Background

The Department of Primary Industries (DPI) is investigating two key issues raised in relation to the method by which scheme liabilities are calculated and apportioned to relevant entities (energy retailers that must contribute to the meeting of the VEET target) under the Victorian Energy Efficiency Target Act 2007 (the Act). Issues have been raised by both relevant entities (REs) and large energy users, and other representative organisations.

The VEET target is collectively met by REs through greenhouse gas emissions liabilities imposed on REs under the Act. RE liabilities are calculated with reference to "scheme acquisitions" and the "Greenhouse Gas Reduction Rates"(GHGRR) in accordance with the formula set out under section 31 of the Act . The GHGRRs are set with regard to the greenhouse gas emissions attributed to electricity and gas end-use consumption. The GHGRRs for a compliance year are set by an Order in Council made by 31 May in that calendar year, based on energy consumption in the previous full calendar year.

The two key issues being investigated by the former DPI are:

1) Calculation of "scheme acquisitions"

A discrepancy exists between the scope of the consumers whose energy consumption contributes to the calculation of RE liabilities (ie scheme acquisitions) and the scope of consumers who are eligible to participate in the scheme.

Section 3(1) of the Act defines scheme acquisitions to mean:

"the purchase for on-sale to a prescribed customer or prescribed class of customers in Victoria of [electricity or gas]".

In accordance with the class of customers prescribed under regulation 121 of the Victorian Energy Efficiency Target Regulations 2008 (the Regulations), RE liabilities are currently calculated based on an RE's energy acquisitions for all of its customers, except for gas sold to gas-fired electricity generators.

However, large businesses that are subject to the Environment Protection Authority's Environment and Resource Efficiency Plan (EREP) program are not eligible to participate in the VEET scheme2.

A situation has arisen where REs are seeking to apply a VEET pass-through cost to business sites listed on the EREP register despite those business sites being excluded from participating in VEET. This action by REs was not envisaged in the modelling for the Regulatory Impact Statement published in March 2011.

2) Definition of Relevant Entities

Stakeholders have requested that the criteria that determines whether a retailer is an RE be reconsidered. Specifically, stakeholders have questioned the suitability of the criteria that imposes a liability on energy retailers where retailers hold 5,000 customers or more as set out under paragraph (b) of the definition of relevant entity under section 3(1) of the Act.

Consultation

The Department is engaging in targeted consultation with the principal stakeholders that have raised these matters. This includes:

  • energy retailers and representative bodies;
  • large energy users and representative bodies.

A targeted consultation will enable stakeholder responses to be sought in a timely fashion.

In addition to the two key issues described above, this paper will also include some discussion on other secondary issues that have been raised by stakeholders in relation to the calculation of RE liabilities. For example, the method (and date) by which the annual GHGRRs are set.

The Paper also canvasses potential methods of resolving the issues and discusses the mechanisms for implementing any changes, including legislation and regulations.

Stakeholders are invited to make submissions to any of the matters contained in this Issues Paper. Submissions should be made by email under the subject line "Response to liabilities for REs – Issues Paper" no later than 20 April 2012.

Stakeholder submissions will be carefully considered and a response will be prepared and provided regarding further actions.

Issues

Issue 1 – Calculation of scheme acquisitions

The VEET target for the first three-year phase of the scheme (1 January 2009 to 31 December 2011) was fixed under section 30(a) of the Act. During that time the scheme was restricted to the residential sector. Accordingly, during the first phase of the scheme the Regulations provided for a method of calculating scheme acquisitions such that RE liabilities were apportioned between REs based on each RE's residential energy acquisitions only. Determining residential energy acquisitions required a process whereby REs identified their residential consumer loads based on tariff data and verified the data through an independent auditing process approved by the scheme administrator, the Essential Services Commission (ESC).

In May 2011, in accordance with section 30(b) of the Act, the Regulations were amended to set the target for the second three-year phase of the scheme, which runs from 1 January 2012 to 31 December 2014. The size of the target was influenced by the Victorian Government's commitment to extend the VEET to allow Small and Medium-sized businesses (SMEs) to participate. The target was set following the completion of a Regulatory Impact Statement (RIS) in March 2011 that was put to public consultation.

The amended Regulations established a new basis for apportioning RE liabilities with reference to the total energy acquisitions of each RE. This methodology came into effect on 1 January 2012 to coincide with the doubling of the VEET target. In the development of the amendment to the Regulations, the Department consulted with energy retailers and the Energy Retailers Association of Australia (ERAA) on the change to the definition of scheme acquisitions and it was agreed that the new approach would be preferable on the basis that it would reduce administrative imposts on each RE as the process of distinguishing classes of consumer loads could be avoided. That approach was reflected in the exposure draft of the amending regulations that were released as part of public consultation on the RIS.

