Applicability of Energy Saving Obligations to Indian electricity efficiency efforts

Energy Strategy Reviews 2 (2014) 298e306

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CASE STUDY

Applicability of Energy Saving Obligations to Indian electricity efficiency efforts Robert Harmsen a, *, Luke Moth a, Atul Kumar a, b a b

Copernicus Institute of Sustainable Development, Utrecht University, P.O. Box 80115, 3508 TC Utrecht, The Netherlands The Energy and Resources Institute, IHC Complex, Lodhi Road, New Delhi 110003, India

A R T I C L E

I N F O

Article history: Received 11 December 2012 Received in revised form 26 May 2013 Accepted 9 July 2013 Available online 26 July 2013 Keywords: Obligation India End-use Electricity savings

1. Introduction The current pace of India’s economic growth, together with governmental programmes such as the rural electrification policy and the Ministry of Power’s “power for all”mission suggest a strong growth in future power demand. A report by the Indian Planning Commission expects that electricity requirement will be increased by a factor three to four in 2031, compared to 2011 [1]. Fulfilling this demand will be quite a challenge. In January 2012, the reported deficit with respect to demanded power supply and demanded peak supply were
9.3% and
13.7%, respectively [2]. In order to meet future demand and reduce shortages there is a focus on issues such as, but not limited to, adding generation capacity, improving plant load factors and DSM (demand side management). Currently, there is no central legislation in place which obliges entities to participate in DSM schemes.

* Corresponding author. E-mail address: [email protected] (R. Harmsen).

A B S T R A C T

This paper investigates end-use electricity efficiency policies and DSM related aspects within the Indian electricity sector. This work also identifies lessons for India from White Certificate schemes and Energy Saving Obligations in the UK, France and Italy. These two analyses aim to identify lessons which are applicable for a utility based energy saving obligation scheme within India. Most relevant results and recommendations are that an obligation is suggested, that no elements should be simply copied and that standardization could offer benefits to the Indian context. However, a number of steps would be required prior to introduction of such obligation. Ó 2013 Elsevier Ltd. All rights reserved.

However, studies have shown that there is substantial potential to reduce or change electricity consumption from Indian end-users in order to save additional generating capacity and primary energy consumption [3,4]. These savings can be cost-effective for both consumer and distribution utility, especially if the latter has to buy expensive peak power or has to sell this power at lower (tariff determined) prices. The amount of literature published on DSM programmes in India is relatively limited, although a number of papers have investigated specific options for enhancing electricity efficiency through DSM in India. Parikh et al. [5] presented suggestions for efficient DSM programmes in India’s energy intensive industry. Sant & Dixit [6] analyzed least cost power planning of Maharashtra State and the role of DSM in the potential financial savings. Kumar et al. [7] investigated the reasons for stagnation of the CFL (compact fluorescent light) market in India and suggested ways to popularize such technology. Reddy [8] identified efficient technologies for the household sector in India, and analyzed their benefits to

2211-467X/$ e see front matter Ó 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.esr.2013.07.001

the consumer as well as to society. McNeil et al. [9] provided detailed estimates for maximum cost-effective efficiency improvement potentials for key energy-consuming products in India. The appliances studies included household refrigerators, room air conditioners, industrial and agricultural motors, and distribution transformers. Bhargava et al. [10] observed for Punjab that electricity demand is unresponsive to price specifically in the short run asking for DSM programmes focussing on efficient appliances. Garg et al. [11] estimated the potential of DSM efficiency improvement targets for Gujarat state in India regarding 1) short-term efficiency improvement (agricultural pump rectification) and 2) long term efficiency improvement (standards for appliances such as air conditioners and refrigerators, and for new agricultural pump purchase and pump replacement). To date, some DSM projects have been implemented in India. Barriers have prevented large scale uptake and related benefits of these schemes. A large scale, obligatory DSM scheme designed in order to overcome these barriers, could enhance end-

