Markets can boost energy efficiency projects

Reuters: Policymakers can learn from contrasting approaches to developing markets in energy efficiency, as interest grows in savings which boost competitiveness and security of supply while cutting fuel bills and carbon.

That rising interest was illustrated by US President Barack Obama, in his Executive Order recently, for “Accelerating investment in industrial energy efficiency.”

“Accelerating these investments in our Nation’s factories can improve the competitiveness of United States manufacturing, lower energy costs, free up future capital for businesses to invest, reduce air pollution, and create jobs,” reads the Order.

Suggested policy tools included best practice standards, target-setting, technical assistance and public information.

Markets should also have a role given a major advantage of efficiency is its low marginal cost compared with energy generation, but were not mentioned.

Two models are illustrative, one a trading approach which allows factories and power plants to meet efficiency targets using tradable energy saving certificates (ESCs), and the other a capacity auctioning approach.

Evidence so far suggests the former is more complicated and potentially unpopular, while the latter has scored successes, is simpler and may slot into similar capacity auction schemes worldwide.

Trade

India’s national Bureau of Energy Efficiency (itself a novelty) launched its Perform, Achieve and Trade (PAT) scheme in April.

The scheme is part of a wider efficiency program, itself one of eight “national missions” under the country’s 2008 National Action Plan on Climate Change.

It covers energy-intensive installations in the power generation, fertiliser, cement, pulp and paper, textiles, iron and steel and aluminium sectors accounting for about a third of the country’s energy consumption.

Targets for individual factories and power plants are based on a percentage reduction in energy intensity, in tons of oil equivalent per unit of production.

They are expressed in an absolute energy saving that each installation must achieve over a three-year cycle.

A benchmarking approach is used to ensure more inefficient plants are assigned tougher targets.

It is similar to cap and trade, where polluters are set an emissions limit but allowed to buy or sell permits according to whether they beat or miss their targets.

The PAT scheme allows installations to meet targets by trading energy saving certificates (ESCs) each equivalent to 1 ton of oil equivalent, in a true-up at the end of the cycle.

The scheme seeks to avoid about 2.2 million tons of oil equivalent (MTOE) annually over its first cycle from 2012-15, compared with a (rapidly rising) baseline of 165 MTOE.

As with emissions trading, it has softer advantages besides target-setting: by forcing companies to measure and report energy consumption it should raise awareness of waste.

Sophisticated

The approach is related to energy obligation schemes in various US states where utilities have to meet a certain percentage of their retail sales from renewable sources or energy savings, but can meet these targets using tradable certificates.

The Indian scheme is more comprehensive, calculating precise energy savings required by each of 478 individual installations from 2012-2015, and applies to manufacturing in addition to thermal power.

Simpler ESC markets were launched from 2006 in a handful of US states, including Connecticut, Nevada, Pennsylvania, and New Jersey, which allow commercial and industrial companies to earn ESCs from investing in efficiency projects, and then sell these to utilities.

Only Connecticut has an active ESC trading market, reported to be worth $36 million in 2010.

Reports suggest that the slow uptake is partly a result of limited understanding of the schemes among industry and the public, where Obama’s executive order could help.

Directly relevant to that order, the Connecticut scheme allows combined heat and power (CHP) schemes to earn ESCs for every megawatt hour of electricity produced, deemed an efficiency by saving and re-using heat in power plants rather than venting this into the atmosphere.

Obama’s order called for 40 gigawatts of new CHP plants by 2020.

Capacity auctions

In a more direct approach to boosting efficiency projects, north eastern US energy operator ISO New England is in the sixth year of a scheme which allows projects to bid alongside power plants in forward auctions to provide generating capacity.

ISO New England oversees energy generation and transmission in the north eastern US states of Maine, Vermont, New Hampshire, Massachusetts, Connecticut and Rhode Island.

Like some countries, it holds auctions for forward capacity three years ahead to allow planners to maintain a safe margin against peak demand.

Uniquely, it allows energy efficiency projects to compete with generators, where winners are awarded payment at the same clearing price and capacity reduction is fully equivalent to capacity supply.

Projects include demand response, where industrial energy consumers agree to cut demand at peak times for example by controlling heating and cooling equipment, or public efficiency projects to upgrade insulation or lighting and so permanently reduce demand.

The aim was to attract less costly resources than new power generation, and seems to have succeeded.

The scheme has awarded capacity payments to more than 200 megawatts of additional new energy efficiency capacity in each delivery year since 2010, creating a cumulative 1,354 MW of demand reduction for delivery in 2014/15, more than a large nuclear power plant, and about a third of the entire contracted capacity under the scheme for that year.

Stiff penalty charges ensure offered capacity is honoured, at five times the corresponding payment for delivery.

Markets

As with any government intervention, all these markets face implementation costs, especially in the measurement and verification of energy savings, but the prospect of guaranteed revenues seems to be overcoming these in New England.

A related challenge is to have clear rules and accountability to demonstrate these savings, where the woes of corresponding carbon offset markets are illustrative.

For the Indian market, a credible, independent national certifying body will be paramount.

The New England scheme, meanwhile, appears the simplest approach and could slot directly into plans in Britain, Brazil, South Africa and elsewhere to auction generating capacity, by allowing demand reduction projects to compete on an equal footing.