9 July 2013
Dear Mr Blowers ,
ESI Review – Issues Paper
AGL Energy Limited (AGL) welcomes the opportunity to provide comment on the Review of the Energy Saver Incentive Issues Paper published by the Department of Environment and Primary Industries in June 2013.
In AGL's experience there continue to be barriers to the take up of energy efficiency measures or technologies. The design of the Energy Saver Incentive (the Scheme) could be modified to more successfully address these barriers at across different energy efficiency measures and technologies.
AGL is strongly supportive of amalgamating the existing state based energy efficiency schemes and introducing a National Energy Efficiency Scheme (NESI). In the absence of a NESI we view the Scheme as broadly complementary to national emissions reductions schemes.
AGL would be supportive of the Review investigating options to increase scheme efficiency, encourage consumer investment, lower compliance costs for participants and to better target low income households.
We have provided further comments around these and other issues in the Appendix.
Should you have any questions in relation to this submission, please contact Kate McKinnon, Regulatory Advisor on (03) 86337250 or at KMcKinnon@agl.com.au.
Manager Retail Markets Regulation
Note: Sections of this submission highlighted in yellow are confidential and are not for publication. The information highlighted is provided for the Department of State Development, Business and Innovation internal consideration only.
1. Barriers to the uptake of energy efficiency measures
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?
AGL is currently a provider of energy, a range of physical products, energy efficiency activities and energy management services. We continue to observe barriers to the take up of energy efficiency measures across a broad range of situations.
This market research highlights that financing, overcoming existing behavioural habits and a lack of information/education are the main impediments to the take up of energy efficiency products and services.
When AGL is promoting energy efficient products we need to overcome these barriers. We have found that these barriers continue to exist, and whilst they can be addressed for the specific product at the time of installation, there is no broader reduction in barriers over time across different appliances. We would suggest that this is because most services are provided on a low or no cost basis by semi-skilled installers, where these installers are not given the remit to offer a range of products or to educate the consumer on the products.
In our experience the key barriers are consumer's lack understanding of how to reduce energy consumption by changing their behaviour, how their consumption compares to efficient households and a lack of understanding of the economics of investing in energy efficient technology. To assist its customers, AGL has invested in creation of website tool (AGL IQ) which allows our mass market users to monitor their energy usage online and to view how they compare to efficient similar homes, and AGL is convinced that tools of this nature can work in a broad based way to address these key barriers. AGL would be supportive of the Review considering incentivising tools of this nature in future phases of the Scheme.
AGL has found that the conversion rate of take up of an energy efficiency measure has reduced over time, and this suggests that the sum of the impediments has increased rather than reduced 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?
We have observed evidence of barriers to acceptance of each of the energy efficiency technologies we have provided to consumers. Consumers have had little or no knowledge of newer energy efficiency technologies and there has been little pro-active demand for products from consumers, demonstrating the continued existence of these barriers. To address the main impediments to participation we have invested in improving our promotional and educational collateral and sales propositions in each of our relevant sales channels.
What evidence is there to show that the ESI effectively addresses these barriers?
While each installation is evidence of these barriers being overcome in that instance for that technology, there does not appear to have been comprehensive or sustainable addressing of these barriers to consumer participation through the ESI. The typical customer experience of ESI has been the taking up of specific low or no cost energy efficiency measure after an offer via door knocking from a semi-skilled installer. We would suggest that customer experience needs involve greater choice of technologies, better and broader education on a range of technologies and feedback on the effectiveness of their selected measures. This experience is more likely to result in consumers understanding the process of investing in energy efficiency as well as the barriers to take up of energy efficiency measures being addressed in a broad and sustained manner.
What evidence can you provide to indicate the extent to which the ESI is complementary to national emissions reduction schemes?
We view the ESI as broadly complementary to national emissions reduction schemes and to a number of other energy efficiency programs.
In terms of national emissions reduction schemes, carbon pricing can increase the incentive available to a customer from the take up of energy efficiency measures. However, carbon pricing does not address the listed barriers to energy efficiency measures directly.
A feature of the ESI has been the cyclical high take up of a particular low cost energy efficiency measure or technology for a period, followed by saturation ( such as CFL light globes) and the resulting steep decline in the take up of that measure. Other efficiency programmes tend to provide broader information on energy efficiency but fail to provide a path for consumer implementation of energy efficiency measures, for example:
- The Minimum Energy Efficiency Performance Standards (MEPS) set out the minimum performance standards applicable to new appliances. In isolation this program needs to wait for appliance replacement within the general population to bring about change. The ESI bring forwards the benefits of MEPS by providing an incentive (in the creation of VEECS) to replace appliances more quickly.