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use electricity efficiency and could achieve electricity savings. The implementation of an obligatory DSM scheme in India has been discussed by policy makers and researchers but, so far, has not been analyzed in a scientific paper. Our literature review reveals that earlier work analyzed either limited options for energy efficiency (largely focussing on estimating their potentials) or analyzed a particular region of the country. Furthermore, given the federal structure of the Indian government, it is important to delineate an institutional structure wherein role and responsibilities of both central and state level institutions are clearly defined. Central level stakeholders should provide the overall framework for implementation of energy efficiency, whereas stakeholders at the state level have an important role in the final implementation of the scheme which may differ depending on local priorities. An obligatory DSM scheme in India may include many mechanisms and measures: Increased electricity efficiency at end users, load shifting, market research and awareness creation can all be eligible measures under such scheme. Such flexibility, combined with the need of future end-use electricity savings and possible financial gains related to the avoiding of peak power purchases, can make an obligatory DSM scheme a valuable tool within India’s electricity sector. The untapped potential for end use electricity savings would offer benefits to India if harnessed efficiently. Although e.g. in Europe, White Certificate schemes and Energy Saving Obligations have proven to be quite successful in achieving cost-effective energy savings at the end use level [12], copying successful elements of these existing schemes to the Indian policy framework would not by definition be successful, as success is to a large degree determined by the existing (policy) context. The aim of this paper is to analyze the applicability of an electricity savings obligation in India and discuss design recommendations for the short and long term. The approach we take for this is argument-based and relies on document review and semistructured interviews. The set-up of the paper is as follows: firstly, we provide a brief overview of the relevant institutional and regulatory context in India (Section 2). Secondly, we investigate lessons learned from (previous) Indian policies on electricity efficiency and identify the barriers for electricity efficiency (Section 3). Section 4 investigates possible interactions between existing schemes and policies and the proposed obligatory DSM scheme. Then, Section 5 identifies considerations and lessons learned based on experiences from the Energy Saving Obligations and White Certificate Schemes of

the UK, France and Italy which could be useful for India. Section 6 provides the results of a stakeholder consultation carried out. Section 7 wraps up. A number of recommendations, based on the performed research, are given. It also lists challenges that an obligatory DSM scheme would face. 2. Institutional and regulatory aspects of the Indian electricity sector A number of acts, policies and institutions outline the (future) activity India undertakes in the area of electricity efficiency. This section provides a brief overview. The Indian electricity distribution, transmission and generation companies were formerly bundled in State Electricity Boards. Most states have now unbundled these activities. Whereas generation facilities are owned at the state level, the central level or by private firms (44.6%, 30.8% and 24.6% of installed capacity respectively1), most transmission and distribution utilities are state, and thus publicly, owned. All states have an electricity regulator, though some are relatively new. These regulators had to be constituted within the states because of central regulations. 2.1. Institutions The Ministry of Power has a number of representing regulatory and implementing bodies operating on certain tasks. For this work, the bodies mentioned in Table 1 are considered most relevant. 2.2. Legislation The central act which regulates issues related to electricity efficiency at the enduser level is the Energy Conservation Act (2001). Some amendments within the Energy Conservation Act, stipulated by the National Mission on Enhanced Energy Efficiency, has initiated some additional policies related to electricity efficiency, see Table 2. 3. Indian policies for electricity efficiency and DSM: existing programmes and barriers 3.1. Review of programmes implemented by the Bureau of Energy Efficiency (BEE) BEE is responsible for a variety of programmes related to energy efficiency. This subsection discusses standards and labelling and DSM projects.

1

As on 31 January 2012 [13].

299

3.1.1. Standards and labelling An energy efficiency standard prescribes minimum energy performance of an energyusing product. An energy efficiency label is an information label attached to a product indicating the product’s energy efficiency rating and enabling consumers to make an informed decision for its purchase. Standards and labelling programmes are either implemented independently or together with other programmes to stimulate the market of more energy efficient products. In India, the 2001 Energy Conservation Act mandates BEE to conduct product testing, establish minimum energy performance standards and implement energy labelling programmes. Subsequently as part of its mandate BEE launched the national energy labelling programme in 2006. The programme targets display of energy performance labels in form of stars wherein the number of stars represent the degree of energy efficiency. Five star labelled products are most efficient while one star being the least. Initially, the energy star-rating scheme was launched on a voluntary basis for refrigerators, tubular fluorescent lamps, room air conditioners and distribution transformers. In January 2010, some of the appliances were brought under mandatory labelling compliance. This included household frost free refrigerators, room air conditioners, tubular fluorescent lamps and distribution transformers. Subsequently, some more appliances which include LPG stoves, general purpose motors, ceiling fans, pump sets, colour televisions, electric water boilers, washing machines and laptops were included in the voluntary labelling programme [15]. The verified energy savings as a result of this are shown in Table 3. The impact of the Indian standard and labelling programme has been quite different for different appliances. For example, for refrigerators results of the standard and labelling programme have been encouraging while in case of air conditioners there has been slow adoption of most efficient product. The main reason for these differences is the price sensitivity in the appliance market. The market for air conditioners is currently dominated by 2e3 star labelled appliances. The price of an air conditioner increases significantly as one moves up the efficiency ladder which is not the case for refrigerators. The higher upfront costs of 4e5 star air conditioners limit their uptake in India. Other reasons for the lower uptake are the limited usage hours of air conditioners (used only in summer time) compared to refrigerators (used throughout the year), and the availability of substitutes for air conditioners (coolers, fans) whereas these lack for refrigerators.

