Minutes of Poli y Roundta le on Effi ient Market for E“Certs in India on 6

th August 2015

at Bureau of Energy Efficiency, New Delhi

The Knowledge Exchange Platform was launched by the Bureau of Energy Efficiency (BEE) in partnership

with Institute for Industrial Productivity (IIP) on 26th February, 2015, for transfer of best practices in

industries covered under the Perform Achieve and Trade (PAT) scheme. As part of its mandate, KEP is

facilitating sustained periodic discussions and dialogue between BEE, Industry and other relevant

stakeholders on key policy issues to seek views and feedback from the industry, raising awareness

regarding policy directives and improving preparedness among the industry to implement energy

efficiency improvement targets and Energy Management Systems.

2. In line with this objective, KEP has i itiated a K o ledge “eries o ke poli a d the ati issues a d linked to them a series of papers on Poli ‘ou d Ta le with a focused group of stakeholders to seek

inputs, comments and feedback on some of the key recommendations made in these papers with the

intent to make them relevant to the tackling the issues and challenges currently facing the industry

sector. The first policy roundtable in this context was organised o Effi ie t Market for E“Certs i I dia on 6

th August 2015 (02.30pm - 05.30 pm) at Bureau of Energy Efficiency, New Delhi.

3. The meeting was attended by 63 participants with representation from key opinion leaders of all 8

PAT sectors (Aluminium, Cement, Chlor-Alkali, Fetilizer, Iron & Steel, Pulp & Paper, Textile and Thermal

Power Stations), relevant Industry associations (Alkali Manufacturers' Association of India, Cement

Ma ufa turers Asso iatio , Fertiliser Asso iatio of I dia, I dian Paper Manufacturers Association,

National Council for Cement and Building Materials and Northern India Textile Research Association,

Confederation of Indian Industry and Federation of Indian Chambers of Commerce and Industry),

organizations associated with Trading mechanism of PAT (Central Electricity Regulatory Commission,

Central Electricity Authority, India Energy Exchange, PXIL, Power System Operation Corporation Ltd. and

Global Energy Pvt. Limited) and Government and Research Organizations (National Productivity Council,

The Energy and Resources Institute, and Petroleum Conservation and Research Association). The list of

the members of the Policy Roundtable is at Annexure-1 and the agenda of the meeting is at Annexure -

2.

4. The roundtable discussion was presided over by Dr. Ajay Mathur, Director General, Bureau of Energy

Efficiency. Dr. Mathur in his opening remark welcomed the participants and requested the participants

to actively participate in the discussion and not just keep it focussed on what is possible within the

existing/ proposed framework of ESCerts, but come out with suggestions and feedback on how the

trading mechanism can be made efficient. He particularly requested the participants to deliberate on

the following three key issues during the round table discussion:

a. Fixation of initial trading price viz. floor price and forbearance price: Forbearance price serves the

purpose of penalty, while floor price has a bearing on ESCerts trading. In this context, BEE has

currently not fixed the floor price with the thinking that the market would takes its own course to

price discovery. Dr. Mathur however, asked the participants to discuss the ways in which the initial

price can be defined.

b. Transaction cost involved in trading: There is a need for ease of operation for all the participants

during the trading of ESCerts, however, there is also a need for proper due diligence process to

make the transaction secure, which may make the process excessively bureaucratic. Also, high

security provisions may increase the transaction cost for the participants involved in buying and

selling. Dr. Mathur requested the participants to discuss the comparative trade-offs involved in

different options and the way forward on it.

c. Management of Registry: Dr. Mathur sought input from the participants on effective strategies for

maintenance of trading account, particularly understanding whether it would be a net seller or

buyer market and the uncertainties under which a market operates.

Dr. Mathur requested the participants to actively contribute to the discussions so that the round table

could come out with robust recommendations for making the ESCerts Trading more efficient.

Dr. Ajay Mathur, Director General, Bureau of Energy Efficiency delivering his opening remarks

5. In his address, Mr. Somnath Bhattacharjee, Director, Institute for Industrial Productivity (IIP),

highlighted the importance of having such interactions and the value of getting input from diverse

stakeholders in evolving innovative solutions on key policy issues like ESCerts trading.

