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Dear Mr Blowers,

Re: Clean Energy Council (CEC) Submission |Review of the Energy Saver Incentive | Issues Paper June 2013

The Clean Energy Council welcomes the opportunity to participate in the consultation process for the Review of the Energy Saver Incentive (ESI).

The Clean Energy Council works with more than 600 solar, wind, energy efficiency, energy storage, bioenergy, hydro, cogeneration, geothermal and marine energy businesses to accelerate the transformation of Australia's energy system into one that is smarter, cleaner and more consumer-focused.

The attached submission is our response to the June 2013 Issues Paper.

More than one million Victorian homes across all income groups have benefited from the ESI to date. The scheme has consistently achieved is targets and delivered energy efficiency measures to the Victorian community at least-cost. Continuation of the ESI is critical to help deliver energy efficiency measures to the approximately 1.9 million homes in Victoria that do not currently achieve five-star ratings.

We welcome the regulatory certainty that the Victorian Government has achieved with the ESI, which, as a result, has stimulated investment and jobs in Victoria across sectors spanning manufacturing, retailing and service providers. There are currently 123 accredited companies under the ESI with an average number of 73 employees. The ESI provides the scope for these companies to continue to grow, prosper and contribute to the Victorian economy.

The key issues highlighted in the Clean Energy Council's submission are:

  • In an era of rising energy prices the ESI plays a vital role in enabling consumers to reduce their bills and get the benefit of competitively priced energy services.
  • The ESI is complementary to the national carbon price mechanism. The carbon price is unlikely to have a significant effect at the household level and does not address residual market barriers, such as information gaps, capital costs and split incentives. The ESI has been shown to overcome these barriers.
  • The ESI needs to remain in place until a National Energy Saver Incentive (NESI) is implemented. If the ESI was ended prematurely then consumers would no longer benefit from the competitive services the industry provides. Furthermore, the community would not be able to address the barriers that exist in the energy efficiency market and would be hindered in their ability to respond to the impact of higher energy prices.
  • Energy efficiency measures under the ESI have played a role in driving overall falling energy demand in Victoria. But rising peak demand continues to drive up energy retail prices. The ESI can help protect Victorians from the escalating cost of energy by targeting electricity use during peak periods.
  • The ESI is estimated to add the nominal amount of 0.4 c/kWh annually to the retail and wholesale component of power bills in Victoria, compared with distribution network costs which are driving up more than half of the price increase in Victoria.
  • Low income households have received a greater share of total ESI benefits than more advantaged areas. However, given the impact of rising energy costs on vulnerable households the Department should give active and early consideration to the inclusion of a priority group for low income households, similar to South Australia's Residential Energy Efficiency Scheme (REES), or other incentives such as on-bill financing and low interest loans, in order to help low income households access higher-cost items in the ESI.
  • Incentives for whole-of-house retrofits should be included in the ESI to capture the opportunities for more substantial retrofitting activities and increase the ability for lower-cost products to subsidise higher-cost items.
  • An emissions reduction value for insulation should be reintroduced into the ESI. Insulation is the most effective way to improve the energy efficiency of a home, accounting for a 45-55% saving off a typical home's heating and cooling energy load.

Please do not hesitate to contact Ange Nichols, Phone: 03 9929 4109, email ANichols@cleanenergycouncil.org.au for any queries regarding this submission.

Yours sincerely,
Russell Marsh

Director of Policy
Clean Energy Council

1. Barriers to the uptake of energy efficiency measures

1.1 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?

1.2 Under the first and current phases of the scheme, is there evidence from household and business participants on the existence of these barriers?

1.3 What evidence is there to show that the ESI effectively addresses these barriers?

Analysis of the 2009-11 phase of the ESI indicates that participating households have shifted towards more energy efficient behaviour since undertaking ESI activities.i Households also reported partially or in full replacing energy efficient products which had stopped working, indicating a shift towards potentially significant long-term behavioural changes. This suggests the ESI has been successful in addressing a nascent demand for energy efficiency measures which households may have been open to, but were restricted by information, capital and split incentive barriers.