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Table 1 Description of some of the important institutions in the electricity sector of India. Bureau of Energy Efficiency (BEE)

National and State Regulators Central Electricity Regulatory Commission (CERC) State Electricity Regulatory Commissions (SERCs) Forum of Regulators (FOR)

A statutory body responsible for design and coordination of energy conservation measures across different sectors. Roles and responsibilities are described in the Energy Conservation Act. Some major programmes coordinated by the Bureau are the standards and labelling scheme for appliances; the energy conservation building code; DSM projects within agricultural, municipal and residential sectors; development of funding possibilities for Clean Development Mechanism (CDM) projects; industrial energy efficiency guidelines, norms and standards; training and certifying energy managers and auditors. CERC’s goal is to promote competition, transparency and economic efficiency in bulk power markets. Main tasks are to facilitate and advise on electricity trading and transmission aspects and to regulate the tariffs for inter-state transmission and generating companies owned by the central government. The SERCs task is to set tariffs for state owned generation, transmission and distribution (including prices for end-users). They are the regulators enforcing regulation on the licensed utilities within their state. The primary tasks of the FOR are harmonizing regulations in the power sector, providing information and guidelines among the members and evolving measures in accordance with the Electricity Act.

One of the shortcomings of the Indian labelling programme is that, almost seven years have passed from the date of the launch of the programme but for very few products only labelling is made mandatory. Also many appliances are still not covered by the programme leaving a huge untapped efficiency gap. 3.1.2. Agricultural and Lighting DSM projects The Bureau of Energy Efficiency has initiated some Agricultural and Lighting DSM projects. The reader should note that these DSM projects are very different in design from utility based DSM programmes (see Section 3.2), though results may be similar. For the Agricultural DSM programmes a pilot project in Solapur (Maharashtra) has been initiated. The project design was determined in July 2009. As of March 2012, 500 of the planned 2000 pumps have been installed.2 Though other projects are in the pipeline, the pace of implementation seems slow. The design philosophy is that through public private partnerships savings are achieved, i.e. an ESCO (energy service company) implements the measure (being a pump set) and the utility monitors the savings. As these DSM projects are voluntary, there might be lack of awareness among and incentives for farmers who have to work with the pumps. Although these projects offer an ideal learning experience for DSM in India, few lessons learned have been made publicly available. The Lighting DSM programme “Bachat Lamp Yogana” started in 2009 and is still running. This is also a voluntary scheme in which households connected to the grid can swap up to four incandescent of their working (!) light bulbs and pay approximately US$ 0.27 for a Compact Fluorescent Lamp (CFL) [18]. The investor can overcome the cost difference through CDM (clean development

2 Personal communication with energy economist of Bureau of Energy Efficiency (19 March 2012).

mechanism) benefits. The Bureau of Energy Efficiency registers and oversees “Bachat Lamp Yogana” projects and distributes allocated so called CDM Certified Emission Reductions (CERs). Currently, carbon prices are low3 and limit the profitability for investors. Moreover, future demand for Indian CDM projects is uncertain (see also Section 4). Utilities, which have an important supportive role in these Lighting DSM projects, do not receive direct (financial) gains. Tata Power Delhi Distribution Limited e a Delhi distributor e considered their involvement in some of the projects as a good learning experience how to shape customer services and realize customer satisfaction.4 However, without state support or strong internal vision few utilities will spontaneously take up such projects. The CDM pipeline (state of affairs on February 1st, 2012) shows that 17 projects have been registered or included within “Bachat Lamp Yogana”. Twelve of these are within the states of Punjab and Delhi [19]. In December 2011, the Bureau of Energy Efficiency mentioned that 23 million incandescent lamps had been replaced by CFLs so far.5 This is a substantial amount, but not near the envisioned goal of approximately 150 million replacements. 3.2. Utility based DSM programmes Utility based DSM programmes have been given priority within the National Mission on Enhanced Energy Efficiency (NMEEE). The DSM regulations, published by the FOR in 2010, call for efforts from both SERC and distribution utility. These regulations are intended to be a model for a SERC. As the central level does not have the authority to

3 Spot prices for European Union emission Allowances (1 tonne) were below V7 during May 2012 (see www.eex. com). 4 Personal communication with Jayanta Chatterjee, Tata Power Delhi Distribution Limited (6 March 2012). 5 Personal communication with energy economist of Bureau of Energy Efficiency (19 March 2012).

