ESCerts: Comprehensive Insight into Issuance, Stakeholders, and Trading Dynamics

The energy landscape is rapidly evolving with ESCerts (Energy Saving Certificates) becoming an integral part of energy-saving initiatives. ESCerts play a pivotal role in incentivizing energy efficiency and carbon emission reductions.

1. ESCerts Issuance and Relevance

The Mechanism of Issuance
The Central Government undertakes the issuance of ESCerts. When a Designated Consumer (DC) overachieves the notified SEC targets within the compliance year, ESCerts are issued for the differential quantity between the set target and the actual achieved SEC.

In contrast, DCs that have an SEC higher than the notified target in the compliance year are instructed to purchase ESCerts equivalent to the shortfall quantum.

2. Key Stakeholders in the PAT Scheme

Central Role of Designated Consumers (DCs)
DCs are industrial companies encapsulated by the PAT scheme. Their performance, whether surpassing or falling short of the notified SEC targets, dictates the issuance and purchase dynamics of ESCerts.

CERC’s Oversight
The Central Electricity Regulatory Commission (CERC) is pivotal in ensuring fair practices and transparent operations within the ESCerts trading ecosystem.

Indian Energy Exchanges’ Role in ESCerts Trading
Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL) have emerged as critical facilitators for ESCerts trading. They offer robust platforms ensuring smooth and transparent trading procedures.

3. ESCerts Trading Overview and Challenges

Trading Dynamics of ESCerts
With the culmination of PAT cycle-I, energy savings of 8.67 million toe were recorded. Corresponding to these savings, DCs were awarded tradable ESCerts. This translated to a trading worth of 100 Cr INR spread over 17 sessions. The traded ESCerts had a weighted average price of INR 768.5 each.

However, despite the initial success, several challenges have surfaced in ESCerts trading:

1. Market Imbalance: The excess in supply of ESCerts over demand influences the market’s stability. Continuous surplus supply, as seen in PAT Cycle-1, can lead to decreased prices in ESCerts trading, discouraging DCs from investing in energy-efficient technologies.
2. Limited Participation: Currently, only DCs can participate in ESCerts trading. Broadening the spectrum to include other potential stakeholders can improve the market dynamics.
3. Short Trading Window: The limited period available for trading, approximately four months, inhibits both buyers and sellers from optimal participation.

4. Future of the ESCerts Market

Several predictions and assumptions shape the future landscape of ESCerts trading:

1. Market Predictions: With the present rules, untraded ESCerts from PAT cycle 1 will expire post the compliance period of PAT cycle 2. By the end of the PAT Cycle 2 compliance period, a surplus of 4.57 million ESCerts is anticipated.
2. International Inferences: Lessons can be gleaned from global practices. For instance, the China ETS is regularly traded on the Shanghai Environment and Energy Exchange. Similarly, the Korea ETS (K-ETS) has a daily trading mechanism since 2015. Adopting some of these best practices can bolster the Indian ESCerts market.

5. Major Barriers in ESCerts Trading

There exist specific impediments in the smooth functioning of ESCerts trading:

1. Limited Participation: Only DCs with targets under the PAT cycle can currently participate. This restriction curtails market potential.
2. Compatibility Issues: The current unit of trading poses challenges for voluntary demand and from a global perspective, thereby limiting broader participation.
3. Constrained Trading Time: The short trading window hinders optimal buyer and seller participation, leading to reduced traded volume.

6. Global Commitments and Their Influence

Globally, around 5600 corporates have committed to emission reductions via initiatives like SBTi or CDP. The expected offset requirement from these companies is estimated to be b/w 270 to 950 million tonnes of CO2 by 2030. Such commitments will undoubtedly influence ESCerts trading and their relevance in the coming years.

Conclusion

The ESCerts mechanism, while robust, still has areas of potential enhancement. By addressing the current challenges and leveraging global best practices, the system can reach its optimal potential, benefiting both the environment and the stakeholders involved.