- The National Australian Built Environment Rating System (NABERS) and mandatory disclosure (of the NABERS Energy Rating and Building Energy Efficiency Certificate) create a benchmark that consumers can measure against.
- The Home Energy Saver Scheme (HESS), other than the no interest loan scheme, is not solely focussed on the physical implementation of energy efficiency measures. It is more focussed on the provision of information around energy efficiency and budgeting.
It is a positive characteristic of the ESI that it complements to these energy efficiency schemes and provides the consumer a practical path to implementation of energy efficiency measures.
2. The performance of the ESI to date
What evidence can you provide to demonstrate the impact of the ESI on energy consumption and retail prices?
ESI scheme compliance costs are borne by energy retailers and recovery of these costs is achieved through retailers' energy sales. AGL suggests that there are a number of improvements which could be made to increase the administrative efficiency of the Scheme:
- the certainty and timing of the annual targets (The greenhouse gas
reduction rates are published prior to the end of May during the year of the target. The target is calculated based on these rates and actual load for the entity for that year which is unknown until the end of that year. Accordingly, AGL is pricing without annual target certainty);
- the handling of exclusions to the Scheme particularly the resolution of change to the definition of relevant entity; and
- the administrative actions of the regulator in creating monopoly or quasi monopolies through the approval process and the time taken for the approval of products (refer to SME lighting approval).
Has the mix of activities included in the scheme been appropriate to maximise energy efficiency uptake?
The mix of activities and the design of the Scheme has maximised the take up of the lowest payback activities but has failed to maximise the take up of larger impact longer payback items. As discussed AGL would be supportive of the Review investigating options to encourage a broader uptake of the energy efficiency measures under the Scheme.
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?
The majority of AGL's program has been delivered into urban areas or the more heavily populated rural centres. With the lack of pro-active take up from consumers the majority of benefits have been delivered through our door to door sales channel. As such the majority of benefits have gone to consumers with accessible addresses who are present when door to door sales are occurring.
There is evidence to suggest that low income households are accessing the Scheme However, there is also evidence that low income households are accessing the low/no cost technologies rather than the energy efficiency measures that are higher on the cost curve. The cost of these measures is the primary impediment to take up of these bigger ticket items. These households are spending a higher proportion of their income on energy consumption and may display proportionately higher energy usage than average Victorian household. There is opportunity to better assist these households and AGL would support the Review investigating of changes to target these households and to address the access to capital challenges faced by this specific group.
How are the costs and benefits of the scheme distributed between different customers?
As noted earlier, retailers recover the costs of Scheme compliance through retail energy sales. The majority of benefits have been delivered to consumers who are accessible via door to door sales and who are in urban areas or regional centres. [Information redacted]
There has been delay in the approval of lighting products for small to medium enterprise customers under the Scheme which has limited this customer segments access to the Scheme.
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?
AGL has observed some long term employment as a result of the operation of the scheme, however the majority of employment observed has been short term semi-skilled employment.
As discussed, a feature of the Scheme has been a boom to bust cycle for low cost technologies. This feature has encouraged firms which have a higher risk appetite to invest in participating. AGL is unsure whether any pre-existing energy efficiency companies have gained longer term growth or benefits from the scheme. Although we note that some of these companies have provided services under the Scheme and would therefore have received shorter term benefits.
Has the scheme created any unintended consequences and what evidence can you provide to support this?
Historical product approval practices have included instances where a low number of brands were approved or even a single brand with a higher certificate creation value was approved. This has created instances of monopolies, quasi-monopolies or low competition markets for that product. When Scheme targets were significantly increased the capability of the regulator to respond has appeared limited, and there was a lack of available product options as result of delayed regulatory product and installation approvals. This contributed to the existence of quasi monopolies.
AGL would encourage greater consideration of the market for energy efficiency products and competition in the approvals process and as we have observed, the approval of standby power controllers and LED's are strong case studies for the need to consider market impacts and competition outcomes in the product approvals process.
AGL would also be supportive of greater consideration of both the market for VEECs and for energy efficiency products and the effects of interference in those markets under the Scheme in associated processes or in any Scheme changes. We would be open to guidelines or objectives which expressly reflect this position.