put the obligation directly on state utilities, the states have a lot of freedom in shaping the regulation. The model DSM regulations propose that the role of the SERCs are to set targets and timeframes, choose cost recovery options, issue guidelines on the DSM processes, approve DSM plans and funding and to evaluate proposed monitoring and verification methodologies. The role of the distribution utility is to research the market, their load and economic potential for DSM, to propose DSM plans, to implement measures (once approved) and to monitor and verify the savings resulting from the implemented measures. In Maharashtra, the regulator has stipulated action from distribution utilities on DSM, mainly driven by projected demandsupply gaps. Measures include replacement of street lights, replacement of lighting in the residential sector, replacement of inefficient agricultural pumps, time of day tariffs, reduction of load shedding through power purchase arrangements with captive power plants and the introduction of a surcharge on electricity bills for load management resulting in a load management fund. Most of these measures have been completed and are considered to have achieved their targets (programmes should raise awareness and be cost-effective for end user as well as for utility) [20]. The regulation does not mention an explicit savings target. A brief summary highlighting some utilitybased CFL initiatives in various states along with their respective reported achievement is presented in Table 4. 3.3. Barriers for improving electricity efficiency From analysis of existing DSM initiatives, it is observed that in most of the cases these initiatives remained largely in form of pilot projects and were not scaled up. It is apparent that a number of barriers prevent spontaneous market uptake of cost-effective electricity efficiency measures at end-users in India. Moreover, these schemes have been

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Table 2 Brief description of The Energy Conservation Act, 2001 and National Mission on Enhanced Energy Efficiency of India. The Energy Conservation Act, 2001

This act calls for the creation of a single authority responsible for energy conservation, the Bureau of Energy Efficiency. This act provides the bureau, central and state governments with necessary authority to implement energy efficiency policies. Furthermore, the Energy Conservation Act states that the national government may stipulate norms and standards for specified appliances, industrial processes and building codes. At a state level, the state governments have the power to amend building codes to local conditions, are to create a state agency which is to regulate and enforce the provisions of the act and are to set up an Energy Conservation Fund. National Mission on The NMEEE, one of the eight missions which fall under the Prime Minister’s office ‘National Action Plan on Climate Change’, aims to give energy Enhanced Energy efficiency a thrust. The mission has been institutionalized by the Ministry of Power. The Ministry of Power and Bureau of Energy Efficiency are Efficiency (NMEEE) responsible for implementation of the NMEEE [14]. The Perform, Achieve and Trade (PAT) scheme is considered the flagship of the NMEEE and obliges industrial entities to comply with energy intensity targets within this trading scheme. NMEEE also calls for additional DSM efforts.

largely limited to the lighting segment and the experience has not been utilized to develop programmes for other segments or sectors. Review of the existing DSM schemes also revealed that most of these schemes were not based on proper load research whereas ex-post evaluation of these programmes was largely missing. Often mentioned barriers for Indian enduse efficiency are the pricing of electricity, high initial costs of measures, availability of efficient equipment, uncertain outcome or benefits, insufficient information and limited awareness [4,26]. One of the main reasons for limited DSM initiatives is the lack of motivation on the part of utilities to undertake DSM. This is primarily due to the absence of adequate incentives and no explicit mentioning of implementation of DSM as a binding condition on the utility in either the 2003 Electricity Act or the 2001 Electricity Conservation Act. Other barriers for India identified by Dey [27] include the lack of seriousness and leadership, and easy and cheap access to (alternative) energy sources, including theft and illegal mining. The pricing barrier relates to the tariff structure and policy in India. Tariff setting processes can be politically sensitive and heavily influenced by subsidized groups in electoral districts thwarting any increase of their tariffs. Promises of free electricity for agricultural end-users occur within the political arena [1]. In many states crosssubsidization occurs. In general, the residential and agricultural end-users are the subsidized and heavily subsidized sectors respectively, whereas the industrial and commercial sectors are the subsidizing sectors [28]. Domestic consumers who consume little electricity (and are likely to be below

Table 3 Verified energy savings from BEE’s national energy labelling programme [15e17].

Electricity saved (GWh) Avoided generation (MW) Fuel saving (Mtoe)

2007e08

2008e09

2009e10

1426

2106

4351

260

599

2179

0.48

0.57

1.36

the poverty line) usually get subsidized electricity, whereas domestic consumers who consume more electricity can be subsidizing consumers. Many agricultural end-users do not have meters, so a fixed, load dependent, price is used. This means that the marginal costs for these end users to use more electricity are zero and hence incentives for increasing electricity efficiency are limited or absent. National regulation aims to place the subsidies in an appropriate fashion and calls for tariffs to be within 20% of cost of supply [29]. In practice though, the difference in tariffs are larger and cross-subsidization remains an issue. An overview provided by the FOR shows that almost in all states agricultural consumers pay less than 50% of the approved cost of supply [28]. Absence of metering and subsidized electricity obviously discourages electricity efficiency within subsidized sectors. A deteriorating financial condition is another major reason that inhibits utilities to experiment with DSM and instead focus only on improving the supply system. A report published by the Power Finance Corporation (PFC) shows that during 2009e2010, the utilities incurred combined losses of Rs. 635 billion6 (without accounting for subsidy) [30]. Further, inability of the utility to visualize the benefit of DSM and lack of institutional capacity in designing and implementing DSM are also among the important barriers. 4. Policy interactions of a distributors’ obligation on electricity savings in India This section discusses various policy interactions of an obligatory DSM scheme with standing policies and explores possibilities to account for or benefit from some of these interactions.

