ClimateWorks Australia's role as an informed stakeholder
ClimateWorks Australia is an independent not-for-profit organisation, founded through a partnership between Monash University and The Myer Foundation, launched in 2009. Its purpose is to catalyse substantial emissions reductions in the next five years in Australia by working with government, business, industry groups and the community via a collaborative action]based approach.
ClimateWorks has substantial experience in identifying cost]effective carbon mitigation opportunities that include energy efficiency, cleaner energy and low emissions technologies and processes across sectors, including power, industry, land, transport and buildings.
ClimateWorksf expertise draws from research we have undertaken and published, including:
- The Low Carbon Growth Plan for Australia, and subsequent reports which draw on this analysis, including the 2011 Update and The Impact of the Carbon Price Package.
- Sector analyses including the Industrial Energy Efficiency Data Analysis Project (2013). Our response to this issues paper provides a high level overview of our relevant research findings. Further detail on our research findings can be found on our website www.climateworksaustralia.org
Energy Saver Incentive Issues Paper
The Victorian Department of State Development, Business and Innovation (DSDBI), is seeking feedback on the Victorian Energy Saver Incentive (ESI), as per their Issues Paper released in June 2013, which provides the following background information and context.
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 technological 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.
Below is ClimateWorks response to a range of issues which DSDBI is seeking stakeholder views on through the Issues Paper.
Barriers to the uptake of energy efficiency measures
Through our research and stakeholder engagement, ClimateWorks has identified a range of barriers to the uptake of energy efficiency across the residential, commercial and industrial sectors that an ESI scheme can address.
- Limited access to capital and/or high cost of capital -The ESI may contribute to reducing the upfront technology costs, thereby reducing the payback period and overcoming capital constraints.
- Limited understanding of potential energy savings -The ESI could incentivise energy retailers to translate the potential energy savings to tangible opportunities and communicate this to their customer base.
- Low investment priority as factors other than energy efficiency may drive investment choices -The ESI can enable third parties to make investment choices on behalf of households by incentivising investment in energy efficient technologies.
- Transactions costs - The ESI could incentivise third party aggregators to develop approaches that reduce individual transaction costs.
- Low business priority - Utility bills typically represent a small portion of overall operating costs for SMEs and hence are not an area of focus for SMEs. The ESI may overcome this barrier by incentivising energy service providers to undertake energy efficiency upgrades on behalf of SMEs.
- Access to capital - SMEs typically divert cash flow to business growth or productivity improvements rather than energy efficiency. Accessing finance for uncollateralised projects such as energy efficiency is difficult, as SMEs may be considered a risky counterparty. The ESI may partially overcome this barrier through the provision of upfront capital.
- Split incentives - Split incentives can be particularly problematic in preventing the uptake of energy efficiency opportunities, as they affect all tenanted premises. Some opportunities for improving energy efficiency require capital investment by the building owner, where the energy and financial savings benefit the tenant. This is a difficult barrier for the ESI to overcome and may be more effectively tackled by alternative policy mechanisms. However, our research1 shows that around 53% of energy efficiency in commercial buildings is controlled by the occupant, thus not directly affected by the split incentive barrier.
- Suppliers - Equipment choices are often driven by contractors such as plumbers or electricians, who may recommend equipment that they are familiar with or that offers the greatest profit, which may not be the most energy efficient choice. In regional and remote areas SMEs may face higher costs for engaging consultants and purchasing equipment. The ESI may stimulate growth in supply of more efficient technologies, making them cheaper and more readily available.
- Transactions costs ] SME aggregation via the ESI can assist but not fully remove this barrier, as it is expected that elow hanging fruitf (homogeneous and cheap opportunities) will be prioritised ahead of more complex projects.
- Payback periods - Payback period is a strong factor across multiple industrial sectors. Many companies set criteria that require projects to pay for themselves within two years, or sometimes as low as one year. This reflects cautionary investment behaviour in a highly uncertain environment. The ESI, through a price incentive, can increase the relative profitability, reduce the payback periods and increase the internal rates of return of projects which may have been too costly or not attractive enough for investment
- Access to capital - Availability of internal capital to fund projects remains difficult, a result of strong internal competition for capital within companies, the tightness of financial markets, and the challenging economic environment in Australia for some industrial sectors. The ESI can have a moderate impact on the availability of internal capital as businesses recognise the financial benefits of undertaking energy efficiency projects
- Operational risks - Operational risks are a common factor inhibiting implementation. Many industrial sites operate 24 hours a day, seven days a week. Interruptions to operations to implement energy efficiency opportunities - such as installing or modifying equipment - need to be carefully planned to match scheduled downtime periods. This is a difficult barrier for the ESI to overcome and may be more effectively tackled by industry training and sound project management.
