Introduction

A building of offices lit up.On 1 January 2009 the Victorian Energy Saver Incentive (ESI) scheme was launched to promote the uptake of energy efficiency improvements in residential premises.

The scheme is established in the Victorian Energy Efficiency Target Act 2007 (the Act). The objectives of the Act are to:

  • Reduce greenhouse gas (GHG) emissions;
  • Encourage the efficient use of electricity and gas; and
  • Encourage investment, employment and technology development in industries that supply goods and services which reduce the use of electricity and gas by consumers.

The scheme initially had an annual target of reducing lifetime GHG emissions by 2.7 million tonnes per annum in the residential sector, which was doubled to 5.4 million per annum for the 2012-14 period and expanded to include business and other non-residential sectors.

The Department of State Development, Business and Innovation (DSDBI) is preparing a Regulatory Impact Statement (RIS) to develop new regulations for the future of the scheme with its current phase due to end on 31 December 2014. The RIS process requires the Department to undertake a review of the ESI including an assessment of alternative policy options and the costs and benefits of each. In this context, DSDBI will review both the effectiveness of the scheme to date and the need for the scheme to continue.

This issues paper seeks to gather information to support the development of the RIS, and its review, and provides all stakeholders with the opportunity to influence the future direction of the scheme. Stakeholder views are sought on the following key issues:

  • Barriers to the uptake of energy efficiency measures;
  • The performance of the ESI to date; and
  • Looking forward: the future of the scheme from 1 January 2015.

Submissions are invited on the key issues set out in this document and any other matters that stakeholders consider relevant.

Timelines

June 2013

Consultation on Issues Paper

December 2013

Consultation on the RIS with a preferred option identified for the future of the ESI

Early 2014

Announcement of decision on the future of the scheme

Closing date for submissions is Monday 8 July 2013.

There is no preferred format for submissions. Responses may be published on the former Department of Primary Industries (DPI) website; therefore stakeholders should indicate if the submission is confidential and/or clearly indicate sections that may contain confidential or sensitive information that is not for publication.

Please note that due to recent machinery of government changes, the RIS process will be managed through DSDBI; however, consultation documentation for the issues paper will be held on the Department website and use the former DPI e-mail addresses.

Submissions can be lodged as follows:

in writing to

David Blowers
Energy Sector Development Division
Department of State Development, Business and Innovation GPO Box 4440
MELBOURNE VIC 3001

Background

The Energy Saver Incentive: An overview

Energy saving refrigerator with a label indicating 4 stars. Energy consumption of 468 kWH per yearThe Energy Saver Incentive scheme is designed to encourage the uptake of energy efficiency activities.

The scheme works by setting an annual GHG abatement target to be met through the uptake of prescribed energy efficiency activities in residential homes, business premises and other non-residential premises. These activities are specified in the scheme regulations, which allow Accredited Persons (APs) to create Victorian Energy Efficiency Certificates (certificates) when they help energy consumers undertake these energy efficiency activities. Each certificate represents one tonne of lifetime GHG abatement.

The scheme then places a liability on certain energy retailers in Victoria to acquire and surrender certificates to satisfy a portion of the target based on their share of the market. In order to meet their liability, retailers are able to create certificates directly, purchase certificates in a competitive market, or both. Revenue generated through the sale of certificates enables APs to offer energy consumers incentives that may reduce the cost of undertaking these activities.

The scheme's governing Act and its regulations are maintained by the DSDBI, while the Essential Services Commission (ESC) is responsible for its administration, which includes such functions as accrediting persons to create certificates, approving energy efficient products, managing the certificate register and ensuring compliance with the Act and regulations.

The following prescribed activities are currently available under the scheme:

  • Installation of insulation,* double glazing, weather proofing and gap sealing
  • Purchase of a high efficiency fridge or freezer and disposal of an old inefficient model
  • Installation of a high efficiency heating system
  • Installation of a solar, heat pump or high efficiency gas water heater to replace a more GHG intensive system
  • Installation of a water saving showerhead
  • Replacement of an inefficient light globe with a low energy alternative
  • Purchase and installation of a high efficiency television, clothes dryer or pool pump to replace more inefficient models
  • Purchase and installation of standby power controllers (SPCs) and in-home displays**
  • Replacement of refrigerated display cabinets, refrigeration fans and electric motors with high efficiency units***
  • Upgrade of commercial lighting***
  • Installation of an efficient low flow trigger nozzle and prerinse spray valve in place of decommissioned inefficient versions.***