Energy Efficiency are very relevant. First of all, the BEE programmes can provide a supportive element in a future obligatory DSM scheme: Though currently not the case, an extensive and accurate standards and labelling programme would be compatible with an obligatory DSM scheme. Annual sales could indicate which electricity efficient appliances have limited sales (compared to less electricity efficient types) and could therefore become eligible in such scheme. Eligibility and additionality7 criteria would need to be reviewed regularly. Related to the BEE-DSM projects there should be clear rules. As most utilities are public utilities it would seem wasteful not to allow such ready-made projects. This is especially the case considering that to date few utilities have implemented such programmes.

4.2. Linkages to the perform achieve and trade (PAT) scheme The first cycle of the PAT scheme commenced on the 1st of April, 2012 and will last three years. The obliged industrial entities within the PAT scheme are to enhance energy efficiency within their (power) plant by complying with energy intensity targets. Overachievement is rewarded with the issuance of tradable Energy Saving Certificates. An obligatory DSM scheme does not need to be related to the PAT scheme directly. Savings achieved in an obligatory DSM scheme would be additional to the savings in the PAT scheme when:

The links of a future obligatory DSM scheme to programmes from the Bureau of

 The obliged parties of the obligatory DSM scheme are not allowed to implement projects within the plants of the obliged parties of the PAT scheme.  Savings in electricity use due to an obligatory DSM scheme do not (indirectly) result in a less stringent cap for the power sector. This is currently the case, as the PAT scheme’s target is expressed in energy intensity terms and not e.g. as a cap on energy use.

6 1 US$ ¼ INR (Rs.) 54.56 (as on December 3, 2012, source: Reserve Bank of India, www.rbi.ord).

7 If an efficiency investment is also made in absence of the obligation, it is not considered additional.

4.1. Linkages to programmes implemented by the Bureau of Energy Efficiency

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Table 4 Details of some lighting DSM schemes introduced by various utilities. Programme

Price of CFL

Payment collection mechanism

Achievement

BELP (BESCOM Electricity Lighting programme) by BESCOM, Karnataka [21] Nashik pilot CFL programme of Maharashtra State Electricity Distribution Company Ltd (MSEDCL), Maharashtra [22,23] Reliance Energy CFL Scheme, Maharashtra [24]

15% less priced as compared to prevailing market price Less priced than prevailing market price

Option of payment through electricity bills of the utility Option of payment through electricity bills of the utility

Peak reduction in the range of 25.70 MW and annual savings close to 37.515 GWh Peak load reduction in the range of 7e9 MW and to an annual energy savings of 12e16 GWh

50% less priced as compared to prevailing market price Free of cost

Upfront payment

Peak load reduction in the range of 10.79 MW and to an annual energy savings close to 16.85 GWh Saving of 200 GWh is estimated to result from the CFLs

Atal Bijli Bachat Yojana, HPSEB, Himachal Pradesh [25]

In case of an explicit linkage between PAT and an obligatory DSM scheme, costs for achieving obliged savings within an obligatory DSM scheme could differ to the ‘original’ compliance costs within the PAT scheme. This could reduce or enlarge demand for the savings within the obligatory DSM scheme or the PAT scheme. Hence, either within the industrial sectors or within the eligible obligatory DSM end use sectors more savings would be achieved. From an economic point of view this will be the most cost-effective option for saving energy, though it might be unattractive from a societal point of view because either end users or industry pays for savings achieved outside their sectors. An initial set up could be two separate schemes with limitations on exchange or limited one way exchanges. Another, perhaps more practical point, is that direct linkages allow possible ‘errors’ within the design of either scheme to spill over. Learning phases would be able to identify such errors and strengthen the independent schemes, before linking them. 4.3. Linkages to CDM funding Considering 1) the administrative hassles and timescales required, 2) the fact that CDM funding always occurs after implementation, 3) the low prices of today and 4) the expected low demand for the future, linkages of an obligatory DSM scheme and CDM funding might be limited. The EU ETS will focus on the Least Developed Countries post 2012 (which India is not). Besides this, CDM projects have to prove additionality, which will make it difficult for obligatory DSM measures to become eligible, as an obligation is part of the scheme set-up. However, CDM funding can be allowed if the scheme is carefully designed. The CDM Executive Board and the Designated Operational Entities (the independent auditors) will test each project on additionality and in the case of a project which is (partly) due to an Indian obligatory DSM scheme the CDM administration will only be satisfied if shown that additional (i.e. more than under the obligation only) savings are to be realized.

