A Discussion Paper on India's Perform Achieve and Trade(PAT) scheme

Can the Learning’s from International Examples
Make the ‘Perform Achieve and Trade (PAT) Scheme’
Perform Better for India
Perform, Achieve & Trade (PAT) scheme, promoted under the National Mission on
Enhanced Energy Efficiency (NMEE), will help energy-intensive large industry units in India
enhance cost effectiveness in terms of energy efficiency.
A Discussion Paper by
Sanjay Dube
Ritesh Awasthi
Vivek Dhariwal

A Discussion Paper on India's Perform Achieve and Trade (PAT) Scheme 2
Emergent Ventures International
Executive Summary
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esignated Consumers (DCs) account for 25% of the national gross domestic product (GDP) and about 45% of
commercial energy use in India. Since 2000, industrial GDP has been growing at 8.6% annually and energy use in
Dindustry at 5.8%. The lower rate of growth of industrial energy use can be attributed to many reasons. It has been
observed that in recent years, industry has been choosing state-of-the-art technologies, which are more energy-efficient.
Also, there have been many in-house efforts made by the industry to become more energy-efficient. In order to further
accelerate as well as incentivize energy efficiency, the Government of India is designing a Perform Achieve and Trade (PAT)
Scheme. PAT is a market based mechanism to enhance cost effectiveness of improvements in energy efficiency in energy-
intensive large industries and facilities, through certification of energy savings that could be traded. The genesis of the PAT
mechanism flows out of the provision of the Energy Conservation Act, 2001. The Ministry of Power (MoP) has notified
industrial units and other establishments consuming energy more than the threshold in 9 industrial sectors namely Thermal
Power Plants, Fertilizer, Cement, Pulp and Paper, Textiles, Chlor-Alkali, Iron & Steel, Aluminum and Railways in March, 2007 as
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DCs under PAT Scheme .
Table 1: Minimum annual energy consumption and estimated number of DCs in select sectors
Source: PAT Consultation Document, December 2010, Bureau of Energy Efficiency, Government of India
Minimum annual energy consumption for the
DC (tonnes of oil equivalent)
No. of probable DCs
Aluminium 7500 11
Cement 30000 83
Chlor-Alkali 12000 20
Fertilizer 30000 23
Iron and steel 30000 101
Pulp and paper 30000 51
Railways (diesel loco
sheds and workshops)
8
Textiles 3000 128
Thermal power plants 30000 146
Sector

Requirements of the EC Act for DCs
The Energy Conservation Act 2001, herein referred as the EC Act, enacted by the Government of India in 2001, provides for
the overall framework for efficient use of energy and its conservation in India. The Act provisioned for various sectors to adopt
measures for ensuring energy efficiency and also led to the formation organization such as the Bureau of Energy Efficiency
(BEE). Identifying 15 energy intensive sectors as Designated Consumers, the Act provided regulations for these DCs to:
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?Furnish report of energy consumption to the Designated Authority of the State as well as to Bureau of Energy Efficiency
(BEE).
?Designate or appoint an Energy Manager who will be in-charge of submission of annual energy consumption returns of the
Designated Agencies and BEE.
?Comply with the energy conservation norms and standards prescribed under section 14 (g) of the Act.
?Purchase Energy Saving Certificates (ESCerts) for compliance to
section 14 (g) in the event of default. The Act has been amended with
the addition of new sub-section 14A to enable this and section 14A (2)
allows such trading. EScerts are defined by adding a new sub-section
2(ma).
?Monitoring and Verification of compliance by Designated Energy
Auditors (DENA) which will be prescribed the Government/ BEE under
section 14A/13 (p) of the Act.
?Excess achievement of the target set would entail issuance of ESCerts
under section 14A (1).
?Penalty for non-compliance being Rs. 10 lakhs and the value of non-
compliance measured in terms of the market value of tones of oil
equivalent by inserting a new section 26(1A).
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BEE was made to be the overall regulator and dispute resolution agency and The Energy Efficiency Service Limited (EESL),
a public sector undertaking to be the process manager.
Perform Achieve and Trade (PAT) a result of the National Mission on Enhance Energy Efficiency (NMEEE) under the National
Action Plan on Climate Change (NAPCC) is an ambitious project of GOI given its scale, complexities, timelines and absence
of precedence.
The design phase of PAT is the most crucial phase as it would largely ensure successful implementation and operation of the
scheme. This paper discusses key design issues about boundary and target setting and performance of the scheme in the
market. The paper also presents international case examples to suggest possible modifications in the current format of the
PAT Scheme.
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The Energy Conservation Act 2001 has identified following 15 energy intensive sectors as 'Designated Consumers': aluminium, fertilizers, iron
and steel, cement, pulp and paper, chlor - alkali, sugar, textiles, chemicals, railways, port trust, transport, petrochemicals, power and
commercial buildings or establishments.
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PAT Consultation Document, December 2010, Bureau of Energy Efficiency, Government of India
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The Bureau of Energy Efficiency (BEE) is a statuary body set up by the Government of India to implement the Energy Conservation Act 2001.
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In order to develop a viable ESCO industry, Ministry of Power has set up Energy Efficiency Services Limited (EESL), a Joint Venture of four
public sector undertakings (PSUs); NTPC, PFC, REC and POWERGRID to facilitate implementation of energy efficiency projects. EESL will
work as super ESCO and lead the market related actions of NMEEE.

