Market Mechanisms in India s Clean Energy Efforts

Transcription

1 Market Mechanisms in India s Clean Energy Efforts Perform, Achieve and Trade Mechanism Balawant Joshi Director, ABPS Infrastructure Advisory Pvt. Ltd. October 2010

2 Agenda Introduction to ABPS Infra Energy Scenario in India NAPCC & NMEEE Proposed Perform, Achieve & Trade Scheme

3 Introduction to ABPS Infra October 2010

4 An Introduction to ABPS Infra Set up in Sep 2005 as start-up Consulting Organization by professionals, having wide range of experience in the energy and infrastructure sectors Promoted by Ajit Pandit, Balawant Joshi, Palaniappan M & Suresh Gehani Services Clients Regulatory & Policy Corporate & Financial Advisory Renewable Energy DSM & Energy efficiency Climate Change Advisory Regulatory Commissions Utilities (State and Private) State Governments Central Government Industry Associations Investors Regulations development Tariff determination Market Mechanisms Policy for Renewable energy Rural Electrification Diagnostic studies Due Diligence Financial Modelling Counter Party Risk Assessment Bid Process Management Business Valuation Contractual support Resource Assessment RPS and RPO Feed-in tariff Market Study Investment Strategy Project structuring Project development Designing DSM Plans Energy Audit Life Cycle Assessment Monitoring & Verification End use energy efficiency improvement Climate Change Policy analysis Carbon Footprint Carbon Neutrality CDM project development support Emission Trading advice Developers Capacity Building Financial Institutions

5 Energy Efficiency and Demand Side Management MNRE/UNDP-GEF Market Assessment of SWH Systems in Industrial Sector Acting as OA for Task XX & XXII Branding of EE & EEPS Assessment of Mandatory and Voluntary Trading in Energy Saving Certificate Impact Assessment of KVAh metering in India Assistant to BEE to act as a Secretariat to Forum of Regulators Activities in DSM, Load Study and Energy Conservation Assistance in Design and development of DSM implementation strategy Development of National DSM Policy Acting as Country Expert to BEE for IEA s Global Initiative on Task XV Network DSM Advisor for addressing various issues Related to DSM measures and Energy Efficiency measures By Utilities

6 Energy Scenario in India October 2010

7 Energy Imperatives for India Over 487 million people without access to electricity (2005) 80.4% of the population is below the $2 per day level, and 34.3% below the $1 per day level ( ). India needs GDP growth of 8%plus over next 25 years to lift bottom 40% citizens to an acceptable level of economic & social well being which is not possible without increased energy use. India must be able to pursue accelerated social and economic development. Development is also an imperative for adaptation (i.e. actions to cope with climate change e.g. in agriculture, health, to tackle sea-level rise, disaster mitigation, risk financing etc.) Source : Presentation, Prime Minister s Council on Climate Change, October 2009

8 India Energy Demand Supply Scenario Year Total Primary Energy Requirement (mtoe) Commercial Energy Non Commercial Energy Total Primary energy Total Primary Energy Supply in FY (mtoe) Crude Oil Natural Gas Coal Hydro Nuclear Renewable Noncommercial Total Both Demand Supply scenarios are for 8% GDP growth rate as per Integrated energy Policy Report

9 NAPCC National Initiatives towards Climate Change & EE October 2010

10 India s response to Climate Change Honorable Prime Minister of India unveiled National Action Plan on Climate Change (NAPCC) on June 30, NAPCC identifies measures that promote India s development objectives while also yielding co-benefits for addressing climate change effectively. NAPCC is comprised of eight core national missions running through 2017 and will help in bringing better planning, management and developmental strategies and cleaner technologies Increased attention towards energy efficiency at a policy level is visible with National Mission on Enhanced Energy Efficiency (NMEEE) as one of the missions under NAPCC

11 Principles of NAPCC Protecting the poor through an inclusive and sustainable development strategy, sensitive to climate change Achieving national growth and poverty alleviation objectives while ensuring ecological sustainability Efficient and cost-effective strategies for end-use Demand Side Management Extensive& accelerated deployment of technologies for adaptation& mitigation New and innovative market, regulatory, and voluntary mechanisms for sustainable development Effective implementation through unique linkages with civil society and publicprivate partnerships International cooperation for R&D, technology transfer and global IPR regime NAPCC seeks to promote sustainable development through enhanced demand for clean technologies by creating stringent specifications such as ECBC, norms for industries etc and creating a market for new technologies e.g. solar application, urban transportation system etc.