*    Ceiling insulation is effectively excluded from the scheme until at least the end of 2014

**  In-home displays are only available to the residential sector

*** These prescribed activities are only available to businesses

For further information

On the scheme

On scheme administration

The Regulatory Impact Statement

The ESI's targets require resetting every three years and, with the scheme's second three-year phase due to end on 31 December 2014, new regulations for the scheme will be needed. In line with the Subordinate Legislation Act 1994, a RIS providing justification for these new regulations must be prepared.

The purpose of the RIS process is to ensure that:

  • regulation is only implemented when there is a justified need;
  • only the most efficient forms of regulation are adopted; and
  • there is an adequate level of public consultation in the development of regulatory measures.

In this way the RIS process requires the Department to undertake a significant review of the ESI to determine if it is the most appropriate policy response to address any identified barriers to energy efficiency uptake. With the scheme now having operated for four full years, the RIS process also provides an opportunity for the Department to evaluate the impact of the scheme on energy consumption and energy markets using real world data. The Victorian Competition and Efficiency Commission guidance on preparing a RIS for sunsetting regulations recommends the evaluation of current regulations.

As well as undertaking the above, the current RIS will act as the scheme's complementarity review to Commonwealth climate change policy under the Council of Australian Governments' Select Council on Climate Change (SCCC) and Business Advisory Forum Taskforce.

Submissions to this issues paper will be used in the development of the RIS, and its review, which will affect the future design of the scheme.

Key Issues for consultation

1. Barriers to the uptake of energy efficiency measures

Closeup of an oven showing the timer at 16.40The ESI is designed to address a number of market failures or barriers that prevent the optimal uptake of energy efficiency measures in Victorian households and businesses.

The 2011 RIS for the expansion of the ESI summarised the barriers as follows:

  • Information gaps. When information has public good characteristics it is likely to be underprovided by the private sector as there is little incentive to do this. For consumers, understanding the potential benefits of investing in energy efficiency activities will be dependent on the availability and transparency of information. For example, a household can be unaware of the level of energy they are using and therefore may be unable to assess the potential benefits from installing an energy efficient product. Gathering trustworthy information can be costly and time consuming for households and businesses and linking activity to energy bills may be difficult. Information asymmetries may be particularly marked between individual consumers and energy providers, for whom energy use reductions are not necessarily in their interests.
  • Split incentives. Incentives to invest in more energy efficient appliances can be weak where those who bear the cost do not enjoy the benefits. For example, a landlord paying for a new energy efficient water heater will not receive the benefit from reduced energy consumption and energy bills. These benefits will be accrued by the tenants of the property.
  • Externalities. An externality is a cost or benefit that is not valued in the market and affects a third party who did not choose to incur that cost or benefit. Energy consumption results in the production of GHG emissions, which imposes costs on third parties. As the consumer does not directly bear these costs there is no incentive to reduce consumption to a socially optimal level.
  • Access to capital. Access to capital can be a barrier to investment in energy efficiency initiatives. Many energy efficient products have a high upfront cost, which necessitate capital outlays that both households and SMEs may not have access to. It also takes time and effort to determine if this higher cost is offset over time, in terms of savings, and demonstrating this to financial decision makers.
  • Behavioural, organisational and cultural factors. Even when information and capital are available, established norms may affect decision making. The concept of 'bounded rationality' recognises that individuals have a limited ability to process and analyse information and hence make decisions that can satisfy, but may not necessarily maximise their utility, leading to suboptimal social outcomes. Bounded rationality impacts the uptake of energy efficiency products due to the complexity associated with measuring the relative benefit of purchasing an energy efficient product. For businesses, the organisational structures and processes of firms may prevent information from reaching decision makers to enable them to make informed decisions.

The scheme seeks to target these barriers by providing incentives to third parties (APs) to help energy consumers undertake  energy efficiency measures. Certificate creators are incentivised through the value of the certificate that accrues upon its sale or surrender. By creating a market for these certificates, the scheme enables APs to offer consumers benefits when they undertake energy efficiency activities. The take up of these activities under the scheme by residents and businesses will be dependent on the extent to which the incentives offered to them address the barriers they face.

