Status of PAT trading
The Perform, Achieve and Trade (PAT) scheme was introduced in India in 2012 as a market-based mechanism to promote energy efficiency in energy-intensive sectors. Under the scheme, Designated Consumers (DCs) are assigned energy-saving targets, and they are required to achieve these targets or face penalties. One of the key features of the scheme is the trading of Energy Saving Certificates (ESCert), which are issued to DCs that exceed their targets.
However, the current status of ESCert trading in India is a cause for concern. As per the present rules, ESCerts of PAT cycle 1, if not traded during upcoming PAT cycle 2 trading, will expire after PAT cycle 2 compliance period. This expected desperation to sell a commodity, which is set to expire, may result in lower Market Clearing Price (MCP) for ESCerts in terminal trading sessions. This will lead to reduced profitability for DCs and ultimately, deter investments in energy efficiency technologies.
At the end of the compliance period of PAT Cycle 2, surplus ESCerts are expected to be 4.57 million ESCerts, which is 80% of the total ESCerts issued during PAT cycle 2. With the current rules, at the end of PAT cycle 3 compliance period, approximately 4 million ESCerts may retire without being traded. This volume may increase if compliance is low in the DISCOM sector, similar to the case observed in the Renewable Energy Certificate (REC) market for Renewable Purchase Obligation (RPO) compliance.
The surplus of ESCerts in the market is a result of muted demand and increased supply. The demand for ESCerts remained muted during the first two months of trading in PAT Cycle 1 and picked up only during the last month of compliance. In the 17 trading sessions that took place on every Tuesday during PAT Cycle 1, the MCP varied from INR 200 to INR 1200, with a weighted average MCP of INR 768.50, which is about 7.3% of the price of one metric tonne of oil equivalent (or the penalty for non-compliance). At the end of the PAT cycle 1, there was a surplus of 2.53 million ESCerts, which are banked for the next PAT cycle. However, the banked ESCerts of PAT cycle 1 are expected to expire after the completion of the compliance of PAT cycle 2.
To address the supply-demand gap, it may be useful to explore ways to increase the demand for ESCerts. One approach could be to broaden the scope of the PAT scheme to include other sectors or to set more ambitious energy-saving targets for DCs. Another approach could be to create a market for voluntary ESCert trading, which would allow entities that have not been assigned energy-saving targets to purchase ESCerts and use them to offset their carbon emissions.
In conclusion, while the PAT scheme has been successful in reducing emissions in the Indian economy, the surplus of ESCerts in the market is a cause for concern. The current rules, which lead to ESCerts expiring without being traded, are a major contributor to this surplus. Addressing this issue will require a multi-pronged approach that includes increasing the demand for ESCerts, exploring new sectors to bring under the PAT scheme, and creating a market for voluntary ESCert trading.