Some of the major recommendations which are discussed in greater details include:
Boundary Setting: For effective implementation of the scheme, it is advised that the unit or DC boundary for Specific Energy
Conservation (SEC) under PAT should be determined based on 'activity' rather than 'gate to gate' definition which is
suggested under the current format of scheme. It is also advised to define the activities falling under the purview of PAT SEC
determination.
Target Setting: Based upon the learnings from international examples, it is advised to have energy saving targets at industry,
sector and DC level rather than adopting a cluster approach for target setting in a particular sector.
Market Mechanism: The paper discusses the necessity and options for providing guidance on the price of Energy Saving
Certificates (ESCerts). It stresses on the core task of setting proper targets that are neither too easy nor too strict. The paper
also discusses about complimentary tools like auctioning, floor/roof prices of EScerts, and penalties for non-compliance.
The paper also recommends protection measures for sectors and units based on international competitiveness and healthy
outputs.
The views expressed in this paper are of the experts at EVI and insights gained with the help of a series of discussions with
industry partners, Government agencies and other stakeholders (exchange, traders, etc). EVI interacted with industry and
industry associations to understand their preparedness for PAT Scheme and captured their views about the structure of the
scheme.

Perform Achieve and Trade (PAT)
Scheme Overview

Perform Achieve and Trade (PAT) Scheme Overview
In response to the growing challenge of climate change, the Government of India (GOI) released the National Action Plan on
Climate Change (NAPCC) in June 2008. Its objective is to achieve a sustainable path of development that simultaneously
advances the economic and environmental objectives. The NAPCC enunciates eight key National Missions (Figure 1).
Figure 1: NAPCC Missions
National Mission
for Enhanced
Energy Efficiency
NAPCC
Missions
National Mission
on Sustainable
Habitat
National Wate
Mission
National Mission
for Sustaining the
Himalyan
Ecosystem
Naitional Mission
for a Green India
National Missions
for Sustainable
Agriculture
National Mission
for Strategic
Knowledge for
Climate Change
National Solar
Mission