Complementarity with national emissions reduction schemes

At the time of the scheme's introduction there was no national mechanism to address the negative externality associated with GHG emissions. As such, one of the main objectives of the Act under which the ESI was established is to reduce GHG emissions.

At a national level, both main political parties have now committed to achieving the same emissions reductions target, although they plan to achieve this target through alternative mechanisms (a carbon price mechanism and a Direct Action Plan).

In July 2012, the Commonwealth Government introduced a national carbon price mechanism to address this externality through imposing a cost on the emission of GHG. The current price mechanism takes the form of a fixed carbon price, which is due to transform into an emissions trading scheme (ETS) in 2015.

Introducing a national GHG abatement scheme provides an additional incentive for producers and consumers to reduce their emissions independent of those provided by the ESI. The extent to which the ESI is complementary to a national emissions reduction scheme is dependent on the extent to which it addresses residual market failures other than the negative externality associated with GHG emissions.

Questions:

We are seeking your views on barriers to the uptake of energy efficiency measures and the effectiveness of the ESI in addressing these barriers. In developing your response we would like you to consider the following issues:

  • What evidence can you provide that supports the existence of the barriers outlined above and whether the extent of these barriers has remained constant, increased or diminished over time?
  • Under the first and current phases of the scheme, is there evidence from household and business participants on the existence of these barriers?
  • What evidence is there to show that the ESI effectively addresses these barriers?
  • What evidence can you provide to indicate the extent to which the ESI is complementary to national emissions reduction schemes?
  • Is there any further information in relation to this matter that we should consider?

2 . The performance of the ESI to date

Percentage of total certificates registered for each activity (as at 31 December 2012)

This piechart shows the percentage of total certificates registered for each activity as at 31 December 2012. The greatest precentage: Standby Power controllers, lighting, water heating, low flow shower roses, other and space heating

During its first phase (2009-11) the ESI set a target of 2.7 million certificates per annum, the equivalent of reducing GHG emissions by 2.7 million tonnes over the lifetime of the associated activities. The target was then increased to 5.4 million certificates at the beginning of the scheme's second and current phase (2012-14).

With the total number of certificates created throughout the life of the scheme reaching 16,602,734 as at 31 December 2012, the scheme has been successful in meeting each of its targets. Data provided by the ESC suggests that much of this certificate creation has been in relation to SPC, lighting and low flow shower rose installations, as well as water and space heating improvements.

Energy consumption and retail prices

In successfully meeting each of its first four years' targets through the uptake of the above energy efficiency activities, the ESI is estimated to have resulted in energy consumption savings associated with 13.5 million tonnes of avoided lifetime GHG emissions. This level of energy savings is based on the deeming algorithms that underpin certificate creation and determine the average level of expected energy savings associated with each activity under the scheme.

All estimates of this nature include a number of assumptions that seek to account for some forms of consumer behaviour and other variables. These assumptions can differ based on the energy efficiency activity and in some cases are based on modelling undertaken prior to an activity being introduced to the market. However, should some of the key assumptions underpinning the average energy savings associated with the activity be different to actual consumer behaviour, the energy savings associated with the scheme may be different to those actually achieved. Evaluating the level of energy savings achieved through the ESI will be important to determine the effectiveness of the scheme in achieving its objectives.

A number of stakeholders have suggested that the operation of the scheme to date has required energy retailers to pass on additional costs in the form of higher energy prices as a direct consequence of the scheme. Previous modelling undertaken by Government in 2011 suggested that there would be downward pressure on overall energy prices due to the cost reductions associated with energy savings achieved through the ESI, such as reduced energy generation costs.

Activities

Under the ESI, the types of energy efficiency measures that can be undertaken are limited to those prescribed in the scheme regulations. This list of prescribed activities not only defines for which energy efficiency improvements certificates can be created, but also directly influences the price of certificates and subsequently the costs and benefits of the scheme.

The scheme provides an incentive to encourage third parties to identify low cost energy efficiency opportunities. One marker of the ability of the scheme to achieve this objective is the cost of certificates. If the most appropriate activities are included, the scheme will meet its target at the lowest cost, thereby maximising the net benefit of the scheme. As such, it is important that the right mix of energy efficiency activities are included under the scheme.

