Energy Management for Competitive Advantage

Energy

management for competitive advantage

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India’s energy consumption is growing faster than that of world’s energy. However the domestic energy supplies are not growing at the same pace owing to host of factors including fuel unavailability, delays in clearances, project delays and inadequate innovative technologies. This has resulted in increased reliance on energy imports and rise in fuel prices. In current times, Indian industries are facing challenges due to economic slowdown. The problem has worsened due to rising inflation, unreliable grid power and increasing energy costs.

In the midst of these trying times, wherein energy cost constitutes 10-20% of the total cost, energy management could be the key for optimizing cost and enhancing competitiveness. It has been seen that management of energy is often neglected, even though there is considerable potential to save energy and reduce costs. Energy management requires an organization to develop a holistic understanding of energy consumption and optimize its utilization without compromising productivity. For effective implementation of energy management solutions, industries need to adopt a strategic approach towards energy procurement & consumption and define energy management goals for their organization.

Owing to changes in policy, advancement in technology and process redesign, there are numerous solutions available for energy management. The Government has also provided the necessary support and regulations for adopting energy efficiency initiatives.

The report highlights that there is an urgent need for all the industry participants to holistically adopt energy management measures, not only to gain an edge in competitive markets, but also to ensure sustainability of operations. The benefits are not restricted to the individual industry level but are also vital for the country as a whole, as it results in lesser dependence on new capacities. Our industries contribute to majority of our energy requirements; we also hope that each individual industry unit will focus on improving energy productivity and enhancing competitiveness, while delivering a dividend to the environment and the global goal of Sustainable Development.

Santosh KamathPartner - Management ConsultingKPMG in India

Praveer SinhaChairman, Regional Committee On Power Reforms & Renewable Energy, CII NR and CEO & EDTata Power Delhi Distribution Ltd


Foreword


Energy scenario in India

Need for energy cost management

Measures for energy management

Policy framework for energy conservation

Sustainability

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08

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Table of contents

Energy scenario in India


03. IMF Energy Database, 2013

04. Indian Petroleum and Natural gas statistics, 2012-13

05. Price List, Mahanadi Coalfields Ltd.

06. Tariffs correspond to the category of HT Continuous Industry on express feeder. The growth rate corresponds to cumulative annual growth rate over past four years

01. BP Statistics 2013

02. International Energy Agency Statistics 2013

India has the fourth largest energy demand after the United States of America, China and Russia. In the ten year period, India’s energy consumption has increased by more than 80 per cent from 308 Mtoe in 2002 to 564 MToe in 20121. However, as India’s per capita energy consumption is 0.6 toe in 2011 as compared to the world average of 1.88 toe2, the country’s energy demand is far from saturated.

India’s energy demandOut of the 564 Mtoe that was consumed in India, coal, oil and natural gas are the major primary fuel sources that account for 92 per cent of the total energy consumption. However, only 62 per cent of primary energy is produced in India with the remaining being imported. In 2012, 130 Mtoe of petroleum products, 13 Mtoe of natural gas and 69 Mtoe of coal were imported.

Soure: BP Statistics 2013

According to the Planning Commission estimates in the 12th five year plan, India’s primary energy consumption will grow by 80 per cent to 1018 Mtoe in 2022. With the increase in energy demand, the energy import requirement will also increase, by 77 per cent, from 212 Mtoe in 2012 to 375 Mtoe in 2022.

In addition to straining the forex reserves, rising imports of fuels could also expose India to greater geopolitical risk and price volatility.

Energy pricesIn the past, the full costs of petrol and diesel were not passed to the consumers and coal was largely produced from domestic fields. However, recently there has been a significant change in the fuel costs. Given the high cost of import and its impact on economy, the Government has increasingly aligned prices of petroleum products to market prices.

The subsidy on petrol has been removed, whereas the subsidy on diesel is witnessing a gradual reduction. In the past four years (2009-13), crude oil price has increased by 14 per cent resulting in the increase in prices of other industrial fuels3. Gas price has also seen a steep increase in the past and with the Rangarajan formula being accepted, the price could further increase. The following charts provide an overview of the increase in diesel and natural gas prices over the period of the past four years.

Diesel has shown an increase of 12 per cent, whereas the price of natural gas has increased by 30 per cent4. The price of coal (domestic supply) has also witnessed an increase of 11 per cent during the last four years. The fuel price increase has also resulted in a corresponding increase in power tariffs5. In Maharashtra, one of the most industrialised states, the power tariff has increased by 18 per cent6 during the last four years.