Information gaps

Under the ESI, service providers have tended to provide information on the benefits of, and provision of, energy efficiency measures free of charge. This has helped overcome some of the main information barriers to energy efficiency, particularly in low-income households – as evidenced by the fact that energy efficiency behavioural change appears to be greater within this sector of ESI participants.ii

The community clearly has an appetite for information about energy efficiency. A nationwide survey conducted by Auspoll for the CEC in June 2011 found that Australians wanted more support to save energy and money on their electricity bills. Ninety five percent of people surveyed said they were concerned by rising energy costs and 89 per cent said they were willing to take action to use less energy. The ESI helps provide a source of this information by creating a financial incentive on service providers to educate their customers to reduce their energy consumption.

Split incentives

Analysis of the 2009-11 phase indicates the ESI is predominantly accessed by home owners, with a demographic that is skewed towards mature households, pre-retirees and retirees. A 2011 survey found 91% of consumers surveyed were home owners.iii

This is unsurprising given the conflict of 'split incentives' between landlords and tenants is well known. The inability of a landlord to capture the benefits of the upgrade they pay for means that leased space has historically fallen behind owner-occupied buildings in pursuing energy efficiency.

The limited evidence that exists indicates that leased households – particularly low-income households - had a lower initial incidence of energy-efficient products such as light globes and showerheads prior to the ESI.iv This may reflect split incentive barriers.

However, the increased uptake of energy efficient products by leased households under the ESI indicates the effectiveness of the scheme in providing a split benefit for energy efficiency - landlords can sell Victorian Energy Efficiency Certificates (VEECs) received for investing in efficient products while the tenant enjoys reduced bills.

Access to capital

Up-front capital cost is a well-known barrier to households implementing energy efficiency measures. In particular, many low-income households simply do not have the up-front cash to invest in energy efficient products. Additionally, some low-income households place more value on a dollar in the hand today than the projected future savings from increased energy efficiency.

As a result, products under the ESI for which households have to pay a large up-front cost are less likely to be taken up by low income households, even if they may lead to reasonable savings over time. This barrier will become more of an issue as the lower cost measures that require little or no co-contribution, will potentially be exhausted and the level of cocontribution required for other measures will be higher.

Recent studies have revealed that a payback period of less than three years for energy efficiency activities in households, and less than five years in commercial and industrial environments, are typically required to incentivise the uptake of such activities. v The Department could explore evaluating project costs and the setting of a price cap, to ensure that attractive payback periods can be achieved for low income households struggling to cocontribute for higher cost measures.

The Department could also explore the inclusion of a priority group for households with concession cards, similar to the priority group in South Australia's Residential Energy Efficiency Scheme (REES) and the UK's Carbon Emission Reduction Target Scheme (CERT) and Community Energy Saving Programme (CESP)1. Additional financial incentives for lowincome households, such as rebates, on-bill financing and low-interest loans, can also help provide access to higher value measures.

1.4 What evidence can you provide to indicate the extent to which the ESI is complementary to national emissions reduction schemes?

The introduction of a price on carbon is a potentially significant step in reducing greenhouse gas emissions. However, it is insufficient on its own to achieve the level of emissions cuts that are required for Australia to meet its legally binding international obligations. Complementary measures such as the ESI are still needed.

Australia's carbon price imposes a cost on greenhouse gas emissions, thereby sending price signals to discourage carbon emissions. While these signals may be heard by large business and industry, they are deliberately muted for households as the compensation package provided under the scheme diminishes their impact. Consequently, the carbon price is unlikely to have a significant effect at the household level.

Unlike the carbon price, the ESI should not be viewed solely as an abatement tool. While the ESI does deliver low-cost abatement, it does so with energy efficiency measures that are difficult to incentivise through a carbon price due to residual market barriers, such as those mentioned above. This supports COAG's Complementarity Principles which guide the assessment of emission reduction measures to complement the national carbon price mechanism.