As previously discussed a feature of the Scheme has been a boom to bust cycle for low/no cost technologies. This feature has been demonstrated in the take up of lighting, showerheads and standby power controllers so far. This structure and cycle causes:
- product manufacturing which is short term and unsustainable;
- shorter term rather than longer term employment growth; and
- skewed participation toward firms with higher risk appetites.
Activities and products under the Scheme to date have been provided at low or no cost to the consumer. This manner of provision may contribute to a consumer expectation that energy efficiency measures will be provided by another party for free and as such they should hold off any personal investment. Direct consumer investment and understanding of the associated benefit would be more likely to result in ongoing investment in energy efficiency measures.
Is there any further information in relation to the performance of the scheme to date that we should consider?
Currently each state operates a different energy efficiency scheme. The state schemes all contain differences in structure, model, rules and objectives. This creates administrative burden for providers operating in multiple states. We would prefer that the states moved toward a NESI to reduce this administrative burden. In the absence of a NESI then moves to harmonise the ESI and other state based schemes would be supported.
The ESI includes deemed values for activities. The nature of some activities is such that there is a high risk of non-compliance via consumer intervention post installation as many items can simply be unplugged or removed. As this high-risk has crystallised the regulator has attempted to reduce this non-compliance risk by overlaying increasing guidance, retrospective audit requirements and self surrender of certificates on providers to address the level of non-compliance. Whilst AGL recognises the issues around non-compliance the regulator's approach comes at a high cost for providers associated with compliance with the scheme. These costs must be continually assessed against the need to be reasonable in the circumstances. The introduction of retrospective compliance obligations not only adds costs which are extremely difficult to manage, it creates an undesirable level of regulatory risk and uncertainty. AGL would support the Review in investigating options to reduce the compliance cost to participants. A possible option is to reduce the deemed values of activity to reflect the non-compliance risks. Sufficient data exists to support this option, which would lower the compliance and administration cost for participants.
We have observed differences in auditing standards under the Scheme compared with the auditing of our retail energy business. We note the Essential Services Commission is currently reviewing Guideline Number 22, Regulatory Audits of Energy Businesses. AGL has made separate submission to that consultation, and contends that the VEET Audit framework should be identical to that required for Guideline 22.
AGL has found in some instances that the rules governing a new activity have been underdeveloped, unclear or open to interpretation. An example of this has been in LED's and revision of requirements to include a power factor requirement. This initial lack of clarity has led to a participant perception of a lack of rigour or planning on the part of the regulating body. AGL encourages the regulating body to ensure that the rules around new activities are clear and well developed prior to implementation.
There have also been some challenges in the process for calculation of ESI liability. The process currently involves multiple versions of data being provided to the regulator for validation. We would encourage refinement of the process so that the administrative burden on participants is lowered and the validation procedures utilised by the regulator are transparent.
3. Looking forward: the future of the scheme from 1 January 2015
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?
Consumer demand for an energy efficiency measure is a function of the opportunity to take up that measure, the cost of the measure, the channel for sale and the sales proposition. We have observed a decreasing conversion rate between contact with the consumer and take up of the energy efficiency measure. The opportunity to take up a particular measure is reducing as more consumers have the specific device installed. As most sales are conducted via door to door sales channels, the addresses being visited are those which are accessible. For locations that are less accessible via door to door sales there would remain opportunity, however, these consumers will need to be accessed via higher cost channels. A good example of this is a single consumer household where the consumer works full time during normal business hours. In most instances they will not have been present when door knocking has been conducted, a function of both working hours and permissible door knocking times. To contact this consumer a provider will need to consider direct mail, telemarketing at permissible times when the consumer is likely to be present, and then making an appointment for installation. This evolution of demand and supply is evident in the fact there has previously been a high take up of CFL's, there is now a lower opportunity to install CFL's, however, AGL is still installing some CFLs through less conventional channels.
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?
AGL expects that small to medium enterprise lighting and LEDs will be the next area of focus for energy efficiency providers.
We can also see opportunities in the market around products which fall under the Scheme already being sold or disposed of but not attracting certificates because of the process for this sale or disposal. Working with other existing appliance providers through partnering arrangements to meet the Scheme requirements could be a growth area.
With scheme costs and technology limitations in mind, if the scheme were to continue what would be an appropriate target for its next phase?
The appropriate target for the Scheme is dependent on the technologies included in the Scheme. AGL encourages a quicker introduction and approval of new technologies to support the current target level.