Soure: http://iocl.com/Products/DieselDomesticPrices.aspx, 01 February 2014

Soure: Petroleum Planning and Analysis Cell

Soure: BP Statistics 2013, 12th Five Year Plan

Domestic production and import of energy in 2012 (Mtoe) Increase in diesel prices

Increase in natural gas prices

Estimated growth in energy consumption (Mtoe)

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07Energy Management for Competitive Advantage

Need for energy cost management


In 2012, the industrial sector consumption was about 47 per cent of the total energy consumption.

The impact of rising energy costs will likely be felt differently by each industry based on the energy intensiveness of production. The chart below depicts the average energy cost with respect to the total expenses of companies in a particular sector.

It can be observed that, for certain industries, the energy cost is more than 5 per cent of the total expenses. A small variation in fuel prices can have a significant impact on profitability of companies in such sectors. Thus, savings in energy can drive cost competitiveness, especially given the context of increasing cost of energy. It has become important to adopt energy efficiency practices to achieve strategic competitive edge in markets.

Case example on importance of energy efficiency for companies

Company A and company B both manufacture cement in India. In the period of 2003-2013, both these companies strived hard and achieved a high revenue growth of about 20 per cent per annum. Despite both companies achieving 20 per cent growth, the profitability of Company B declined during this period. While at the outset it seemed that both the companies are equally competent, a closer look at energy costs offers useful insights.

Company A adopted a holistic approach of cost rationalisation by targeting areas such as raw-material sourcing, plant energy management, transportation cost, distribution and marketing cost. It reduced their energy cost as a proportion of total cost by more than 5 per cent. On the other hand, the energy cost of Company B increased by 6 per cent. In fact, company B could have added 11 per cent to its profitability without compromising on growth. This highlights that energy efficiency measures cannot be ignored in today’s competitive markets.

Besides, the world is still recovering from the economic downturn. The purchasing power and risk appetite of consumers is low, inflation is high and austerity is being practiced by various governments. The Sales in many industries have dwindled and it has become difficult to recover even fixed costs. Thus, some of the industries are facing a double whammy of stagnated sales coupled with rising input costs. Indian auto components industry is one such example wherein companies are looking at all avenues to manage their costs, given the slowdown.

The case of Indian auto components industry

After being one of the world’s fastest-growing automobile markets in the last decade, Indian passenger vehicles’ sales has declined 7.2 per cent in the last year for the first time in more than a decade. The local sales of trucks and buses declined about 16 per cent in 2013.

Given the declining sales, the auto component manufacturers who mainly depend on Original Equipment Manufacturers (OEMs) for their revenues are facing adverse impacts on revenue growth.

These manufacturers are now increasingly focussing on internal cost reduction by way of managing energy costs, reducing shifts and manpower amongst other measures.

This is not to say that one must wait for the situation to deteriorate. Managing energy costs can yield positive results irrespective of the financial health of the organisation or state of the economy. Companies should start seeing reduction in kilowatt-hours as another currency to earn cash in.

Soure: Energy Statistics 2013, Ministry of Statistics and Programme Implementation, Government of India

Soure: CMIE Database, 2013

Soure: ‘Indian Auto Components Industry’, ICRA Research Services, January 2014

Industrial energy consumption in India (2012)

Energy cost as a proportion of overall cost for select energy intensive sectors

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Measures for energy management


Energy management refers to the process of monitoring, controlling and conserving energy within the boundaries of an entity or an organisation. It is done with an objective of resource conservation, climate protection and cost savings while ensuring the required reliability for the end users. The companies and various institutions can consider energy management by targeting three areas - procuring their energy from cheaper sources i.e., managing supply, reduction in wasteful energy spend and utilising technology to use energy efficiently.

Supply side managementIn case of power, renewable energy and open access procurement of power are increasingly becoming favorable options for companies who are looking beyond grid power for meeting their energy needs.

Increasing competitiveness of renewable energy with grid powerRenewable energy is an alternative that has gained a lot of attention in recent times. Multiple organisations are investing in renewable energy not only from a sustainability perspective, but they are also considering long term advantages on savings due to increasing competitiveness of renewable power. This is evident by the increasing share of renewable as a percentage of installed capacity.

The cost competiveness of wind energy has been established in the past and already there are significant installations of wind in some states like Tamil Nadu, Gujarat, Maharashtra, Rajasthan and Karnataka1.

The solar power installed capacity has seen substantial growth in India in the last three years with over 2000 MW installed until October 2013 – over 70 per cent of these are concentrated in Gujarat and Rajasthan2.

