On 21 December 2011, the ESI Working Group released an Issues Paper seeking stakeholder input on various design aspects for a national ESI. The responses received from stakeholders will be used to prepare a progress report to the Federal Government in the first half of 2012.
The Issues Paper is primarily concerned with the objectives and major design elements of a national ESI. Possible objectives of the scheme discussed in the paper are lowering customers’ total energy bills, improving energy affordability, reducing greenhouse gas emissions, reducing the cost of achieving any emissions target and reducing transition costs resulting from having multiple state schemes. The priority in which these objectives are viewed will directly influence the design of the scheme. Major design elements for consultation identified in the Issues Paper are discussed below.
Trading and certificates
The Issues Paper seeks stakeholder’s views on the benefits and costs of ‘trading’ in existing State-based schemes. Under the NSW and Victorian schemes, liable parties have the option of undertaking activities themselves or purchasing certificates on the market. A potential problem with trading is the risk that trading may not occur if there are only one or two major energy retailers. As such, parties may not be willing to undertake energy savings activities.
The Government has committed to investigating a national ESI that is broadly based and encompasses the residential, commercial and industrial sectors. This approach is supported by the Issues Paper:
Different sectors will have different opportunities to improve energy efficiency, and can potentially deliver different quanta of activities. This will affect decisions about which sectors will be eligible to have activities undertaken in them, and which sectors are allowed to undertake activities, and what activities can be undertaken.
It is also possible to have broad sectoral coverage but only allow certain energy saving activities to be undertaken in one sector and not in another, so as to achieve different results.
An issue related to sectoral coverage, is which fuels are covered by the scheme. Electricity is a fuel covered in all the State-based schemes discussed above. The South Australia and Victorian schemes also cover gas. The Issues Paper frames the issue of fuel coverage in the following way:
Covering a wider range of fuel offers the potential to reduce the overall scheme costs and increase the benefits by opening up a greater array of low-cost energy efficiency opportunities. However, this may also add complexity to a scheme, which may increase administration and participation costs.
Various factors have been identified as relevant to which fuels are covered by a national ESI, including:
- location and activity of use: location is important to consider because in some regions particular fuels are used, which are not used in other regions. Similarly, a region may exhibit a preference for one type of fuel. Accordingly, it may not accord with the objectives of a national scheme to include fuels that are infrequently used
- opportunities for savings: the various ways in which energy savings can be achieved by using a fuel in different ways will also influence whether the inclusion of that particular fuel in the scheme will achieve scheme objectives
- measurement ease: the ease with which fuel usage and savings can be measured is important because unless energy savings can be calculated it will not be possible to evaluate the effectiveness of the scheme.
Units of measurement
The issue of which fuels are included in the scheme will impact on the appropriate unit of measurement for the scheme. This is because different units of measurement are used for different fuels. Similarly, the level of energy savings expected to be achieved through eligible activities is also a relevant consideration. If large energy savings are expected, then a unit of measurement more appropriate to measuring greater amounts of energy may be more appropriate.
Targets and penalties
The energy efficiency targets that are set will control how effective the scheme is at reducing energy consumption. The Issues Paper considers that:
If the target is too low, the objectives of the scheme may not fully be met. If the target is too high, the scheme will drive investment in higher-cost energy efficiency improvements that are not cost-effective from a private or social viewpoint.
Related to the target set is the appropriate penalty to be imposed on parties that do not meet energy savings obligations. Penalties would operate to create an incentive for liable parties to meet targets under the scheme.
Managing a smooth transition from state-based schemes
As part of its Terms of Reference, the Working Group is required to consider the possible arrangements for a smooth transition from State based schemes to a national ESI.
Energy use and efficiency in low income households
Low income households have been identified as requiring specific consideration as a sector more likely to experience barriers to increased energy efficiency. Price barriers may prevent low income households from taking up energy efficient initiatives; similarly non-price barriers such as a reluctance to trust government and reduced literacy may also result in an inability or reluctance by low income households to take up energy saving initiatives. Accordingly, the Issues Paper seeks input on the policy options and methods which could be employed to reduce such barriers and outlines three potential ways to achieve this objective:
- A requirement based scheme which could mandate that a certain portion of savings occur in each sector (such as occurs in South Australia’s REES as discussed above)
- An incentive based scheme which would reward participants for activities undertaken
- A scheme without any requirements or incentives which focuses on the indirect affects to low income households.
Targeting peak demand
Peak demand occurs where demand for energy reaches its highest point (ie peak). Peak demand is more likely to occur in electricity networks than gas networks due to the ability of gas networks to retain some gas in pipelines. The problem with peak demand is that it is largely responsible for increasing the cost of energy infrastructure on the basis that any new energy infrastructure is designed around peak demand requirements. However, as noted in the Issues Paper:
Peak demand is often 1.4 times higher than average demand, so a large proportion of electricity infrastructure is under-utilised much of the time
A consideration is whether peak demand can be addressed in the national ESI. Energy Savings Initiatives including a peak demand component are not common and consequently there is little precedent to base a design on. However, a national ESI scheme targeting peak demand could provide incentives to promote peak reduction by:
- allowing liable parties to claim additional credit for any peak demand reduction impacts of their activities;
- imposing a requirement that a certain proportion of a parties eligible activities result in peak demand reduction.
Another alternative to promote peak demand would be to create a ‘sub-scheme’ within a national ESI that imposes obligations to reduce peak demand that are separate to the obligations to undertake energy savings activities.
Further detailed discussion on each of the design elements is contained in the Issues Paper. In addition, consideration is also given to the interaction between a national ESI and the recently legislated carbon pricing mechanism (the Mechanism).