While AGL is comfortable with a volumetric fixed target, AGL would encourage greater certainty of that target. As previously discussed, the greenhouse gas reduction rates are published prior to the end of May during the year of the target. The target is calculated based on these rates and the actual load for the entity for that year which is unknown until the end of that year. We would benefit from a set target provided prior to relevant year and for that to be a final target. We recognise the need for a true up mechanism, however, given final actual data relevant to the target could be up to two years later we would advocate that the 'true up' is incorporated in the future target setting (rather than through a revision mechanism).
AGL also views there to be opportunity to encourage investment in energy efficiency measures higher up the cost curve especially with the consumer co-contribution. There are myriad ways to encourage a shift to consumer investment in energy efficient measures higher up the cost curve. AGL is broadly supportive of the Review investigating options to encourage such investment including:
- actual measurement of energy savings for a period (example 1 year) followed by a subsequent application of that reduction over the expected life of the savings through deeming;
- incentivising programs and tools which assist consumers to make informed decisions on energy efficiency products and services;
- creating a minimum size bundle of activities for the creation of VEECs (to encourage take up of a broader range of activities); and
- a model which reflects the United Kingdom Government's initiative 'Green Deal'.
Is the ESI the most appropriate scheme in which to encourage energy efficiency uptake for large energy users?
In AGL's view the Scheme is effective in encouraging the uptake of energy efficiency measures for these users. The commercial and industrial sector in Victoria continues to face economic challenges. AGL has undertaken a number of lighting upgrade projects within this sector, capturing the benefits of the Scheme on behalf of its customers. Largely, the commercial and industrial sector has been very pleased with the financial contribution the creation of saleable VEET certificates has made to their projects. In nearly all cases, without the support the Scheme, the lighting upgrade projects we have undertaken would not have progressed and the energy savings associated of up to 80% (exchange of halogen downright for LED lights) would not have occurred.
There is a need for incentives under the Scheme to span a wider range energy efficiency measures. In AGL's view this will significantly add to the competitiveness of the sector both nationally and internationally as energy productivity during a period of rising energy costs will be a key determinant of how competitive businesses can be over the next decade. AGL believe that additional inclusions to the Scheme could include upgrades to boilers, replacement of old boilers for new boilers, and upgrades to steam lines and steam traps. Additional areas of focus could be to apply the Scheme to desk top studies that could be undertaken on industry, particularly energy mass balance tools that highlight areas of focus for industry to improve energy productivity. These studies often cost in the vicinity of $10,000-$20,000 to perform. This significant upfront cost can be a barrier to customers undertaking these studies, given early work is exploratory, even though the overall benefits can be substantial.
It is important that for additional energy efficiency measures under the Scheme (beyond lighting upgrades) certificates are not created on a deemed value basis. Instead certificates should be created based on actual annual savings using project based methodologies. Further, it is imperative that the Scheme remain robust in its application of methodologies so that a 'flood' to market of certificates does not occur and the best quality of energy reductions and the overall competitiveness of Victorian industry are ensured.
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 ?
In the event large energy users were to be excluded from the Scheme the key requirements from our perspective would be:
- sufficient consultation;
- sufficient notice of change;
- certainty of the exclusion; and
- administrative ease in identifying excluded customers.
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?
There is scope to target the least efficient low income households under the ESI scheme. This is could be achieved by providing incentives to perform activities on a defined group of customers. With the proposed implementation by the Department of Human Services (DHS) of a mechanism which limits the application of concessions where energy usage exceeds an upper limit, we would suggest definition of this defined group of customers be consistent with the application of this limit and target high energy consuming concession customers. This would bring benefits to those households most in need by helping them reduce their energy costs, adequately incentivise assistance to these customers and work in a complementary manner with the DHS mechanism to reduce overall concession costs.
AGL would also encourage the Review to consider the possible impact of incentives on a traded market through an analysis of scenarios and associated risks posed and investigation of possible strategies or mechanisms to limit the exposure of participants in that market to those risks.
One of the challenges that we have experienced under the Scheme and in the energy efficiency context generally has been achieving a broad reduction in the barriers to take up of energy efficiency measures. AGL would support the Review investigating efficient options to achieve a more sustainable and broad reduction in the barriers to take up. The possible application of project based methodologies to the various customer segments under the Scheme is an option to consider and assess in this context.
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?
As discussed AGL has observed a low level of long term employment and higher levels short term semi-skilled employment as a result of the scheme. Employment currently encouraged by the Scheme is likely to be jeopardised by the discontinuation of the Scheme.
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