July 2012

1. Introduction

In April 2012, the former Department of Primary Industries (DPI) released an Issues Paper: Liabilities for Relevant Entities (Issues Paper) in response to two key issues raised by stakeholders relating to the method by which scheme liabilities are calculated and apportioned to relevant entities under the Act.

This Discussion Paper:

  • sets out the Department's response to submissions received on the Issues Paper that specifically concern the "5000 customer threshold"; and
  • outlines the Department's proposed approach to addressing that issue.

2. Background

In section 3(1) of the Victorian Energy Efficiency Target Act 2007 (the Act), a relevant entity (RE) is defined to be

"...a person who-

  1. sells either electricity or gas, or both electricity and gas, to customers; and
  2. has 5000 or more customers to whom either electricity or gas is, or both electricity and gas are, sold to in Victoria; and
  3. makes a scheme acquisition in connection with the sale of either electricity or gas, or the sale of both electricity and gas, to those customers;"

The establishment of the 5,000 customer threshold ensures that new entrants to the retail energy market for small and residential customers are not burdened in a way that detracts from a broader objective of facilitating a competitive energy retail environment in Victoria. By excluding these new entrants from VEET obligations, those businesses avoid the immediate burden of the need to establish administrative processes to manage compliance with VEET until such time as their customer base reaches the 5,000 customer threshold.

However, it has been suggested that the retention of the 5,000 customer threshold does not deliver an equitable outcome and distorts the competitiveness of the retail energy market in the context of the expansion of the VEET scheme to the business and non-residential sector. This distortion arises from the ability for retail licensees with less than 5,000 customers to gain a competitive cost advantage from being exempt from VEET liabilities. As a result, these licensees are able to, for example, make more attractive energy supply offers to large energy using customers who, because of their size, account for significant volumes of energy sales.

Thus, whilst the 5,000 customer threshold was originally provided to assist new retailers to enter the market, the threshold appears to unintentionally:

  • provide a means for licensees who account for significant volumes of energy sales to avoid VEET liabilities; and
  • enable incumbent energy retailers to split their business using 'spare' retail licenses that have less than 5,000 customers to gain a competitive advantage in respect of attracting large energy using customers.

3. Submissions received on the Issues Paper

Submissions on the 5000 customer threshold can be broadly distinguished according to three representative groups: large energy users; energy retailers who are REs; and retailers who are not REs. While there are differences in the detail, submissions from respondents within each group were reasonably consistent and appeared to reflect similar key concerns.

1. Large energy users

Large energy users generally argued that they should be shielded from VEET costs or have minimum exposure to VEET costs. This was variously said to be achievable by:

  1. excluding large users entirely from participation in the scheme and from their energy being counted in relevant entities' scheme acquisitions;
  2. ensuring that large energy users can purchase energy from a retailer that is not a VEET relevant entity – ie by not changing the 5,000 customer threshold; and
  3. having the widest participation of users possible so as to equitably spread the burden more widely and more thinly across all users.

2. Retailers that are REs

Retailers that are REs supported a review of the 5,000 customer threshold to remove market distortions that could affect retailers' competitiveness for large energy using customers. There was also some acknowledgement from REs of the disproportionate compliance burden that VEET may impose on new market entrants compared to incumbent retailers and that an alternative threshold needed to be fair.

REs offered a range of alternative thresholds including:

  1. no threshold (consistent with the NSW approach under the NSW Energy Savings Scheme);
  2. a consumption based threshold calculated based on the consumption of 5,000 residential, small or average business customers;
  3. a dual consumption threshold and a 5,000 customer threshold, with liability to be an RE triggered by whichever threshold is exceeded first.

3. Non-RE retailers

Submissions were received from two energy retailers that are not REs who advocated a cautious approach to changing the threshold, in close consultation with retailers. It was submitted that any changes to be implemented should be undertaken in a manner that provides adequate notice for retailers to adapt to the change.