6. The round table discussion was

initiated with a background

presentation by Dr. Murali

Kanakasabai, Adjunct Professor,

Illinois Institute of Technology,

Chicago (USA). Dr Murali has also

developed a paper for the

knowledge series of KEP on

ESCerts Trading that captures the

learnings and experiences from

evolution of similar markets

globally and provides

recommendation on what can be adopted to make ESCerts trading effective.

Dr. Murali Kanakasabai giving his presentation

7. In his presentation, Dr. Murali highlighted the optimum seven stages process that are needed for

establishing an effective ESCerts trading platform drawing lessons from global experience on what has

worked and the key factors for their success particularly highlighting those that can be emulated for

developing a vibrant ESCerts trading platform. The presentation made by Dr. Murali is attached at

Annexure- 3.

8. The background presentation was followed by a presentation by Mr. Girja Shankar, Asst. Energy

Economist, BEE, on the key features of ESCerts trading scheme and the progress made so far, which

included Status of ESCerts Exchange Regulations, Roles and Responsibilities of entities involved,

Formulation of Business Procedures for ESCerts exchange on Power Exchanges and Up-gradation of

PATNet Portal including M & V process. Mr. Shankar also shared the contents of Draft ESCerts Exchange

Regulations and described the roles of all stake holders. He informed that the Central Electricity

Regulatory Commission will be the market Regulator and POSOCO as Registry of ESCerts. He also

explained the Process flow for Issuance of ESCerts and its Trading and the Adjudication Process. The

presentation made by Mr. Shankar is attached at Annexure- 4.

9. After the two background presentations, the house was open for discussion, where the participants

discussed the key issues highlighted by Dr. Mathur in his opening address and the suggestions made in

the background presentations. The summary of the key issues discussed by the participants are as

follows:

a) Participants expressed mixed reactions on the issue of the floor and forbearance price. Some

participants were in the favour of fixation of floor price and forbearance price as they felt that

leaving it open to the market, price may bring in uncertainties whereas others felt that fixing the

floor price will restrict the market to the lowest price. Some of the participants were of the opinion

that experiences of Renewable Energy Certificate (REC) trading shows that price fixation mechanism

has not been very effective in creating an effective market for RECs as almost 1.50 Cr RECs are

available for trading whereas only 1 to2% are being actually traded. It was suggested by BEE that the

DCs and industry Association may like to provide their feedback on the floor price of ESCerts to BEE

so that it can be taken up for consideration under the Next PAT Cycle.

b) It was suggested that, Government may consider creating a green fund which could be used to buy a

certain percentage of ESCerts from the industry with a purpose of 1) Regulating the market price for

ESCerts by ensuring liquidity/ demand in the market and 2) Create a mechanism to fund energy

efficiency initiatives within industries. It was agreed that, a draft proposal along these lines may be

developed jointly by Industry and BEE for consideration in the next PAT cycle.

c) Participants felt there was a need for capacity building on various aspects of ESCerts Trading like

management of registry, inter-sectoral trading, technical terminologies like floor price and

forbearance price for which BEE should organize regional interactive workshops. Further it was also

suggested that BEE should develop a FAQ on key queries being raised on ESCerts trading mechanism

by DCs and also consider creating a help-line to assist DCs particularly in the initial stages of setting

up the trading mechanism.

d) On the issue of frequency of trading, it was informed that trading of ESCerts may happen on weekly

basis and after the compliance period, it can be a monthly trade market.

e) Participants also raised the issue of management of ESCerts belonging to different DCs of one

company. They felt that such companies should be allowed to manage ESCerts of their DCs together

with a routing through Registry.

f) Currently there is a limit to the number of ESCerts that a DC can buy which has been pecked at their

target level which means that a DC cannot buy ESCerts more than what they need to achieve their

targets. They felt that this would constrict the market and would not help in creating liquidity in the

ESCerts Market. Necessary amendments in PAT Rules GSR 269 (E) may be incorporated.

g) Participants also raised the issue with regard to accounting of the sale-deed of ESCerts and the

manner in which it would get reflected in their Financial Report and type of taxes that it may be

subjected to. It was suggested that Government could consider providing fiscal incentives to offset

such tax burden on DCs. BEE suggested that they may take up this matter with Ministry of Power in

case the DCs and Industry Associations put up a proposal to them addressing the nature of tax

burden and the fiscal incentives they may need to offset the same.