Adding to this is the significant political uncertainty surrounding the future of the carbon price. If the carbon price is repealed under a future government, the ESI will continue to deliver benefits to Victorian households and businesses in the form of improved energy efficiency and lower electricity bills. This is important given rising electricity prices and predictions that gas prices are set to triple within the next decade.vi

1.5 Is there any further information in relation to this matter that we should consider?

Many jurisdictions have a combination of carbon pricing and energy efficiency policy measures, including the United Kingdom, the European Union, India, Japan and the United States. These countries recognise the importance of having a tailored mix of actions. Closer to home, the NSW Energy Savers Scheme (ESS) and South Australia's Residential Energy Efficiency Scheme (REES) continue to complement our national carbon price scheme.

2. The performance of the ESI to date

2.1 What evidence can you provide to demonstrate the impact of the ESI on energy consumption and retail prices?

Overall demand for electricity traded in the National Electricity Market (NEM) has reduced dramatically in the last four years. Drivers of this fall in demand are varied, but include the high level of rooftop solar PV installed recently, and changes in customer behaviour in response to highly publicised electricity price increases - including the use of more energy efficient devices under the ESI.

Peak demand is a major factor that has driven up energy retail prices. While overall demand for electricity has been falling, peak demand has been increasing as more air conditioners and other appliances are installed in people's houses than ever before. The Australian Energy Market Commission (AEMC) estimated in 2012 that 24 per cent of retail electricity prices were derived from peak demand events that made up less than 40 hours per year.vii

Energy efficiency needs to be a sustained focus in order to reduce electricity use during these peak periods and protect consumers from rising electricity prices. It is peak demand that drives investment in network infrastructure. The ESI has helped reduce overall electricity consumption in Victoria. However, if Victoria continues to successfully reduce overall electricity consumption, but does not reduce peak electricity demand, total electricity use will go down but the cost per unit of electricity will increase, to enable network companies to recover their fixed costs. If targeted towards peak demand, the ESI has the potential to offer overall network benefits and ease the upward pressure on energy prices.

The potential for energy efficiency to alleviate pressure on energy prices is noted in the AEMC's Retail Electricity Price Movements 2012. The ESI is estimated to add the nominal amount of 0.4 c/kWh annually to the retail and wholesale component of energy bills, and the AEMC predicts downward pressure on wholesale spot market prices will continue as falling demand and increasing investment in energy efficiency and renewable energy push down prices. As a result, wholesale and retail prices are estimated to follow a moderating trend in Victoria, rising only on average 2% from 1 July 2012 to 30 June 2015.viii

2.2 Has the mix of activities included in the scheme been appropriate to maximise energy efficiency uptake?*

The ESI needs to be more responsive to changing consumer priorities and new technologies, rather than being based around a relatively static list of energy efficiency products, and one that is not necessarily aligned with consumers' current and changing energy efficiency Page 6 priorities. Furthermore, the process for bringing new products into the scheme should operate more rapidly.

Insulation

Insulation represents less than one per cent of all VEEC's created. This low number reflects the fact that the emissions reduction value for insulation under the ESI was reduced to zero following the introduction of the Federal Home Insulation Program (HIP), effectively removing it from the scheme. The rationale for doing so was to avoid duplicating the incentive for installing insulation. However, the HIP has now concluded and no replacement scheme is operating. As such, there is scope to reintroduce insulation in the ESI.

The effective exclusion of insulation from the ESI is a missed opportunity to maximise energy efficiency uptake. Insulation is the most effective way to improve the energy efficiency of a home, accounting for 45-55% saving off a typical home's heating and cooling energy, and offering households a payback period as short as 5-6 years. A recent assessment of cost benefit ratios for energy efficiency activities clearly shows the benefits of ceiling insulation, particularly in the Victorian context. This is shown in the graph below.ix

Benefit Cost Ratios for various house improvements by State/Territory

Graph showing Benefit Cost Ratio for various house improvements by State/Territory. Ceiling insulation has the highest ratio within every state, ranging from 16.1 in Victoria to 2.7 in Queensland. Double Glazing has the lowest ratio in three states; Queensland -0.4, NSW -0.2, and WA -0.3.