The National Mission for Enhanced Energy Efficiency (NMEEE)
The National Mission for Enhanced Energy Efficiency (NMEEE) is a key component of the NAPCC and reflects GOI's
increased emphasis on achieving energy efficiency in the Indian economy. In addition to a number of ongoing schemes and
programs, the NMEEE has put in place four new initiatives to enhance energy efficiency in India (Figure 2).
Figure 2: Initiatives under NMEEE
The Indian Government, as a policy tool towards meeting the objectives of NMEEE, has identified an Energy Efficiency
Trading Scheme - Perform Achieve and Trade (PAT) – which is to be in the national interest, easing the pressure on the power-
sector infrastructure and reducing the need for primary energy resources. The PAT aims to enhance cost effectiveness of
improvements in energy efficiency, through certification of energy savings that could be traded.
The EC Act, 2001 has identified 15 large Energy Intensive Industries for energy efficiency improvements in India. Section 14
(e) and 14 (g) of the Act empower the central government, on the recommendations of Bureau of Energy Efficiency (BEE), to
prescribe energy consumption norms and standards for energy intensive industries. These energy intensive industries are
named as Designated Consumers (DCs) in the EC Act. Out of the 15 Designated Consumers, nine (Aluminium, Cement,
Chlor-Alkali, Pulp & Paper, Fertilizers, Power Generation Plants, Steel, and Railways) are covered under the PAT Scheme.
Table 2 lists the minimum energy consumption thresholds for each sector for inclusion in the PAT mechanism.
National Mission for
Enhanced Energy
Efficiency (NMEEE)
Perform Achieve and Trade (PAT)
A Market based mechanism to
enhance cost effectiveness of
improvements in energy efficiency
in energy intensive large industries
through certification of energy
savings that could be traded
Market Based Transformation for
Energy Efficiency (MTEE)
Accelerating the shift to energy
efficient appliances in designated
sectors thorugh innovative
measures that make the product
more affordable
Framework for Energy Efficient
Economic Development
Developing fiscal instruments to
promote energy efficiency
Energy Efficiency Financing
Platform (EEFP)
A mechanism to finance DSM
programmes in all sectors by
capturing future energy savings

How will PAT work?
Each DC will be given Specific Energy Consumption (SEC) target to meet over a period of three years. Any additional saving
will qualify for earning Energy Saving Certificates (ESCerts), which could be traded, with DC's who could be short of targets.
This trade can be made bilaterally or through exchange.
Impact of PAT
According to Government of India, the estimated size of
this entire scheme will be about 700 Billion Indian Rupees
or approximately 16 Billion US Dollars and will lead to 98
million tons of GHG mitigation. BEE is setting up the
overall framework for the scheme and Energy Efficiency
Services Limited (EESL) will work as an implementation
and monitoring agency for the entire scheme.
PAT Timelines
First target period of PAT is scheduled to start in April
2011. Each target period is planned to be of three years.
March 2014 would thus mark the conclusion of first target
period. At the end of each target period, DC's
performance on SEC reduction will be assessed by third
party auditors who will submit their verification reports to
EESL. Verification and allotment of the first target period
would be completed post which the trading/delivery will
start on exchanges.
Minimum energy consumption for designated consumer
(in tons of oil equivalent per year) for inclusion in PAT
Aluminium 7500
Cement 30000
Chlor-Alkali 12000
Fertilizer 30000
Pulp & Paper 30000
Power 30000
Iron & Steel 30000
Textiles 3000
Table 2: Minimum Energy Consumption Thresholds for DCs
Source: PAT Consultation Document, December 2010, Bureau of Energy Efficiency,
Government of India

Analysis of PAT Design
The design phase of a cap and trade scheme is the most critical phase as it largely ensures successful implementation and
operation of the scheme. Though, there will always be changes based on the learning in the both implementation and
operation phase, a better design would prevent major modifications ensuring continuity and faith in
the scheme.
There are three areas which need to be carefully addressed for a better design of a cap and trade
mechanism namely boundary setting, target setting and market mechanism.
In this section we would grade the approach adopted by PAT scheme in the areas of boundary, target
and market based on clarity, comprehensiveness and robustness.
1. Boundary – Normally the boundaries are defined at three levels in a well designed cap and trade mechanism.
a. Industry - Sectors that are covered under the scheme.
PAT scores average in this aspect. While, the scheme covers few energy intensive sectors with significant energy
saving potential it also covers sectors like chlor alkali with limited units and possibly limited potential.
The nine sectors covered under PAT have been selected from 15 energy intensive sectors identified in The EC Act 2001.
There is no justification given for inclusion of sectors like chlor alkali and textile, and exclusion of sectors like chemicals,
sugar, transport, petrochemicals etc.
b. Unit - Individual units that are covered under the scheme.
PAT scores high on this aspect by defining threshold energy consumption for units to be included under the scheme.
The Table 2 in the previous section lists threshold energy consumption for different sectors.
c. Activity - Activities at individual units covered under the scheme
PAT scores low on this front. PAT's 'gate to gate' boundary definition leaves too much room for interpretation. The 'gate
to gate' definition of boundary for SEC calculation is untenable and likely to lead to several complications.
For example SEC for a cement plant with onsite quarry is likely to be different from a plant without a quarry. Likewise, the
SEC of a plant with an onsite waste treatment unit will be different from a plant treating the waste offsite. The current
boundary definitions do not speak about the recovery of limestone from an onsite quarry or waste treatment on site is an
activity covered under PAT or not.