4. The Department's response

1. Large energy users

  1. The Department considers that this issue has been largely addressed by the exclusion of sites registered under the Environment Protection Authority's Environment and Resource Efficiency Plan (EREP) program from the calculation of RE scheme acquisitions. This exclusion was given effect through the making of the Victorian Energy Efficiency Target Amendment (Scheme Acquisitions) Regulations 2012 which came into effect on 1 July 2012. This amendment aligns scheme acquisitions with eligibility for participation, which ensures that only consumers who are able to participate in the scheme are likely to be charged costs associated with VEET by their retailer.
  2. Enabling non-EREP large users to avoid VEET costs based on their selecting a retailer in the market with less than 5000 customers would maintain the distortion complained of by REs. the Department seeks to address this distortion and does not therefore support this position.
  3. Having the widest participation of users under VEET to enable the market to find the lowest cost means of delivering energy efficiency savings is an underlying principle of expanding the scheme beyond the residential sector. This approach ensures that costs passed through to consumers are minimised and spread on a fair and equitable basis.

2. Retailers that are REs

  1. No Threshold
    Entirely removing the trigger threshold on which retailers become liable to contribute to meeting the VEET scheme target would fundamentally alter the basis on which retailers are required to participate in the scheme.

    Care is needed to ensure that removing the threshold entirely does not result in further unintended consequences and an exemptions mechanism, similar to that included in the NSW Energy Savings Scheme, may also need to be created.

    Given the complexity of implementing such a change, and the likelihood that a Business Impact Assessment may be required, it is considered that removing the threshold altogether is not an option that could be pursued in the immediate term.
  2. A consumption based threshold
    The Department is open to considering an option to replace a customer number based threshold with a consumption based threshold.

    A consumption based threshold based on the average consumption of 5,000 residential customers is considered preferable to the average consumption of 5,000 residential and business customers, as the latter would effectively raise the threshold so as to have the effect of excluding some retailers that are currently captured as REs. The Department does not consider it desirable or necessary to increase the protection currently provided to new entrants from VEET obligations in this manner.
  3. A dual consumption threshold and 5000 customer threshold
    the Department is open to considering an option for a dual threshold comprising a consumption threshold – determined as discussed above in b) – and a 5,000 customer threshold, with liability to be an RE triggered by whichever threshold is exceeded first.

    A dual threshold provides the added benefit of ensuring that the obligation on existing REs to contribute to the target is not disturbed while addressing the market distortion created by the threshold. Furthermore, by maintaining the current 5,000 customer threshold it may be possible to proceed with the amendment without the need to undertake a Business Impact Assessment, on the basis that the change addresses an unintended consequence, removes a loophole that enables certain retailers to obtain an unfair competitive advantage, restores the intended effect of the 5000 customer threshold.

3. Non-RE retailers

The Department accepts that the setting and adoption of a threshold should be carefully examined in close consultation with retailers.

5. Proposal for change

When the VEET scheme commenced in 2009, the scheme was initially targeted to residential consumers. At that time, as well as supporting new entrants to enter the small/residential retail energy market, the 5000 customer threshold – together with the definition of 'scheme acquisitions' which was confined to residential customers – also provided a crude means of confining scheme liabilities to retailers who supplied energy to residential consumers. This contrasts with the approach adopted under the, now concluded, Victorian Renewable Energy Target (VRET). Under VRET, liabilities were imposed, with some exclusions, on purchasers of electricity from the National Electricity Market broadly as all energy consumers were to equally benefit from the investment in renewable energy generation.

With the ongoing expansion of the VEET scheme to the non-residential sector and the examination of opportunities for harmonisation with the NSW Energy Savings Scheme, a deeper review of the scheme design might evaluate the desirability of removing the 5000 customer threshold altogether. Such an approach would promote alignment between the expanded scope of consumers eligible to participate in the scheme and the retailers who supply energy to those consumers.