xi

Safeguards to address the safety and training concerns raised during the HIP would be necessary to ensure a robust and well run ESI. These include:

  • Accreditation and training: installers must be accredited to the ICANZ installation manual and installation must be in accordance with the Australian Standard
  • Product certification: product must be certified to comply with AS/NZS 4859.1:2002 (insulation material) and achieves a minimum winter R-value of 2.5 when measured and labelled in accordance with AS/NZS 4859.1:2002
  • Manufacturer's warranty: product must carry manufacturer's warranty for the life of the product
  • Installation: the installer must provide a warranty for 10 years
  • Audits: must be in accordance with the Essential Services audit risk profile and an accredited person should be required to audit 10% of their new installations per annum.

Whole-of-house retrofits

Typically under the ESI, lower cost energy efficiency measures tend to be implemented over other, more expensive but more cost-effective opportunities and service providers tend to favour approaches which focus on single or double-item visits. This reduces the opportunities for more substantial retrofitting activities and lessens the ability for the lower cost products to subsidise other higher-cost items. For example, solar hot water is likely to be more cost-effective when coupled with the delivery of low-cost measures such as showerheads. A better outcome for households could be achieved through an incentive built into the ESI to provide an additional benefit for whole-of-house or multiple retrofit measures in one arrangement.

2.3 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?

Analysis of the 2009-11 phase of the ESI suggests that overall, specific groups do not experience barriers to participation in the ESI, but barriers do exist for some groups to access particular products in the Scheme.x

Households from low-income areas received a greater share of the total ESI benefits, measured by the number of Victorian Energy Efficiency Certificates (VEECs), than more advantaged areas. The higher number of VEECs created in low-income areas reflects the high proportion of VEECs generated through replacement light globes, primarily compact fluorescents (CFLs), and replacement high efficiency showerheads.xi

Conversely, low-income households received fewer of the products which cost more to install and result in higher energy efficiency returns, such as hot water services, space heating and insulation. Higher-income households received more of these high-value, highreturn measures including hot water service replacements. These items generate higher savings per household than the low-cost measures but are likely to involve a household cocontribution.xii

Analysis for the same period found that more than four in ten consumers surveyed were earning personal incomes of $35,000 p.a or lower, and a median household income of $51,800 p.a. This is below the Victorian median of around $66,900 p.a. Additionally, more than a third of those surveyed claimed to be on some form of welfare support, noting that this is assumed to be predominantly retirees - 81% of scheme participants aged 55 and over held a concession or health care card.xiii

2.4 How are the costs and benefits of the scheme distributed between different customers?

All households ultimately pay for the direct costs of the ESI through their energy bills because energy retailers are able to pass on the full costs for implementing the scheme to customers. However, modelling showed that the current emissions reduction target of 5.4 MtCO2-e would lead to a reduction in overall energy usage and subsequently a reduction in the average household's electricity bill.xiv

Households that participate by implementing energy efficiency measures receive both the system wide reduction in energy bills and any savings from the energy efficiency products introduced into their homes. The average benefit for households that take part in the scheme (based on undertaking at least two energy efficiency activities) is identified as $308 saving on their electricity bill over the first five years (assuming an annual household electricity bill of $1104.50, or $5522.50 over five years).xv

Non-participating households, on the other hand, only receive the benefits from any systemwide reductions in energy bills. Over the long term, the scheme will lead to net reductions in electricity consumption, and subsequently reductions in residential electricity bills - it is estimated that non-participating households will receive a cumulative electricity savings valued at approximately $38.80 between 2012 and 2015.xvi

2.5 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?

