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Energy Saver Incentive (ESI) Review submission– July 2013

About us - Embertec

Embertec Pty Ltd is an Australian energy efficiency technologies company. We specialise in power-saving products for the consumer electronics and appliances market utilising a unique microprocessor controlled chip and supporting platform technology. This is the Embertec SmartSwitch SPC range which forms a major part of the installed SPCs in Victoria.
We support the continuation of the ESI and maintenance or increase of the target for the next phase. Market evidence shows that there remains sufficient unmet demand for low-cost activities to meet this target without excessive costs. The doubling of the target between phase 1 and phase 2 led to increased participation in energy efficiency activities across all market sectors, from manufacturing to residential and commercial participation and increased awareness of energy efficiency opportunities. This increased awareness and participation in energy efficiency has led to greater market competition and an overall decrease in the cost of certificates.

Barriers to Uptake

Financial Barriers

We can see very clearly that there are major financial barriers to the uptake of energy efficiency measures, which are effectively addressed by the ESI. For households, these barriers consist of more than access to capital, although this is significant. For many households, paying out a lump sum of hundreds of dollars would put the household budget under severe strain. However, this does not fully explain the low uptake of relatively low cost energy saving measures by households of moderate means.

A "bounded rationality" effect is likely to be at work here. Relatively low cost measures are likely to have commensurately modest returns. However, the effort required to quantify exactly the returns for a specific household is significant. This combination of effort and expense required, leads to the "rational" decision to do nothing, even when the householder knows that it is very likely that the effort and expense would pay a dividend in the relatively quickly.

Case Study – RACV and RACQ

Inadvertently, we gathered quite dramatic evidence of the effectiveness of the ESI in addressing these barriers for low cost energy saving measures. In mid-2012 and early 2013 we ran very similar advertising campaigns offering Standby Power Controllers (SPCs) in Victoria and Queensland. In Victoria we had the support of the ESI, in Queensland, we did not. The difference in response was dramatic. The Victorian campaign was nearly 100 times as successful as that in Queensland almost entirely due to the upfront cost component of the Queensland as opposed to the "free" offer via the ESI program.

The campaigns were directed at motoring organisation members: RACV in Victoria and RACQ in Queensland. Members of motoring organisations come from a wide socio-economic range. Membership of a motoring organisation providing emergency roadside assistance indicates that members are prudent and comfortable with the value of paying money for a delayed benefit. The RACQ campaign included a significant price reduction incentive, and a compelling case for saving money in the medium term. A good response was anticipated even in the absence of the ESI. The campaigns and the responses are summarised in Table 1.

Table 1: Comparison of SPC take-up with and without ESI.

Victoria Queensland
Audience: 1,000,000 RACV Members 1,000,000 RACQ Members
Period: April, May, June 2012 February, March, April 2013
Media: RACV Member Magazine RACQ Member Magazine
Responses generated: 30,359 3,408
Cost to Customer $0 $50-$60 (40%-50% discount)
SPC Installations: (households) 7,249 86
SPC Market Saturation at time of promotion >20% 0%
Campaign Advertisement An example of an campaign advertisement in Victoria. An example of an campaign advertisement in Queensland.

It can be seen that the ESI support is essential for encouraging significant uptake of energy saving measures of even quite modest cost by households. The number of RACQ members who even showed interest in the campaign was 10 times less than for RACV members. Ultimately the sales to RACQ members, unsupported by the ESI, were less than 1.2% of the number of RACV member households where SPCs were installed with ESI support.

National Scheme Complementarity

This also shows that the ESI is complementary to any national emissions reduction scheme. The current "carbon tax" and the proposed extension to become an ETS are designed to send price signals to discourage carbon emissions. These signals may be heard and heeded by large businesses and industry, but they will be very much muted for households. As can be seen from our Qld experience, even a very loud "price signal" in terms of reduced cost and lifetime savings, was insufficient to persuade households to undertake energy saving activities, so this Commonwealth scheme is unlikely to have a significant effect at the level of individual households.

The alternative Direct Action Plan is directed to business and industry, and does not include direct targeting of households.
Beyond their common goals of GHG reduction, there would be little overlap between the ESI and the existing or proposed Commonwealth schemes.

