The focus on climate change mitigation measures has increased the attention on energy efficiency. The implementation of the National Mission on Enhanced Energy Efficiency (NMEEE) is to commence from April 1, 2011 with the launch of the first phase of the `Perform, Achieve & Trade' (PAT) mechanism. InfralineEnergy's Chhavi Tyagi spoke to Mathur about the implementation of the NMEEE, the functioning of the PAT and their effect on India's economy and climate change mitigation efforts.
How much can energy efficient measures help in reducing the country's carbon emissions?
The National Mission on Enhanced Energy Efficiency (NMEEE), which is part of the National Climate Change Action Programme, is looking at a series of measures which would together lead to a reduction of about 98 million tonnes of CO2 every year by 2015. This would be done through the introduction of PAT which would not only reduce the emissions but also has the potential to augment the cumulative installed capacity by adding 19 GW at the end of 2014-15. India's total emissions are a little over a billion tonnes. We are looking to reduce those by at least 10 percent through the actions taken under the NMEEE.
However, we are not concentrating on reducing emissions only, as our goal is to enhance energy efficiency, increase energy security, and ensure that more people have access to energy in order to make the industry become more competitive. The reduction of carbon emissions, thus, is a co-benefit of all these steps. Therefore, we are undertaking the four actions specified in the NMEEE: The first action is to design and implement the Perform, Achieve and Trade (PAT) mechanism, which would enable the trading of certified energy savings; the second is to use the future energy savings to finance the demand- management programmes; the third endeavour is to transform the market through promoting prompt development and introduction of the more energy-efficient appliances; and, the fourth is to shape the financial and fiscal policies to accelerate the movement towards energy efficiency. These are the four building blocks of the NMEEE.
How would energy efficiency help India remain competitive within the domestic market and in the international market?
We have a relatively free market. So if anybody has to manufacture cement or steel, or anything else, in India, they have to do it at a globally competitive cost. Moreover, since energy prices in India are very high, the manufacturers have to be energy efficient; otherwise they will not be able to compete. This is the reason that every new and large industry that has been set up in India in the last 10 years is among the most energy and cost efficient in the world. Today we have the world's most efficient cement, fertiliser and steel plants. However, we still have the older and smaller plants, which are much less efficient. They use twice or thrice the energy used by the new plants to produce each tonne of cement or steel or any other product they make. Therefore, the challenge is to remove this inefficiency. The trend is in the right direction, but it requires acceleration.
Why is there a difference between the Restructuring Projects and the Standard Energy Efficiency Projects? Should the multipurpose restructuring projects, which are common in industrial renovation, also be included in energy efficiency financing schemes?
The heat rate must be reduced at any power station that is renovated and modernised. The minimum aim should be to reach the original design heat rate or even reduce it further. Now, why doesn't that happen? Well, it doesn't happen for a variety of reasons. One reason is that till recently, there was no incentive for doing so. Another reason is that very often there are no spare parts or more efficient condensers available for the older plants, which are mostly based on Russian or Czech designs. For the financially struggling companies, funding becomes a problem. However, investing in improving plant load factor and reducing energy consumption results in higher revenues and margins, which help a company repay its loans quicker. The banks or the Power Finance Corporation (PFC) have no problem lending for plant renovation and modernisation, but the inherent financial health of the borrowing company has to be acceptable to them. This is the reason why NTPC's plants are efficient.
"Investments in improving plant load factor and reducing energy consumption results in higher revenues and margins. It helps a company repay its loans quicker. The banks or the Power Finance Corporation (PFC) have no problem lending for plant renovation and modernization, but the inherent financial health of the borrowing company has to be acceptable to them. This is the reason why NTPC's plants are efficient."
Another helpful step in this direction has been taken by the state electricity regulatory commissions. They have started setting targets for heat rate improvement while allowing the cost of the additional investment required for it. Therefore, realistically speaking, there is no reason why the developers should not be able to do so. The reasoning is simple - if they do it, they will make more profit; and if they don't, they will pay a very heavy penalty, as envisaged in the Energy Conservation Act. There would be no incentive provided to thermal power plants, as they do not fall in the renewable category. In the case of renewable energy plants, there is an incurred net cost on which the government provides incentives; whereas, in the case of thermal power plants, the cost factor is replaced by net profits when you make the plant more efficient, so there is no case of providing incentives.