10. Based on the discussions, feedback and inputs from the participants, the recommendations made by

the expert/ resource person in the background paper developed on making ESCerts Trading efficient

were reviewed and accordingly the following suggestions were made for consideration of BEE in the

current and future cycles of PAT.

1. Standardization of ESCerts: An enabling condition for an efficient ESCert market would require that

tradeable instrument is clearly defined and standardized1. As ESCert already fits well with the

requirement of being a standardized compliance instrument with various elements of efficient

standardization already considered in current ESCert design such as standard grade metrics,

centralized issuance authority and delivery mechanism. A further definition on the specific class of

tradable instruments (commodity, equity or new class) would provide clarity for product innovation,

participants and exchange venue in future cycles of PAT.

2. Delivery Mechanism for ESCerts: A delivery mechanism in the form of a single centralized electronic

registry/depository is vital for the success of the program, which has already been established by

BEE in the form of centralized National ESCert electronic registry in which the following minimum

features are proposed for the current and future cycle of PAT:

a. Secure internet-based access by participants to their own accounts

b. ESCerts must be tagged with unique, individualized serial numbers according to International

standards

c. Direct interface with trading platform and clearing mechanism

d. Enable 24/7 views and transfers between accounts and account management

1 Standardization refers to specifying characteristics of the tradable instrument, allowing seller and buyers to know

with clarity what is being sold and bought. Standardization allows market participants not to worry about grade

and focus on price negotiation, thereby reducing transaction costs.

e. Expandable to include other energy efficiency attributes

In addition to above access, tracking and security features, BEE may consider 1) allowing diverse

participants to maintain accounts, 2) DC s to o su -accounts for better internal management

etc. as added features.

3. Trading Mechanism: Provision of flexibility mechanism in ESCert trading is recommended. PAT Rules

2012 already allow for Escerts from cycle I to be banked for 2nd

cycle. In addition, BEE may consider

other market flexibility mechanism including netting, and bubble provisions to be included in ESCert

trading framework. The banking provision allows DCs flexibility across time to manage their PAT

compliance. Netting and bubbles would allow DCs the flexibility to manage their PAT compliance

goals across sources and production units. This recommendation suggests that compliance be

o sidered for DC s as o e legal e tit , but this needs to be seen in terms of provisions of EC Act and

PAT Rules

4. Advance issuance of ESCerts: Under PAT Rules 2012 there is a provision to allocate future stream of

ESCerts in advance, following the general practice in similar markets. Theoretically, once the energy

baseline and energy saving targets are established, program guidelines can allow for allocation of

sufficient ESCerts equivalent to the energy savings targets. This allows designated consumers to plan

inter temporally their ESCert balances, improve market liquidity and provide price discovery over

compliance periods. Allowing for ESCert allocation in advance can also allow designated consumers

to source capital for energy saving improvements through the sale of future ESCerts. Potential

reason for not being adopted by DC may have been lack of efficient market and price discovery. As

PAT o es i to its e t phase ith a a ti e arket, DC s a ie this pro isio differently.

5. Market sequencing: Optimal market sequence for initiating an ESCert market could first involve an

exchange traded spot market, followed by a derivatives market, if required. It is proposed that BEE

may consider establishing a full-fledged daily spot market through regulated exchanges in India

(subject to provisions of PAT Rules and trading volumes). While it is expected that a liquid and

mature daily spot market will take time to evolve, building the market under that framework would

have several advantages. A fully fledged daily spot market provides for continuous pricing of EScerts

allo i g DC s a d others to etter a age the asset/lia ilit aspe t of the E“Cert ala es. I conjunction with a live daily market for ESCerts, periodic auctions at least prior to an active market

emerging could be very useful. These periodic auctions (monthly or quarterly) would help in

ensuring deliverable supply and price discovery to designated consumers. A descending price Dutch

auction method has been employed in other similar markets.

6. Participation of other Actors: Although trading of Escerts is between DCs, participation from non-

compliance and financial participants, including proprietary traders, banks, hedge funds, etc. can

foster liquidity in the ESCert marketplace and price discovery. Diverse set of market participants

take on specific roles and risks and hence important for market efficiency. This can also lead to

assuring capital flows to the most cost effective energy saving solutions under PAT (This may need

amendment in PAT Rules).