Solar power costs have seen a sharp decline in the last few years. The solar module prices have reduced by around 75 per cent over the past five years owing to innovation contributing to lower manufacturing and processing costs3.

The solar power prices in India, based on the auction prices conducted by different states in the last three years, have decreased by more than 45 per cent4. This makes it competitive with the prevailing marginal power tariffs for certain consumer categories in some states – especially the highest slab residential, industrial and commercial category of power consumers. The retail tariffs of these segments are already upwards of INR 7-8 per unit at the margin and would be even higher if one were to take a levelised view (long-term cost)5.

Comparison with other sources of powerIt has been estimated that more than 30,0006 MW of captive power plant capacity has been installed in India. Further, it has been estimated that around 13,0007 MW of additional captive power capacity is likely to get added during the XII Five Year Plan. A large quantum of this installed capacity is based on diesel and natural gas. Based on economics, solar power can displace certain amount of captive power consumption based on diesel. At present, the variable cost of power from diesel based generation is upwards of INR 14 per unit, whereas solar power currently is less than INR 7.5 per unit. Further, solar installation can co-exist with diesel gensets that can provide power on demand when solar power is not present.

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Soure: Ministry of New and Renewable Energy, *Annual report 2012-13

Soure: Ministry of Power and Energy Statistics (India), Annual Report 2012-13

Grid interactive renewable power (MW)

Breakup of installed power capacity

Soure: Analyst Report - Deutsche Bank, KPMG in India Analysis 2013

Solar PV prices

01. Energy Statistics (India) 2013

02. Bridge India, Oct 2013

03. Analyst Report - Deutsche Bank

04. Data published by State nodal agencies on renewable energy and KPMG in India Analysis 2013

05. State Tariff orders 2014

06. Planning Commission – The Working Group on Power for 12th Plan

07. Overview of Power Sector – Planning Commission – Working group for 12th Plan


Growing importance of solar rooftop marketWith solar prices approaching grid parity, solar power is expected to make significant contributions to incremental demand. This has been realised by many companies and they are exploring the solar rooftop option (factoring the likely parity and the ‘green energy’ aspects of solar power).

One important benefit of solar rooftop power over other sources of power is that power can be generated at the point of consumption and hence, avoids the significant network and distribution losses. The advantages of solar rooftop power are:

For Consumers For Government

• Can be generated at the point of consumption – reduces the dependency on grid power and provides long term reliable power source

• Can help in long term savings on energy costs – can mitigate requirement of expensive fuels like diesel to some extent

• Additional Generation Based Incentives (GBI) in some states like Tamil Nadu for domestic consumers

• Low gestation time

• Reduces the demand for conventional power

• Avoids transmission and distribution losses

• At the national level, rooftop reduces the requirement of land.

The marginal tariffs of certain segments are already above the current solar rooftop power cost, refer Marginal power tariff (INR/kWhr). For example, in the state of Andhra Pradesh and Maharashtra, the marginal tariffs for highest slab residential and Low Tension (LT) commercial categories are upward of INR 8/kWh. The gap between levelised cost of generation of solar power and marginal tariff of large consumers (Industrial) can be bridged through Accelerated Depreciation benefit.

Considering the rising consumer tariffs, if consumers take into consideration the long term view and look at the levelised marginal tariff8, rooftop power is even more economical. This is mainly because cost of solar power remains constant through asset life and protects the consumer from periodic discom tariff revisions.

Each consumer category is differently placed to tap benefits from solar power due to availability of space and utility tariff. As seen in the graph, different consumer categories are breaking even9 at different times depending on their existing utility tariff and cost of solar power.

Price sensitivity of the consumer would determine the timing to shift to solar power. Additionally, solar installation may help captive consumers in meeting targets under the Perform Achieve Trade (PAT) scheme as well. Consumers may also benefit from the (Ministry of New and Renewable Energy) MNRE capital subsidy support for standalone rooftop installations (up to 100kW) to the extent of 30 per cent of the project cost.


Soure: CEA, KPMG in India Analysis

Cost of generation (INR/unit from various sources)

Soure: State Utilities Tariff Order FY14, KPMG in India Analysis

Difference between solar rooftop power cost and marginal consumer tariff of Karnataka (Illustrative)

08. Assumption: Annual Tariff Escalation of Residential Consumers – 3 per cent; Commercial Consumers – 3 per cent; LT Industrial Consumers – 5 per cent (higher than domestic and commercial due to expected cross-subsidy rationalisation; discount rate 11 per cent

09. Assumption: Solar rooftop power cost – INR 7.5/kWh, reduction in solar rooftop power cost by 3%

Soure: State Utilities Tariff Order FY14, KPMG in India Analysis - The Rising Sun September 2012.