Expansion of the scheme to business and non-residential sectors

During its first three year phase the ESI was only open to Victorian households. At the beginning of its second phase the scheme was opened to business and other non-residential sectors, with new activities added to the scheme, providing these consumers with the opportunity to also reduce their energy consumption through the uptake of ESI activities.

Expanding the ESI in this way has the potential to lower the costs of the scheme given a particular target: in theory the more people and businesses that are eligible to undertake scheme activities, the greater the potential for certificates to be created, which can result in downward pressure on certificate prices and overall scheme costs. It also provides for a broader range of activities that will deliver benefits to those APs who deliver these activities. The existence of activities in the residential sector that provide greater incentives for APs may, however, limit the ability of business and non-residential consumers to participate in the scheme.

Investment, employment and technology development

One of the three objectives of the ESI is to encourage investment, employment and technology development in industries that supply goods and services which reduce the use of electricity and gas by consumers. In 2011, the Department undertook an evaluation of the first phase of the ESI and found that around a quarter of APs surveyed were established specifically to address the opportunities generated by the ESI.

In evaluating the performance of the scheme it is important for the Department to further understand the degree to which this objective has been met over the scheme's first four years.

Questions:

We are seeking your views on the performance of the scheme to date. In developing your response we would like you to consider the following issues:

  • What evidence can you provide to demonstrate the impact of the ESI on energy consumption and retail prices?
  • Has the mix of activities included in the scheme been appropriate to maximise energy efficiency uptake?*
  • Is there evidence you can provide that suggests that there are barriers to the participation of specific groups in the ESI? For example, low-income households, rural consumers and business and non-residential customers?
  • How are the costs and benefits of the scheme distributed between different customers?
  • Can you provide evidence of the impact the scheme has had on investment, employment and technology development in industries that supply goods and services which reduce the use of electricity and gas by consumers?
  • Has the scheme created any unintended consequences and what evidence can you provide to support this?
  • Is there any further information in relation to the performance of the scheme to date that we should consider?

* This issues paper is seeking your broad views on the activities that have been included in the scheme to date and is not calling for submissions on the inclusion of new activities or specific technologies. The Department calls for submissions on new activities from time to time. All stakeholders who have signed up to the ESI mailing list will be notified of any future opportunities to provide submissions.

3. Looking forward: the future of the scheme from 1 January 2015

This RIS process provides the Department with an opportunity to assess how the ESI is working, as well as to assess the continued need for the scheme.

The RIS also seeks to identify the most appropriate method of future intervention to address any barriers to energy efficiency uptake identified. In undertaking the RIS it will therefore be necessary to consider and evaluate various future policy options.

While a rigorous cost benefit analysis will underpin this review, to ensure the analysis is robust it is important that the Department gather sufficient information in relation to the issues raised below.

The ESI target

The continuation of the scheme into its next three-year phase, including in an expanded or revised capacity, would require the target to be reset.

In setting the target thought needs to be given to what would constitute an achievable target and the implications the target may have on the scheme's costs and potential benefits for the community. As such it is important to understand the types of energy efficiency activities available and their potential to generate sufficient uptake under the scheme.

From the commencement of the scheme to December 2012, over 16 million certificates have been created, mainly by capturing the "low hanging fruit" in the residential sector. The term "low hanging fruit" refers to those activities that are low cost and can be offered to consumers free of charge, such as lighting replacement, shower rose installation and SPCs. To date the take up of these items has exceeded the forecasts undertaken by Government prior to the introduction of the scheme and its
expansion in 2012. If most low cost options have been exhausted, however, raising the target may place further upward pressure on the costs of the scheme.

While there are some commentators that believe the low cost opportunities are nearing exhaustion, others believe that there is still potential for further uptake of low cost activity within the residential sector. There are however also a number of activities currently included in the scheme that have seen limited take up by either the residential or business sector, due to the low cost of certificates.

There is also the potential to add new activities to the scheme, should this be appropriate. The Government recognises that it is important to review the activities periodically to ensure that the scheme stays up to date with technical advances and to ensure an appropriate range of activities are incentivised.

This issues paper is seeking your input into the future of the ESI, including a broad sense of the types of activities that may be included. The issues paper, however, is not calling for submissions on the inclusion of new activities or specific technologies into the scheme. The Department already has a process for the development of new activities and, from time to time, calls for submissions on new technologies. The previous request for submissions commenced in November 2011 and closed in early 2012.