7. Product innovation by exchanges: At present the trading platform is envisaged to occur through

regulated Power exchanges. These exchanges should be given the option of carrying out Contract

design and product innovation for ESCert spot, futures and options contracts in case they wish to list

ESCert products. This will help in adding to the maturity and efficiency of the market. Competition

and innovation by individual Exchanges through such processes would also accrue benefits to entire

market place and address the differentiated needs of market participants.

8. Taxation and Accounting Issues: In order to fully integrate sound and efficient management of

ESCert into the operations of designated consumers and for it to be treated as full-fledged financial

asset, appropriate accounting principles and tax issues regarding ESCert trading must be resolved.

BEE may consider coordinating this function with appropriate government agencies and

independent tax experts to address these issues for industry.

Shri K. K. Chakarvarti concluded the meeting with a vote of thanks to Chair and all the members who

participated and requested the DCs and Industry Associations to come up with relevant proposals and

suggestions to enable BEE to take up their issues and concerns with relevant agencies/ authorities which

would also help in making ESCerts Trading Mechanism more effective.

-----------

ANNEXURE 1

Participants of 1st Policy Roundtable on Effi ient Market for E“Certs In India 6th August 2015 (2.30pm - 5.30 pm) at Bureau of Energy Efficiency, 4th Floor, Sewa Bhawan,

R K Puram Sector 1, New Delhi -110066

S. No. Name Designation Organization

1. Dr. Ajay Mathur Director General and

Chairperson Bureau of Energy Efficiency

2. Shri K. K.

Chakarvarti Expert Consultant Bureau of Energy Efficiency

3. Shri S. K. Khandare Energy Economist Bureau of Energy Efficiency

4. Shri G. Shankar Asst. Energy Economist Bureau of Energy Efficiency

5. Shri Somnath

Bhattacharjee Director Institute for Industrial Productivity, India

6. Ms. Ritu Bharadwaj Senior Program Manager Institute for Industrial Productivity, India

7. Dr. Murali

Kanakasabai Adjunct Professor Illinois Institute of Technology, Chicago

8. Shri Biswajit Dhar Sr. Vice President Ultratech Cement Ltd

9. Dr. S. Nand Dy. Director General Fertiliser Association of India

10. Shri Pandurang S.

Jalkote Asst. Vice President Dahanu Thermal Power Station

11. Ms. Adritha

Subbiah

Policy Advisor, Low Carbon

Growth British High Commission

12. Shri Udit Mathur Senior Policy Advisor British High Commission

13. Shri Vikas Sharma Principal Scientific Officer Northern India Textile Research

Association

14. Shri Debasish

Ghosh Hindalco - Technology

15. Shri Vivek K. Singh AVP and Functional Head -

Engineering Grasim Bhiwani Textiles Limited

S. No. Name Designation Organization

16. Shri R. K. Upadhyay DGM Power Plant Grasim Bhiwani Textiles Limited

17. Shri Sanjay Jain Asstt. Executive Director Dalmia cement (Bharat) Limited

18. Shri B. P. Bhandary Director & Group Head (EM) National Productivity Council

19. Shri R. Bhargava Vice President Shree Cement Limited

20. Shri Sanjay Singh Energy Manager Shree Cement Limited

21. Shri Abhijit Pati Chief Executive Officer Vedanta Aluminium Business

22. Shri Niranjan Gupta CFO Vedanta Group

23. Shri Deepak Prasad Vice President BALCO

24. Shri B. K. Sharma Chief Engineer Central Electricity Authority

25. Shri Govind Kumar

Mishra

Superintending Engineer &

Energy Manager Anpara Thermal Power Station

26. Shri K. S.

Venkatagiri Deputy Executive Director Confederation of Indian Industry (CII)

27. Shri Rohit Pandit Secretary General Indian Paper Manufacturers Association

(IPMA)

28. Shri S. S. Sodhi Dy. General Manager (Elect.

& Instt.)

Ballarpur Industries Ltd;Unit: Shree

Gopal -BILT

29. Shri R. K. Wadhwa Dy. Manager (Electrical) Ballarpur Industries Ltd;Unit: Shree

Gopal -BILT

30. Shri Jayant Joshi General Manager (Engg) Raymond Limited

31. Shri Dominic

Fernandes General Manager ACC Limited

32. Shri Mohan Patil Director Federation of Indian Chambers of

Commerce & Industry

33. Shri M N Girish Additional Director Federation of Indian Chambers of

Commerce & Industry

S. No. Name Designation Organization

34. Shri Rajiv Kumar

Chittrey

Senior Manager - Fuel

Management Department M/s. Tata Steel Limited

35. Ms. Harjeet Kaur

Anand Jt. Director (Tech.)

