PPt_DSM_INTERNSHIP

DSM: A GROWING
NEED IN INDIA
SANDIIP GUPTAA
UPES(2014-2016)
INTERNSHIP
MAHARASHTRA ELECTRICITY REGULATORY COMMSIION
MAHARASHTRA ELECTRICITY
REGULATORY COMMISSION

DSM AND ITS NEED
 process of selection, planning, and implementation of measures intended to have an
influence on the demand or customer-side of the electric meter, either caused
directly or indirectly by the utility
 The most common rationale for Demand Side Management in the Power Sector is
that it is often more cost effective and socially beneficial to reduce or manage
electricity demand through investment in efficiency and other demand side measures
than to increase power supply or transmission capacity
 DSM programmes are used to eliminate or reduce the need for additional
peak or base load generating capacity and/or distribution facilities

LOAD CURVE AND OBJECTIVES
 LOAD CURVE: A graphical plot showing the variation in
demand for energy of the consumers on a source of
supply with respect to time is known as the load curve.

LOAD-SHAPE OBJECTIVES
 Valley Filling (increased demand at off peak) involves increasing the load
during off-peak hours. Valley filling consists of building off-peak loads. This
may be particularly desirable where the long-run incremental cost is less
than the average price of electricity.
 Load Shifting (demand shifting to non-peak) involves shifting peak loads to
off peak hours. Popular applications include use of storage water heating,
storage space heating, and coolness storage. In this case, the load shifting
associated with thermal storage involves load shifting related to conventional
electricity applications e.g. building heating by electric convectors.

CONTINUE…
 Strategic Conservation (the reduction of utility load, more or less equally, during all or
most hours of the day) is one of the non-traditional approaches to load management and
results from utility-stimulated conservation. Not normally considered load management, it
also involves a decrease in sale as well as modifications in the way electricity is used.
 Strategic Load Growth (the increase of utility loads) is the load-shape change which
refers to overall increase in sales. Load growth may involve increased market share of
loads through the development of new applications (electric cars, microwave
technologies, automation).

CONTINUE…
 Flexible Reliability (interruptible agreements by utility to alter customer energy
consumption on an as-needed basis) is a concept which may be conveniently
perceived as a load-shape change. Reliability is actually a planning constraint.
Utilities must make sure that they can curtail a customer’s load demand if need
be (either for an immediate need or as a constituent for their energy reserves), in
exchange for various incentives.
 Peak Clipping refers to the reduction of utility loads during peak demand
periods. This can delay the need for additional generation capacity. The net effect
is a reduction in both peak demand and total energy consumption.

REGULATIONS W.R.T DSM
 DSM IMPLEMENTATION FRAMEWORK REGULATIONS
 The MERC notified the regulations to guide the DISCOMs on the DSM
implementation framework in 2010.
 The regulations require the DISCOMs to make DSM an integral part of
their day-to-day operations and plan, design, and implement DSM measures on
a sustained basis
 The DISCOMs are also required to conduct load research, consumer surveys,
Integrated Resources Planning (IRP), load forecasting, and other studies on a
regular basis
 COST EFFECTIVENESS ASSESSMENT REGULATIONS FOR DSM
MEASURES AND PROGRAMMES
 According to these regulations, the DSM measures and programmes have to
pass three cost-effectiveness tests in order to be approved by the MERC
 The Total Resource Cost (TRC) test is the main test which requires the net
present value (NPV) of the DSM programme i.e. the difference between the
NPV of benefits and costs, to be positive. The benefits constitute the avoided
power purchase cost due to the estimated savings from the DSM measure, and
the costs includes the cost of technology, installment, maintenance as well as the
programme’s operating cost MAHARASHTRA ELECTRICITY

CONTINUE…
 The DSM measures should have a positive value in the Total Resource Cost
(TRC) test in order to be approved
 The second test is the Ratepayer Impact Measure (RIM) test in which the
impact on the tariff is estimated by including the loss of revenues due to the
avoided sales from the DSM measure as a cost in the cost- benefit equation of
the TRC test
 When the RIM test yields a negative number for DSM programmes, such
programmes have to pass the Life-cycle Revenue Impact – RIM (LRIRIM) test, in
which the tariff impact as calculated in the RIM test over the total annual sales of
the DISCOM has to be less than Re.0.01/kWh or less than 0.01% of the existing
tariff.
 Difference between NPV of Cost and NPV of Benefits shall be divided with total
utility kWh sales to determine the rate impact on the non-participants.

