India requires efficient energy markets

Economies the world over have made rapid strides in development and industrialisation in recent years. These have, however, been accompanied by massive unanticipated challenges, especially in addressing climate change issues.

While policy interventions around clean energy are work in progress, it was becoming apparent that these interventions need to address energy efficiency too. This would also mean development of market instruments to achieve the objectives.

Normally, energy efficiency initiatives call for low capital investment, low risk leading to reductions in energy consumption and carbon emissions.

The Paris Agreement 2016 calls for the reduction in Global Greenhouse Gases (GHGs) in order to limit the global temperature rise to 1.5 degrees Celsius. Being one of the signatories, India has set a target of cutting emission intensity by 33-35 per cent from 2005 levels while generating 40 per cent of its electricity from non-fossil fuel sources by 2030. Therefore, it becomes imperative to act on energy efficiency issues on priority.

Energy efficiency initiatives

The primary energy demand in India was 770 MTOE (million tonnes of oil equivalent) in 2012 and is expected to increase to 1,500 MTOE in 2030. This increase is driven by factors like increase in incomes and economic growth. Despite the significant progress in the renewable energy sector, India remains predominantly a fossil-fuel driven economy.

To ensure that the energy demands are met while ensuring minimum growth in carbon emissions, the government has taken a two-pronged approach: greater use of renewable energy and facilitating efficient use of energy.

In order to attend to energy efficiency, the government enacted the Energy Conservation Act, 2001 and established the Bureau of Energy Efficiency (BEE) in March 2002. Recognising the difficulty in creating awareness on energy conservation, these initiatives were designed to generate visible savings.

Given the human tendency to value future income more than future savings, the government launched Perform, Achieve and Trade (PAT) scheme, or earning carbon credits, for the industrial sector. This was mainly to incentivise investment in energy efficiency by industries, and thus provide scope for visible and monetisable savings. .

PAT scheme

Under the National Mission for Enhanced Energy Efficiency (NMEEE), the PAT scheme is a regulatory instrument to reduce specific energy consumption in energy-intensive industries, to enhance the cost of effectiveness through tradeable certification of excess energy savings in the form of ESCerts.

A multi-cycle scheme, PAT, in its first cycle (2012-15), was designed to reduce specific energy consumption (SEC) in energy-intensive areas including 478 direct consumers (DCs) from eight sectors — aluminium, cement, chlor-alkali, fertiliser, iron and steel, paper and pulp, thermal power and textile.

PAT I had achieved an energy saving of 8.67 MTOE, which was 30 per cent over the target, saving approximately ₹9,500 crore. IEX traded a total of 13 lakh ESCerts under PAT I, representing 90 per cent of the total obligations. This further facilitated the reduction of about 31 million tonnes of CO2 emission.

Based on the success, the instrument was further extended to PAT II cycle, to include three more sectors — refineries, railways and Discoms. PAT in its second cycle (2016-17 to 2018-19) aimed at achieving an overall energy consumption reduction of 8.869 MTOE for which the energy reduction targets were assigned and notified to direct consumers in these 11 sectors (eight existing sectors and three new sectors).

Sustainable economic growth being one of the central tenets of India’s SDG (Sustainable Development Goal) and which depends on the country’s macro indicators, including those of key sectors like iron and steel, cement, and agriculture. Improving energy efficiency in these sectors will also lead to an overall improvement in the economic progress.

Iron and steel show a potential of saving up to 45 MTOE by 2041 while MSME sector can save at least 15 MTOE by 2041. Over the period 2021-2041, around 5-12 per cent of energy savings will be possible, bringing down the carbon emissions by 187 MT in 2021 and 1029 MT in 2041.

Energy markets

The power exchanges have become key players in supporting distribution utilities and industrial consumers in a transparent, competitive and flexible manner to facilitate optimisation of demand and supply. This in turn leads to efficient power plant operations at the national, regional and state level. Competitive power prices discovered in the markets ensure that the most competitive and efficient power plants find easier despatch over the less efficient ones.

In fact, over the last one decade, the power exchanges have emerged as a critical avenue for power procurement optimisation and efficient operations through effective and optimal utilisation of generation resources thus facilitating efficient operations as well as improvement of the overall financial liquidity and profitability of the generators, power utilities and consumers.

Cost-effective energy efficiency improvements can yield positive macroeconomic impact by boosting economic activity and often leading to increased employment.

Driven by transparency, flexibility, competitive prices, power procurement optimisation, risk management and customer focus in the electricity value chain, the share of exchange based power markets has increased to 30 per cent in 2015 and further to 41 per cent in FY20 of the short-term market.

The exchange volumes have increased at a 32 per cent CAGR since its inception. Therefore, our pace of progress in embracing energy efficient ways, at an individual and national level, will be important to carve out a cleaner, sustainable and more energy secure future.

The writer is former Secretary, Ministry of New and Renewable Energy, GOI