Marginal power tariff (INR/kWhr)


States such as Tamil Nadu have introduced a favorable policy for rooftop installations. This policy, among other measures, allows for accounting of any excess generation from rooftops on a real time basis (net metering). In absence of such a policy, any real time excess generation gets lost resulting in adverse economic impact.

Hence, given the fuel, land and environmental challenges that the country is facing in setting up new power capacity, industries could explore competitive energy solutions like solar rooftops to optimise their power mix and realise the potential long term benefits.

Open access procurement can enhance supply, reliability and reduce costMost of the states allow consumers with high power requirement to go for open access procurement of power. In this arrangement, industrial and commercial consumers

can meet entire or a part of their power demand from other sources such as power exchanges, captives and IPPs. This option can be cost effective in states where power supply is intermittent and consumers use diesel generators, grid power prices are high and open access charges and cross-subsidy surcharge are not so high.

The short term power exchange market is gaining popularity amongst the industrial segments which have energy costs typically in the range of 7-15 per cent as a proportion of the overall costs. Hence, these consumers may prefer buying power from the short term market than own captive consumption if the power is competitively available.

For the last 2-3 years, prices at the power exchange are in the range of INR 3.5 to 4 which is close to the long term power rates. With the decrease in prices and increase in awareness amongst consumers, trade in the Indian power exchanges have increased at a CAGR of 54 per cent in the last three years10.

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Soure: Indian Energy Exchange (IEX) Electricity Market Report 2013 Soure: Indian Energy Exchange (IEX) Electricity Market Report 2013

Volume and price at IEX - Day ahead market Industry segments at IEX

10. Indian Energy Exchange (IEX) Electricity Market Report 2013


Given the power availability at competitive prices, the number of open access consumers at the exchange has grown from 52 in March 2010 to over 2100 till December 20136 as seen in the graph below.

Other fuels and supply chain optimisationFor some companies, industrial fuels such as Furnace Oil, Diesel Oil, Naptha etc., form a substantial proportion for their energy costs. In such cases, businesses can look at the following measures for fuel and supply chain optimisation:

1. Appropriateness of Fuel and Technology• Conduct a comprehensive review of the applicable

fuels and associated technology to select the most appropriate fuel

• Explore technology interventions to optimise fuel consumption

• Optimise tax on fuel procurement

2. Inventory cost management• Develop system to stock optimum fuel

• Improve technology and process for effective inventory management

3. Logistics cost optimisation• Decide optimal order size; frequency of procurement;

type and size of transport medium; and transport route to optimise order and transport cost.

Demand side measuresGiven the low reliability in energy supply, steep increase in fuel prices and increase in power demand charges, demand side measures are gaining popularity among organisations. Demand side measures refer to interventions deployed to reduce consumption or manage peak energy demand. Thus, demand side measures help organisations to deliver same or better output with lower energy consumption. These measures typically include enhancing process efficiency,

equipment rightsizing, reducing wastage and managing the peak demand.

Demand management In a manufacturing facility, for a given production capacity, the processes, technology and equipments are key determinants of the energy requirement. In most of the cases, equipment and technology in plants would be old and there is less emphasis on energy efficiency of the processes or equipment as long as the plant is meeting its production targets.

To be able to evaluate and implement demand side measures, management needs to be aware of energy consumption of specific processes and equipments and their efficiencies. A robust energy audit is necessary to help understand these apects. In an Energy Audit process, the auditor identifies the energy systems and measures the energy input and output for each system. Additionally, heat loss and equipment condition are also assessed either through observation or through usage of advanced monitoring equipments. Measurements can be extended to certain specific duration to unearth patterns in energy consumption. Such patterns can provide pertinent insights on deviations in energy consumption and can also point to behaviors leading to more than required energy consumption. An Energy Audit report will typically provide understanding on energy consumption, utilisation and wastage of energy systems and mostly will also contain impact of improvements in it.

Thereafter, the management needs to evaluate energy efficiency interventions on the basis of aspects such as new technologies available, change in processes, replacement of equipments, resizing of equipments, process timings and relook at the layout. Important aspects are assessment of initial investment, energy savings, returns over lifecycle and risk to business continuity in order to prioritize the implementation of interventions.

In case of buildings, lighting and cooling/heating equipment account for majority of the energy consumptions. Energy saving in lighting is the easiest to achieve through installation of energy saving devices such as CFL and LED lights. However, interventions for reducing energy consumption in heating and cooling equipment require an approach similar to the one deployed for manufacturing facilities. The approach includes assessment of energy efficiency, condition of the equipment and fine tuning of temperature control devices. It may also include changing staff behavior to adopt best practices for maintaining building temperature.

