Consultation begins on National Energy Savings Initiative

January 2012 Authors: Elisa de Wit, Samuel Tyrer

Contacts

Introduction

The Federal Government formally committed to exploring the possibility of a national Energy Savings Initiative (ESI) in July 2011 as part of its Clean Energy Future Plan (Plan). In line with this commitment, the Department of Climate Change and Energy Efficiency (DCCEE) has now established the National Energy Savings Initiative Working Group (ESI Working Group) to prepare a report on possible design options for a National ESI.

This legal update:

  • provides a brief overview of existing ESI schemes in Australia;
  • discusses the Issues Paper released by the Working Group in December 2011; and
  • details the likely next steps in the development of a national ESI and what stakeholders should do in response to the Issues Paper.

Existing schemes

Energy savings or energy efficiency schemes impose obligations on energy retailers to implement energy savings at the level of the consumer, for example in households and businesses. Typically, energy retailers are made liable to pay penalties for not meeting prescribed energy savings targets and will thus have an incentive to seek out the cheapest means by which to satisfy the targets by undertaking certain eligible activities. Alternatively, where the scheme allows for trading, a retailer may choose to pay another party to undertake eligible activities so as to meet relevant targets. Such schemes are designed to bring about improvements in energy efficiency using a market-based approach. Whilst it is expected that increased costs on the part of energy retailers liable under any national ESI will flow through to consumers, these will be offset by the adoption and implementation of improved energy efficient practices. Currently, energy savings schemes operate at a State level.

New South Wales Energy Saving Scheme

The NSW Energy Savings Scheme (ESS) commenced on 1 July 2009 and sets a state-wide energy saving target measured as a percentage of total retail electricity sales. The ESS applies mainly to electricity retailers who must meet individual energy savings targets through obtaining and surrendering tradeable Energy Saving Certificates (ESCs). These are created by undertaking activities that improve energy efficiency in the residential, commercial and industrial sectors.

Victorian Energy Saver Incentive

The Victorian Energy Efficiency Target (VEET) commenced on 1 January 2009 and is now referred to as the Energy Saver Incentive. The scheme targets state-wide greenhouse gas abatement and operates by placing a liability on electricity and gas retailers with more than 5000 customers in Victoria to surrender a number of tradeable Victorian Energy Efficiency Certificates (VEECs) every year. VEECs can be created by helping energy consumers make energy efficiency improvements to their homes, business premises or other non-residential premises.

South Australian Residential Energy Efficiency Scheme

The Residential Energy Efficiency Scheme (REES) also commenced on 1 January 2009. Under the scheme, electricity and gas providers with more than 5000 residential customers are required to provide incentives for households to improve household energy efficiency. The REES specifically targets low-income homes as a priority by requiring obligated energy retailers to meet 35 per cent of their obligations through the delivery of activities to such homes. Targets must also be met for the delivery of energy audits to these households. Although trading of credits between energy retailers is allowed under the REES, unlike the NSW and Victoria schemes no tradeable certificates are issued.

It is important to note that the Plan makes the introduction of a national ESI contingent on the abolition of existing and planned State-based schemes. Accordingly, the long term future of these separate schemes is uncertain.

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Other countries

ESI schemes currently operate in various forms in Belgium, Denmark, France, India, Italy, the United Kingdom and twenty-six states of the United States. The European Commission has also issued an energy efficiency directive to EU Member States requiring them to implement energy saving schemes.

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Issues Paper

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.

Sectoral coverage

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.

Fuel coverage

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).

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Carbon Pricing Mechanism

On 8 November 2011, the Australian Federal Government legislated to place a fixed price on carbon for a period of three years, commencing on 1 July 2012. View our legal update released on 10 July for more details of the mechanism: Carbon pricing mechanism snap shot: key features, certainty and flexibility.

The Mechanism will transition to a flexible price emissions trading scheme on 1 July 2015. Relevant units for compliance under the Mechanism will be “carbon permits”, which will each represent one tonne of CO2-e of greenhouse gas emissions. However, any certificates generated under a national ESI through energy savings activities will not be eligible for compliance with the Mechanism. The reason for this is given in the Issues Paper:

the electricity and gas sectors are covered by the carbon price mechanism cap, so any reductions made in energy use (through a national Energy Savings Initiative or other means) do not represent an additional reduction in Australia’s national emissions.

Accordingly, a national ESI will operate as a complementary measure to the Mechanism but will remain a separate scheme.

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What next?

Review of the Issues Paper is recommended for those stakeholders likely to be affected by a national ESI.  Stakeholders can make submissions on the Issues Paper until  Monday 27 February 2012. As noted above, these responses will be used by the Working Group to prepare a progress report to the Federal Government in the first half of 2012. Further work will then be undertaken by the Working Group in the second half of 2012, including preparation of a regulation impact statement, to enable the Federal Government to decide whether to pursue the ESI.

If you require further information about the ESI, would like to understand the opportunities that arise from it or require assistance in formulating a submission in response to the Issues Paper, please contact a member of our Climate Change Group.

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