2 of 15 W and 2 of 20 W CFL were provided free of cost to each household

There are other options for (international) funding, such as bilateral funding, funding through the Carbon Finance Unit of the World Bank, voluntary carbon markets and/or funding through Nationally Appropriate Mitigation Actions. Indian utilities cannot be expected to search for such funds though. This would require substantial effort and transaction costs. Timescales could also be greater than the timescales of the obligation. At the central level though, these options could be investigated. 4.4. Linkage to Renewable Energy Certificate trading In India distributors are stipulated to purchase a share of their electricity requirement from renewable sources. The obligation is set at a state level and purchase is obligatory at a preferential (higher) tariff. This Renewable Purchase Obligation has been supplemented with a certification and trading option, the Renewable Energy Certificate trading mechanism. Possible certificates of an obligatory DSM scheme could be made fungible with Renewable Energy Certificate through at least one technical conversion as a unit of end use electricity saved corresponds to approximately 2e4 units of primary fossil energy (depending on conversion efficiencies at thermal power plants). However, the real issue is not whether the schemes can be fungible, but whether they should be. Fungibility of certificates increases flexibility and economic efficiency, but the drawback is that one of the schemes would achieve less of the stated goals. The initially cheaper certificates (which are likely to be the energy saving certificates) would limit demand for certification (and hence achievement) of renewable electricity. There are some drawbacks to linking these two schemes. Substantial (policy) effort has been put into the specific goals of generating renewable power and enhancing electricity efficiency. This has resulted in, or is aimed to result in, (sub) benefits such as cheaper supply of technologies, development of knowledge and variety of possibilities to reduce fossil energy consumption. Especially these

side effects and variety of sub benefits would be limited when full linkage of such schemes is allowed. Separate from linkage issues, another indirect effect gains importance if the electricity savings target would be very ambitious. In this case the obligation within an obligatory DSM scheme would limit primary energy consumption, it lowers the absolute value of the Renewable Purchase Obligation as the latter has been set as a percentage of electricity demand. This should be recognized and accounted for once it becomes important. 5. Lessons for India from European obligation schemes This section provides lessons for India drawn from the Energy Saving Obligations and White Certificate Schemes of the UK, France and Italy [31]. There are numerous publications on (international) trading schemes, White Certificate schemes and Energy Saving Obligations, of which some compare the design modalities of several schemes. The Energy Saving Obligations and White Certificate Schemes of the UK, France and Italy are well covered and discussed in literature [32e35]. Though they differ on many aspects, these schemes share in common that an energy related utility has an energy saving obligation. Their targets, and units of trade, are expressed in either energy savings or carbon savings. The three schemes have a focus on residential end-users and are aimed to be simple, yet cost-effective tools. Standardized measures, which attribute measures with exante saving values have been used predominantly as they require little monitoring and verification. 5.1. Lessons for India First of all it should be noted that the European schemes differ substantially from each other but all have been able to work within their settings. Lessons learned in one scheme cannot be blindly copied to another

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scheme, as goals, background and design modalities differ and all influence each other. National policy priorities may be, and indeed are, reflected in the various schemes. Nevertheless, from experiences with the European schemes, the following generic lessons can be drawn for India:  Obligation schemes offer a lot of apparent trade-offs. Environmental effectiveness, for instance, could be increased through more stringent monitoring and verification guidelines, though this will also result in additional burden and costs. Flexibility is important with respect to securing effectiveness of a scheme under changing circumstances, but too many changes can create a lack of transparency and long term security for investors.  Learning is important. Stakeholders need to get used to a new scheme, whereas design and process can be improved in following phases, using the lessons from previous ones.  To be able to draw lessons from the previous phase of the scheme, proper monitoring, that allows for ex-post evaluation of a scheme’s functioning, is crucial.  In addition to this, an obligation scheme requires supporting measures, periodic updating of regulatory and technical issues and flexibility to adapt to new situations. This requires continuous effort. A good design only does not guarantee success.  A healthy balance in the relationship between regulator and obliged entities is needed. Legal backing and penalties can increase compliance, though the regulator should also communicate with, cooperate with and support the obliged entities to create high compliance levels.  The actual cost-effectiveness of a measure should resemble the costeffectiveness this measure has for the obliged entities. The challenge is to achieve this while keeping transaction costs, for the obliged entities, and administrative burden, for the regulator, low. To realize this dual goal well understood measures can be standardized (though experiences have shown that subsidies or skewed saving values can distort this cost-effectiveness).  Trading only makes sense when the costs of trade are smaller than benefits gained through buying certificates. Trading requires a transparent market that can function. This can be supported by introducing standardized measures, a sufficient number of eligible measures and sectors targeted and a sufficient number of eligible and obliged entities.

