By Manish Dabkara, Chairman and Managing Director, EKI Energy Services Limited
The central government’s revolutionary proposal to establish a domestic credits market shows that India is accelerating its climate action to achieve its net zero target by 2070. The recent amendment to the Energy Conservation Act passed by the Lok Sabha is a move worth applauding. The development of a national emissions trading scheme (ETS) will enable India to strengthen its position in the global climate action scenario while facilitating the transition to a more energy efficient economy.
Before we dig deep into the Energy Conservation Act, its key provisions and the recently proposed amendments, let’s begin with the emergence of energy efficiency in India and the key developments over time.
Post-Independence surge in energy demand
At a time when we are all faced with the extreme impacts of climate change acÂross the world and global climate action is strengthening every passing day, unÂderstanding the journey of energy efficiency in India becomes crucial.
The inception of the concept of energy efficiency in India dates back to the creation of the Electricity (Supply) Act of 1948 to aid the coordinated developmeÂnt of electricity, which was identified as a high priority sector for post-war reÂconÂstruction. Thereafter, integrated enÂergy planning was recognised as an important aspect of development planning in the early 1960s, but the focus on deÂmaÂnd-side management (DSM) was limited. The Energy Survey of India CommiÂttee (ESIC) was formed in 1963 to study the demand and supply of energy.
The Gulf oil shock and its impact on India
Energy continued to become more vital for the country as industrial production grew over the years. But then came the Gulf oil shock in 1973, a turning point not only for India but for the world. The crisis began when the Organization of Petroleum Exporting Countries (OPEC) announced an oil embargo in response to the nations extending support to Israel in the Yom Kippur war. It led to a sharp rise in the price of petroleum products, which made the situation difficult for oil importing developing countries such as India.
The second oil shock worsened the situation. The Iranian revolution in 1979 affected Iran’s oil production and Saudi Arabia cut down the production, which further increased oil prices.
The oil embargo and its aftermath had disastrous consequences for India as the country became one of the major losers from the ensuing oil shock. As the nation was completely dependent on imports of oil, the bill increased by significant margins; this created immense pressure on the already overstrained balance of payments. Additionally, food production dropped because of rising oil prices and a lack of petroleum-based fertilisers.
Aware of the global market conditions, the Fifth Five Year Plan had already predicted prices rising to $4.75 a barrel by 1978. The plan, therefore, had provisions to incur increased expenses on oil imÂports over the next five years. HowÂever, another shock came when oil prices climbed to more than $8 a barrel.
The next feasible solution was to inÂcrease the prices of petroleum products, which caused a significant dip in demaÂnd for petrol with imports dropping alongside. The economic impact was bad including inflation and unemployÂmeÂnt which was also fuelled by the Indo-Pak war in 1971, two successive failed monsoons in 1972 and 1973, and other factors ultimately leading to an emergency situation in 1975. One significant contribution of the oil shock to the Indian economy was a rise in its coal production as the country took to mining its huge reserves.
The birth of the Energy Conservation Act, 2001
The first oil shock made the countries, especially developing ones, face the distressing truth of the vulnerability in oil supply. As a result, the significance and need for energy efficiency and conservation measures increased. This resulted in the enactment of the Energy ConserÂvation Act, 2001 to encourage energy efficiency and discourage wasteful use of energy.
The Energy Conservation Act, 2001 is largely driven by the recommendations of an expert committee. The Energy ConÂservation (EC) Bill, 2000 was introduced in the Lok Sabha in February 2000. The standing committee on energy took into consideration the opinions and views of representatives of institutions, industry, the Ministry of Power and others, and suÂbmitted its recommendations in a report in November 2000. The EC Bill that incorporated all the recommendations of the committee on energy was later passed by both the houses and the President in September 2001 and finally, the Energy ConservaÂtion Act, 2001 came into force on March 1, 2002.