There are currently 123 accredited companies under the ESI. The scheme has clearly encouraged investment, employment and technology growth in several different sectors, such as manufacturers, energy retailers and energy efficiency services companies. In analysis of the 2009-11 phase of the ESI:

  • Around a third of businesses' had local Victorian operations only and the average number of employees was 73.
  • A quarter of surveyed businesses' indicated they had established their business as a result of their participation in the ESI.
  • Almost one in three services providers claim to have hired new staff specifically to work on the ESI scheme.
  • Many businesses have used the ESI as a launching pad to a more diverse range of operations, encouraging innovation.
  • Many participating households have implemented energy saving activities outside of the ESI such as buying GreenPower and solar PV panels, further spurring investment and employment in associated sectors.xvii

Stable and sound policy-making such as the ESI maintains an environment where businesses have a high degree of certainty that their investments will not be subject to inconsistent and ad hoc government decision-making. The ESI provides the regulatory certainty needed for companies to support their business models. An ongoing, secure scheme will be of significant economic benefit to Victoria, particularly in the absence of a National Energy Saving Initiative (NESI).

2.6 Has the scheme created any unintended consequences and what evidence can you provide to support this?

No comment.

2.7 Is there any further information in relation to the performance of the scheme to date that we should consider?

No comment.

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

3.1 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?

More than one million homes across all income groups have benefited from the ESI to date. However, approximately 1.9 million homes in Victoria do not achieve five-star ratings, including an estimated 590,000 homes with inefficient showerheads and 230,000 homes that do not have dual flush toilets.xviii This is likely to include many of the 73,000 low-income properties within the provision of the Department of Human Services (DHS). Based on these figures, it is likely that demand for low cost activities still exists.

3.2 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?*

Please see Section 1.2.

3.3 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 ESI has been successful in meeting each of its first four years' targets. This is despite the ESI undergoing significant change, such as the doubling of the target between phase 1 and phase 2 and its expansion to include business and other non-residential sectors.

Further change may occur if large energy users are added to the scheme. Given this, a period of evaluation is needed to assess how the market is responding to these changes, during which the current target (5.4 MtCO2-e) should remain, with a view to increasing it if appropriate.

If the target is increased, it should be structured to facilitate the significant ramp-up required in business energy efficiency activities (and potentially large energy users) and ideally provide for a clear transition into a national scheme.

3.4 Is the ESI the most appropriate scheme in which to encourage energy efficiency uptake for large energy users?

If large energy users are transitioned into the ESI, care will have to be taken to ensure the ESI market does not become dominated with a small number of very large projects, reducing the amount of activity in the residential sector. Additionally, the inclusion of large energy users in the retailer's scheme acquisition may increase demand before there is project based capacity to meet that demand. To avoid these issues and ensure large users are brought into the ESI quickly and smoothly, the CEC recommends that deemed savings for currently approved activities be accepted for large energy users, either as part of define projects or stand alone.

3.5 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?

No comment.

3.6 Is there any further information in relation to the continuation of the scheme that we should consider?

3.7 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?

The CEC strongly supports the development of a National Energy Saver Initiative (NESI), building on the successes of state-based schemes such as the ESI. As the first jurisdiction to introduce an energy efficiency trading mechanism, the CEC would encourage Victoria to pursue national adoption of its ESI. A national scheme could deliver significant scales of economy and reduce the regulatory burden inherent in the present patchwork of statebased schemes.

However, developing a NESI is a lengthy process that must secure COAG support. Uncertainty surrounds when or if a NESI will be agreed. It is critical the ESI remains in place until such point in time that a NESI is operational. If the ESI is discontinued prematurely, it would remove a key mechanism for addressing the barriers to the uptake of energy efficiency measures and stall the energy markets ability to drive energy efficiency improvements and ultimately be ready to respond to when a NESI is in place.

3.8 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?