303

6. Stakeholder consultation For our research we performed a consultation with a number of key Indian stakeholders regarding an obligatory DSM scheme (ABPS Infrastructure, Bureau of Energy Efficiency, Delhi Electricity Regulatory Commission, Shakti Sustainable Energy Foundation, TATA Power Delhi Distribution Limited, Maharashtran Electricity Regulatory Commission, TERI) [31]. Based on this consultation the following specific barriers which could possibly prevent successful implementation of such DSM scheme were identified:  No clarity on outcome, amount of savings and benefits.  Bad financial health distribution utilities and limited investment capabilities.  Small ESCO market.  Limited possibilities to give incentives to mainly public utilities.  Political difficulties related to (rising) tariffs (for cost recovery).  Deficiencies in regulatory and policy framework.  Willingness of end-users to participate; non-awareness of energy use and savings.







From the same stakeholder consultation, we also derived some useful comments, relevant for an obligatory DSM scheme:  An obligation is most important.  A lot depends on perception and willingness of consumers, which is very low in the agricultural sector.  Monitoring and verification (M&V) is critical, though transaction costs should be kept minimal.  Involve manufacturers of energy efficient appliances.



The findings from the stakeholder consultation are used as input for the recommendations for an obligatory DSM scheme in India in Section 7. 7. An obligatory DSM scheme for India: recommendations and proposed steps



In this section we synthesize our findings of chapter 3, 4, 5 and 6 into design recommendations for an obligatory DSM scheme in India. To allow for a transition period we distinguish between short and term recommendations.



7.1. Short term recommendations  Recommendations for the short term include:  Build upon the current DSM regulations implemented in some states, but make

them obligatory. It should be well communicated towards stakeholders (through participation in design discussions) that the long term goal is a national obligation. Express obligations in units of electricity and ensure a minimum target so that every state develops experience and achieves comparable savings. Reflect on successes and failures of the current DSM regulations. Learn from experiences. National level should offer (harmonized) support. Communicate successes and address failures and identified barriers. Additional effort for tariff rationalization: tariff rationalization would give the (former) subsidized end-users more incentives to save electricity, whereas it would make the (former) subsidizing sectors a more attractive option to the distributor utility for implementation of electricity saving measures. Experiment with cost recovery methods, incentive frameworks and third party inclusion. This would provide flexibility and incentives to (private) distribution utilities. Third party inclusion is especially relevant in states in which utilities have limited resources or are not considered the appropriate entities for implementation of electricity saving measures. Evolve standardized measures. Expand (obligatory) standard and labelling scheme and other supportive programmes. Standardized measures will be valuable for inter-state comparisons and possible harmonization. Furthermore, costs will be reduced. Standard measures could differ dependent on external factors (such as climate in case of heating and air conditioning), but issues related to baselines and lifetimes should be determined by a knowledgeable body. This would mean that additionality (besides cost-effectiveness) is more likely to be ensured. The Bureau of Energy Efficiency needs to provide adequate technical guidelines, whereas CERC and SERCs should act as the central and state regulators. The Forum of Regulators can aim for harmonization possibilities and communicate regulations and lessons learned. Initial focus could be on awareness raising and reduction of power capacity needs (lower costs for utility). For the short term, explicit linkages with the Renewable Energy Certificate trading and PAT schemes are not recommended to avoid spill over of design errors. Learning phases would allow identifying such errors and strengthen the DSM

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scheme, before linking it with other schemes.  The actual obligation should be kept within state boundaries: distribution utilities are to implement measures at their own customers, with no initial cross-state exchanges or trading. From an economic point of view this will not be the most cost-effective option for saving electricity, though it might be more attractive from a societal point of view because end users do not have to pay for savings in other states. Preferably, state governments indicate state priorities and provide (financial) support for measures.  CDM and other funding possibilities (such as National Appropriate Mitigation Actions) should be allowed and further investigated. The additionality of CDM in relation to an obligatory DSM scheme should be secured in the regulation. 7.2. Considerations for the long term This section outlines relevant considerations for the long term. The proposed path is to build upon obligatory utility based DSM projects, which, in the long run, can become a national obligatory DSM scheme. Designing such national scheme is a normative process, though the design modalities should be internally consistent.

The linkage of different institutions for implementation of such national scheme, building upon the current institutions in India and their role (see Section 2) is presented in Fig. 1. The key operational elements of an Obligatory DSM scheme are:     

