Energy Saving Certificates (EScerts) – Market Outlook, Trading Strategy and related ponderable
– Anupam Das Purkayastha
Finally, the first EScert (Energy Savings Certificate) trade has taken place in IEX (India Energy Exchange) on 26th September, 2017.
An Energy Saving certificate or EScert is an exchange tradable instrument which is issued to an industrial unit in India for generating surplus energy saving of one metric ton of oil equivalent (TOE) beyond the target needed for compliance.
Under the Perform Achieve and Trade (PAT) mechanism of the National Mission of Enhanced Energy Efficiency, industrial units (Designated Consumers or DCs) in the energy intensive sectors of the Indian economy are assigned energy efficiency enhancement targets. To comply, each designated consumer needs to undertake energy conservation and efficiency enhancement measures within a stipulated 3 year period – cycle years. In the third (last year also called target year) of the cycle the assigned targets have to be complied with.
The first such PAT cycle covered the period 2012-13, 2013-14 and 2014-15 and assigned targets to 478 industrial units belonging to 8 energy intensive sectors.
A hallmark of PAT is the market mechanism linked to it. The industrial units which are unable to meet the assigned SEC target end up with a shortfall calculated in terms of TOE. The market mechanism offers a flexible opportunity to industrial units to comply by making good the shortfall in energy performance by purchasing 1 EScert for each TOE of shortfall. The EScerts issued to those with surplus energy savings can be traded with those having shortfall only through an exchange trade mechanism in the designated power exchanges in India. The strike price for the trade is discovered by the market during trading.
The first such trade of EScerts in India was executed on 26th September 2017. Industrial units with their surplus and deficits of first PAT cycle 1 participated in the trade.
Highlights of the first EScert trade in IEX
The first EScerts trading in India took place in IEX – one of the two power exchanges in India designated for the purpose. The discovered price in the first trading session has been reported to be Rs.1200 per EScert.
The exchange received 2,39,644 sell bids and 50,904 buy bids. The volume of trade was 10,904 EScerts.
This implies 21.4% of buy bids transacted successfully whereas 4.5% of the sell bids transacted successfully.
The exchange reported that 77 Eligible Entities are registered in the exchange and 39 of them i.e. 50.6% participated in the first session.
Observations, Analysis and Open questions
We have just experienced one trading session. Given that such trading sessions are slated to take place weekly, there are many more trading sessions to come and the full picture is yet to emerge. Also the registration process for becoming Eligible Entity seems to have speeded up with 162 DCs already registered and 81 reported to be in the pipeline(*). However, it is worth analysing the picture thus far, to look at the first indications or questions which are emerging when the outcome of this trading session is analysed in context.
|Traction in first EScerts trading session|
|Sell Bids in first trade session||6.3% of total supply|
|Buy Bids in first trade session||3.6% of expected demand|
|Participants in first trade session||9.3% of expected participants|
It was well known that the supply of EScerts is about 2.7 times the demand for EScerts – assuming none of the EScerts are banked. Yet total EScerts offered for sale was about 6.3% of the total issued EScerts (approx. 38.24 Lakhs). The purchase bids amounted to 3.6% of the total purchase requirement (approx. 14.23lakhs).
Till 15th September there were about 126 eligible entities who had registered in EScerts registry. Only 61% of those have participated in the first trading session. Is enthusiasm for trading somewhat muted? Or is this a wait and watch approach adopted in absence of any pricing and other cues for EScerts?
The price of Rs1200 per EScert discovered in the first trading session works out to about Rs.0.10 per kWh. Is this price level good enough to motivate surplus savings in the on-going PAT cycles ie.PAT cycle 2 and PAT cycle 3? Within a corporate set up, is the price good enough to justify CXO interest in the market element of the mechanism and the capex or opex that it is capable of driving or will this rescind PAT to a largely compliance requirement with muted interest in the associated market aspect?
An area of immediate importance for DCs would be to decide what trading strategy to adopt in the upcoming trading session. There are some who would consider this price to be far lower than what they had expected their EScerts to fetch. Given that there were sellers who had offered to sell their EScerts at that price, one can infer that the marginal cost of producing each TOE of surplus saving has been Rs.1200 or lower at the least for the DCs who have been able to sell their offered volumes. How representative is that as cost of producing energy savings for other DCs with surplus will be known from the price discovery in the subsequent trade sessions. So for a DC with the marginal cost of generating the surplus savings (EScerts) greater than the discovered price, it would be prudent to look at the status of energy performance of the 2nd PAT cycle and decide whether banking of cycle-1 EScerts for use in cycle-2 make more commercial sense. What if significant number of DCs with issued EScerts take the banking route? How will it impact the market? If one was a seller with marginal cost of generation of EScerts less than the first trading session’s market clearing price – then for them even at this price there would be room for speculating on the possible upside. Their trading strategy in the upcoming sessions would likely be to maximize the upside from EScert sale.
Unlike RECs (Renewable Energy Certificates), which are also traded in the power exchanges, the regulators have not assigned EScerts a floor and forbearance price. It would be interesting to see whether the outcomes that emerge from subsequent trading sessions trigger a need for fixing a floor or forbearance price, at least in the subsequent PAT cycles.
With commencement of EScerts trading, an important landmark has no doubt been reached in PAT. With this, the 450+ industrial units of 8 energy intensive sectors of Indian economy have reached the last leg of their PAT cycle-1 journey. In the process a massive nationwide framework for systematically driving energy efficiency enhancement and continual energy performance improvement in industry has gotten deployed. This has indeed been a massive endeavour on the part of all stakeholders.
For DCs this has brought in a regime of building credible energy performance improvement. The technical measures which they have undertaken until 2015 have fixed their PAT cycle 1 SEC. Now they need to put in the mechanism in place to deal with the market aspect of their energy savings and compliance. As they do so, they need to set themselves up internally to effectively analyse trading outcomes, assimilate market insights and develop trading strategies for EScerts – be it to capture potential market upside or to comply at the lowest possible cost.
The inventory of clearable EScerts (after discounting excess supply), seems to have been valued at RS.170Crores by the market in the first session. To what extent there will be value enhancement or erosion of the inventory will be known in the coming sessions.
The data used in the article has been referenced from IEX Market Update dated 26th Sept 2017, https://beenet.gov.in/UI_Forms/Registry/Registry_Doc/Press%20release%20for%20Bureau%20of%20Energy%20Efficiency_16%20March%202017.pdf, https://beenet.gov.in/UI_Forms/Registry/Eligible_Entities.aspx, https://beenet.gov.in/UI_Forms/General/Login.aspx.
The views expressed by the author are his personal views. The content of this article does not constitute any trading advice.