Interview: ROIs on energy efficiency will determine uptake on PAT

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Dr. G.C. Datta Roy, CEO of Dalkia Energy Services shares his thoughts on the potential of the PAT scheme, current status and the future.

Can you give us an overview of Dalkia Energy Services and the core business areas that you are involved in?
We are a part of the global Dalkia family, a French company. Dalkia belongs to the Veolia group, which focuses on 4 business areas worldwide – water, environment, transport and energy. The energy part of the business is handled under the Dalkia brand, whereas the other 3 areas are under Veolia name. In December 2009, Dalkia acquired us from DCM Shriram Consolidated Limited (DSCL) – an Indian manufacturing & service conglomerate.

Currently, we provide consulting and performance contracting services in the domains of energy efficiency  and renewable energy particularly bio mass power development in. Such services are being provided for the industrial and commercial sectors globally.  We are a small consulting boutique with 50% revenue coming from  the export market.

We are probably the only company in India which is providing the Performance Contract services for Industrial, Municipal and Commercial establishments.  To explain the concept of performance contracting – say you are currently consuming 100 rupees worth of energy. I come in, and after a preliminary study, offer to reduce your energy cost to Rs 80 or saving Rs 20 from the current bill under guarantee. My business model is to earn substantial part of my revenue from a share of savings depending upon the investment model. There are 2 investment models – Investment by client backed by performance bond from us or financing by us with cash flow security from the client.  The sharing of savings is determined in a transparent manner depending upon who invests. We charge a small consultation fee upfront, but the main revenue is generated from a percentage of the savings that out client generates by implementing projects discovered during the study phase. Hence, performance contracting is a guaranteed energy saving consultation service that we provide to our client.

 

In what capacity have you been involved in the planning and implementation of the PAT Scheme?
With regards to the planning and implementation of the PAT Scheme, I have been involved at both personal and professional levels. When the Bureau of Energy Efficiency (BEE) was set up in 2001, a group of 5-6 members were brought together to advice on the action agenda. I was a member of that inception informal advisory group. Industrial energy efficiency was a core part of that action agenda. That is where I had made some personal contribution in developing an agenda for industrial energy efficiency.

From a business standpoint, we have recently been contracted by ClimateWorks Foundation, an International not-for-profit organisation through their Indian partner, Shakti Group to provide M&V development advisory services to BEE for implementation of the  PAT Scheme

When you ask a Designated Consumer to become energy efficient, one has to consider lots of variables that are involved in this process, some within and some outside the control of the individual DC– production, raw material, product mix, etc.  PAT Scheme is based on gate-to-gate specific energy consumption. So the challenge here lies in comparing ‘apple to apple’ versus ‘apple to orange’. In order to be consistent with the theme and the intent of the PAT Scheme’s energy efficiency and enhancement, we have to capture the performance that will truly represent the energy efficiency performance  achieved due to company’s internal efforts. The protocol should be able to eliminate impact of  external factors.  The  protocol design will involve defining a baseline, finding the variability and a system for capturing and monitoring the variabilities. This would enable implementation of the proposed normalization process in a transparent manner and therefore, the true SEC, which would be the basis for performance assessment.

Why is Performance Contracting currently not happening on a large scale basis in India?
There is a knowledge gap that exists in the Indian market between clients and consultants, which leads to miscommunication and misunderstanding between the parties,  precisely the same issue of M&V protocol as would be faced during implementation of PAT scheme.  The basic issue is how to assess the performance when external conditions vary-let us take the case of a building. Suppose the present expense on air-conditioning is Rs 1000. I do a performance contract under a guaranteed saving of Rs 200. On completion of the energy efficiency project, client decides to install new facilities in the building like computers, which would generate additional heat and thus, increase the load on the system. Or, the weather conditions have changed or office running hours has increased. All of these would increase energy consumption despite implementation of energy efficiency projects. These variabilities are defined in the baseline and baseline adjustment documents, which clients find difficult to understand-for him it is the utility bill that is the baseline. ESCOs cannot accept that for obvious reasons. Primarily due to  cultural factors and often based on past bad experience, client find it difficult to trust the ESCOs.  India has not been able to bridge this trust gap due to information asymmetry between client and ESCOs. We have to come up with actions that can bring the customer and the service provider on a common platform and bridge this knowledge gap.

We have implemented energy efficiency work on performance contracting model in India in commercial building such as the NDMC building in Connaught Place, Delhi and the Batra Hospital in Delhi and number of industries in paper and sugar segments. The NDMC building project contract was for a period of 5 years beginning 2003. The results were monitored on an annual basis through physical verification. We had guaranteed 25% reduction in energy consumption, and the actual verified energy savings was of 33%. At the Batra Hospital, we had guaranteed a 15% savings and the actual savings was close to 23%.

The PAT scheme was implemented in April 2011 and is likely to result in savings of 9.78 million metric ton of oil equivalent (MMTOE), in electricity saving terms. What would you say has been the level of adoption of the scheme so far?
The baseline studies have been completed, and as per our understanding the target savings are being reassessed by BEE. The original target was set at 9.70 MMTOE.  After re-evaluation, the target may get reduced to about 6.5 MMTOE.  Actual figure would be known after BEE formally communicate the target to individual DCs. The process of fixing the target and communication protocol are under approval by the Government and is likely to be finalized in the next few weeks.

A penalty for non-compliance has been set at Rs. 10 lakhs, and the value of noncompliance  is measured  in  terms  of  the  market  value  of  tons of  oil. How is this penalty levied – per incidence/per year/per target period of three years?
Currently the BEE has given a 3 year timeline on the total target that has been set. However, if a company achieves a certain level of energy efficiency – full or partial, it can approach BEE to apply for ESCerts. Such ESCerts can be banked for trading as and when the trading window opens.

BEE has setup a panel of energy auditors and accredited energy audit service companies who are equipped to provide their auditing services until the Designated Energy Auditors (DENAs) come into the market after April 2013. BEE is currently in the process of developing the criteria for selection of DENAs. DENAs need to have both the technical and system expertise. BEE needs to take these criteria into consideration while developing the training programmes and courses.

Does the industry see a business case for undertaking PAT, or is it purely being driven by compliance?
What will make PAT a driver or a rider – that is a crucial issue right now.  Energy efficiency in India has primarily been looked into at the operational level till now. So there were not much of financial and prospective driving force-forces that release energy through the entire organisation for discovery of newer investment opportunities driven by goal and not audit findings. PAT would precisely drive setting up such goal and would also be a financial driver because it is a tradable instrument. Analyzing at an absolute level, if the cash flow contributes significantly to the company’s bottom-line, then we can expect to see enthusiasm from higher management  like CFOs and CEOs-this can make the PAT a big driver for investment in energy efficiency.  Seeing the success of another market transformative tool, standard and labeling program of BEE, I am quite optimistic about PAT doing a similar thing for the Indian Industry.

The first cycle of coming 3 years  will be a big learning curve and we should all participate with full of enthusiasm to learn as much as possible and contribute in making the scheme a success.

This interview has been conducted by Pramita Sen, a member of the India Carbon Outlook editorial team.

Image(s) Courtesy:
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Anton Fomkin
Sean MacEntee
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Author: Pramita Sen