ET: Barriers to electricity efficiency: March 17, 2008

IT IS estimated that potential saving of electricity through efficiency is about 20% of the electricity generation today. It reduces the requirements of capacity addition to electricity generation by much more than 20%. Our average aggregate technical and commercial loss (ATC loss) is around 33% and plant load factor (PLF) is about 72%. So a reduction in demand by 20% (through efficiency gains) translates in to an effective 30% gain in capacity and further to 42% when an increase in PLF is also accounted for. So the potential of reduction in the capacity addition requirements is around 42% through energy efficiency efforts. Compare this with the Eleventh Plan target of addition of 78,000 MW — 42% of this is 32,760 MW and hence if we do our homework on energy efficiency then a capacity addition of only 45,240 MW during the Eleventh Plan will meet the projected requirements.

Why is energy efficiency not picking up? There are a few barriers to this which need to be understood and addressed. The barriers can be classified as internal and external. External barriers are those where efforts by us as a society or a country are not sufficient to produce satisfactory results since vital support from outside is required. The first external barrier is technology, generally costlier than the one that was used hitherto. Appropriate policies to make the efficient technology competitive in comparison with the less efficient technology may be a strategy in these situations.

   Another barrier is that the technology or the product of the new technology may require a large investment upfront. The initial investment requirement can be a real barrier, even when the high initial cost is recoverable during the life cycle of the technology or the product. Here the challenge is to create a bankable investment project so that investors are willing to invest in such a project. One way to achieve this is to combine the benefits of clean development mechanism (CDM) of the UN Framework Convention for Climate Change (UNFCCC) in efficiency projects to defray some of the costs or to augment the returns.

   Another way can be to combine the profits from manufacturing new technology products with the financial engineering of the project. This leverages the profits of the manufacturer towards funding the project costs. In energy efficiency the CDM benefits may not be substantial as compared to the real savings due to the reduction in electricity bills. The return from energy efficiency projects may be enhanced by using CDM if the transaction cost of CDM is less as compared to the extra gains from selling the CERs. 

   Internal barriers can be classified as lack of knowledge and awareness among the stakeholders, high initial costs, manufacturers or consumers not paying the economic price of electricity, lack of incentive to adopt efficient technology, costs of inefficiency not being borne by the producer or the service provider, or extravagant use of electricity by the relatively well off class.

   Lack of knowledge about the advantages of efficient technology or product and pay back period is one of the barriers relevant to a developing country. The consumers need to be informed about efficiency of electricity use and how it is beneficial to them. A programme like Standard and Labelling of electric appliances is an example where labels pasted on the appliance are used to educate the consumers about how efficient the equipment is. 

   Higher efficiency means saving in the electricity bills and if the cost of efficient technology can be recovered in a few years through reduction in bills then there should not be any obstacle to the use of more efficient technology. An impediment can be the capacity of the consumer to make investment in newer technology products. Let us take the case of CFL. It costs 12 times more to purchase a CFL today, since an incandescent bulb costs about Rs 10 whereas a CFL costs around Rs 120.

   ANOTHER impediment in changing over to new and efficient technology may be a tariff regime, where extra costs of inefficiency are passed through to the consumers. In those sectors where the price of a service or product using electricity is either administered (APM) or is based on a cost plus methodology then additional costs as a result of inefficient use of energy is passed on to the consumer. When the final cost is determined by a cost plus method or APM, there is no incentive for the industry to use more efficient methods. Wherever the price of the service or the product is not determined by the market it may be difficult to convince the manufacturer or service provider to use more efficient technology. Here the way to start is either through the regulator or through policy initiatives regarding price determination mechanisms. 

   Another hurdle is when the actual user of an inefficient product has no incentive to switch over to an efficient one. It is required in such cases to initiate adoption of efficient technology by a stakeholder who has the real financial interest. A typical example of this is the agricultural pump set. As the farmers are either not paying at all or are paying subsidised charges for use of electricity, there is no incentive to the farmers to change to a more efficient pump set. In such cases the initiative for changing the pump sets has to come from some other stakeholder who is paying the subsidy bills, say, the agriculture department or the finance department of the state government on whose budget the subsidy to farmers is being reflected. Project design in such cases has to take care of these ground realities.

   Wherever public services are concerned, it is again a case of lack of incentive for the organisation providing these facilities to adopt a more efficient technology. Let us take the example of municipal functions like street lighting or drinking water supply etc. In these cases since the bills are to be paid by the citizens and the service charges are a pass through, the impetus for changing to a more efficient system has to come from the people or the government. Once an efficient technology is adopted by the municipality the benefits will go to the people but since it is being managed as a public service hence the municipal body may not be incentivised enough to start this change of technology. In such cases a project model that can achieve financial closure and is attractive enough for the private sector Electric Service Company (ESCO) is important.

   So a strategy designed as per the intricacies and barriers to introduction of electricity efficiency can lead to significant savings in electricity. In a power deficit situation that we are facing today energy efficiency is a real source of power waiting to be harnessed.