By Saravana Sivasankaran
A large reason why the Clean Development Mechanism (a mandatory process for certifying carbon credits) never really took off was because of the bureaucracy and ambiguity behind the requirements of the process. Project developers never knew with certainty if their projects, whether a clean coal plant, an energy-efficient building or a renewable energy project, would absolutely qualify for credits.
Take the case of India. I worked for a company that manufactured wind turbines for the regional Indian market. The price of the turbines we sold ultimately relied on the project’s IRR which in turn relied primarily on the site’s wind characteristics. However, with intensifying competition, a significant portion of the developer’s return increasingly came from income derived from selling carbon credits. I have seen first hand how the reliance on carbon credits killed deals or gave false hope to developers on risky projects only to be let down during the certification process. To further exacerbate the situation, India offered tax breaks for such projects resulting in many poor projects being funded. This in turn created havoc on the grid’s capacity to handle renewable energy’s erratic supply.
Having learnt its lesson, India decided to rely more on a market based mechanism to promote energy efficiency. The Perform Achieve and Trade (PAT) scheme, currently being implemented, is designed to rely on market forces to expedite energy efficiency. The Indian government has identified key industry sectors (see charts below) that have enough room for energy efficiency savings. The identified plants are then given mandatory energy reduction targets based on their past base consumption. Plants obtain efficiency certificates once they achieve their targets and these certificates in turn are freely tradable. The mechanism sounds very similar to carbon credits, except with much more focus on energy efficiency and more importantly, greater clarity on the requirements for obtaining certification.
The market tradable energy efficiency certificates might also help on another situation we explored in class. These same measures can be extended to target building efficiencies and attack the classic problem of who pays for energy efficiency measures in a building – the landlord or tenant. The mandated reduction and certificates effectively behave as a uniform tax for old, inefficient buildings and incentive for new energy efficient buildings. Lease rates will ultimately have to reflect these costs/ benefits.
While this mechanism would sound commonplace in the West, India happens to be among the first developing countries to take up this initiative. Companies such as Schneider Electric, Siemens and GE have jumped on the Indian bandwagon to provide a wide portfolio of products to capture the ongoing boom in the Indian energy efficiency market. This I believe is India’s second coming on the clean energy market, with the first leading to the success of home grown renewable energy companies. This time around, we should expect to see Indian companies competing with the Schneiders of the world for providing efficiency solutions.
While the actual success of this PAT national scheme is yet to be ascertained given the various challenges of working with the state governments and refining the criteria for certification, this is definitely a step in the right direction, helping to bridge the demand-supply energy gap. It would serve as a much more effective regional framework than mandating countries to adopt renewable energy quotas or participate in carbon credits on a global scale.