2. Target - Like boundary, a well designed cap and trade would have clear target on three levels:
a. Industry - Total energy saving to be realized in given time via this scheme, across all sectors.
PAT scores low on this front. We are not aware of any comprehensive study that has been conducted on the overall
energy savings to be realized through the implementation of PAT scheme.
b. Sector - Total energy saving to be realized in given time in a particular sector via this scheme.
PAT scores low on this front. The overall industry saving potential to be realized through the scheme could be
distributed across sectors based on energy saving potential in each of them. Another option is to arrive at the energy
saving to be realized in each sector and then sum them to arrive at the overall energy saving to be realized through the
scheme. In either case it is necessary to study the energy saving potential in each sector.
We are not aware of any comprehensive study that has been conducted on the energy saving potential across sectors
for PAT.
c. Unit - Energy saving to be realized at each individual unit in a given time via this scheme so that it contributes to meeting
the sector and industry energy saving target.
PAT scores average on this front. PAT clustering approach for setting unit level targets score high on clarity. The
approach however scores low on comprehensiveness due to boundary definition issues. It also scores low on
robustness and it fails to reward or penalize DCs for good or bad performance across processes.
3. Market - In order to have an effective cap and trade or market mechanism that aids desired reduction in energy use, it is
necessary to have targets that are neither too easy nor too difficult to achieve. It is necessary to ensure participation in the
markets through proper definition of penalties. To provide guidance and to enhance faith in the market the regulator can
also look at the options for credit auction or minimum guarantee price (both roof and floor).
PAT scores low on this front.
a. We are not aware of any study that has been conducted so far on the price variability of ESCerts based on the targets
being set. If the targets are too easy there are chances of market collapse, thus eroding trust. If they are too difficult they
would prompt default.
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b. The penalties defined in the EC Act 2001 are inconsequential and would not deter DCs from non compliance.
However, BEE recognizes this and is in the process of developing a structure for imposing financial penalties for
noncompliance.
c. The current PAT mechanism also does not plan auction of EScerts nor does it define any floor or roof price for ESCerts.
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The financial penalty provided in the Act amounts to INR 374,000.0 per year if a designated consumer fails to comply with the specific
energy consumption reduction requirement.

