Compliance choice analysis for India's thermal power sector in the market-based energy efficiency regime

Abstract

India has recently introduced a market-based scheme―Perform, Achieve, and Trade―to realize emission reduction by enhancing energy efficiency. In the case of thermal power plants, investment in energy efficiency projects, using clean coal and buying energy saving certificates are the available compliance options for complying with the scheme. These options are associated with specific forms of cash flows that depend on the uncertain price of energy saving certificates and clean coal premium. This paper uses a Monte Carlo-based decision tree approach to find the optimal compliance options for an efficient and a less efficient thermal power plant. The decision tree evaluates different sequences of compliance options in three consecutive PAT cycles by using the discounted cash flows and their associated probabilities. The study shows that investment in energy efficiency is optimal in the first PAT cycle for the inefficient plant only. The threshold certificate price for the efficient plant is substantially higher than the inefficient plant, implying that the real efficiency improvement is likely to take place in the low-efficiency plants. The study also indicates that the investment in high-efficiency plants is not optimal over a wide range of certificate prices and the incremental cost of clean coal.