DEMAND RESPONSE
 Demand Response is a DSM mechanism in which the end users of electricity are
encouraged to take part in reducing the peak load on the system by changing their
normal energy consumption
 This process leads to reduction the overall system peak load as end-users shift the
operation of some of their loads from peak hours or high market price hours to off-
peak hours.
 Majority of the Demand Response programs are designed to enhance the reliability of
the system and to reduce the energy production from fossil fuel based power plants
 Besides improving the reliability, the concept of Demand Response is used to
minimize the electricity prices and ancillary service provision in addition to maintaining
reliability
 Given below is a list of Demand Response programs available and these can be
broadly grouped into two types as -
1. Incentive based DR and
2. Price based DR programs.

CONTINUE…
 INCENTIVE BASED Demand Response:
 In this category programs are generally designed by the utilities or regulators, in
which contracts are made with the specified consumers in order to increase their
participation in demand adjustment during the system peak hours
 The contracts specify the type and magnitude of the incentive to be provided to the
specified consumers. The incentive can be a price based incentive in which
customers will be given the pre-specified amount for the amount of loss
reduction as mentioned in the contracts
 In some of these programs penalties are charged on the consumers for violating
the contracts
 PRICE BASED DEMAND RESPONSE:
 In this category of Demand Response programs the price of electricity acts as a
source of motivation for the consumers to participate in Demand Response
 The end-users or consumers vary their consumption of electricity in response to
the electricity market prices
 These prices refer dynamics in the energy availability on the systems available, which
implies higher electricity prices represents peak hours and lower electricity prices
represent off-peak hours

INTERNATIONAL PRACTISES
 U.S. EXPERIENCE WITH DSM
 In the United States, more than 500 utilities implemented DSM programs from
1985-1995, saving more than 29 GW of peak load. The average upfront cost of
implementing this energy savings was only 2 to 3 cents per kilowatt-hour, far
below the average tariff
 Total U.S. spending on utility DSM has risen steadily to $1.10 billion in 2000
 CALIFORNIA SUCCESS STORY
 The most prominent example is California, whose leadership in energy efficiency
and DSM substantially reduced the economic and environmental damage
associated with the state’s severe energy crisis of 2001
 In response to the crisis, Californians reduced their total electricity consumption
in 2001 by 6.7 percent compared to 2000
 Consumers bought record numbers of energy-efficient appliances in 2001,
including nearly 100,000 high-efficiency refrigerators (more than five times that in
2000) and 4 million compact fluorescent light bulbs
 Recognizing the value of DSM programs, especially in a restructured electricity
market, California substantially increased funding for utility DSM programs in
2001 to more than U.S.$480 million, an increase of more than 50 percent over
2000 levels

 THAILAND
 In 1993, Thailand initiated a U.S.$189 million DSM program to help curb
electricity demand growth and promote more energy-efficient equipment and
cost-effective energy services
 The program was largely successful and substantially exceeded its original
peak reduction and energy conservation targets. From 1993 to 2000, the
DSM program succeeded in reducing peak load by an aggregate of 556 MW,
 Cumulative annual energy savings were 3,140 GWh, representing more than
double the original energy savings program targets. The program also
reduced carbon dioxide emissions by 2.32 million tons per year.