Recommendations
Framework
1. Two Tier Structure – It is recommended that a two tier structure be adopted with extensive involvement of sector or trade
association in base lining and target setting.
A case of Climate Change Agreements (CCAs) of UK can be referred for adopting this approach (Please Refer to Box 1 for
introduction to CCL and CCA). The Climate Change Agreements (CCAs) have successfully adopted and perfected this
two-tier structure. There is a
sector-level agreement between
the Department of Energy and
Climate Change, UK (DECC, UK)
and the sector/trade associations
( k n o w n a s a n u m b r e l l a
agreement), and individual
agreements between DECC and
the operator of the facility (known
as underlying agreements). The
sector association agrees with
DECC on the targets and then
passes them to Technical Units
(TU's). The TU's are equivalent to
DCs under PAT Scheme.
Associations also advise and
agree on targets for TUs which
enter into an agreement with
DECC. A similar approach could
be adopted in the Indian context.
Box 1: Climate Change Levy and Climate Change Agreements
The UK Government set itself a domestic objective to reduce emissions of carbon dioxide (CO2) by 20% on
1990 levels by 2010. As a result, a range of policies for reducing greenhouse gas emissions were introduced.
Major components of this programme are the Climate Change Levy (CCL) and Climate Change Agreements
(CCAs) announced with the 1999 Budget and introduced in April 2001.
Climate Change Levy (CCL)
The CCL is chargeable on the industrial and commercial energy supply of consumers in the following sectors:
Industry, Commerce, Agriculture, Public and service sectors.
The CCL does not apply to supplies used by domestic consumers, by charities for non-business use or by very
small firms using domestic levels of energy (roughly equivalent to the energy used by a six-bedroom house).
CCL is charged on taxable energy supplies and includes: Electricity, Natural gas, Petroleum and hydrocarbon
gas in liquid form, Coal, Lignite and Coke.
The CCL is added to bills before VAT and, although there is no legal requirement for it to be shown, it usually
appears as a separate item on energy bills.
Climate Change Agreements (CCA)
The UK Government recognized that energy intensive industries that are exposed to overseas competition
should be given special consideration. Therefore, it agreed that such industries could qualify for a discount of
up to 80% of the CCL. This would be done through a CCA.
Climate Change Agreements have been very successful in the impact and the adoption by the industry. The
fourth assessment report on the impact of AEA* shows that:
?20.3 million tonnes of CO2 per year emissions were saved in total compared to sector baselines
?36 out of 52 sectors reporting met their targets outright
?In a further 12 sectors all the facilities had their Climate Change Levy discounts renewed
?99 per cent of facilities (8,973 no.) have had Climate Change Levy discounts renewed
?Generally, there was continued improvement across the sectors
* Department of Energy and Climate Change (DECC) currently contracts AEA Energy & Environment (AEA) to provide technical support in matters
related to the operation of the CCAs.

2. Role of BEE and Independent Committees/Sector Associations under the Two Tier Structure – For better
coordination, the roles for independent sector/trade associations and BEE should be redefined under the new Two Tier
structure. The learning from the role of sector/trade associations and DECC in CCAs can be incorporated in redefining the
roles under PAT scheme
?BEE can appoint an independent body (sector committee/trade association) capable of representing most units covered
under a particular sector.
?The independent body can conduct a detailed study on Sector Average Target SEC (SATS) that the sector collectively can
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achieve over a time period. For example, if the desired time to achieve the target is April 2020 , then the Sector Average
Target SEC can be referred as SATS2020. The
study will be based on the energy efficiency
potential in the sector based on the local context,
international benchmarks and technology
roadmap.
?The study can objectively be analyzed by BEE to
ensure that the SATS are neither too ambitious
and nor too easy. BEE should evaluate how the
overall saving potential compares with the target.
In case if the target plans to over achieve current
potential, where will the remainder come from?
(e.g. from the throughput effect /promising
technology being commercialized?). On the
other hand, if the targets are much less than the
potential, then why it is so? BEE and the
independent body can finalize the SATS2020.
They will then decide SATS2014 and SATS2017 that ensures incremental progress towards SATS2020.
?This step is very crucial. In Regional Clean Air Incentives Market Mechanism (RECLAIM), emissions are reduced at only a
fraction of the rate expected at the time of the program's adoption due to the setting of too generous caps (Please refer to
Box 2 for introduction to RECLAIM)
?The report can be hosted by BEE for review and comments from stakeholders before arriving at any conclusion about
Sector Average Target SEC (SATS2020).
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First target period of PAT is scheduled to start from April 2011. Each target period is planned to be of three years. April 2020 would thus mark
the conclusion of three target periods.