Performance of ESI

The mix of activities must be considered to be successful. The penetration of energy saving activities has been remarkable – for example, SPCs are now installed in more than 55% of Victorian households. Yet the cost of certificates has continued to fall. This indicates that "third parties", being the APs and the manufacturers, are identifying low cost means for supplying energy efficiency activities.

Participation in the scheme has been remarkable, with more than 1M households having benefited from the scheme. The low or no upfront cost to customer nature of most activities has led to uptake across all income groups, with the voluntary, household choice nature of the scheme contributing to high participation by those consumers feeling the greatest pressure from rising prices. Suburb saturation of VEET activities shows a much higher penetration in lower income suburbs, so it can be assumed that ESI through its very design has benefitted lower income households.

Sustainability of savings is critical, especially when activities savings are deemed over a long period of time. Embertec has undertaken research with Victorian households, on sustainability and it is very clear that householders that have responded to advertising or telephone appointments have a much higher sustainability than those householders that have been door knocked. This research also suggests that if consumers have the opportunity to opt-in, they would be far more receptive to future offers from the same company (in this case, from Embertec, 100% for advertisement respondents, and 89% for telephone – as compared to 74% for door knocking) Please refer to Table 2.

Table 2: Embertec brand trust: Research by Pureprofile, May 2013.

Total/ Average Responded to an Embertec advertisement Had somebody telephone me offering installation Had somebody knock on my door offering installation I can't recall how I got it
Do you still have your Embertec SmartSwitch™ Standby Power Controller installed? 82% 85% 100% 79% 80% 
How satisfied are you with your installation - boxes 6-10  73% 82% 67% 71% 75%
Would you consider a lighting offer from Embertec? Y/N 81% 100% 89% 74% 60%
Is Embertec a brand you trust? Y/N 80% 100% 78% 72% 60%

The AP model has proved very effective in driving uptake of energy efficiency measures. However, two groups of customers are less well served by this model. Customers living in areas with few households, such as rural areas, are difficult for installers to service economically given the travel involved. A further group of people are inaccessible to AP's, either because they do not wish to have an installer in their home, or because they cannot conveniently arrange to be home to receive the installer. It would be useful for DSBDI and the ESC to be able to receive proposals for customer self-install models with technological verification that deliver sustainability of savings. Clearly, such a model, and the technological verification methods proposed, would need very careful assessment to avoid "rorting". An indication that such solutions would be entertained would stimulate research and development into effective and efficient ways to achieve the necessary level of verification confidence and deliver further market participation in the ESI by those householder groups where the current installation process is not easily accessible to them; in addition to delivering other cost efficiencies.

Costs and Electricity Prices

Energy efficiency measures do not decrease electricity prices directly, and may even cause the headline kWh price to increase. This is because a major component of increasing electricity prices is the network charges ("poles and wires") which are fixed by the Australian Energy Regulator on a five year horizon.

For individual consumers the increased kWh charges can only be offset by reduced consumption. Without the ESI allowing low-income consumers access to energy saving measures, the consumers least able to afford the increases will bear a disproportionately high part of the network costs. With household energy saving measures in place, rising headline electricity prices do not lead to equally large increases in the total bill paid by the individual consumer.

The network charges are fixed by the regulator, based in part on historical demand levels. Although there is a significant lag, demand reduction is ultimately reflected in lower, or at least more slowly increasing, network charges.

This effect is already being felt. The Australian Electricity Market Operator AEMO forecast paper (National Electricity Forecast Report 2013, Executive Summary) said this about forecast Maximum Demand (MD) for Victoria:

The Victorian MD has been reduced by 347 MW for 2013–14, and average annual growth over the 10-year outlook period is now forecast to be 0.9%, down from the 1.4% forecast in 2012, as a result of increased energy efficiency savings.

A decrease in Maximum Demand growth means a lower requirement for new infrastructure and moderation of network charges in the long term.
This makes the maintenance of the ESI target for the next phase critical, since a return to pre-ESI maximum demand growth rates may mean the effect of the ESI measures to date becomes a mere "blip" and network charges will not moderate.

Investment, Employment and Technology Development

The ESI has provided and continues to provide, a significant boost for investment and technology development. Embertec alone has six full time engineering positions dedicated to research and development alone. We invest over $2M/year in Australia solely on R&D, improving current products and developing new and innovative energy saving technologies.