- Decision cycle - Decision cycle relates to equipment with a long lifespan, which companies can be reluctant to replace before the end of its useful operating life. This is a difficult barrier for the ESI to overcome, although by improving the financial attractiveness of replacement of certain types of equipment, this may encourage the uptake of more energy efficient equipment sooner than would naturally have occurred.
- Access to information - Access to information can be a particular issue for smaller companies, who may not have the internal resources or skills to identify and implement energy efficiency opportunities. On the other hand, evidence suggests that organisations with multiple sites and participating in EEO or other State]based energy efficiency programs generally have the skills and resources to tackle energy efficiency. The ESI may reduce transaction costs if energy retailers or third party service providers aggregate energy efficiency projects across numerous entities. This may also have a flow]on effect on the rest of the industry by stimulating growth of third party service providers.
The performance of the ESI to date
ClimateWorks analysis has found that energy efficiency typically saves businesses and households money over the life of the more efficient asset through avoided energy costs. Incentivising least cost emission reductions in Victoria through programs such as ESI will also assist Victorian businesses and households to be better positioned within a carbon restrained economy. In combination with a carbon price and other complementary measures, the ESI plays a vital role in reducing Victoriafs emissions at the lowest cost, by helping to overcome key barriers that prevent the uptake of energy efficiency through aggregation of energy efficiency opportunities by third party service providers, facilitating market growth in energy efficient technologies and overcoming capital constraints and decision process barriers.
An ESI also plays a key role in complementing the carbon price by encouraging the uptake of energy efficiency in those sections of the economy not directly targeted by a carbon price, yet who bear additional costs associated with carbon price pass]through as well as rising energy prices.
Looking forward: the future of the scheme from 1 January 2015
ClimateWorks supports the ongoing delivery of the ESI beyond the 1st January, 2015. This scheme has been effective in overcoming a range of barriers facing the uptake of energy efficiency in Victoriafs residential and commercial sectors. Our analysis for Tracking Progress shows that there is still significant room for improvement in the energy efficiency of both commercial and residential buildings, and that White Certificate schemes such as the ESI are important drivers to ensure the take up of this opportunity.
ClimateWorks also supports the rollout of the ESI program to the industrial sector, utilising a project]based approach similar to that which NSW has adopted. Through our IEEDA research, we have found that there is significant untapped potential for energy efficiency across the industrial sector nationally:
- Companies that account for half of Australiafs total energy consumption have reported projects that could save an average of 11% of their energy use, lowering their energy costs by $3 billion per annum and cutting greenhouse gas emissions by 15 million tonnes. A significant proportion of this can be achieved with a payback of less than 2 years.
- Our analysis indicates that around 40% of the energy savings identified will be implemented under current policy settings, and that most of these opportunities will achieve a payback of less than 2 years. This is equivalent to 4.8% of total energy use across these sectors - worth $1.2 billion per year in energy savings.
- These energy savings are achieved primarily through operational improvements such as implementation of process controls and measurement, improved process design and optimisation or changes to staff behaviour and maintenance practices. Some of these require minimal capital expenditure for significant gains, and can often be achieved through simplified decision channels (e.g. via maintenance budgets).
- There are multiple and competing factors which influence business decisions relating to energy efficiency, many of which are interlinked. This means that not all the identified energy savings opportunities will be implemented, leaving about $2.1 billion of energy savings not expected to be taken up in current business implementation plans. The barriers preventing the uptake of these opportunities have been identified in an earlier section of this submission.
The industrial sector is a largely heterogeneous sector and an energy savings initiative that covers the breadth of opportunities across the range of industry sub]sectors would require detailed policy design to be effective. However, given the significant opportunity in this sector, and the fact that a carbon price alone is unlikely to be sufficient to drive the uptake of much of this energy efficiency potential, there is clear need for additional mechanisms to successfully drive emission reductions in this sector.
Finally, the review may wish to consider that accessibility of cash back from white certificate schemes can sometimes prevent people from claiming them. Anecdotal evidence suggests that many people who buy appliances, such as high efficiency televisions or white goods donft claim certificates. This is due to the fact that the consumer must approach a third party after the sale to cash in certificates which is usually approximately only 5 to 10 per cent of the sale cost. Industry experts suggest a point of sale processing ability for white certificates, where consumers are automatically able to cash in their benefits, could further aid purchases for energy efficiency and increase the number of white certificates generated.
ClimateWorks would be pleased to discuss or provide further information on any of the content included in this submission.
1 - Australian Carbon Trust Report: Commercial buildings emission reduction opportunities. Produced by ClimateWorks Australia, December 2010.
Page last updated: 24/06/20