Are there any regulations regarding heat rate reductions?
Under the Perform, Achieve and Trade system, we have specified the heat rate reduction targets to be achieved by the industrial units. This system would be implemented through the regulatory commissions - the Central Electricity Regulatory Commission for the central plants and the State Electricity Regulatory Commissions for the state plants.
How would the 'Perform, Achieve and Trade' mechanism help the economy become more energy efficient?
In any sector, you will come across some plants which are more efficient and some which are not so efficient. The challenge lies in increasing the efficiency of all the plants. The PAT mandates a specific target for reduction in the specific energy consumption of each plant in a sector.
"The challenge lies in increasing the efficiency of all the plants. The PAT mandates a specific target for reduction in the specific energy consumption of each plant in a sector. The more efficient a plant, the lower are its targets and the less efficient the plant, the higher the targets."
The more efficient a plant, the lower are its targets and the less efficient the plant, the higher the targets. If a company manages to do more than its targets, it receives additional tradable energy saving certificates. It can sell these certificates to other companies which are unable to meet their targets or find meeting those targets extremely expensive. This mechanism would help the nation to achieve the desired energy savings. It also matters that it is achieved in the most cost effective manner. We are proposing that these certificates be traded through power exchanges so that their price is discovered through trading.
If the price of the energy saving certificates is discovered through trading, it may happen that the discovered price may not be attractive enough for the stakeholders. How do you propose to rationalise it?
The baseline is that everybody has to reduce the emissions by certain numbers. If they are able to find energy saving certificates at a price which is lower than what it would cost them to improve their own energy efficiency, they will buy the certificates. Otherwise, they will have to invest in their plants, or pay penalties. The problem with creating a new market is that you have no idea of the prices, whether it is for certificates, derivatives, or anything else. A market takes time to develop. Generally speaking, there is always an overhead and that occurs because of the varied kinds of market players. There are some who are risk averse and some who are risk takers. So, you have a spread and whenever you have a spread, the market will find its optimal allocation.
How much time would the market need to reach a reasonable level of maturity?
We are setting the first compliance period three years from the introduction date of the PAT. That would be followed by another three-year cycle and another set of targets, and so on and so forth. My feeling is that the maturity will be achieved sometime after the first compliance period and before the completion of the second compliance period. Nowhere in the world have the markets matured within the first compliance period. During the first cycle, people experiment. Some people trade more, some less and some just wait and watch till the market deepen and the price information becomes more transparent. After that stage, people start adjusting their own investment schedule to get the best prices. All this takes time. Still, my feeling is that in the first compliance period, people will overachieve. So, probably we might allow people to bank the certificates for trading in the second period.
Would short-term trading of these certificates be promoted? Would it be appropriate to emulate countries such as France, Germany and the UK, where they issue certificates and trade it on short-term basis and reap the benefits?
I cannot speak for the people who take short-term gains. However, there will be such people in the market and you need such people to give depth and liquidity to the market. However, it is also true that a market cannot be designed on the basis of the profitability of investments made for short-term gains. At the end of the day, this is a compliance market. For a three-year period, the designated consumers have to show that they have either done what they were supposed to do or they have acquired certificates, or a mix of both. The certificates handed in for compliance are retired. A certificate could be traded many times between the time of its issuance and the time of its submission for compliance - between the compliant companies or between the market intermediaries. It is hard to determine whether they would make money on these transactions.
Bolivia's leadership termed the Cancun climate summit as "Ecocide" by rich nations? Do you believe there is any substance in their claim? How would the Cancun deliberations affect the electricity market in India?
The Bolivian statements are rhetoric. They cannot be answered. As far as Cancun is concerned, I don't know how it will affect the Indian electricity market. The summit has created a framework for a range of instruments for climate mitigation and adaptation under which people would pledge voluntary actions. There will be an adaptation mechanism and an action committee which would promote adaptation. Thus, it has created a structure, and over the next one year, the operational details of this structure would be filled in. It creates a necessary framework for the necessary actions. Also, since people are pledging the emission reduction targets themselves, the chances are that these targets will be achieved, which, in turn, increases global confidence in climate change mitigation and adaptation agreements. Therefore, it could, if managed well at a multi-lateral level, lead to a virtuous cycle of the nations increasing commitments rather than diluting the old commitments, as is happening right now.