South Africa’s response to chronic under-investment and rising demand

South Africa’s limited investment in new capacity coupled with continuous demand growth, fuel unavailability, plant shutdowns and unfavorable weather led to reduced reserve margins and power system vulnerability. The system operators had to resort to load shedding to prevent a system collapse. About 58 per cent of the demand came from industries and 20 per cent from the


Soure: Indian Energy Exchange (IEX) Electricity Market Report 2013

Open access consumers at IEX

06. Indian Energy Exchange (IEX) Electricity Market Report 2013


residential sector, which contributed the most to the peak load. South Africa responded with a ‘Power Conservation Program in 2008-09’ that followed both short-term and long-term measures:

• Setting, for all sectors, a 10 percent energy savings target, amounting to 3000 MW

• 500 largest industrial users were preferentially targeted for energy efficiency measures

• ‘Power Alert’ scheme for households to reduce peak load

• Awareness and behavior campaign called ‘49 Million’

• Technology intervention such as switching to CFLs

• Longer-term programs such as:

– National Energy Efficiency strategy

– Introduced savings targets, efficient building codes and efficient equipment

– South African public utility, Eskom’s, Demand Side Management program – Saving 5000 MW over 20 years.

Peak demand managementPeak demand describes a period in which power demand is higher than the average demand. Some states have implemented time-of-day tariff for industrial category consumers. Thus, it becomes important to manage energy demand during these periods.

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Soure: Tariff order from Maharashtra Electricity Regulatory Commission, KPMG in India Analysis

Soure: Demand Side Management: Saving electricity in a hurry, International Energy Agency, November 2013

Time-of-day tariff for industrial consumers for TPC - D (Maharashtra) in FY 2013-14


Comprehensive evaluation of energy consumption and criticality of each of the energy intensive operations is needed to manage the peak demand at the plant and can result in cost reduction.

Winter peak demand reduction scheme (WPDRS) of IRELAND

In Ireland, demand for electricity over the winter period is very ‘peaky’ and ensuring security of supply is expensive. In 2003/04, eligible customers committed to reducing consumption between 5 and 7 pm every business day from November to February. Customers received a payment for reliably delivering this committed reduction. In 2003/04, the total available payment was EUR 210 per megawatt-hour of load reduction. Of this total, EUR 160 per megawatt was a reliability payment and EUR 50 per megawatt-hour was an energy payment. The WPDRS paid out a total of EUR 2.4 million to the participants (customers), comprising EUR 610,000 in

energy payments plus EUR 2,392,000 in reliability payments, less EUR 598,000 in capped reliability rebates. The peak load reduction achieved was an average of 82.5 MW in November, 83.0 MW in December, 84.4 MW in January and 81.3 MW in February. This was 1.85 percent of the winter peak. Compared with 2002/03, the peak on the system was reduced by about 80 MW, even though demand for the entire year increased by roughly 3 percent. The load reduction achieved was quite reliable on a daily basis - 95 percent of the time, the achieved load reduction lay between 72MW and 88MW. Many industrial and commercial customers continue to participate in the scheme.

If left unmanaged, peak demand also has an impact on energy networks and infrastructure, leading to disruption in supply. Northern region, particularly, faces very high peak deficit of about 11.6 per cent. Northern region imported, from other regions, 22 billion units while exported 5.6 billion units in FY13. Northern region already has high power generation cost as it neither has the advantage of domestic coal mines like Eastern region nor can it rely on imported coal like Western region does. Importing power from long distances adds to

transmission losses and power costs of Northern region. The inter-regional links of Northern region, with Western and Eastern regions, are placed under heavy burden during peak power exchanges. This was reflected in the blackout of July 2012, which affected millions of people and impacted critical services. Southern Region being now synchronously connected with the national grid would draw some power to meet their demand, which may leave even lesser for the Northern region.

Apart from avoiding network failures, peak demand management also reduces need for investment in power generation and transmission capacity for meeting peak demands. Thus, National Electricity Policy [Clause 5.9.6], Tariff Policy [Section 8.4] and Electricity Act [Section 62(3)] have encouraged and facilitated regulators as well as utility companies in developing a framework for optimally utilising existing resources before adding new capacity.