The act provided for the establishment of the Bureau of Energy Efficiency (BEE) by merging the erstwhile Energy ManaÂgement Centre. The bureau was given the responsibility to spearhead the imÂproÂvement of energy efficiency of the economy through various promotional and regulatory instruments. AdditionaÂlly, it was tasked to reduce energy intensity in the Indian economy through the adoption of a result-oriented approach, implementation of policies and programmes related to energy and by coordinating the implementation of energy conservation activities, etc. Another imÂportant feature of the act was standards and labelling (S&L), which has been identified as a key activity for imÂpÂroÂvement in energy efficiency. The act also recommended setting up a central energy conservation fund to develop a delivery mechanism for the large-scale adoption of energy efficiency services.
PAT and trading of ESCerts
The Perform, Achieve and Trade (PAT) scheme is a flagship programme of the BEE under the National Mission for EnÂhancÂed Energy Efficiency, one of the eight national missions under the NaÂtioÂnal Action Plan on Climate Change. Under the PAT scheme, the government targets to accelerate energy efficiency initiatives across industries. The energy savings are converted into tradable instruments called energy saving certificates (ESCerts), which are traded at power exchanges.
PAT cycle I commenced on April 1, 2012 covering 478 industrial units from eight sectors. The ongoing PAT cycle VI (2020-21-2022-23) commenced with effect from April 1, 2020. The BEE projects toÂtal energy savings of about 26 million tonnes of oil equivalent (mtoe) and avoiÂdance of about 70 million tonnes of CO2 by March 2023.
Energy Conservation (Amendment) Bill, 2022
The bill to amend the Energy ConservaÂtion Act, 2001 and to promote energy efÂfiÂciency and conservation was introduced in the Lok Sabha on August 3, 2022 and passed in the lower house on August 8, 2022. The key proposals of the bill are the obligation to use non-fossil energy sources, setting up of a carbon trading market scheme, an energy conservation code for residential buildings, standards for vehicles and vessels, defining the regulatory powers of state electricity regulatory commissions, and changes in the composition of the governing council of the BEE, among other important measures.
The government proposal has come at the right time as global climate acÂtiÂon is accelerating at a fast pace and coÂunÂtÂries, industries and organisations across the globe are adopting measures to achiÂeÂve a net zero future. It will revolutionise the Indian carbon credit market by unloÂcking new market potentials and opening up new opportunities for Indian sellers of carbon credits who will now have five different markets to choose from:
- Domestic compliance carbon markets
- Domestic voluntary carbon markets
- Article 6.2 of the Paris Agreement Carbon Markets
- Article 6.4 of the Paris Agreement Carbon Markets
- International voluntary carbon markets
Once the amendments get incorporated into the existing act post the approvals from the Rajya Sabha and the President in the upcoming winter session, ESCerts and renewable energy certificates will be merged into one single commodity that will be called carbon credits certificates.
Carbon credits form the backbone of greenhouse gas abatement efforts to achieve net zero emissions. A robust and effective carbon credits market would maÂke it easier for companies to locate trustworthy sources of carbon credits, benefiting both buyers and sellers and ultimately, supporting the progress towards a low-carbon future. The carbon credits market is a valuable tool and a long-term solution for hard-to-abate emissions and sectors.
HowÂevÂer, there is a misconception amÂoÂng the public that the proposed amÂendments seek to completely ban the export of carbon credits from India to international markets. This is not true as it will not have any impact on the export of credits other than the proposed cap and trade national compliance carbon market targeted to India’s nationally determined contribution (NDC) commitment under the Paris Agreement, till India will be able to meet its NDC commitment of 45 per cent emissions intensity reduction of GDP by 2030, from the base year 2005. The present market, which is primarily a voluntary carbon market, doesn’t have any direct impact; on the contrary, it will encourage more participation from stakeholders as well as strengthen the voluntary markets too.
A step closer to net zero by 2070
It’s great to see how India is inching closer to its climate goals and taking actions to fulfil its commitment to achieving net zero by 2070 and its fivefold strategy, PaÂnchamitra. As the world comes toÂgether to stride faster towards restoring the planet, India is fast-tracking its journey too. The ongoing developments in India’s energy transition will strongly position the nation in the realm of global climate action.