?The independent body can advise individual DCs on the average SEC targets that they should take in each target period.
These targets can be referred as DCAS2014, DCAS2017 and DCAS2020. The suggestion could be based upon:
§Sector Average Target SEC (How it helps achieve the
Sector Average Target SEC?)
§Target profile
§Throughput profile on which this is based
§Performance in the base year and subsequent years to date
§Energy saving action plan which is submitted by DCs with
implementation dates and expected savings – split into direct
and indirect (grid electricity) energy saving measures
?After a dialogue with the sector committee /association the DC
may submit a proposal to BEE detailing about Target SEC and
plans to achieve that. Independent sector committee/association
can also submit their report. Both these reports may or may not
conform and are independently evaluated by BEE to make a final
decision. In the end an agreement can be signed between BEE
and DC.
Boundary Setting
1. Activity Definition – It is recommended that rather than 'gate to gate' boundary definition, BEE should define the activities
that fall under the purview of PAT. This is necessary to account for differences in the activities performed at or outside the
geographical site for two units producing the same product.
In case of CCA, eligible activities are defined under the Pollution Prevention Control Regulations (2000).
2. Grouping – It is recommended that units under the same operator be grouped. In some sectors there are companies that
own and operate more than one unit. It makes sense to combine these units as one designated consumer and calculate a
single SEC for the company which will be the weighted average of individual SECs of different units. The production during
the target period can be considered as weight. This is likely to have the following advantages:
§It will provide greater flexibility to the operator
§Prevent redundancies and extra cost as single PAD (PAT Assessment Document), registry, verifier etc. could be used
by the company
§There will be reduction in the effort at the end of regulator and dispute resolution body. They will be dealing with one
entity rather than multiple
§It will serve as natural normalization rather than mathematical normalization which is likely to be used to reduce the
number of clusters
Box 2: Regional Clean Air Incentives Market (RECLAIM)
The California RECLAIM trading program is used by the South Coast Air
Quality Management District (SCAQMD) in USA to control the amount of
nitrogen oxide (NOx) and sulfur oxides (SOx) in Los Angeles and Orange
counties. This region, the smoggiest in the nation, was required to achieve
federal clean air health standards by 2010. Because RECLAIM offered
financial incentives to reduce emissions, it was expected to reach that
goal at a lower cost with increased flexibility. It required industries and
businesses to cut their emissions by a specific amount each year,
resulting in a 70% reduction for nitrogen oxides (NOx) and a 60%
reduction for sulfur oxides (Sox)” by 2003.”RECLAIM Trading Credits
(RTCs) were denominated in $/lbs (one RTC is equates to one pound of
NOx emitted).
However, due to the setting of too generous caps, emissions were
reduced at only a fraction of the rate expected at the time of the program's
adoption. The scheme serves a general lesson for market-based
systems, namely that market-based programs require significant
planning, preparation, and management during development and
throughout the life of the program.

Target Setting
1. Sector Energy Saving Potential Study - It is recommended that a study on energy saving potential for each sector be
conducted.
While the targets can be set either top-down, i.e. starting with industry, which are then distributed across sectors and finally
across units in that sector, or bottom up, i.e. deciding on unit targets, then consolidating them to sector and finally into
industry targets. Both the approaches have their pros and cons. While, the first is more theoretical, the second is more time
consuming and borders on impracticality. It is thus best to use the combination of both which we can call the hybrid
approach.
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PAT cluster approach is a hybrid approach for target setting. However, a study on sector energy saving potential would
definitely help.
2. Process Based Clustering Approach - A further refinement of the cluster based approach is recommended by
performing clustering at processes level and not on overall DC level energy consumption.
To take care of wide variations in raw materials and technology use, there is a need to classify the activities under the
purview of PAT as sequential/parallel/exclusive processes before performing the clustering on each class of processes
rather than clustering at DC level, which is the current approach for PAT (Figure 3). This would ensure that each DC is
rewarded and penalized for its performance in a particular process irrespective of the activities performed in a 'gate to
gate' boundary. DC level clustering can sometimes creates biases due to boundary, technology, raw material variation and
lead to wrong target setting for some Dcs.
For example, if a sector has only two units (DC1 and DC2). The manufacturing is divided into three processes (P1, P2 and
P3). While DC1 performs all three processes
within the geographical boundary, DC2
performs P1 and P2. The Table 3 depicts the
result of process clustering approach on
process target SEC while Table 4 shows the
result of overall target SEC for both the units
due to above approach.
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Current PAT Scheme proposes the cluster approach for target setting in a particular sector. The SEC of all the units covered under each
sector can be plotted on a graph to identify the clusters. All units in a cluster will have same target SEC.
Target SEC for
Process P1
Target SEC for
Process P2
Target SEC for
Process P3
Process Target SEC
Min
(DC1P1, DC2P1)
Min
(DC1P2, DC2P2) DC1P3
Table 3: Process Target SEC based on Process Clustering Approach
Table 4: Target SEC for DCs based on Process Clustering Approach
Units Target SEC for DCS using Process Clustering Approach
Dc1 Target SEC using
Process Clustering Approach
Min (DC1P1, DC2P1) + Min (DC1P2, DC2P2) + DC1P3
Dc2 Target SEC using
Process Clustering Approach
Min (DC1P1, DC2P1) + Min (DC1P2, DC2P2)