Further amendments to the Regulations were made in December 2011 to prescribe the first range of activities that can be implemented in businesses. The amendment also restricted the range of businesses sites that can participate in the scheme by excluding sites that are subject to energy efficiency obligations under the Environment Protection Authority's EREP. EREP sites are identified in the Regulations3 by reference to the EREP register (which is administered by the EPA).

Businesses operating EREP sites are excluded from participating in VEET on the basis that they are already required to undertake energy efficiency activities through the EREP program and accordingly, activities incentivised through the VEET would not contribute to "additional" greenhouse gas abatement. This would be contrary to the policy intent of the VEET scheme which is to incentivise activities that would result in reductions in greenhouse gas emissions that would not otherwise occur. This exclusion of EREP registered sites was first canvassed in the March 2011 RIS.

Together, these settings have contributed to the issue set out in the Background of this paper.

Proposed action

The Department proposes that the Regulations be amended so that RE liabilities are calculated based on their total energy acquisitions4 less acquisitions of energy that are attributed to EREP registered sites. This would enable a direct correlation between the scope of customers whose energy acquisitions contribute to an RE's liability and the class of consumers who are eligible to participate in VEET.

The acquisitions would continue to be subject to audit requirements in accordance with a process to be approved by the ESC.

The change may be made so that amending Regulations could feasibly commence on 1 July 2012.

The proposed action may impact on the 2012 GHGRRs that are to be set by 31 May 2012. The Regulations do not have power to implement changes retrospectively in the absence of an amendment to the Act. Accordingly, if changes to scheme acquisitions are implemented by 1 July 2012, two definitions of scheme acquisitions would apply between the first and second half of 2012.This gives rise to some complexity given the timing for setting the GHGRRs which could potentially be calculated "based on" two different methods for determining scheme acquisitions.

Impacts of amendment

Retail energy prices are deregulated in Victoria and each RE is entitled to develop its own pricing strategies with regards to compliance costs and the manner in which those costs are allocated to consumers. In particular, implementation of the proposed action can not prohibit REs from allocating costs across their customer base, subject to the terms of customer contracts. However, such action would better reflect the policy intent of the VEET scheme.

Issue 2 – Definition of Relevant Entities

The Act defines an RE for the purpose of establishing the circumstances in which an energy retailer must contribute to the VEET target. REs contribute to the VEET target by acquiring and surrendering Victorian Energy Efficiency Certificates (VEECs) commensurate with their VEET liability in a given year.

Stakeholders have specifically questioned the continued suitability of applying the current threshold criteria that determines that an energy retailer is an RE if it "has 5,000 or more customers to whom either electricity or gas is, or both electricity and gas are, sold in Victoria"5 (the 5,000 customer threshold).

The establishment of the 5,000 customer threshold ensures that new entrants to the retail energy market 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 businesses. This distortion arises from the ability for small energy retailers to avoid attracting VEET liabilities and gain a competitive advantage by, for example, focussing on attracting large energy using customers but maintaining a customer limit under the 5,000 customer threshold.

Proposed action

The Department proposes that the Act be amended so that the definition of RE is altered in a manner that applies a consumption-based threshold. The threshold may be set so that it is based on a generic energy metric of joules. A threshold of this nature could be applied across electricity and gas sectors.

As the proposed action would require an amendment to the Act, the timeframes for implementation are more protracted than those required for regulatory amendment. Furthermore, a Business Impact Assessment may be required to test the effects of the proposed amendment. It is therefore unlikely that such a change to the Act could be implemented before the end of 2012.

The Department invites comment on the proposed action, including a level of consumption that may be set to establish the threshold.

Other issues

Method of setting Greenhouse Gas Reduction Rates

REs have requested that consideration be given to changing the date by which GHGRRs are set for a given compliance year. This has been requested to provide greater certainty to energy retailers in regard to VEET compliance and the setting of their energy tariffs.

The Act requires that GHGRRs be set no later than 31 May in a given compliance year, but is not prescriptive in how early the GHGRRs must be set.

In accordance with the requirements of the Act, the GHGRRs have been set by Orders in Council made in May of the compliance year. This practice has been adopted to enable accurate settled energy consumption data from AEMO to be used as the basis of the calculation of the GHGRRs as well as to enable certificate surrenders in the previous year against the previous year's target to be taken into account in setting the liability rates for the relevant year. This assists in ensuring that VEET liabilities are as closely aligned to achieving the target in a given year.

Although the Act requires the GHGRR Orders in Council to be made by the 31 May date, there is no legislative barrier to prevent the rates from being set earlier.

The Department understands that the REs' preference is to have the rates for a particular year set by November in the previous year. Although this is possible, it would affect the accuracy with which the target for the following compliance year could be met, since the full-year acquisition data would be unknown.

Where the amount of abatement that has been met deviates from that set in the Regulations, the practice has been to set the GHGRRs in the subsequent year so as to allow the deviation to be corrected.

