Energy

PAT Scheme (Perform, Achieve & Trade):

A Blessing in Disguise

The PAT Scheme introduced by the Bureau of Energy Efficiency (BEE) under the purview of the Ministry of Power aims to reduce the energy consump-tion in 8 energy intensive sectors by 6.68 million toe by 2015. With the PAT Scheme becoming a reality, organizations should develop a strategic ener-gy management plan to comply with the PAT targets for each cycle. In reali-ty PAT Scheme is a blessing in disguise, an intuitive way to move towards the Triple Bottom Line and overall Energy Excellence, say Shardul Kulkarni, Amit Kumar Singh and Pranab Medhi of Tata Strategic Management Group.

The PAT Scheme (Perform, Achieve and Trade) is one of the four energy efficiency improvement initiatives spelt out under National Mission for Enhanced Energy Efficiency (NMEEE). The genesis of the PAT mechanism is the Energy Conserva-tion Act, 2001 which empowers the Ministry of Power (MoP) to notify industrial units consuming energy more than the threshold in 9 sectors namely Thermal Power Plants, Fertilizer, Cement, Pulp and Paper, Textiles, Chlor-Alkali, Iron & Steel, Aluminum and Railways as Designated Consumers (DCs). PAT scheme is currently being implemented in 2 cycles, Cycle I (2012-2015) and Cycle II (2015-18). It is targeted at increasing energy efficiency across identi-fied sectors and aims to save 6.68 million toe of energy at the end of Cycle I.

Bureau of Energy Efficiency (BEE) conducted sector specific studies to arrive at the acceptable band of Specific Energy Consumption (SEC) within an industrial sector. The wide band of SEC within an industrial sector is indicative of the large energy-savings potential and the differences amongst plants because of their varying vintage, production capaci-ty, raw material quality, and product-mix. Due to these differences SEC improvement targets are plant-specific. The targets are decided using a baseline which is the arithmetic average of the last 3 years (2008-10) SEC and normalized as per a methodology specified by BEE. It is observed that higher the energy efficiency (lower the SEC), the lower are the energy-saving targets. The SEC of a plant is calculated based on Gate-to-Gate con-cept (Only energy used within the boundary walls of the plant for producing the final product is considered) and expressed in terms of the metric ton of oil equivalent (toe) per unit of product. The total energy input to the plant is converted into a single unit and all products produced are converted to equivalent of the major product. A total of 478 DCs have been identified across 8 sectors for the first cycle of PAT. Each of the plants has been given an energy saving target for 2015. At the end of 2015, Designat-ed Energy Auditors will conduct energy audits to ascertain the achieved SEC. Inability to meet the targets would attract penalty while overachievement would be rewarded with Energy Certificates (ESCerts) which can be traded in the designated exchanges (IEX and PXIL). The value of 1 ESCert has been set to the value of 1 MTOE of energy (~Rs 12,500/MTOE as per BEE pricing formula). In short, the PAT scheme is a perfect example of rewarding the overachiever and penalizing the underperformer.

The PAT Scheme has generated a lot of ripples in the ener-gy intensive process industries and is perceived as a source

of capital outflows in tough economic times. Though there are some disputes over the target setting methodology and skepticism as associated with any new regulation about it’s implementation, some proactive firms have used this regu-lation to initiate comprehensive energy management and improve their margins. We, at Tata Strategic, believe that this is the right time to view the PAT scheme in a fresh per-spective; as a blessing rather than another regulatory road-block.

Figure 1: PAT Mechanism

The PAT scheme is in fact an indirect way to approach the elusive triple bottom line. The triple bottom line (TBL) cap-tures an expanded spectrum of values for measuring organ-izational success: profit, planet and people. In the private sector, a commitment to corporate social responsibility (CSR) has been traditionally viewed as a commitment to some form of TBL reporting. But a closer look reveals that the PAT scheme actually allows organizations to move to-wards a true TBL reporting. See Figure 2 below:

Figure 2: Triple Bottom-line Concept

Profit : The PAT scheme aims at reducing the energy con-sumption per unit of output product. In the current situa-tion when increasing competition is already putting pres-sure on margins, reduction in energy cost will help boost the bottom line. E.g. Energy cost accounts for ~30-35% of total manufacturing expenses for DCs in the cement sector. 10% reduction in the energy cost could potentially boost operating profit margins by ~20%.

Planet : Reducing energy consumption will not only benefit the DC but would also have a lasting impact on the planet. 1 toe reduction in energy consumption can poten-tially reduce carbon dioxide emissions by ~3.18 tons. Many progressive Indian Groups (e.g. Tata, Essar) have vol-untarily taken carbon emission reduction targets in the larger interest of community and Planet. PAT provides an excellent opportunity for such Groups to achieve their plan-

Introduction

Target Setting Methodology

PAT and the Triple Bottom Line

et specific objectives. In short, the PAT scheme aims to reduce pollution, protect conventional energy sources and manage waste. People BEE conducts conferences and workshops on energy efficien-cy and on new and advanced technologies. Companies could use such programs to train their employees for sustainable energy management. These employees could be further empowered by manage-ment to achieve higher performance through suitably de-signed Key Performance Indicators (KPI). With the proposed Companies Act mandating CSR spend, increased profit margins would also allow companies to con-tribute some portion of their profits to strengthening the community. In short, the PAT scheme hits the sweet spot between the three pillars of the triple bottom line.