3.9 Is there any further information that we should consider if the scheme were not continued?

Discontinuation of the ESI will directly result in the following adverse issues for Victoria:

  • Loss of local jobs: as mentioned above, 123 ESI accredited companies employ an average number of 73 employees, with many staff hired specifically to work on the scheme. Given a quarter of surveyed businesses' for the 2009-2011 phase established their business as a result of their participation in the ESI, it can be assumed many would risk closure should the ESI be discontinued.
  • Expose Victorian consumers to rising electricity and gas prices: rising electricity prices and predictions that gas prices are set to triple over the next decade are an increasing concern for businesses and households already struggling with their energy bills. Energy efficiency is the simplest and least-cost way to reduce their reliance on power. More than one million homes across all income groups have benefited from the ESI to date. Discontinuing the scheme would clearly expose Victorian consumers to volatile and higher prices in the future.
  • Loss of investment and innovation: Also mentioned above, many participating households have implemented energy saving activities outside of the ESI such as buying GreenPower and solar PV panels, further spurring investment, employment and innovation in associated sectors.xix Furthermore, the ESI stimulates innovation by assisting with a faster market take-up by legitimising the product and providing cost offsets to users of the product.

Stable and sound policy-making such as the ESI maintains an environment where businesses have a high degree of certainty that their investments will not be subject to inconsistent and ad hoc government decision-making. The ESI provides the regulatory certainty needed for companies to support their business models. An ongoing, secure scheme will be of significant economic benefit to Victoria, particularly in the absence of a National Energy Saving Initiative (NESI).

Discontinuation of the ESI would highlight the ongoing energy policy uncertainty and the abrupt changes to, or cancellation of, related schemes such as the ESI that makes long-term investment in the energy efficiency industry increasingly difficult. Australia has a real and growing sovereign risk problem. Stable and sound policy-making is needed to maintain an environment where businesses have a high degree of certainty that their investments will not be subject to inconsistent and bad government decision-making.

The CEC and its members would be happy to discuss these issues further with you as your review progresses. If you have any further questions please contact Ange Nichols via telephone on 03 9929-4109 or by email:anichols@cleanenergycouncil.org.au

Russell Marsh

Director of Policy Clean Energy Council

1 Since 1 January 2013 these have been superseded by the Energy Company Obligation which funds measures outside the new private sector funded UK Green Deal.

i Energy Saver Incentive Scheme: Phase 1 Evaluation Survey, September 2011

ii Energy Saver Incentive Scheme: Phase 1 Evaluation Survey, September 2011

iii Energy Saver Incentive Scheme: Phase 1 Evaluation Survey, September 2011

iv Brotherhood of St Laurence, The Power to Save: An equity assessment of the Victorian Energy Saver Incentive in metropolitan Melbourne, 2012

v Submission by AGL Energy to the Issues Paper on the Expansion of the Energy Saver Incentive, 17 November 2010

vi Kane Thornton, Clean energy can be the answer to our gas woes, May 2013

vii Clean Energy Council, Clean Energy Australia Report 2013

viii http://www.aemc.gov.au/Media/docs/Victoria-information-sheet-49d2e2a5-1a35-4cc9-b05b-534fd7958de5-0.PDF

ix ICANZ, State by state guide of the benefit cost ratios for typical energy efficiency products, January 2013

x Brotherhood of St Laurence, The Power to Save: An equity assessment of the Victorian Energy Saver Incentive in metropolitan Melbourne, 2012

xi Brotherhood of St Laurence, The Power to Save: An equity assessment of the Victorian Energy Saver Incentive in metropolitan Melbourne, 2012

xii Brotherhood of St Laurence, The Power to Save: An equity assessment of the Victorian Energy Saver Incentive in metropolitan Melbourne, 2012

xiii (Gary report)

xiv ACIL Tasman 2011, Energy market modelling: expansion of the ESI scheme, Department of Primary Industries (DPI), Melbourne

xv Department of Primary Industries (DPI) 2011, Regulatory impact statement Victorian Energy Efficiency Target regulations part 2, DPI, Melbourne, 2011

xvi Department of Primary Industries (DPI) 2011, Regulatory impact statement Victorian Energy Efficiency Target regulations part 2, DPI, Melbourne, 2011

xvii Energy Saver Incentive Scheme: Phase 1 Evaluation Survey, September 2011

xviii COAG to debate six-star energy efficient homes, April 2009,

xix Energy Saver Incentive Scheme: Phase 1 Evaluation Survey, September 2011

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