Taking Energy Efficiency to the Market

India’s current initiatives to unlock energy efficiency opportunities rely heavily on market players for effective implementation

Like in many developing countries, the Indian energy policy is confronted by the challenge of balancing between four competing objectives:

  • sustain economic growth through powering industrialisation;
  • increase energy access for the poor;
  • enhance energy security; and
  • reduce carbon emissions.

Recognizing this challenge, India has prioritized energy efficiency measures and set up the National Mission for Enhanced Energy Efficiency (NMEEE), one of the eight missions under the National Action Plan on Climate Change. The underlying rationale is that energy efficiency measures not only can support domestic developmental priorities, but also can yield climate co-benefits. The mission – adopting market-based approaches to unlock energy efficiency opportunities – has launched two flagship initiatives, viz. Perform, Achieve and Trade (PAT) and Market Transformation for Energy Efficiency (MTEE).

With the launch of PAT last year, India has become the first developing country to adopt market-based mechanisms to trade energy efficiency. The PAT scheme targets the energy-intensive industries (known as designated consumers), who account for 60% of India’s total primary energy consumption. Keeping with the mandate of the Energy Conservation Act, the Bureau of Energy Efficiency (BEE) has identified the designated consumers from 15 sectors. PAT covers 478 plants from eight targeted sectors: aluminium, chlor-alkali, textile, pulp and paper, iron and steel, fertiliser, cement and thermal power plants. Each of these plants has been assigned a specific reduction target in energy consumption compared to its baseline consumption (average of the period between April 2007 and March 2010), to be achieved by March 2015. Plants receive tradable energy saving certificates (ESCerts) if they achieve energy efficiency gains beyond their specific target. Those who fail to meet their target can buy ESCerts to make up the difference, or pay a financial penalty.

Drawing on the high price of energy, the scheme seeks users to improve their energy efficiency, and thereby, make savings on their energy bills and generate profit through ESCerts. However, implementing such a scheme that involves consultation, installation, data collection, monitoring and verification across 500 plants requires considerable human and institutional capacity with very specific skills. In response, the state has been intensively engaged to build players to fill the human and institutional capacity gap. The BEE has facilitated the emergence of energy service companies (ESCOs), trained and certified energy auditors and managers.

Simultaneously, through MTEE, the mission seeks to accelerate the shift to energy efficient appliances in designated sectors through innovative measures, so that products are more affordable and accessible for end users. The initiative covering agricultural and municipal demand-side management and energy efficient lighting scheme aims to leverage international funds for promoting energy efficiency. It also covers Super-Efficient Equipment Programme that offers manufacturers incentives to produce super-efficient appliances that are 30%-50% more efficient than the most efficient ones available in the market.

Implementing energy efficiency measures requires substantial upfront investment, which has been a barrier in many cases. State agencies have been promoting a robust ESCO market and engaging in capacity-building of banks and financial institutions. The state has made provisions for a partial risk guarantee fund to comfort private lenders, and the venture capital fund to provide the initial seed capital. Simultaneously, there are provisions for tax exemptions for the promotion of energy efficiency.

Unlike the past, where the state and its agencies retained control over the energy sector, India’s current initiatives for the promotion of energy efficiency rely heavily on market and market players for effective implementation. Though the goal is to make energy efficiency an automatic outcome of market transactions – something that will eventually be self-sustaining – there is less trust in the capacity of market institutions. Going a step further, to make the market mechanisms work effectively, the state has been engaged in creating market institutions and players, training them, and setting rules for their operations. The BEE’s engagement in establishing and promoting the ESCO market is an example. In addition, Energy Efficiency Services Limited has been set up, a joint venture of public sector undertakings of the power ministry, to partner with market players in market terms, and lead market-related actions of NMEEE.

While experiences suggest that market has either deliberately avoided or failed in the Indian energy sector, why does India rely so much on market institutions and players for the promotion of energy efficiency? India has historically been an earnest taker of global energy trends, particularly from the developed countries; that partly explains the current shift to market. However, unlike the past approach of adopting western tools directly, current shifts in energy policy have drawn on and factored in the Indian context based on consultations with stakeholders.

On the other hand, weak institutional architecture for implementation and the realization that Central (policy-making) agencies have increasingly detached from the field (implementing) agencies have significantly influenced the shift to a market mechanism. Consequently, the low confidence of national agencies in local agencies’ capacity (and intention) to implement national policies has pushed them to take an alternative route (i.e. the market) and closely engage with the question of how implementation takes place. In the emerging institutional architecture, the state agencies retain significant roles of setting the rules, monitoring and evaluation, while actual implementation is left to market players whose credibility is linked to their compliance, capability and performance.

The jury is still out on the success of India’s market-plus approach to energy efficiency. If successful, this approach will not only meet all the competing agendas of Indian energy, but also set a trend for other developing countries.

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