Alkali Manufacturers' Association of

India

36. Shri Vibhav Nuwal Director REConnect Energy Solutions Pvt. Limited

37. Shri Anuj Hemant

Xess

Manager-Consulting &

Operations REConnect Energy Solutions Pvt Limited

38. Shri Ashutosh

Saxena Joint Director

National Council for Cement and

Building Materials

39. Shri Akhilesh

Awasthy Head, Market operations IEX

40. Ms. Rashmi Nair Deputy Chief (Regulatory

affairs) CERC

41. Shri N A

Viswanathan Secretary General

Cement Manufacturer Association

(CMA)

42. Dr. S.K. Handoo Advisor (Technical) Cement Manufacturer Association

(CMA)

43. Shri Vikas Kumar Deputy Manager Indo Gulf Fertilizers

44. Shri R. K

Manchanda Chief Of Maintenance TATA Sponge Iron Limited

45. Shri A. K. Chauhan Dy. Genaral Manager

(Technical Services) KRIBHCO Shyam Fertilizers Limited

46. Shri S. R. Mohanty AGM(Elect) NALCO, Damanjodi

47. Shri B. P. Naik Dy. GM(Finance), Corp. NALCO

48. Shri S. K. Jena AGM(Mech), Smelter NALCO

49. Shri B. Kar AGM(TQM), Corp. NALCO

50. Shri Girish Sethi

Director and Senior Fellow,

Industrial Energy Efficiency

Division

The Energy and Resources Institute(TERI)

51. Shri Niraj Kumar VP - Business Development Global Energy Pvt. Ltd.

S. No. Name Designation Organization

52. Ms. Minaxi Garg DGM (NLDC) Power System Operation Corporation

Ltd.(POSOCO)

53. Shri Amit Mursania Sr. Officer Petroleum Conservation & Research

Association

54. Shri D. Kumar Director & HOD( Industry &

IS)

Petroleum Conservation & Research

Association

55. Shri K M Tandon SFC , Kota

56. Shri Victor Vanya Assistant Manager IEX

57. Shri K K Roy

Choudhary Technical Officer Cement Ma ufa turers Asso iatio

58. Shri Akshay

Dhawan Assistant Manager PXIL

59. Shri Alok Mittal Deputy Manager, EM Group National Productivity Council

60. Shri Nayyara

Hossain Executive Vice President Global Energy Private Limited, New Delhi

61. Shri Shailendra

Verma

Power System Operation Corporation

Ltd.(POSOCO)

62. Shri Ullas Kumar

Mishra

Sr. Manager, Corporate

Affairs DCW Limited

63. Ms. Vinni Program Associate Knowledge Exchange Platform

Secretariat

ANNEXURE 2

1st

POLICY ROUNDTABLE ON EFFICIENT MARKET FOR E“CERT“ IN INDIA

6th

August 2015 (2.30pm - 5.30 pm) at Bureau of Energy Efficiency, 4th

Floor, Sewa Bhawan,

R K Puram Sector 1, New Delhi -110066

PROGRAM AGENDA

2.30pm – 2.45pm

2.45pm – 3.00 pm

Opening Remarks by Dr. Ajay Mathur, Director General, Bureau of Energy

Efficiency

Introduction of KEP by Shri Somnath Bhattacharjee, Director, Institute for

Industrial Productivity (IIP) India

3.00pm - 3.45pm

3.45pm - 4.15pm

4.15pm - 5.15pm

5.15pm - 5.30pm

Background Presentation on Effi ie t arket for E“Certs i I dia

Prese tatio o E“Certs Tradi g BEE

Open Discussion

Concluding Remarks by Shri K. K. Chakarvarti, Expert Consultant, Bureau of

Energy Efficiency

ANNEXURE 3

Presentation made by Dr. Murali Kanakasaba, Adjunct Professor, Illinois Institute of Technology,

Chicago

ANNEXURE 4

Presesentation made by Mr. Girja Shankar, Asst. Energy Economist, Bureau of Energy Efficiency