In the DC level clustering and ‘gate to gate’ boundary definition, if both the DCs were put in the same cluster, it can be easily
visualized that the target for DC1 will be very steep and DC2 will make windfall profits. DC1 would have paid heavily for having
process P3 on its site.
If they were placed in two different clusters
then there would have been an absolute
target for both. The target would have
been tougher for DC1 as compared to
DC2. The approach would have
disregarded probably better performance
of DC1 across processes.
Thus approach of using process SEC for
clustering coupled with activity definition
will not only take care of variations and
resolve boundary issues but it will also
reward DCs for performance across different process.
While the process SEC approach helps, it should also be kept in mind that each such division would have diminishing returns.
It is thus not advisable to have too many such divisions.
Price Discovery
1. ESCerts Price Variation Study - It is recommended that a study on likely price range of ESCerts based on the targets
should be conducted. This study will decide whether the objective of enhancing cost effectiveness of improvements in
energy efficiency in energy intensive sectors, through PAT is being met or not. The outcome of the study will enable BEE to
revisit the targets if the above objectives are not being realized.
2. Auction of EScerts - It is recommended that BEE should explore the option of auctioning limited number of in the middle
of first target period (three years for PAT). Since the target period is scheduled to start in April 2011, the auction can be
conducted at the end of year 2013 or in the beginning of year 2014.
This will ensure the discovery of price as by that time DCs would have some idea about where they stand compared to the
targets and how far they can stretch.
3. Penalty for Non Compliance - It is recommended that the penalties should be high enough to discourage any non
compliance. BEE is of the cognizance that the current penalties do not deter DCs from non compliance and has indicated
to work further on this issue.
Plant 1
Cluster 1
Plant
BaselineSEC
Cluster 2 Cluster 3
Plant 9 Plant 4 Plant 3 Plant 6 Plant 10 Plant 8 Plant 2 Plant 7 Plant 5
0
10
9
8
7
6
5
4
3
2
1
Figure 3: DC Level Clustering Approach For Determination Of SEC
Source: PAT Consultation Document, December 2010, Bureau of Energy Efficiency, Government of India