Soure: Load Generation Balance Report, 2013-14

Soure: Case study on demand side management by International Energy Agency, August 2012

India’s monthly regional peak demand and national deficit for FY 12-13


Japanese summer peak management post Tsunami devastationDue to the unfortunate Tsunami in 2011, 27 GW - about 33 per cent of the overall capacity - became unavailable. A special entity, ESDERH, prepared plans for handling summer peak in view of reduced operational power capacity. In typical Japanese innovative spirit, consumers responded very well to the following energy savings measures:

• Mandatory rationing of 15 per cent for the industry

• Multi-media awareness campaign - Website for households to check energy use and to prepare their own customised energy saving measures. Recommendations pertaining to switching off of unused appliances, maintaining moderate temperatures and avoiding energy loss due to inefficient use were presented in a very user-friendly manner.

• ‘Super Coolbiz’ programme – The programme recommended smart yet comfortable summer clothing which required minimal air conditioning. The office-goers were encouraged not to wear tight fitting attire, ties or dark-colored clothes to protect themselves from the heat.

• Advice to small and medium enterprises.

Employee trainingChange in employee behavior is one of the most important aspect in achieving energy efficiency goals. Sensitizing employees with energy efficiency practices can help them in proactively embracing the practices, and help organisations in soliciting required support and commitment in implementing energy efficiency initiatives. Organisations should also incentivize employees for highlighting suggestions related to energy efficiency improvement and implementing them. By encouraging energy efficient practices, an employer can not only differentiate itself as a responsible employer but also can enhance its brand image among clients /consumers.

Case example of a 5 Star luxury hotel In the wake of rising energy costs, a 5 Star Luxury Hotel in Mumbai decided to implement energy efficiency solutions and reduce energy costs. The Hotel was paying a monthly bill of INR 1 crore and had a contracted demand of 4 MVA, with a load factor of 50 per cent. AC Power Panels, chillers and Lighting accounted for 84 per cent of the load of which the HVAC load is highest at 80 per cent. After a detailed study of equipment efficiency and performance requirement, the Hotel adopted a number of energy efficiency measures to bring down its energy costs. Few measures are listed below:

• Replacement of high wattage equipment with new technologies

• Improvement in Power Factor

• Use of Solar power for heating

• Replacement of chillers

• Fine tuning of operational hours

• Sensitizing of staff.

The implementation involved expenditure close to INR 20 million. However, this resulted in monthly savings of about INR 3.4 million per month with a payback of less than a year.

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Soure: Demand Side Management: Saving electricity in a hurry, International Energy Agency, November 2013

Soure: ENCON Energy Management Services



Policy framework for energy conservation


The 18th Electric Power Survey of India forecasts peak demand of 199,540 MW and 1,354 BU at bus bar in 2016-17. As per the national electricity plan, the projected electrical energy saving potential at the end of 12th Five Year Plan i.e., during the year 2016-17 is 44.85 BU on the demand side (equivalent to 60.17 BU at Bus bar).

The industries are expected to save 11.96 Billion Units (at consumer side) of electricity and 10.41 million tonnes of oil equivalent of thermal fuel with an investment of INR 3,766 crores as per the National Electricity Plan. Thus, industries can save about 16 Billion units at bus bar which is equivalent to 3,300 MW of avoided peaking capacity at the bus bar. With a bare minimum capital cost of INR 5 crores per MW, the saving amounts to INR 16,500 crores and the outgo on equity margin related to investment on INR 16,500 crores is also avoided. Thus, an investment of INR 3,676 crores by the industries in energy efficiency measures has the potential to save more than INR 16,500 crores to the nation.

The government has realized the potential of implementing energy efficiency solution and has undertaken various policy measures. The Integrated Energy Policy, released in 2008, laid emphasis on the need for sustainable and efficient use of energy. It stated that latest technologies should be pursued for maximizing energy efficiency and conservation, and ensuring demand side management of consumption. It also commented that a unit of energy saved is greater than a unit of energy produced since it saves on losses related to production, transportation and distribution.

Energy conservation actEnergy Conservation Act was enacted by the Government of India in 2001. The act bestows rights to the government to set and enforce energy efficiency norms to be followed by the industry, and sets standards of energy efficiency and conservation for equipment, appliances and buildings.

It provided institutional and regulatory mechanism for implementation of energy efficiency initiatives in the country and in the states. Bureau of Energy Efficiency (BEE) was set up under the act in 2002. Since inception, BEE has lead several energy efficiency initiatives such as the Indian Industry Programme for Energy Conservation, Leadership in Energy and Efficiency Design, Standardisation and Labelling Programme etc.

