gas, Petroleum and hydrocarbon gas in liquid form, Coal, Lignite and Coke. DECC on the targets and then passes them to Technical Units The CCL is added to bills before VAT and, although there is no legal requirement for it to be shown, it usually (TU's). The TU's are equivalent to appears as a separate item on energy bills. D C s u n d e r PAT S c h e m e . Climate Change Agreements (CCA) Associations also advise and The UK Government recognized that energy intensive industries that are exposed to overseas competition agree on targets for TUs which should be given special consideration. Therefore, it agreed that such industries could qualify for a discount of up to 80% of the CCL. This would be done through a CCA. enter into an agreement with DECC. A similar approach could Climate Change Agreements have been very successful in the impact and the adoption by the industry. The be adopted in the Indian context. fourth assessment report on the impact of AEA* shows that:
? 20.3 million tonnes of CO2 per year emissions were saved in total compared to sector baselines ? 52 sectors reporting met their targets outright 36 out of ? In a further 12 sectors all the facilities had their Climate Change Levy discounts renewed ? 99 per cent of facilities (8,973 no.) have had Climate Change Levy discounts renewed ? Generally, there was continued improvement across the sectors
* Department of Energy and Climate Change (DECC) currently contracts AEA Energy & Environment (AEA) to provide technical support in matters related to the operation of the CCAs.

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2. Role of BEE and Independent Committees/Sector Associations under the Two Tier Structure For better coordination, the roles for independent sector/trade associations and BEE should be redefined under the new Two Tier structure. The learning from the role of sector/trade associations and DECC in CCAs can be incorporated in redefining the roles under PAT scheme
? appoint an independent body (sector committee/trade association) capable of representing most units covered BEE can

under a particular sector.

? The independent body can conduct a detailed study on Sector Average Target SEC (SATS) that the sector collectively can

achieve over a time period. For example, if the desired time to achieve the target is April 20206, then the Sector Average Target SEC can be referred as SATS2020. The study will be based on the energy efficiency potential in the sector based on the local context, international benchmarks and technology roadmap.
? can objectively be analyzed by BEE to The study

ensure that the SATS are neither too ambitious and nor too easy. BEE should evaluate how the overall saving potential compares with the target. In case if the target plans to over achieve current potential, where will the remainder come from? (e.g. from the throughput effect /promising technology being commercialized?). On the other hand, if the targets are much less than the potential, then why it is so? BEE and the independent body can finalize the SATS2020. They will then decide SATS2014 and SATS2017 that ensures incremental progress towards SATS2020.
? is very crucial. In Regional Clean Air Incentives Market Mechanism (RECLAIM), emissions are reduced at only a This step

fraction of the rate expected at the time of the program's adoption due to the setting of too generous caps (Please refer to Box 2 for introduction to RECLAIM)
? The report can be hosted by BEE for review and comments from stakeholders before arriving at any conclusion about

Sector Average Target SEC (SATS2020).

First target period of PAT is scheduled to start from April 2011. Each target period is planned to be of three years. April 2020 would thus mark the conclusion of three target periods.

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? The independent body can advise individual DCs on the average SEC targets that they should take in each target period.

These targets can be referred as DCAS2014, DCAS2017 and DCAS2020. The suggestion could be based upon:
Sector Average Target SEC (How it helps achieve the

Box 2: Regional Clean Air Incentives Market (RECLAIM)

The California RECLAIM trading program is used by the South Coast Air Quality Management District (SCAQMD) in USA to control the amount of nitrogen oxide (NOx) and sulfur oxides (SOx) in Los Angeles and Orange counties. This region, the smoggiest in the nation, was required to achieve federal clean air health standards by 2010. Because RECLAIM offered financial incentives to reduce emissions, it was expected to reach that goal at a lower cost with increased flexibility. It required industries and businesses to cut their emissions by a specific amount each year, resulting in a 70% reduction for nitrogen oxides (NOx) and a 60% reduction for sulfur oxides (Sox) by 2003.RECLAIM Trading Credits (RTCs) were denominated in $/lbs (one RTC is equates to one pound of NOx emitted). However, due to the setting of too generous caps, emissions were reduced at only a fraction of the rate expected at the time of the program's adoption. The scheme serves a general lesson for market-based systems, namely that market-based programs require significant planning, preparation, and management during development and throughout the life of the program.

Sector Average Target SEC?) Target profile Throughput profile on which this is based Performance in the base year and subsequent years to date Energy saving action plan which is submitted by DCs with implementation dates and expected savings split into direct and indirect (grid electricity) energy saving measures
?dialogue with the sector committee /association the DC After a

may submit a proposal to BEE detailing about Target SEC and plans to achieve that. Independent sector committee/association can also submit their report. Both these reports may or may not conform and are independently evaluated by BEE to make a final decision. In the end an agreement can be signed between BEE and DC.

