Step by step procedure for Energy Conservation Certificates (ECerts)

Energy Conservation Certificates (ECerts) are tradable certificates issued by the Bureau of Energy Efficiency (BEE) in India as part of the Perform, Achieve and Trade (PAT) scheme. These certificates represent the amount of energy saved by an organization beyond the targets set by BEE. The trading of ECerts takes place on a designated exchange, and the market is governed by various rules and regulations.

In this article, we will discuss a step-by-step approach to trading ECerts based on the market trend of cycle 1 trading.

Step 1: Understand the market trend The first step in trading ECerts is to understand the market trend. As per the market trend of cycle 1 trading, the demand for ECerts remained muted in the first two months of trading and picked up only during the last month of compliance. Additionally, the market trend indicated that the ECerts were a buyers’ market, meaning that buyers had the upper hand in the market.

Step 2: Determine the MCP The Market Clearing Price (MCP) is the price at which the demand for ECerts equals the supply. In cycle 1 trading, there were 17 trading sessions, and the MCP varied from INR 200 to INR 1200, with a weighted average MCP of INR 768.50. This price is about 7.3% of the price of one metric tonne of oil equivalent or the penalty for non-compliance. Understanding the MCP is crucial in determining the price at which to buy or sell ECerts.

Step 3: Analyze the surplus At the end of PAT cycle 1, there was a surplus of 2.53 million ECerts, which were banked for the next PAT cycle. It is important to analyze the surplus as it indicates the supply of ECerts in the market. The surplus can have a significant impact on the MCP and, therefore, the price at which ECerts are traded.

Step 4: Estimate future surplus To understand the future scenario of PAT trading, it is important to estimate the expected surplus of ECerts up to PAT cycle 6. This estimation requires considering various factors, including the actual trading numbers of PAT cycle 1, actual ESCert issuance, and purchase compliance of PAT cycle 2, and percentage over-achievement of energy-saving target from PAT cycle 3 to 6.

Step 5: Choose the right approach Based on the above assumptions, the surplus of ECerts after each PAT cycle can be estimated using two approaches. Approach 1 assumes that the ECerts do not expire after successive compliance cycles and continue to remain valid till PAT cycle 6. The surplus after completion of the compliance period for this approach is termed as “Cumulative surplus.” Approach 2 assumes that the ECerts expire after the next compliance cycle from the issuance cycle. The surplus after completion of the compliance period for this approach is termed as “Cumulative considering retirement.” Choosing the right approach is crucial as it impacts the estimation of the surplus of ECerts.

Step 6: Buy or sell ECerts Once you have analyzed the market trend, determined the MCP, estimated the future surplus, and chosen the right approach, you can make an informed decision to buy or sell ECerts. As the market trend of cycle 1 trading indicated that the ECerts were a buyers’ market, buyers had the upper hand in the market. However, the decision to buy or sell ECerts should be based on your individual requirements and investment goals.

ECert trading is a complex process that requires a thorough understanding of the market trend, MCP, surplus, future surplus, and the right approach. By following the step-by-step approach mentioned above, you can make an informed decision to buy or sell ECerts