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PAT scheme in India: A possible base for India’s carbon market
Carbon Risks
Monday, 6th February 2023

Key highlights:

  • Perform, Achieve, Trade (PAT) targets increasing energy efficiency in energy intensive sectors. These sectors also contribute to ~65% of the GHG emissions in India and emissions reduction is a by-product of the PAT scheme.
  • Initial PAT cycles indicate that the scheme targeted less than 1% emission reduction from these sectors. Energy reduction targets were overachieved by 30%, 16% and 65% in the first three PAT cycles, leading to an oversupply of Energy Saving Certificates (ESCerts). The most recent 7th cycle targets energy intensity reductions in the range of 1-7%.
  • An ESCerts when translated to GHG emission reductions, equals to $ 1-7/ ton of CO2e. This represents a fraction of current carbon prices prevailing in other international carbon market programs.
  • As India considers launching a carbon market, the PAT scheme and its supporting ecosystem is likely to play a key role.

PAT cycles have been operational since 2008

Since 2008, Ministry of Power through the Bureau of Energy Efficiency (BEE), has been running the PAT scheme to promote energy efficiency in energy intensive industries in India.

PAT scheme focuses on Specific Energy Consumption (SEC) of Designated Consumers (DCs) in energy intensive sectors and defines energy reduction targets for a cycle of three years for these DCs. It has an associated market-based mechanism to incentivize the energy efficiency by issuing tradable Energy Savings Certificates (ESCerts) to DCs who manage to overachieve their targets. These ESCerts are purchased by the DCs who underperform against their targets, in order to help them achieve their compliance. An ESCert is equivalent to 1 tonne of oil equivalent (TOE) of energy savings.

Starting from 8 sectors initially, today the scheme encompasses 13 energy intensive sectors: thermal power plants, cement, aluminum, iron and steel, pulp and paper, fertilizer, chloralkali, petroleum refineries, petrochemicals, DISCOMs, railways, textile and commercial buildings (hotels and airports).

Overview of the PAT cycles

Converting an ESCert into carbon

Each ESCert is equivalent to 1 MTOE of energy saved and most of the savings result in reduced usage of coal, diesel and other primary fuels. Correspondingly an equivalence can be developed between the value of an ESCert and that of CO2 reduced.

The price of ESCerts has been ranging between Rs 200–1,840 (~USD 3-22) in the first two cycles and this translates into a carbon price between Rs 65-599 (~USD 1-7). This is lower than other international carbon market programs such as US-based Regional Greenhouse Gas Initiative (RGGI) at ~USD 11, California Carbon Allowances (CCA) at ~USD 28, Canada-based Alberta’s Technology Innovation and Emissions Reduction Regulation (TIER) at USD 60.

Given that the PAT program is designed around Specific Energy Consumption, it is possible to translate that into carbon-intensity with relative ease. Emission reduction programs such as Alberta TIER (Technology Innovation and Emissions Reduction Regulation) are designed in a similar fashion.

ESCerts are oversupplied and the market mechanism is yet to perform its role

  • Ineffective for reductions so far

In all the first three PAT cycles, the overall energy reduction targets were overachieved by 30%, 16% and 65% respectively – indicating lenient targets being set. However, thermal power plant sector was among the lowest scoring sectors in cycle 1 & 2, despite being prescribed with one of the lowest percentage energy reduction targets with respect to their respective energy consumption levels. In the 7th cycle, the scheme targets energy consumption reduction of ~4% in most of the sectors, with thermal power plant target set at ~1% while railway production units set slightly higher at 7%.

There is scope to have steeper targets.

  • ESCerts remains the preferred option to meet compliance targets vis-à-vis energy reduction

While the number of DCs increased by only 30% in cycle 2 as compared to cycle 1, the number of ESCerts purchased more than doubled in cycle 2. A closer look indicates, particularly for thermal power plants, despite moderate targets, only 68% and 47% of the total plants listed in Cycles 1 and 2 could achieve their targets by energy reduction respectively. This was coupled by a corresponding increase in the purchase of ESCerts from 21 DCs in Cycle 1 to 46 DCs in Cycle 2.

The excess supply has also led to a lower purchase value of ESCerts, which ranged between Rs 200 and Rs 1,200 (USD 3-18) in Cycle 1. We saw this in cycle 2 as well. This made adherence to the compliance targets cheaper for plants by opting for ESCerts than achieving energy reduction.

Now in the 7th cycle, the energy reduction targets of the recent cycles seem to be following similar trends as the previous cycles. Based on the observations made, there is a scope to firm up on the targets to better align the scheme to India’s 2070 net zero target.

Strengthening targets will spur investment and can form the base for a carbon market

As India plans to develop its national carbon market, the PAT scheme provides a foundational structure with a system for target setting, assessments, trading platform, etc. This ecosystem provides a launching pad for a carbon market. With some interchangeability between ESCerts and carbon allowances, the existing bank of ESCerts could also be put to good use.

ESCerts trading under the PAT scheme is currently a buyer’s market (Purchase bids being only 7% of the sell bids in the trading cycle on Tuesday), with excess supply of ESCerts. Absence of a baseline price subsidizes the polluters to meet their compliance targets under the scheme. This would have to be addressed for a successful carbon market launch.

The latest ESCert trading on Tuesday recorded a much higher MCP, as the floor price has been set at Rs 1840 (~USD 22.44), than the previous trading cycles. However, unless the targets are strengthened, the prices will remain insufficient to stimulate investment in emission reduction/ energy efficiency technologies.



Analyst Contact:

Tarana Ahmad (tahmad@ckinetics.com)