The obligation itself. Eligible measures and entities. Monitoring and verification set up. Cost recovery options. Inter-state trading and interaction with other trading schemes.  Cost-effectiveness of the scheme. These operational elements and the role of associated institutions shown in Fig. 1 are briefly discussed in following sub-sections. 7.2.1. The obligation After initial, state dependent obligations (as recommended for the short term) national regulation, such as an amendment within the Energy Conservation Act, should stipulate action from all states. An increasingly ambitious electricity saving target will ensure utility stays used to a ‘DSM mode’ and will aim for cheapest kWh reductions. 7.2.2. Eligible measures and entities Studies would need to identify eligible measures. Load shifting measures, which cannot be expressed in terms of electricity

saved, would need different approval and cost recovery processes. Eligible measures could not only include cost-effective measures for utilities, but also societal costeffective electricity efficiency measures. This would increase the electricity savings potential. This could gradually occur as more experience with cost recovery and funding has been gained. More research is required for the determination of saving values of standardized measures. Eligible entities will be restricted to the obliged entities, which are the electricity distributors. The regulators have experience and authority to deal with them, and not with other parties. However, the obliged entities should be allowed to make use of third parties and arrangements with third parties to comply. One can think of bulk procurement agreements, ESCO involvement or competitive bidding, agreement with sales points, etc. In other schemes, these third parties have had a substantial role and utilities have made (long term) agreements with them for compliance towards targets. 7.2.3. Monitoring and verification set up For the well understood, standardized measures monitoring and verification can be reduced to (random) checks to control whether measures have been actually installed. For larger and non-standardized measures, with a necessity for monitoring,

Fig. 1. Linkages of different existing institutions and their role for the proposed scheme.

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the Bureau of Energy Efficiency should develop guidelines, which are to be followed. SERCs should be responsible for the verification procedures, though they could make use of external (BEE accredited) verifiers, which have experience through implementation of other schemes such as the PAT scheme. 7.2.4. Cost recovery options Tariffs will have to be increased if the costs of the distribution utility are substantial. Alternatively, other parties can cover, or reduce, costs. Options for costreductions could relate to governmental tax rebates, bulk procurement and agreements with suppliers, international funding or new tariff mechanisms, such as a utility acting as a loan provider and charging the specific consumer a monthly surcharge until this consumer has (partly) paid for distributor’s expenses made related to the electricity saving measure installed. Measures installed in the (heavily) subsidized sectors or measures reducing peak power consumption have the additional benefit that they can be cost-effective for the utility. Cost recovery options need more research. It would be useful if there would be room to experiment with, and learn from, such cost recovery options. In the case of subsidies, overlapping subsidies or tax arrangements might limit the effectiveness of these instruments. In a country as large, heterogeneous and decentralized as India it is recommended that possibly subsidies or other financial incentives should come only from the state government and not from the central government. The electricity tariffs for endusers, rates for the Value Added Tax and specific demand for certain electricity efficiency measures are state dependent and financial incentives should therefore be a state affair. Another point is that many states subsidizes electricity consumption for some end-users. It would seem rational that electricity efficiency would then also, to a degree, be subsidized within these end-use sectors. 7.2.5. Inter-state trading and interactions with other trading schemes A nationwide scheme means that customers from utility A could pay for measures implemented by customers from utility B, hundreds of miles away. Though this can be technically cost-effective, the areas in which the measures are implemented profit from such a framework, while other areas pay the bill. Another drawback is that the local benefits of an obligatory DSM scheme (such as more reliable electricity supply, less peak power purchases for utility, employment) will not arise in some states. These issues are especially relevant in a nation in which many

distribution utilities already have a poor financial situation. Furthermore, such a linkage would require certification of electricity savings and therefore additional efforts from (new) institutions within the obligatory DSM scheme. Moreover, trading will introduce additional transaction costs and administrative burden and would probably be of limited effectiveness due to a small ESCO market, a limited number of measures, and limited experience of regulators with market players and the public nature of utilities. Public utilities are less motivated by economic incentives. Therefore the costeffectiveness of the scheme should not depend on the behaviour of the obliged entities, but, to a large extent, on the costeffectiveness of the eligible measures. 7.2.6. Cost-effectiveness Societal cost-effective measures should be aimed to be equally cost-effective for obliged entities within the obligatory DSM scheme. Standardized measures should be researched and preferably used as soon as possible for well understood measures. Benefits are reduced monitoring and verification costs for utilities, reduced administrative burden for regulators and synchronization of the value of savings. Furthermore, an appropriate entity is determining the saving values, rather than involved utilities or SERCs. The number of standardized savings should not be too small as this may limit the effectiveness and flexibility of the obligation. Even researched cost-effective measures are simply expensive if they do not realize additional savings. The standardized and nonstandardized measures should therefore reflect additional savings. Changing market sales, behaviour and other relevant factors should be well reflected in regularly updated saving values of (standardized) measures to secure additionality. 7.3. Concluding remark The obligatory DSM scheme proposed for India addresses many of the identified barriers related to successful implementation of such scheme. The crux will be the issues related to costs and cost recovery. However, the scheme does not automatically address the (poor) financial situation of the distribution utilities, or the low awareness and incentives end-users and stakeholders have related to electricity efficiency and savings. Moreover, addressing the high initial costs depends on efforts and approvals from states and regulators. Some barriers, such as lack of will and vision for electricity savings at governmental levels, existing tariff structures and slow

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