Demand Side Management (DSM) and energy efficiency projects are contingent upon monitored and verified energy savings. The difficulties and uncertainties associated with measuring energy savings make it an intangible asset, making project investments difficult. For electricity utilities, there is an added conflict, as DSM and energy efficiency come directly in conflict with the goal of increase in revenues.

The issue gets further vexed in the country, given that the distribution business is almost entirely owned and managed by public utilities which are sticky in responding to incentive structures.

SAVINGS IN ELECTRICITY

As per several estimates, DSM interventions could result in reducing consumption by 15 per cent, which is more than the demand-supply gap of around 10-12 per cent . In terms of savings on electricity procurement, on electricity generation of approximately 800 billion kwh, savings of 120 billion kwh is theoretically possible. Using a conservative rate of power purchase by utilities of Rs 2.50/kwh, the reduction in cost of procurement could be a staggering Rs 30,000 crore every year.

This could be a game changer for the distribution sector that is beset with annual losses of more than Rs 50,000 crore. The financial unviability of the distribution sector is threatening investment returns on existing assets, while dampening the investment climate for the new ones. Utilities could improve their financial health by investing in DSM, given that the investment requirements for DSM are a fraction of investments in fresh capacity for similar outcomes (See table) .

In order to harness this potential, a strategic action plan needs to be laid down at the national level. The plan must address issues related to enhancing capacity of utilities, encouraging supply chain, setting up robust regulatory mechanisms, and innovative financing instruments for DSM. The action plan must also mitigate the following risks associated with DSM to prevent market failures:

Operational risk pertaining to the risk associated with new energy efficient technologies by information dissemination and capacity enhancement;

Project Implementation risk to achieve and maintain desired level of energy savings during the life cycle of the project;

Regulatory and institutional risk arising out of inadequate capacity in the facility owners, financial institutions as well as service providers towards energy efficiency. Regulatory and policy certainty helps reduce risk perception;

Financial risk due to tariff, interest rate movements, as well as counterparty risk (the risk that the borrower won't be able to repay the banker).

UTILITY AND MARKET

Many countries have structured policy and regulatory responses to overcome similar barriers, which could come in handy for Indian policymakers to accelerate the off-take of DSM measures. These responses have not only mainstreamed DSM and energy efficiency in the energy markets, but have also enabled seamless flow of commercial finance to sustain such investment. A couple of possible measures that hold promise for India are:

Utility-based financing of DSM, and

Market-based instruments for DSM

Utility-based financing mechanism is based on the principle of sharing of economic benefits by utility with DSM participants. Implementation of DSM inevitably results in reduction of peak procurement by utility and commensurate monetary savings. Such monetary benefits could be shared with DSM scheme participants as incentives or project enablers. Regulatory oversight for such actions is mandatory under the present legal framework of electricity business in India. All investments and expenditures of utilities need to be approved by the Regulatory Commission. Regulators need to allow the DSM investment as a pass through in tariff, and bless the benefit-sharing approach. Some utilities have implemented such schemes where 2 compact fluorescent lamps were sold to consumers at the cost of one (eg. Delhi and Haryana). Himachal Pradesh implemented a scheme where it provided 4 compact fluorescent lamps free to the households as replacements of incandescent bulbs.

Another model is to create a DSM investment fund and leverage it for risk guarantees, payment security cover, or last-mile equity support for private investments. DSM investments, being contingent upon future energy savings, find it hard to avail commercial lending at attractive rates. Several banks and financial institutions either treat this as unsecured lending (thereby limiting their exposure in compliance with the regulatory requirements) and/or charge a high risk premium, making many projects financially unviable. The DSM fund could provide the necessary risk security cover by way of partial guarantees, payment security and/or last-mile equity, to enable seamless flow of commercial finance at reasonable rates. The fund could be recouped from the return of investments, given that the payback period of most DSM investments is 3-5 years. This will enable the DSM fund to sustain private investments during a long period of time, with relatively small corpus.

Another example is implementation of a market-based instrument for utility DSM, which has been successfully implemented in many countries. The White Certificate scheme of France (and some other European countries) is one of the successful examples of such an instrument that has encouraged private investment. In the White Certificate (WC) scheme, the suppliers of electricity, natural gas, LPG, oil (now including automotive fuels), and heat (district heating) are required to undertake energy efficiency measures and achieve a pre-defined percentage reduction in their annual energy delivery.

WHITE CERTIFICATE

Achievement of targets entitles them for a WC, which is a unique and tradable commodity carrying a property right on the amount of energy savings achieved, and guaranteeing that the benefit of these savings hasn't been accounted for elsewhere. The scheme enables trading of WCs by allowing purchase of WCs by those energy suppliers who are unable to meet the mandated target for energy consumption reduction. Such suppliers could either buy WCs or pay a penalty for ensuring compliance.

The flexibility and tradability of WC guarantees achievement of the overall energy saving target set at the national level, at the most economical cost.

The successful implementation of the Renewable Energy Certificates (RECs) in India has demonstrated the effectiveness of market-based instruments, as well as the appetite of the market. WCs could follow a similar approach with the State Electricity Regulatory Commissions, mandating the utilities to achieve targeted energy savings through DSM. It could allow the investments in DSM as pass through in tariff. Penalties for non-achievement of the DSM target need to be laid down.

For the exercise to be implemented in a uniform manner throughout the country, the Forum of Regulators could play the coordination role at the national level, as in the manner of RECs. Specialised agencies like Bureau of Energy Efficiency (BEE) could support the state regulators and utilities to prepare DSM projects and programmes and implement them. Fungibility of WCs with RECs or the upcoming Energy Savings Certificates (ESCerts) for large industries could be worked out. Innovative financial instruments could unlock the DSM and energy efficiency market, estimated by BEE to be approximately Rs 70,000 crore. It could encourage private sector players to usher in the latest technologies in smart meters, smart grids and some other energy-efficient technologies.

(The author is Programme Officer, OzoneAction Programme, United Nations Environment Programme, Bangkok. )

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