"First we transform the street lighting market and then move on to another user sector where these will make a difference. In this manner, we go on increasing the market volumes and bringing down the prices so that these becomes cost effective much sooner than these would have without such promotion."
As far as India is concerned, post-Copenhagen we said that we will try to reduce the carbon intensity of our economy by 20 to 25 per cent by 2020 as compared to 2005. So, it implies that there has to be greater energy efficiency and a greater amount of renewable power in the grid in the year 2020 compared to 2005. Therefore, the investment in these kinds of technologies would have to be increased, and it is increasing. Though, I cannot say if the increase which has happened till now or is happening now is adequate. Nonetheless, policy signals are making these kinds of investments a high priority.
As you said, it will be a combination of energy efficiency and renewable power to achieve reduction in carbon intensity of the economy by 2020. What new steps are you taking, and what old steps are you accelerating, to achieve the energy efficiency targets by 2020?
There is a long-standing programme to promote large hydro power projects and now the commitment to reduce emission intensity of the economy places a greater emphasis on accelerating that programme. Also, the Electricity Act, 2003 provides that a percentage of electricity in each state should come from renewable sources, as set by the state regulators. This programme is already in effect and would be further accelerated. We are already expected to introduce renewable energy certificates, which would probably accelerate the process even more. Through the PAT programme, we are seeking reduction in the heat rates and increase in energy efficiency in the existing power stations.
As far as new investments in the power sector are concerned, we are increasingly moving towards super critical technology in order to increase the efficiency. Thus, it is the sum of all of these things which would lead to the carbon emission per unit of electricity to be lowered.
Supercritical technology is only for those power plants which have a unit size of over 660 MW. What about those plants that have small unit size of 150 MW or there about?
We are hoping that in the next few years, we would come to a position where we would have a grid that is surplus in electricity, so that the need for capacity addition through captive plants would decline. Generally speaking, I see these small plants contributing a very small part, about 4-5 per cent, of the capacity addition. Those really wouldn't matter.
Do you think that the LED lighting in India could become economic viable soon?
Though it is a fact that the LEDs are more efficient than the CFLs, yet today their prices are much more than those of the CFLs. If a CFL costs about Rs 100, its LED equivalent costs anything between INR 600 and INR 700. Thus, the key issue is to bring the prices of the LED lighting down. When, the CFLs were introduced in India 25 years ago, they used to cost INR 600-800. It has taken so many years to bring their price down to a level where people can afford those.
"Today, every household in Kerala has CFLs, which have been provided as part of the Bachat Lamp Yojana. This programme is in process in the Punjab and in the next couple of months, it would be completed there too. We will soon start it in Karnataka. Our goal is that in about a year and a half, a vast number of the households in the country would have moved from bulbs to the CFLs because of the Bachat Lamp Yojana."
Now, we want to accelerate this process for the LEDs and, therefore, we have started looking at those applications where the LEDs are viable; for example, street lights. We are putting up demos in various cities so that the municipalities and people can see for themselves the amount of light produced by the LEDs, the cost involved and the benefits and decide whether they could order the LED street lights instead of the high pressure sodium bulbs or the tube lights. So, first we transform the street lighting market and then move on to another user sector where these will make a difference. In this manner, we go on increasing the market volumes and bringing down the prices so that these becomes cost effective much sooner than these would have without such promotion.
The government has done a great job with Bachat Lamp Yojana. How is it going to be taken forward?
Bachat Lamp Yojana is now registered as a programme of activities and now the challenge is to complete a large number of sub projects, which are known as CPAs, so that they cover as large a part of the county as soon as possible. In the last few months, we have got enough projects to cover the entire Kerala. Today, every household in Kerala has CFLs, which have been provided as part of the Bachat Lamp Yojana. This programme is in process in the Punjab and in the next couple of months, it would be completed there too. We will soon start it in Karnataka. Our goal is that in about a year and a half, a vast number of the households in the country would have moved from bulbs to the CFLs because of the Bachat Lamp Yojana.
(InfralineEnergy thanks Dr Ajay Mathur, Director General, Bureau of Energy Efficiency for sharing his valuable insights with our readers. The column 'In Conversation', is a platform to engage experts from various sectors to share their views on the different transformations in the Indian energy sector)