The Energy Conservation Act was amended in 2010 to provide a framework for issuance of energy saving certificates and to create a trading platform for these certificates. The provision paved the way for conception and implementation of the Perform, Achieve and Trade (PAT) scheme which is at the forefront of energy efficiency schemes in India.

National mission of enhanced energy efficiencyIndia announced the National Mission of Enhanced Energy Efficiency (NMEEE) in 2008 under the umbrella of National Action Plan of Climate Change (NAPCC). NMEEE introduced market based approach to energy efficiency and aims to unlock energy saving opportunities worth INR 74,000 Crores. By 2014-15, NMEEE aims to save 23 Mtoe of energy and avoid electricity capacity addition of 19 GW.

Perform, Achieve and Trade is a flagship scheme launched by BEE under NMEEE. Empowered by the Energy Conservation Act, the Ministry of Power has identified industrial units and other establishments in eight sectors – Thermal Power Plants, Fertilizer, Cement, Pulp and Paper, Textiles, chlor-alkali, Iron and Steel, Aluminum and Railways as designated consumer (DC) and assigned energy efficiency targets to be met by 2014-15.

These sectors have been selected on the basis of quantum of energy consumption, energy intensity, and energy usage pattern. Due to the large difference in energy usage pattern in designated consumers within a sector, each DC has been given an individual energy efficiency target. The difference in energy usage pattern can be attributed to age of equipments, technology deployed, production capacity, raw material quality and product mix. The table below details the sector wise energy efficiency targets for industries.

No. Sector Designated Consumers in PAT-1

Energy Saving Targets under PAT

Energy Saving Targets under PAT-1(million toe)

1 Aluminum 10 7% 0.456

2 Cement 85 12% 0.816

3 Chlor-Alkali 22 1% 0.054

4 Fertilizer 29 7% 0.478

5 Iron & Steel 67 22% 1.486

6 Pulp & Paper 31 2% 0.119

7 Textile 90 1% 0.066

8 Thermal Power Plants

144 48% 3.211

Total 478 100% 6.686 0.066

Sector-wise electrical saving targets - 12th Plan (BU,%)

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Soure: National Action Plan, Jan 2012 - Ministry of Power

Soure: Perform, Achieve and Trade - July2012, Ministry of Power



In the first implementation cycle of the PAT Scheme, designated consumers would need to achieve their targets by March 2014. In case of non compliance or inability of the designated consumers to meet the efficiency targets, a fixed fine of INR 10 lakhs and an additional fine linked to the amount of non compliance will be imposed on the entity.

PAT scheme also contains a provision for incentivising Designated Consumers to overachieve energy efficiency targets. Energy Saving Certificates (ESCerts) would be issued to DCs who will go beyond their targets to achieve energy efficiency. These ESCerts will be tradable in either a bilateral arrange or a trading platform specially created for such purpose. Trading of ESCerts will allow DCs to meet the energy efficiency targets through purchase of certificates in addition to their own initiatives. The number of ESCerts issued will be dependent on quantum of energy saved and the prices will be a controlled by a suitable mechanism.

In subsequent PAT cycles, it is expected that the scheme will encompass a higher number of sectors and designated consumers. Also there could be a revision in energy consumption baseline and the efficiency targets can be made more stringent.

Energy Conservation Building CodeEnergy Conservation Building Code (ECBC) was devised by the Bureau of Energy Efficiency in 2007. ECBC provides design norms for building envelope, lighting system, HVAC, Electrical System, and Water heating and pumping system. The norms require performance compliance at building level and at sub system levels. ECBC norms are mandatory for new construction that have connected load of 500kW and contracted demand in excess of 600kVA.

Sustainability


In 2012, India was the third largest CO2 emitter in the world, following China and United States. Since 2002, India’s carbon emissions have grown by more than 80 per cent, from 1007 MtCO2 in 2002 to 1823 MtCO2 in 2012. The growth rate for CO2 emissions of India is much higher than the world average for the same period1.

Although India is not obliged to reduce its carbon emission under the United Nations Framework Convention in Climate Change, the Government has shown its commitment to carbon emission reduction through the introduction of the National Action Plan on Climate Change in 2008. National Mission of Enhancing Energy Efficiency (NMEEE) which is one of the eight plans under NAPCC, has a goal of achieving reduction in carbon emissions to the tune of 98 million tons per year2.

For industries, enhancing energy efficiency could be a very effective way of reducing their energy cost and contributing to the national goal of reducing carbon emissions. Thus, besides evaluating the impact of energy efficiency measures only in monetary terms, organisations need to include environmental benefits. This analysis could give management the confidence to implement solutions that may be financially less attractive but have a higher positive impact on the environment.