12 Core Missions Under NAPCC (1/2) National Solar Mission Increased share of solar in the energy mix Decentralized distribution of energy Creation of more affordable, more convenient solarpower systems and storage Clean technologies involved: Solar Thermal power generation, solar photovoltaic generation etc. National Mission on Sustainable Habitat Extension of application of Energy Conservation, Building Code, incentives for retooling existing building stock Recycling of materials and urban waste management; technology development for power from waste Better urban planning and modal shift to public transport National Mission for Enhanced Energy Efficiency Enhance cost effectiveness of improvements in EE in energy-intensive large facilities Shift to energy efficient appliances through innovative measures Mechanisms for financing DSM programmes& other fiscal instruments Clean technologies involved: efficient lighting, VFD, clean coal technology etc. National Water Mission Focus on conservation of water, minimizing wastage and ensuring equitable distribution Recycling of waste water in urban areas Adoption of new technologies such as low temperature desalination for coastal cities Optimize existing irrigation systems Clean water purification technology

13 Core Missions Under NAPCC (2/2) National Mission for Sustaining Himalayan Ecosystem National Mission for a Green India Sustaining and safeguarding the Himalayan glacier and mountain eco-system Understand whether and the extent to which the Himalayan glaciers are in recession Observational and monitoring network for the Himalayan environment: to assess fresh water resources and health of ecosystem Afforestation of 6 million hectares Coverage of degraded forest land Enhancement of ecosystem services including carbon sinks Involvement of communities in Forest protection & afforestation National Mission for Sustainable Agriculture Develop new varieties of crops capable of withstanding extreme weather: Orient agriresearch to monitor& evaluate climate change& recommend changes Convergence and integration of traditional knowledge and practice systems, information technologies and biotechnology National Mission on Strategic Knowledge for Climate Change Funding of high quality and focused research into climate change Study impact on health, demography, mitigation patterns and livelihoods Establish network of dedicated climate change related units in academic scientific institutions, Set up Climate change research fund Private sector initiatives through venture capital funds

14 National Mission on Enhanced Energy Efficiency The basic tenet of the mission is to ensure a sustainable growth by an appropriate mix of 4 E s namely- Energy, Efficiency, Equity and Environment. Promote development objectives, while also yielding co-benefits for addressing climate change effects. By NMEEE to ensure, Annual fuel savings in excess of 23 million toe Cumulative avoided electricity capacity addition of 19,000 MW CO 2 emission mitigation of 98 million tons per year NMEEE is expected to create a regulatory and policy regime to foster innovative and sustainable business models to unlock the market for energy efficiency which is estimated to be around Rs. 74,000 crores.

15 Action Plan Under NMEEE Action plan under the National Mission for Enhanced Energy Efficiency seeks to implement four major initiatives. A market based mechanism to enhance cost effective EE improvements in energy-intensive industries and facilities, through Tradable Energy Savings Certificates. (Perform Achieve and Trade(PAT)) Accelerating the shift to energy efficient appliances through innovative measures to make the products more affordable. (Market Transformation for Energy Efficiency) Creation of mechanisms that would help finance DSM programmes in all sectors by capturing future energy savings. (Energy Efficiency Financing Platform (EEFP)) Developing fiscal instruments to promote energy efficiency namely Framework for Energy Efficient Economic Development (FEEED)