Problem: A major cement player in West India was under the PAT scanner and was given one of the highest energy reduc-tion targets owing to poor energy management in the past. The company having recognized the benefits of energy effi-ciency decided to take proactive measures to ensure PAT compliance. Action: The company took the help of external consultants to undertake an energy audit to pin point areas for reduction of energy consumption. A structured exercise was conducted to identify opportuni-ties to reduce primary and secondary energy consumption across the integrated cement plant. Improvement areas were identified and associated capital expenditure and pay-back period were arrived at. Impact: The study revealed multiple improvement areas across the main plant, grinding unit and power plant. High levels of ingress air, low efficiencies of fans, venting in several blowers, lower efficiency of motors etc. were identi-fied. At the end of the exercise, measures with the potential of saving over 100 kilocalories per kg of cement were identified which translated into a reduction of ~20% relative to base-line SEC. ~25% of the saving potential could be realized without any incremental capex while the next 25% saving needed mini-mal capital investment. A SEC Abatement curve was pre-pared to enable the client achieve future PAT targets under Cycle I and II. See Figure 3 below:

Figure 3: SEC Abatement Curve

PAT: Destination or a Milestone in Overall Energy Excel-lence? By achieving PAT target, not only compliance is met but also organizations can move towards triple bottom line reporting. In spite of the many benefits of the PAT scheme, the under-lying principles of NMEEE can only be realized if PAT is seen as milestone and not a destination in the long journey to-wards “Energy Excellence”. CEOs and CXOs need to challenge themselves by asking the following strategic questions:

How does the company’s energy consumption and man-agement compare with peers/best-in-class/global play-ers? What are the best in class technologies and practic-es companies have adopted?

What are the gaps? Is there a need to review the com-pany’s long term energy consumption goals?

Is there an effective monitoring system and processes in place to achieve stated objectives? What kind of KPIs and dashboards are desired?

What is the overall strategic roadmap in terms of mile-stones/ investments/ benefits?

Thus journey to energy excellence involves climbing a mountain of internal improvements, following the rain-bow of best in class competencies and crossing the stream of arranging financial resources for energy saving measures.

With the introduction of market based instruments for ener-gy efficiency, the Indian industrial sector needs to develop a fresh strategic perspective on PAT. In fact, the PAT scheme should be seen as a blessing in disguise and an opportunity to achieve the ever elusive triple bottom line and achieve superior energy management. Going forward, PAT compliance could be treated as an im-portant milestone in the journey towards “Energy Excel-lence”. With ever rising cost of input energy, companies as-piring for such excellence are bound to gain sustainable stra-tegic advantage and earn handsome dividends going for-ward!!! _____________________________________________________________ © Tata Strategic Management Group, 2013. No part of it may be circulated or reproduced for distribution without prior written approval from Tata Strategic Management Group

Case Study: Cement Company in West India

Conclusion

About Tata Strategic The largest Indian owned Management Consulting firm

500+ engagements, 100+ clients, across countries, across sectors

Increasing presence outside the Tata Group & India

50+% revenue outside Tata Group

20% revenue outside India

Our offerings

Contacts:

The Energy Practice at Tata Strategic has in-depth understanding of Indian Power Sector and has focus on Energy Man-agement, Renewable Energy, Services and Smart Grid. We have been associated with private sector utilities, large cor-porates & MNCs and supported them in areas of strategy, market assessment and strategic performance improve-ment. USP of Energy Practice is a pool of consultants in areas such as EM, RE, generation, distribution & transmission. We are also a part of Core Group on Smart Grid at CII.

Energy

Shardul Kulkarni is Principal of Energy practice. He has about 11 years experience. His areas of specialization include Strate-gy Formulation, Project Finance and Energy Management. He is Certified Energy Auditor from Bureau of Energy Efficiency, an offshoot of Ministry of Power, India. (shardul.kulkarni@tsmg.com)

Amit Kumar Singh is an Associate Consultant. He has about 4 years of experience in the power sector and has worked on several engagements across segments in power (conventional & renewable), oil & gas and petrochemicals at Tata Strategic. Pranab Medhi is an Associate Consultant. He has about 3 years of experience and has worked on several engagements across segments in areas of Strategy Formulation, Energy Management and Organization Restructuring at Tata Strategic

Authors

Our Domains Auto Engineering Technology Infocomm, Education Healthcare Infrastructure & EPC

Functional Areas Strategy Organizational Effectiveness Delivery Excellence Logistics Sourcing Sales Effectiveness

Mumbai

B - 1001, Marathon Futurex, N.M. Joshi Road Lower Parel (East), Mumbai 400 013. INDIA Tel: +91 22 66376789 Fax: +91 22 66376600

Delhi

Level 12, Building No.8, Tower C DLF Cyber City, Phase II Gurgaon – 122002 Haryana, INDIA

Tel: +91 124 4696692 Fax: +91 124 4696970

Set Directions

Drive Strategic Initiatives

Support Implementation

Durables FMCG Retail Hospitality & Tourism Chemicals Energy

Vision

Market insights

Growth Strategy/Business Plans

Scenario Planning

India Entry

Alliance & Acquisition Planning

Strategic due diligence

Manufacturing Strategy

Strategy

Operations

Supply Chain Optimization

Throughput enhancement

Superior Fulfillment

Project Excellence

Procurement Transformation

Strategic Cost Reduction

Energy/Water Management

Revenue Enhancement

Product Innovation

Market Share Growth —Rural/Urban

Dealer Effectiveness

Sales Effectiveness

Organization Effectiveness

Organization Structure

Corporate Center Design

Roles & Decision rules

Culture Transformation

Performance Management

Capability Assessment

Talent Management

Marketing & Sales

Implementation Support

Implementation Plan

Program Management

Refinements/Course Corrections