Case example on a major aluminum manufacturerA major aluminum manufacturer in India undertook the energy audit of its coal based captive power plant. The exercise revealed that through the implementation of energy efficiency measures, the heat rate of plant could be improved by 8 per cent leading to saving of 19000 ton of coal per annum.

In the current scenario, the same amount of electricity would get generated through a higher consumption of coal in the power plant resulting in higher greenhouse gas emissions. Reduction in coal consumption not only reduces emission of green house gases but also ash generation. Additionally, the energy efficiency measures would yield a saving of over INR 3 crores a year with an investment of INR 1 Crore.

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01. BP Statistics, 2013

02. New Release, June 2010 - Ministry of New and Renewable Energy

Soure: KPMG in India Analysis



About KPMG in India


KPMG in India, a professional services firm, is the Indian member firm of KPMG International and was established in September 1993. Our professionals leverage the global network of firms, providing detailed knowledge of local laws, regulations, markets and competition. KPMG in India provide services to over 4,500 international and national clients, in India. KPMG has offices across India in Delhi, Chandigarh, Ahmedabad, Mumbai, Pune, Chennai, Bangalore, Kochi, Hyderabad and Kolkata. The Indian firm has access to more than 7,000 Indian and expatriate professionals, many of whom are internationally trained. We strive to provide rapid, performance-based, industry-focused and technology-enabled services, which reflect a shared knowledge of global and local industries and our experience of the Indian business environment.

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 156 countries and have 152,000 people working in member firms around the world.

Our Audit practice endeavors to provide robust and risk based audit services that address our firms’ clients’ strategic priorities and business processes.

KPMG’s Tax services are designed to reflect the unique needs and objectives of each client, whether we are dealing with the tax aspects of a cross-border acquisition or developing and helping to implement a global transfer pricing strategy. In practical terms that means, KPMG firms’ work with their clients to assist them in achieving effective tax compliance and managing tax risks, while helping to control costs.

KPMG Advisory professionals provide advice and assistance to enable companies, intermediaries and public sector bodies to mitigate risk, improve performance, and create value. KPMG firms provide a wide range of Risk Consulting, Management Consulting and Transactions & Restructuring services that can help clients respond to immediate needs as well as put in place the strategies for the longer term.

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About CII


The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India, partnering industry, Government, and civil society, through advisory and consultative processes.

CII is a non-government, not-for-profit, industry-led and industry-managed organisation, playing a proactive role in India’s development process. Founded over 118 years ago, India’s premier business association has over 7100 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 enterprises from around 257 national and regional sectoral industry bodies.

CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness and business opportunities for industry through a range of specialised services and strategic global linkages. It also provides a platform for consensus-building and networking on key issues.

Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes. Partnerships with civil society organisations carry forward corporate initiatives for integrated and inclusive development across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment of women, and water, to name a few.

The CII Theme for 2013-14 is Accelerating Economic Growth through Innovation, Transformation, Inclusion and Governance. Towards this, CII advocacy will accord top priority to stepping up the growth trajectory of the nation, while retaining a strong focus on accountability, transparency and measurement in the corporate and social eco-system, building a knowledge economy, and broad-basing development to help deliver the fruits of progress to all.

With 63 offices, including 10 Centres of Excellence, in India, and 7 overseas offices in Australia, China, Egypt, France, Singapore, UK, and USA, as well as institutional partnerships with 224 counterpart organisations in 90 countries, CII serves as a reference point for Indian industry and the international business community.

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KPMG in India contacts:

Dinesh KanabarDeputy CEO, Chairman - Sales and MarketsT: +91 22 3090 1661 E: [email protected]

Santosh KamathPartnerInfrastructure and Government ServicesT: +91 22 3090 2527 E: [email protected]

Sanjay SahDirectorInfrastructure and Government ServicesT: +91 22 3989 2541 E: [email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved.

The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International.

Printed in India.

Copyright © 2014 by Confederation of Indian Industry (CII), All rights reserved.

No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the copyright owner. CII has made every effort to ensure the accuracy of information presented in this document. However, neither CII nor any of its office bearers or analysts or employees can be held responsible for any financial consequences arising out of the use of information provided herein. However, in case of any discrepancy, error, etc., same may please be brought to the notice of CII for appropriate corrections.

Published by Confederation of Indian Industry (CII), Northern Region Headquarters

Block No. 3, Dakshin Marg, Sector 31-A, Chandigarh 160030 (India), Tel: +91-172-5022522 / 2607228; Fax: +91-172-2606259; Email: [email protected]; Web: www.cii.in

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