16 Proposed Perform, Achieve & Trade (PAT) Scheme October 2010

17 Energy Efficiency Legislation in India The Energy Conservation Act, 2001, overcomes some market barriers by enabling: Setting of minimum energy standards for, and affixing energy consumption labels on appliances and equipment and promulgation of Energy Conservation Building Codes Energy use monitoring, verification and reporting by large energy users, and the establishment of energy consumption norms for these consumers and creation of cadre of Energy Management professionals in the country EC Act, provides a legal mandate for energy-efficiency regulations for industry Identifies 15 sectors as energy intensive industries & establishment

18 Driver for PAT Scheme Generally, competition drives industries to go for energy efficiency, but Industry is risk averse to take up early adoption of new technologies In developing countries, where new-plant addition rates are high, Capacity expansion is often is more profitable than investment in energy efficiency Financially depreciated plants which are older and less efficient can compete with newer plants which have to be more efficient It is necessary to have Compliance scheme to incentivise industry to undertake energy efficiency measures However, it is not easy to develop Compliance scheme for energy intensive industries

19 PAT Scheme On 12th March 2007, Government of India notified minimum energy consumption for following nine industrial sectors and notified the industries qualifying these criteria as designated consumers. Consumers satisfying the above criteria were identified and notified as Designated Consumers.

20 Overview of PAT Scheme Specific Energy Consumption (SEC) reduction targets for 714 energyintensive units which are Designated Consumers under the EC Act, 2001 Targets would be percentage reduction of current SEC Percentage reduction requirement based on: Current SEC as a ratio of the best in the sector Mix of fuels used SEC measurement and verification by BEE through accredited auditors Issuance of Energy Savings Certificates (ESCerts) to those designated consumers who exceed their target SEC reduction Trading of ESCerts with designated consumers who are unable to meet their target SEC reduction

21 PAT Scheme Coverage Sector Wise Spread of 714 Consumes Regional Spread of DC s 225, 32% 104, 15% 9, 1% 98, 14% 28, 4% 25, 3% , 13% 131, 18% Alumunium Cement Chlor-Alkali Fertilizer Iron & Steel Power Plant Pulp and Paper Textile 75 78% (558) of these 714 consumers belong to cement, iron & steel, power plant and textile sectors AP - 17 installations out of 48 belong to Cement sector, CG - 33 installations out of 49 belong to Iron & Steel sector, TN - 80 installations out of 127 belong to Textile sector, UP - 22 installations out of 49 belong to Pulp & Paper.

22 Sectoral Spread of Designated Consumers 140 Top Ten States in terms of more number of designated consumers Textile Pulp and Paper Power Plant Iron & Steel Fertilizer Chlor-Alkali Cement Alumunium 0

23 Estimated Energy Consumption by DCs Total energy consumption by all designated sectors excluding railways MTOE Total energy consumption by all 714 DCs under proposed PAT scheme MTOE Thermal Power Plant is considered as one of the designated sectors, which is also supplying electricity to the other designated sectors. Total Energy Consumption with & Without Thermal Power Plant is provided below, Total MTOE , 55% Energy Consumption in MTOE (With Thermal Power Sector) 14.35, 5.25% 42.46, 15.5% 28.15, 10.3% 5.15, 1.88% 29.82, 10.9 % 1.77, 0.65% Energy Consumption in MTOE (Without Thermal Power Sector) Total MTOE 0.3, 0.38% , 19 % 42.5, 47 % 8.6, 9.53% 3.1, 3.42% 17.9, 20 % 1.1, 1.18% 0.57, 0.21% Cement Paper and Pulp Fertilizers Aluminium Iron and Steel Textiles Chlor Alkali Thermal Power Cement Paper and Pulp Fertilizers Aluminium Iron and Steel Textiles Chlor Alkali

24 Estimated Energy Saving Potential for 714 DCs Total Energy Consumption by Designated Sectors Excluding Thermal Power Sector ( MTOE) with respect to TPES ( MTOE) is 21.6%. Energy saving potential for each designated sector is estimated by dividing the difference between the existing SEC and best practice SEC by the existing SEC of that sector (as shown in table below) and is 12.5% of existing total consumption of designated consumers to be covered under PAT scheme. Sectors Average Specific Consumption (TOE/tonne) Existing Best Practice Energy Saving Potential (%) Cement % Paper and Pulp % Fertilizers % Aluminium % Iron and Steel % Textiles* Not Available Chlor Alkali % TPP** % It should be noted that it may not be financially viable to to achieve this potential.