4. Floor/Roof Price for ESCerts - BEE can also look at the option of setting a floor and roof price for ESCerts. However,
extra care has to be taken in target setting to avoid any significant financial burden due to the intervention of regulator
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in case the floor or roof price is attained. This situation may also erode the faith in the market .
In UK, CCL is a tax that the
companies have to pay if they do not
enter into CCA. If companies do not
meet the targets set under CCA,
they have to buy and retire carbon
allowances. Thus in case of CCA,
CCL charge and Carbon Allowance
price forms the basis for calculation
of cost to enter into CCAs.
In case of Renewable Energy
Certificates (RECs) in India the
preferential tariff for Renewable
Energy forms the basis of the
pricing.
EU ETS and Kyoto are very good
examples of regulations that have
established a fresh EUA /CER
market,very similar tobwhat
Government of India attempts to do
through PAT. It is interesting to note
how EU ETS targets have been
set and the institutional framework
for verification and price discovery
through fines and auctions has been
created. EU ETS and Kyoto have their own success and failures but they offer good learnings for a program like PAT
(please refer to Box 3 for introduction to EU ETS and Kyoto).
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Minimum guarantee price/floor price or maximum guarantee/roof price is good for ensuring control and faith in the markets but requires
intervention if floor or roof is reached. The regulator must be prepared to sell at the roof price and buy at floor price if such event happens
otherwise the market may collapse. There can be a significant financial burden if such events occur. The chances of occurring of such events
can be reduced through setting proper targets.
Box 3: European Union Emission Trading Scheme and Kyoto Protocol
The European Union Emissions Trading Scheme (EU ETS) is the largest multi-national emissions trading
scheme in the world. It is a major pillar of EU climate policy. The EU ETS has different periods. The trial or first
trading period was from 2005 through 2007, the second and current period is from 2008 through 2012. The
third period would start from 2013 through 2020. EU ETS though is closely linked to Kyoto Protocol and help
the members meet their compliance under it is an independent emission trading market altogether. It thus
can continue beyond 2012 whatever the shape of the Kyoto Protocol or a successor agreement is going to
be. Irrespective of the actual impact, EU ETS has been successful in putting a price on GHG emissions,
creating a system that help monitor and report 12000 installations across 27 EU countries and developing
countries through Clean Development Mechanism (CDM).
EU ETS is different from classic cap-and-trade model by the decentralized nature by which the cap has been
determined. There was no initially determined overall limit; it was the sum of separate decisions concerning
the total number of European Union Allowances (EUAs) that each member state could distribute to
installations within its jurisdiction. Each member state proposed a quantity of EUAs, but that quantity is
subject to review and approval by the European Commission.
The EU ETS includes only CO2 emissions and only a subset of the economy. The sectors and installations
included under the EU ETS comprise about half of EU's CO2 emissions and about 40 percent of the GHG
emissions covered by the Kyoto Protocol. GHG emissions from sources not included in the EU ETS, notably
transportation and buildings, are to be limited by other policies and measures. The Emissions Trading
Directive though has the option of including other sectors and installations in future. Aviation for example has
been recently included.
EU ETS has had its own share of controversies like the price drop at the end of the first trading period. The
reason for the price drop was over allocation. Power companies generated windfall profit by higher electricity
prices and excessive free allocation of allowances. This also implied an emissions cap that was not
sufficiently constraining or at least not demanding enough.

Protection for the Industry and DCs
1. Export Competitive Test - While it is necessary to improve energy efficiency, it should not be at the cost of an industry, a
sector or an unit. Thus it is recommended to take certain protection measures to minimize the risk of negative impact on
international competitiveness.
BEE should define and introduce Export Competitive test and monitor it on a continuous basis. The test would help
evaluate that how PAT targets affect the export competiveness of a sector or make it vulnerable to cheaper imports. There
should be provisions to provide rebate to the sector if it fails the Export Competitive test.
In UK, CCL is chargeable on the industrial and commercial energy supplies to consumers. It is a form of additional tax that
is payable on the use of energy. CCAs were designed to protect
industry from overseas import by giving them an option to
claim rebate from CCL if they achieve CCA targets. The eligible
sectors for CCA have to undergo Import Test to test their
vulnerability to imports. Sectors can participate in CCA and claim
rebate from CCL only if they can demonstrate they are
vulnerable to cheaper overseas imports.
2. Throughput Test – It is also recommended that the umbrella
agreement between BEE and sector committee/associations
or individual DCs should have throughput or production protection
measures in place. If the production of a sector or
individual DC falls below a threshold, there should be a provision for
rebate. This will prevent additional burden on the
sectors or individual DC's in already worsening conditions.
Sanjay Dube heads Sustainability and Climate Value Advisory team at EVI and, Ritesh Awasthi and Vivek Dhariwal
are Senior Consultants in the same team.
March, 2011
Emergent Ventures International.
As BEE gears up for the launch of PAT scheme and the industry prepares itself to understand the impacts, we hope that
the analysis presented would help in bringing better clarity on the design of the scheme. We also hope that successful
implementation of the scheme would help India achieve the objectives of low carbon future as expected under National
Action Plan on Climate Change (NAPCC).

th
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Phone: 91-124-4353100, Fax: 91-124-4102980

A Discussion Paper on India's Perform Achieve and Trade(PAT) scheme

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