DSM IN THE STATE OF MAHARASHTRA
 It was one of the first commissions to approve the time of day (ToD) tariff for High
Tension (HT) industrial consumers in May 2000
 In 2010, the commission notified two regulations regarding DSM in the state. The
first set of regulations on the DSM implementation framework which cover the
guiding principles, planning for and implementation of specific activities, funding
sources, the programme approval process, and sharing of information etc.
 The second set of regulation has prescribed the methodology to assess the cost
effectiveness of the Demand Side Management measures and programmes to
be implemented in the state
 The commission has also formed a DSM consultation committee ordered by its
secretary with members including the representatives of DISCOMs, Maharashtra
Energy Development Agency (MEDA), Bureau of Energy Efficiency, consumer
representatives
 Though the regulations require DISCOMs to make DSM a part of their
day-to-day activity and consider DSM while planning long time power purchase,
there is no specific targets set for the DISCOMs

MAHARASHTRA ENERGY DEVELOPMENT AGENCY
(MEDA)
 In 2003, the Maharashtra Energy Development Agency was designated as
the state nodal agency to coordinate, regulate and enforce the provisions of
the EC act and implement various programmes in the state
 In 2005, the government of Maharashtra created a State level committee
under the chairmanship of the Principal Secretary (Energy) and 15 members
from various government departments and the energy sector
 The members included secretaries from different government departments
like urban development, water supply and sanitation, agriculture, and public
works, a technical member from the MERC, executives of DISCOMs,
representatives of financial institutions and industry associations, and
experts from academic institutions

RELIANCE ENERGY LIMITED (REL)
 REL incorporated DSM Cell in their organization in July 2007
 EE&DSM INITIATIVES BY REL
i. The objective of the scheme was demand and energy saving during peak
hours. Under the scheme, energy saving CFL worth Rs. 165 was provided at Rs. 63
with monthly instalment of Rs. 7 for 9 months. The scheme was implemented in two
phases – pilot scheme and main scheme. 2.05 Lakh consumers participated in
the programme and 6.17 Lakh CFLs were distributed. This resulted in energy
saving of 16.85 MU per annum and demand saving during peak time of 10.79 MW.
ii. Energy audit scheme: Under this scheme which is open for any non
residential consumer having load > 5kW, initially the consumer pays 25% of the
energy audit fees. If the consumer implements 50% of the measures suggested in
the audit, the fees is refunded back to the consumer. More than 30 energy
audits have already been done.
iii. Some of the challenges faced by REL in implementation of programmes include
delay in approval of programme by the regulator, prioritization of programmes and
determination of market scale required to be adopted

TATA POWER COMPANY (TPC)
 TPC incorporated DSM Cell in March 2008
 The Cell undertakes various activities including load and market research,
consumer awareness through exhibitions, conferences, energy audit and
internal energy efficiency improvements among others
 TPC undertook a demonstration project in lighting sector which involved
replacement of T-8 fluorescent lamps and conventional ballasts by T-5
fluorescent tubes with electronic ballasts. 50,000 tube lights were replaced in
the LT commercial and LT industrial consumers’ premises.
 One of the major ongoing activities in TPC is in-house lighting improvement
programme. Total of 1800 FTLs are being replaced by T-5 and electronic
ballast.
 One of the areas where TPC expects challenges is independent Monitoring
and Verification. TPC is of the opinion that in future independent agency
may be required to undertake M & V

BRIHAN MUMBAI ELECTRIC SUPPLY & TRANSPORT
UNDERTAKING (BEST)
 In response to the MERC directive, BEST incorporated DSM Cell in its
organization in June 2008
 The cell proposes to undertake various activities including load research,
DSM potential assessment, and preparation of DSM plan, implementation
and M&V activities
 One of the programmes proposed by the BEST is replacement of 40 W FTLs
having electromagnetic chokes with 36 W FTLs having electronic chokes in
Mumbai Municipal Corporation Hospitals. This programme is being financed
through the Load Management Charges Fund