In December 2012, the Department also consulted with stakeholders on the possible inclusion of 'Project Based Assessments' (PBAs) in the ESI through the release of an issues paper. The introduction of PBAs has the potential to allow for more general site or process upgrades, which incorporate a wide range of energy savings measures, to be recognised under the scheme. The Department received a significant number of submissions to the paper released, with many in favour of PBAs. These submissions will be considered in the development of the current RIS.

Large energy users under the ESI

At the time of expanding the scheme to business and other non-residential customers, large energy users already subject to regulatory obligations under the Victorian Government's Energy and Resource Efficiency Plan (EREP) scheme were excluded from participating in the ESI, both from benefiting from incentives under the scheme and from generating liabilities. Recently however, the Government has announced the closure of the EREP scheme. (For further information on the EREP scheme, visit http:/www.epa.vic.gov.au/business-and-industry/guidelines/ erep-guidance.)

With the EREP scheme coming to an end, it is important to revisit the question of large energy users participation in the ESI. The scheme activities could be extended to provide large businesses with the opportunity to benefit from scheme incentives. This may be undertaken through the introduction of 'project based' methodologies. To ensure equity, it would be appropriate to refine the way in which retailer liabilities are set. This would entail including large energy user consumption under the definition of a retailer's 'scheme acquisition'.

Alternatively, large energy users could be entirely excluded from the scheme on the basis that barriers to energy efficiency uptake facing these businesses are substantially different to those facing smaller users. Large users have a more sophisticated understanding of their energy consumption and a greater incentive to act. Additionally, they may have already achieved significant energy efficiency gains through their participation in the EREP scheme.

Excluding large energy users will generate a red-tape burden as the term 'large businesses' would need to be defined and both energy retailers and APs seeking to identify energy efficiency opportunities would need to reliably identify these businesses without excessive complexity.

Inclusion into the EREP scheme was triggered at around 100TJ of energy per annum. Alternatively other definitions of large businesses, such as those used by the Australian Bureau of Statistics (ABS) utilise employee numbers or financial turnover.

Alternatives to the ESI

The ESI is a white certificate scheme that creates a market for energy efficiency improvements. As mentioned previously, the scheme attempts to address market failures by creating incentives for third parties (certificate creators) to help energy consumers make these improvements. While the scheme may be successful in achieving its objectives in this way, there may be alternative mechanisms that the Government could implement that would be more effective in targeting the market failures or barriers to the uptake of energy efficiency measures.

A further outcome of the RIS process may be that the ESI is not continued, either with or without an alternative mechanism
in its place.

Questions:

We are seeking your views on the future of the scheme from 1 January 2015. The continuation of the ESI requires the consideration of a number of issues. In developing your response we would like you to consider the following:

  • Under the scheme to date there has been a very strong uptake of low cost activities. Can you provide information and data on the remaining demand for these activities?
  • Can you provide information and data on current or new types of activities that may be taken up once these opportunities are exhausted? What would the energy savings be associated with their uptake?*
  • With scheme costs and technology limitations in mind, if the scheme were to continue what would be an appropriate target for its next phase?
  • Is the ESI the most appropriate scheme in which to encourage energy efficiency uptake for large energy users?
  • If large energy users are to be excluded from the scheme what would be the appropriate definition of 'large energy users' and how could this be effectively implemented to reduce the red tape burden on both energy retailers and APs ?
  • Is there any further information in relation to the continuation of the scheme that we should consider?

As outlined above, an outcome of the RIS process may be that the ESI is not continued, either with or without an alternative mechanism in its place. In developing your response on the future of the scheme, we would also like you to consider the following:

  • Do you consider there to be alternatives to the ESI that would achieve the same objectives in a more cost effective or efficient way? What are they and why?
  • What issues do you anticipate if the ESI were not to be continued? How should these issues be addressed to ensure the scheme's equitable closure?
  • Is there any further information that we should consider if the scheme were not continued?

* This issues paper is seeking your broad views on the activities that may be included in the scheme in the future and is not calling for submissions on the inclusion of new activities or specific technologies. The Department calls for submissions on new activities from time to time. All stakeholders who have signed up to the ESI mailing list will be notified of any future opportunities to provide submissions.

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