Boundary Setting 1. Activity Definition It is recommended that rather than 'gate to gate' boundary definition, BEE should define the activities that fall under the purview of PAT. This is necessary to account for differences in the activities performed at or outside the geographical site for two units producing the same product. In case of CCA, eligible activities are defined under the Pollution Prevention Control Regulations (2000). 2. Grouping It is recommended that units under the same operator be grouped. In some sectors there are companies that own and operate more than one unit. It makes sense to combine these units as one designated consumer and calculate a single SEC for the company which will be the weighted average of individual SECs of different units. The production during the target period can be considered as weight. This is likely to have the following advantages:
provide greater flexibility to the operator It will Prevent redundancies and extra cost as single PAD (PAT Assessment Document), registry, verifier etc. could be used

by the company There will be reduction in the effort at the end of regulator and dispute resolution body. They will be dealing with one entity rather than multiple serve as natural normalization rather than mathematical normalization which is likely to be used to reduce the It will number of clusters

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Target Setting 1. Sector Energy Saving Potential Study - It is recommended that a study on energy saving potential for each sector be conducted. While the targets can be set either top-down, i.e. starting with industry, which are then distributed across sectors and finally across units in that sector, or bottom up, i.e. deciding on unit targets, then consolidating them to sector and finally into industry targets. Both the approaches have their pros and cons. While, the first is more theoretical, the second is more time consuming and borders on impracticality. It is thus best to use the combination of both which we can call the hybrid approach. PAT cluster approach7 is a hybrid approach for target setting. However, a study on sector energy saving potential would definitely help. 2. Process Based Clustering Approach - A further refinement of the cluster based approach is recommended by performing clustering at processes level and not on overall DC level energy consumption. To take care of wide variations in raw materials and technology use, there is a need to classify the activities under the purview of PAT as sequential/parallel/exclusive processes before performing the clustering on each class of processes rather than clustering at DC level, which is the current approach for PAT (Figure 3). This would ensure that each DC is rewarded and penalized for its performance in a particular process irrespective of the activities performed in a 'gate to gate' boundary. DC level clustering can sometimes creates biases due to boundary, technology, raw material variation and lead to wrong target setting for some Dcs. For example, if a sector has only two units (DC1 and DC2). The manufacturing is divided into three processes (P1, P2 and P3). While DC1 performs all three processes Table 3: Process Target SEC based on Process Clustering Approach within the geographical boundary, DC2 performs P1 and P2. The Table 3 depicts the Target SEC for Target SEC for Target SEC for Process P1 Process P2 Process P3 result of process clustering approach on process target SEC while Table 4 shows the Min Min (DC1P1, DC2P1) DC1P3 Process Target SEC (DC1P2, DC2P2) result of overall target SEC for both the units due to above approach.

Table 4: Target SEC for DCs based on Process Clustering Approach

Units Dc1 Target SEC using Process Clustering Approach Dc2 Target SEC using Process Clustering Approach Target SEC for DCS using Process Clustering Approach Min (DC1P1, DC2P1) + Min (DC1P2, DC2P2) + DC1P3 Min (DC1P1, DC2P1) + Min (DC1P2, DC2P2)

Current PAT Scheme proposes the cluster approach for target setting in a particular sector. The SEC of all the units covered under each sector can be plotted on a graph to identify the clusters. All units in a cluster will have same target SEC.

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In the DC level clustering and gate to gate boundary definition, if both the DCs were put in the same cluster, it can be easily visualized that the target for DC1 will be very steep and DC2 will make windfall profits. DC1 would have paid heavily for having process P3 on its site. If they were placed in two different clusters then there would have been an absolute target for both. The target would have been tougher for DC1 as compared to DC2. The approach would have disregarded probably better performance of DC1 across processes.

10 9 8 7 6 5 4 3 2 1 0

Cluster 1

Cluster 2

Cluster 3

Baseline SEC

Plant 1

Plant 9

Plant 4

Plant 3

Plant 6

Plant 10

Plant 8

Plant 2

Plant 7

Plant 5

Thus approach of using process SEC for clustering coupled with activity definition Source: PAT Consultation Document, December 2010, Bureau of Energy Efficiency, Government of India will not only take care of variations and Figure 3: DC Level Clustering Approach For Determination Of SEC resolve boundary issues but it will also reward DCs for performance across different process. While the process SEC approach helps, it should also be kept in mind that each such division would have diminishing returns. It is thus not advisable to have too many such divisions.

Plant

Price Discovery 1. ESCerts Price Variation Study - It is recommended that a study on likely price range of ESCerts based on the targets should be conducted. This study will decide whether the objective of enhancing cost effectiveness of improvements in energy efficiency in energy intensive sectors, through PAT is being met or not. The outcome of the study will enable BEE to revisit the targets if the above objectives are not being realized. 2. Auction of EScerts - It is recommended that BEE should explore the option of auctioning limited number of in the middle of first target period (three years for PAT). Since the target period is scheduled to start in April 2011, the auction can be conducted at the end of year 2013 or in the beginning of year 2014. This will ensure the discovery of price as by that time DCs would have some idea about where they stand compared to the targets and how far they can stretch. 3. Penalty for Non Compliance - It is 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 has indicated to work further on this issue.