FINANCING OPTIONS
FOLLOWING FOUR MAJOR FINANCING SOURCES ARE USUALLY AVAILABLE TO
DISTRIBUTION UTILITIES:
1. International Financial Institution and Development Agencies, and special funds:
 Several international lending and donor institutions have created funds for promoting
energy efficiency and conservation in developing countries as well as in countries with
economies is in transition.
 Most of them have specific action plan and/or intervention strategies to support DSM
programmes. These institutions include the World Bank Group, the Asian
Development Bank, International Finance Corporation, etc. Similarly, industrialized
countries have set up bilateral funding agencies whose mandate is to manage public
assistance funds for development.
 USAID (United Agency for International Development) in the United States,
Department for International Development and Canadian International Development
Agency etc.
2. Grants from government/ governmental agencies
 There are several government agencies that give grants or create special funds for the
purpose of providing finance for DSM programs. However, direct lending on the part of
government (or in the form of grants or aid) has not been a prevalent practice in India
so far.

3. Self-financing
 Under the DISCOM Mode, the utility funds the DSM project either by utilizing its own
funds (may be in the form of a special fund created by the utility for DSM financing or
recovery of such costs through ARR) or though borrowings and contract out the
certain aspects of the project works and implementation.
 Direct costs associated with program administration including design, implementation,
monitoring, evaluation and incentives, if not recovered, could impact earnings of the
utility.
 Reasonable certainty of cost recovery is necessary condition for utility program
spending, as failure to recover any costs directly impacts utility earnings, and sends a
discouraging message regarding further investment.
 An example of such fund is ‘Load Management Charge’ fund created by various
utilities in the State of Maharashtra. In May 2005, under Section 23 of the Electricity
Act 2003, MERC directed all consumers to reduce their consumption to certain level.
The Commission levied surcharge of Rs. 1/kWh for consumption above norm
specified by the Commission. Similarly, the Commission directed rebate of Rs. 0.50
for reduction in consumption below norm set by the Commission.

4. Private equity, venture capital funds and project finance debt from
nationalized banks and other sources.
DEBT:
 Debt options include corporate or project loans under recourse or limited recourse
structures, leasing arrangements, and full or limited guarantees. Many funders
specify minimum cash flow generation projections, debt coverage, leverage and
other financial ratios for projects to qualify for loans. Stronger credit support can
sometimes be structured into a transaction by obtaining additional collateral, cash
flow, or parent company or third party guarantees for a loan. Debt financing can
include options whereby loans convert to some amount of equity ownership if the
project is successful, to increase the lender’s rate of return.
Leasing
 Leasing can be used to finance the sale of energy efficiency equipment and
services. It is commonly used in vendor financing and ESCO projects and as part
of utility programs.
 Lease financing can also be applied to energy efficiency manufacturing ventures.
Leasing works best with simple equipment and large quantities of sales or
installations. Large numbers of similar transactions facilitate a statistical approach
to managing end-user credit risk. Lease financing is possible only in countries
having fairly well developed capital markets and amenable laws (as a rule-of-
thumb, select countries that have more than ten private leasing companies).

Equity
 Equity financing involves the ownership of a company or project, and can take a variety
of forms. Equity can come from the project sponsor, or in the form of a private
placement or preferred or common stock. Equity usually provides longer term financing
for a higher expected rate of return than debt.
 Usually a minimum of between 20 percent and 30 percent equity in a project is
required to obtain debt financing, depending on the company or customer’s credit-
worthiness. For larger projects in developing countries, according to the World Bank,
the sponsor’s equity stake is usually around 30 percent. Funders providing equity may
provide more stable financing but also require significant control of the initiative.
ESCO Financing (ESCO mode)
 Under the ESCO Mode, the ESCO signs a contract with the utility to finance and
implement project; the ESCO may borrow the project debt and repay it from project
revenues. An energy service company (ESCO) is a professional business providing a
broad range of comprehensive energy solutions including designs and implementation
of energy savings projects, energy conservation, energy infrastructure outsourcing, and
risk management.
 ESCO also maintains the system to ensure energy savings during the payback period.
The savings in energy costs is often used to pay back the capital investment of the
project over a five to twenty year period. If the project does not provide returns on the
investment, the ESCO is often responsible to pay the difference.