Implementing such a change would involve a significant revision to the basis on which retailers become liable under VEET and require careful consideration of the consequential impacts. As such, the Department considers that proceeding with such a change would involve significant delay in ensuring that an appropriate analysis and consideration of the scheme design options is completed. Depending on the outcomes of that analysis, a Business Impact Assessment may also be required.

However, in order to provide a timely response to the issues currently raised by stakeholders, the Department considers that a preferable interim approach is to, as soon as is reasonably practical, address the unintended market distortion that enables retail licensees with less than 5000 customers to offer more competitive supply offers to large customers.

The Department has taken into account the following Principles in considering the alternative thresholds for liability:

  • remove competition distortions between retailers for large energy using customers;
  • ensure that REs that are currently liable do not come off the RE list to minimise further unintended impacts on the VEET market;
  • recognise that there is a disproportionate burden that may be unfair for a new market entrant;
  • avoid unintentionally making dedicated suppliers of energy to consumers who are ineligible to participate in VEET – eg EREP sites – liable to contributing to the VEET.

Accordingly, the Department proposes that the basis on which a retailer becomes liable to contribute to meeting the VEET scheme target be a dual threshold triggered when:

  • their customer base reaches 5000 customers; or
  • their scheme acquisitions of electricity exceeds 30,000 MWh; or
  • their scheme acquisitions of gas exceeds 350,000 GJ

    whichever occurs first.

The calculation of the electricity and gas consumption thresholds is based on average annual consumption of 5,000 residential customers approximated for this purpose to be 6 MWh of electricity, and 70 GJ of gas.

In proposing the above thresholds for electricity and for gas, consideration was given to the feasibility of using a single consumption threshold that combined both electricity and gas expressed in GJ of energy. That option was not considered feasible as it is difficult to directly compare electricity consumption and gas consumption in such a way that would reasonably reflect the energy consumption of 5,000 residential customers. Accordingly, separate thresholds are proposed for simplicity and ease of administration.

The Department considers that this proposal strikes an appropriate balance between removing market distortions in respect of supply offers to large energy using customers while recognising that there may be disproportionate burdens for new market entrants to the retail market. As such, small-scale supply of energy to non-EREP sites will not make an energy retailer liable to VEET under this proposal, provided the supply does not exceed one of the consumption triggers.

It is acknowledged however that this is not a perfect solution as there remains a threshold that could still theoretically be manipulated for commercial advantage. As indicated above, a fuller solution to entirely address this problem would require deeper analysis and potentially also require the preparation of a Business Impact Assessment.

The Department invites commentary on this proposal.

6. Timing

The possible timing for implementing the proposed change depends on when a bill could be brought to Parliament.

Ideally, The Department considers that changes to the trigger threshold for retailer liabilities under VEET should be implemented at the start of a compliance year. This will ensure that overall scheme liabilities on relevant entities can be reasonably aligned with the target for that year.

However, as indicated in the Issues Paper, it is unlikely that a legislative amendment could be implemented before the end of 2012.

7. Submission timelines

Written submissions are invited on the issues raised in this paper. Submissions should be provided no later than Monday 13 August 2012.

1the Electricity Industry Act 2000

prohibits a person from engaging in the supply or sale of electricity unless the person holds a relevant license granted by the Essential Services Commission.

2 Under the NSW ESS, a broad range of energy suppliers – energy retailers, direct suppliers of electricity, and market customers – are all liable to meet energy savings targets with exemptions available in certain situations.

3 In ACIL Tasman modelling undertaken to support the Regulatory Impact Statement prepared in March 2011 for the expansion of the VEET scheme for 2012-2014, average annual residential energy consumption was assumed to be 5.71 MWh of electricity, and 66 GJ of gas.

4 1 MWh, as a unit of energy, can also be expressed as 3.6 GJ.

5 Energy consumed at EREP sites is already excluded from being counted towards RE liabilities by the making of the Victorian Energy Efficiency Target Amendment (Scheme Acquisitions) Regulations 2012.

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