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4. Floor/Roof Price for ESCerts - BEE can also look at the option of setting a floor and roof price for ESCerts. However, extra care has to be taken in target setting to avoid any significant financial burden due to the intervention of regulator in case the floor or roof price is attained. This situation may also erode the faith in the market8. In UK, CCL is a tax that the companies have to pay if they do not enter into CCA. If companies do not meet the targets set under CCA, they have to buy and retire carbon allowances. Thus in case of CCA, CCL charge and Carbon Allowance price forms the basis for calculation of cost to enter into CCAs. In case of Renewable Energy Certificates (RECs) in India the preferential tariff for Renewable Energy forms the basis of the pricing.

Box 3: European Union Emission Trading Scheme and Kyoto Protocol

The European Union Emissions Trading Scheme (EU ETS) is the largest multi-national emissions trading scheme in the world. It is a major pillar of EU climate policy. The EU ETS has different periods. The trial or first trading period was from 2005 through 2007, the second and current period is from 2008 through 2012. The third period would start from 2013 through 2020. EU ETS though is closely linked to Kyoto Protocol and help the members meet their compliance under it is an independent emission trading market altogether. It thus can continue beyond 2012 whatever the shape of the Kyoto Protocol or a successor agreement is going to be. Irrespective of the actual impact, EU ETS has been successful in putting a price on GHG emissions, creating a system that help monitor and report 12000 installations across 27 EU countries and developing countries through Clean Development Mechanism (CDM). EU ETS is different from classic cap-and-trade model by the decentralized nature by which the cap has been determined. There was no initially determined overall limit; it was the sum of separate decisions concerning the total number of European Union Allowances (EUAs) that each member state could distribute to installations within its jurisdiction. Each member state proposed a quantity of EUAs, but that quantity is subject to review and approval by the European Commission. The EU ETS includes only CO2 emissions and only a subset of the economy. The sectors and installations included under the EU ETS comprise about half of EU's CO2 emissions and about 40 percent of the GHG emissions covered by the Kyoto Protocol. GHG emissions from sources not included in the EU ETS, notably transportation and buildings, are to be limited by other policies and measures. The Emissions Trading Directive though has the option of including other sectors and installations in future. Aviation for example has been recently included.

EU ETS and Kyoto are very good examples of regulations that have established a fresh EUA /CER market,very similar tobwhat Government of India attempts to do EU ETS has had its own share of controversies like the price drop at the end of the first trading period. The through PAT. It is interesting to note reason for the price drop was over allocation. Power companies generated windfall profit by higher electricity prices and excessive free allocation of allowances. This also implied an emissions cap that was not how EU ETS targets have been sufficiently constraining or at least not demanding enough. set and the institutional framework for verification and price discovery through fines and auctions has been created. EU ETS and Kyoto have their own success and failures but they offer good learnings for a program like PAT (please refer to Box 3 for introduction to EU ETS and Kyoto).

Minimum guarantee price/floor price or maximum guarantee/roof price is good for ensuring control and faith in the markets but requires intervention if floor or roof is reached. The regulator must be prepared to sell at the roof price and buy at floor price if such event happens otherwise the market may collapse. There can be a significant financial burden if such events occur. The chances of occurring of such events can be reduced through setting proper targets.

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Protection for the Industry and DCs 1. Export Competitive Test - While it is necessary to improve energy efficiency, it should not be at the cost of an industry, a sector or an unit. Thus it is recommended to take certain protection measures to minimize the risk of negative impact on international competitiveness. BEE should define and introduce Export Competitive test and monitor it on a continuous basis. The test would help evaluate that how PAT targets affect the export competiveness of a sector or make it vulnerable to cheaper imports. There should be provisions to provide rebate to the sector if it fails the Export Competitive test. In UK, CCL is chargeable on the industrial and commercial energy supplies to consumers. It is a form of additional tax that is payable on the use of energy. CCAs were designed to protect industry from overseas import by giving them an option to claim rebate from CCL if they achieve CCA targets. The eligible sectors for CCA have to undergo Import Test to test their vulnerability to imports. Sectors can participate in CCA and claim rebate from CCL only if they can demonstrate they are vulnerable to cheaper overseas imports. 2. Throughput Test It is also recommended that the umbrella agreement between BEE and sector committee/associations or individual DCs should have throughput or production protection measures in place. If the production of a sector or individual DC falls below a threshold, there should be a provision for rebate. This will prevent additional burden on the sectors or individual DC's in already worsening conditions.

As BEE gears up for the launch of PAT scheme and the industry prepares itself to understand the impacts, we hope that the analysis presented would help in bringing better clarity on the design of the scheme. We also hope that successful implementation of the scheme would help India achieve the objectives of low carbon future as expected under National Action Plan on Climate Change (NAPCC).

Sanjay Dube heads Sustainability and Climate Value Advisory team at EVI and, Ritesh Awasthi and Vivek Dhariwal are Senior Consultants in the same team.

March, 2011 Emergent Ventures International.

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