25 Institutional Framework for PAT Scheme 1. Policy Governor & Compliance Driver (Bureau of Energy Efficiency) Trading Stock Exchange Platform Set Compliance Directives 3. Designated Consumers Industry-A Industry-B Energy Audit 6. Accredited Verification Agency 5. Transfer Agent / Depositories Issue of ESCerts Recommendation for Issue of ESCerts 2. Market Governor

26 Roles of institutions Sr No Institution Role Responsibility Authority Agency 1 Policy Governor and Compliance Driver Compliance assurance through incentives and automatic penalties 2 Market Governor Ensure publicly available data 3 Industry Undertake energy efficiency measures; appoint accredited 3 rd party energy auditors 4 Trading Platform Maintain data of traded prices, traded volumes and trends. Reduce conflict of Interest; Accredit independent 3 rd party Energy auditors Maintain centralized data administration; strong quality assurance Maintain compliance with set energy efficiency benchmark Create efficient and transparent market for trading Sets Compliance benchmarks; Resolve disputes through collaborative approach with petition process level playing field; Issue of ESC safeguard market integrity and enhance transparency Bureau of Energy Efficiency (BEE) EESL -- Designated Consumers etc Power Exchanges, 5 Transfer Agents / Depositories 6 Third Party energy Auditors Hold the ESC in electronic form. Provides services related to transactions in ESC. -- Audit industry energy savings -- KARVY, CAMS, NSDL, CDSL Recommendation for the issue of ESCerts Accredited Auditors

27 Key Design Challenges October 2010

28 Methodology for setting SEC Norm for each DC Methodology for setting up SEC norm in the base year and target year Sectors (e.g. steel, cement, paper) are everywhere characterized by great diversity in terms of: Scale, Technology pathways, Technology vintages, Project boundaries, Type and quality of inputs/resource endowment, Product diversity Differential targets for different Designated Consumers on a gate-to-gate basis For thermal power plants and fertilizer plants, the SEC targets to be harmonised with current tariff setting context CERC and Ministry of Fertilizer to undertake this Target setting methodology that combine the use of historical performance factors (installed technology, production) places the installation into one of multiple bands (Gold, Silver, Bronze, Tin), and then uses a benchmark approach to set targets within those bands. It is recognized that some sectors may have only one band and that others may have more than one. However, the banding approach may present problems over time as there is no provision to move the less efficient companies up the banding structure. Data for baselines currently being collected by BEE

29 Unit Boundary for PAT Scheme: Gate to Gate Methodology Energy Input Coal, Oil & Gas Electricity Purchased Industry Boundary Production Delivered SEC Target As Energy per unit of product PAT Proposes differential targets for different Designated Consumers on a gate-to-gate basis. Inside industrial boundary DCs are free to use energy the way they want, only the energy input other than non conventional and final production will be verified in gate to gate approach. However for thermal power plants and fertilizer plants, the SEC targets to be harmonized with current tariff setting context CERC and Ministry of Fertilizer

30 Setting SEC Norms - Process Not feasible to define a single norm/standard unless there is a significant homogeneity amongst units in a sector Energy Efficiency improvement targets would have to be almost Unit Specific. Bands of differential targets to be created within sectors Each DC mandated to reduce its SEC by a fixed percentage, based on its current SEC within the sectoral bandwidth