DIFFERENT TYPE OF ESCO BUSINESS MODELS PREVALENT IN THE MARKET :
Full-Service ESCO:
The ESCO designs, finances and implements the project, verifies energy savings
and shares an agreed percentage of the actual energy savings over a fixed period
with the customer. This is also referred to as the ‘Shared Savings’ approach.
End-Use Outsourcing:
The ESCO takes over operation and maintenance of the equipment and sells the
output (e.g., steam, heating/cooling, lighting) to the customer at an agreed price.
Costs for all equipment upgrades, repairs, etc. are borne by the ESCO, but
ownership typically remains with the customer. This model is also sometimes
referred to as Chauffage or Contract Energy Management.
ESCO with Third Party Financing:
The ESCO designs and implements the project but does not finance it, although it
may arrange for or facilitate financing. The ESCO guarantees that the energy
savings will be sufficient to cover debt service payments. This is also referred to as
the ‘Guaranteed Savings’ approach.

Equipment Supplier Credit:
The equipment supplier designs and commissions the project, verifying that the
performance/energy savings matches expectations. Payment can either be made
on a lump-sum basis after commissioning or over time (typically from the estimated
energy savings). Ownership of the equipment is transferred to the customer
immediately.
Technical Consultant (with Performance-based Payments):
The ESCO conducts an audit and assists with project implementation. The ESCO
and customer agree on a performance based fee, which can include penalties for
lower energy savings and bonuses for higher savings.
Guidelines on Performance Contract:
Performance contracts are different from traditional contracts with energy
engineering and consulting companies because the firm contracted is compensated
based on actual energy savings resulting from the project implementation, instead
of a fixed contract price.

IMPLEMENTATAON CONSTRAINTS
 Inadequate Load Research- The load curve of any Indian utility normally has a
morning peak and an evening peak. In order to encourage load shifting the utility
needs to introduce time differential tariffs (TOU tariffs) for the large industrial /
commercial users.
 Lack of institutional and regulatory framework - Failure by regulators and
utilities to recognize the benefits to utilities and rate payers of meeting demand in
the most efficient manner. As a result, efficiency programs and policies may lack
adequate legal and regulatory backing to be pursued by utility companies or
other entities.
 Lack of trained EE personnel - Lack of EE service providers is a critical issue in
India. Most of the attention in the energy sector in India has traditionally focused
on energy supply, which is also evident in the enormous interest expressed in
solar power over the past few months. EE experts particularly those with program
design, implementation, evaluation, monitoring and verification skills are lacking
in the country.
 Lack of awareness – A large portion of customers do not have easy access to
information on EE. The BEE has initiated a major marketing and promotion
campaign to raise the awareness levels. However, this is at a nascent stage. A
related problem to this barrier is the uncertainty about the quality of “new” and
efficient products.

RECOMMENDATION FOR DSM IMPLEMENTATION
1. State level Energy Efficiency Plans
Each state should prepare a plan for energy efficiency (electricity, oil,
coal). BEE can help facilitate the process of state level plans. This plan should
include programme designs, targets and define roles for public – private
partnerships in achieving energy efficiency.
2. Energy Conservation Fund
Each state should allocate an energy conservation fund to implement its
efficiency plan. Regulatory commissions can allow utilities to factor EE/DSM
expenditure into the tariff.
3. Monitoring & Verification
Independent monitoring and verification of savings achieved and cost
effectiveness of programmes is essential. Evaluation reports should be quantitative
and should be publicly available. An annual report of the investments and savings
made (energy and peak reductions) in energy efficiency and DSM programmes
should be prepared at the state and nationals levels. The feedback from the
monitoring exercises should be incorporated into modified programme designs.
4. Benchmarking
Initiate Benchmarking exercises for different industrial sectors, hotels,
hospitals, buildings . A road map (10-20 years) can be created for energy efficiency
improvements in each industry segment.

PPt_DSM_INTERNSHIP

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