For example, in consideration of establishing the GHGRR for 2012, the rate will take account of whether the final 2011RE liabilities actually matched the 2011 target. This will be known by 30 April 2012 when REs submit annual acquisition statements to the ESC. Where there is a deviation from the 2011 target of 2.7 million tonnes, the GHGRR may be set marginally higher or lower than the regulated target of 5.4 million tonnes to account for the deviation.

Given the situation described above, REs should note that if the timed publishing of GHGRRs is brought forward it will impact the certainty of target liability for a given year.

The Department invites comment on the issue described above.

The current practice will continue to apply in 2012 – so that GHGRRs are set in May this year. However, the Department will consult further regarding refinement of this approach and aim to resolve the issue by the close of the third quarter 2012.

Reducing overall target commensurate with exclusion of EREP

Stakeholders have suggested that the overall target be reduced by the amount resulting from the exclusion of EREPs from the calculation of liabilities.

The VEET target was modelled based on a range of activities that were suited to SMEs. Therefore, the exclusion of EREP consumers – which are large energy using sites – would not in itself lead to any increased challenge in meeting the target under the scenarios that were modelled in the March 2011 RIS.

As there is no compelling reason to reduce the target this option is not being explored further.

Excluding Energy Efficiency Opportunity companies

Under the Commonwealth Government's Energy Efficiency Opportunities (EEO) program, corporations whose business, including their subsidiaries and related companies, uses more than 0.5 petajoules (500 TJ) of energy per year, must be registered with EEO and publish performance reports relating to their energy efficiency.

While the March 2011 RIS had noted the intention to exclude EEO covered businesses from eligibility to participate, explicit exclusion for EEO was not ultimately adopted in the Regulations because of the administrative burden imposed on APs in determining whether or not a business is captured under EEO and eligible to participate under VEET. EEO requires controlling corporations of very large energy using businesses to undertake audits and report on the energy use of all subsidiary and related companies. Furthermore, because EEO does not compel businesses to take action, the "additionality" of greenhouse gas abatement incentivised through VEET is preserved.

Conversely, since EREP provides a publicly available register of all EREP liable sites in Victoria that exceed an energy consumption threshold (including sites that exceed that threshold that are controlled by EEO corporations), it was considered that explicitly excluding EREP sites was the most effective way of achieving the intent flagged in the RIS.

For these reasons the Department is not considering explicit exclusion of EEO corporations from participating in VEET.

Excluding Energy Intensive Trade Exposed Industries

The Commonwealth Government has developed a catalogue of Energy Intensive Trade Exposed Industries (EITE) for the purposes of determining compensation under its Clean Energy Future carbon pricing mechanism.

Under the NSW Energy Savings Scheme (ESS) regime, EITE businesses may apply to have their electricity load exempted from counting towards a retailer's ESS scheme liability. This has prompted stakeholders to suggest that companies that are considered to be EITE should be excluded from VEET liabilities (i.e in the same manner that is being proposed for EREP customers).

ACIL Tasman has advised that it estimates that 99.3% of EITE businesses located in Victoria are also listed on the EREP register. Accordingly, they have assumed in their analysis that all EITE businesses are listed on the EREP register and that excluding EREP sites from scheme acquisitions would effectively also exclude EITE businesses.

If this overlap between EITE and EREPs is accurate, there would not be a strong case to take additional steps to exclude sites on which EITE activities are undertaken from participating in VEET.

The Department invites comment on the accuracy of this understanding.

Range of activities available to large energy users

Stakeholders have queried the range of activities that are available which are suited to larger energy users. This has been raised in the context that there are non-EREP businesses who nevertheless consume a large amount of energy and are being imposed VEET cost pass-throughs by their energy retailers and whose capacity to participate in and take advantage of the scheme to offset these costs is affected by the limited range of activities available.

Regulations have recently been introduced for several activity classes which the Victorian Government expects may be widely deployed across Victorian businesses. Furthermore, it expects to introduce a commercial lighting upgrade activity which will have very high potential in both SME and larger businesses.

The Department considers there to be additional significant opportunities for new activities. In 2012 and 2013 broader consultation will occur on these opportunities as they are investigated and developed.

1 Regulation 12 provides: "For the purpose of the definition of scheme acquisition in section 3(1) of the Act, the following are prescribed customers -

  1. all of a relevant entity's customers of electricity in Victoria;
  2. all of a relevant entity's customers of gas in Victoria, other than customers who are engaged in the activity of owning, controlling or operating a gas-fired electricity generator connected to the interconnected national electricity system and who, for the purposes of section 11(1) of the National Electricity (Victoria) Law are Registered participants, or are exempt from the requirement to be a Registered participant, in relation to that activity."

2 See regulation 10(1)(ab)

3 See regulation 10(1)(ab)

4 ie total energy acquisitions as determined using the current class of customers prescribed under regulation 12 of the Regulations

5 See paragraph (b) of the definition of relevant entity in section 3(1) of the Act

Page last updated: 24/06/20