31 Energy Saving Certificates Vs Energy Usage Allowances Energy Saving Certificates 1. ESCerts issued match the objective of scheme i.e. energy saving, rather than energy usage targets 2. Use of ESCerts, coupled with an intensity-based target, has led the Government of India to adopt an expost allocation of tradable certificates Energy Usage Allowance 1. EU-ETS uses emission allowances (EUAs), rather than emission reductions as its unit 2. Notable difference is in the volume of units in circulation. Higher volumes lead to higher market liquidity and less price volatility 3. Similar mechanism may be used in the form of Energy Usage Allowances

32 Ex-ante Vs Ex-Post allocation Ex-Ante Allocation To create liquidity in the market for ESCerts, and to create better price signal ESCerts could be allocated Ex-Ante. Either free allocation or auctioning process could be used for allocation of ESCerts. Additional advantage of ex-ante allocation (where the certificates have value) is that they can be used to underwrite investments in energy savings technology Ex-Post Allocation As currently envisaged, ESCerts will be issued at the end of the first period of PAT scheme. As a result, no certificates will be available for spot trading, dampening the market price signal. When certificates are issued at the end of the first period, there could be mismatch between the quantity of certificates issued and the quantity demanded by underperforming sites

33 Verification and Issuance of ESCerts Verification by accredited verification agency or by energy auditors, Issuance of ESCerts only after verification or self-declaration subject to verification process Process of selection of verification agencies Liability of verification agencies Trading Process for ESCerts bilateral and/or exchange Compliance and reconciliation process for ESCerts

34 Compliance Driver - Penalty One of the primary concern for successful implementation of PAT Scheme was weak penalty structure in case of failure to meet targets. According to earlier legal provision penalty was:..he shall be liable to a penalty which shall not exceed ten thousand rupees for each such failures and, in the case of continuing failures, with an additional penalty which may extend to one thousand rupees for every day during which such failures continues: Recently (2010) the Government has modified the Act. The revised penalty provision is as given below: If any person fails to comply with the provisions of clause (n) of section 14, he shall be liable to a penalty which shall not exceed ten lakh rupees and, in the case of continuing failure, with an additional penalty which shall not be less than the price of every metric ton of oil equivalent of energy, prescribed under this Act. Modified provisions are stringent and will ensure that industries take appropriate actions to achieve energy efficiency.

35 Other Design Challenges PAT Scheme Coverage Despite inclusion of the eight sectors in the scheme, it covers only 700+ installations across the country. Significant numbers of small, inefficient installations will not be included in the PAT scheme. There is scope in the future to deepen the scheme to cover additional (smaller) installations within the energy intensive sectors covered by the PAT scheme, or to broaden the scheme by including other sectors of the Indian economy especially those sectors which have already been identified as energy intensive but currently not part of PAT scheme Banking of ESCerts Allowing full banking from Phase 1 to Phase 2 will ensure positive and smooth price between phases. It will encourage the earliest possible adoption of energy efficiency technologies. However, in case of overachievement in Phase 1, large volume of ESCerts from Phase 1 that could reduce the actual performance in Phase 2

36 Linkage between REC and PAT Scheme Different denominated units MWh for REC/ MTOE for PAT Implications on the market price Marginal cost of generation of certificate will be significantly different Could have impact on price of certificates Different registries for issuance and reconciliation Different trading rules for these certificates Monitoring and Verification protocols of the two instruments Currently, one way link for RECs into PAT Scheme is being explored.

37 PAT Current Status & Penalty Bureau of Energy Efficiency (BEE) to announce the target for Perform, Achieve and Trade (PAT) scheme for energy efficiency in December PAT Scheme to come into force with effect from April 2011 To familiarize & facilitate the industries to participate in PAT scheme, BEE would conduct meetings with the CEOs of Corporate houses in State in November & December 2010 Data Collection work and studies are underway for 8 industrial sectors. Protocols for trading, monitoring and verification will be set up by December, Notifications for Accredited Energy Auditors has been issued.

38 ABPS Infrastructure Advisory ABPS Infrastructure Advisory A-309, Kohinoor City Kirol Road, off LBS Marg Kurla (West), Mumbai Ph: / Fax: October 2010