As an Australian manufacturer, we have found our experience with the ESI to be invaluable in pushing into export markets, particularly in the USA. The Victorian ESI is perceived as an international standard setter for white certificate schemes. The scheme is well known and well regarded internationally, being considered the benchmark for a well regulated, market based scheme.

The continued learnings that have propelled R&D investment have also helped Embertec become more competitive in export markets, with a number of pipeline deals in Africa and in the USA.
Data on the scheme, both collected by us, and released by the Department, have great credibility internationally.

Future of the ESI

The ESI should certainly continue, and the target for the next phase should not be reduced. As evidenced by the fact that the doubling of the target between phase 1 and phase 2 resulted in a drop in the certificate price, a greater opportunity leads to greater investment. The increased investment by scheme participants led to business and technological innovation, allowing more energy efficiency activities to be undertaken, at a lower cost per unit of greenhouse gas emission saving.

Demand for Low Cost Activities

Where are the opportunities for continued energy efficiency? At time of writing, the market saturation for SPC's – the major contributor to date is around 60% of householders. Creation will continue to decline, with a shrinking market, and a combination of VEEC liquidity and uncertainty of the ESI future beyond 2014, leading to low VEEC prices.

1. Future SPC activity: Embertec undertook research in September 2011 to understand the consumer propensity towards adopting SPC's. This research shows that 89% of households would be interested in a free installation by their energy company. See table 3

This means that a further 30% of householders could still benefit from SPC's, assuming the economics stack up in terms of VEEC demand and price, and uncertainty around the ESI is removed. This equates to around 4m VEEC's still available from this activity alone.

Table 3: SPC market under ESI, by household type: Research by Pureprofile, September 2011
Survey Question: - The product might be available for free from your power/electricity supplier. How interested would you be in applying for this device?

Total Sample Single and living alone Single and living in shared accommodation Single parent Couple without children Couple with children under 18 years Couple with children under and over 18 years Couple with children over 18 years Widowed
Extremely interested 47% 56% 75% 29% 55% 45% 50% 38% 50%
Very interested 42% 24% 25% 57% 36% 45% 50% 47% 50%
Not that interested 11% 20% 0% 14% 9% 9% 0% 13% 0%
Not interested at all 1% 0% 0% 0% 0% 0% 0% 3% 0%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%

2. Future of lighting: CFL's were the mainstay of Phase 1 of ESI, and continue to be installed on the back of SPC installations, so the penetration is increasing. New LED technology, recently approved as activities 21C and 21D in the ESI provides an exceptional energy saving and carbon abatement opportunity. However due to the cost of implementation and the technology, a customer contribution is likely. What is the size of the opportunity?

a. Number of homes in Victoria eligible for LED downlight replacements, that require a householder contribution = 884 000. That increases to 1.944 X 66.8% = 1.302m if available for free, as it is assumed that renting tenants would not invest for the long term. Table 4 below:

Table 4: Number of homes with downlights. Sources: ABS Census 2011, Research by Pureprofile, Nov 2012
Number of homes (Vic) 1,944,000 ABS 
Less: Unoccupied 104,976 ABS
Less: Rented 515,586 ABS
Balance: Owner occupied homes 1,323,438
% of homes with downlights 66.8% Pureprofile
Downlight presence – all income, all homes  884,000 Pureprofile
Downlights per home 15 Pureprofile

b. Willingness to pay. Currently market offers range from $20-$40 for installation of downlights. With improved manufacturing scale, experience with installation efficiencies, and certainty in the ESI future, it is likely that the prices will come down to the householders. Assuming a price point of $20, and 48% willing to invest at this price, this means that there is an available market of 884,000 homes multiplied by 48% = 424,000 homes, each with 15 downlights average delivering 12 VEEC's per home, totalling 5.1m VEEC's. Furthermore if the price falls to $10 per globe, the potential number of VEEC's available for this activity increases to 7.3m.

Table 5: Willingness to invest in LED downlights at various price points, broken down by age of respondent: Research by Pureprofile, May 2013.
Proportion willing to pay at each price point Total 20 -29 Years 30 -39 Years 40 - 54 Years 55 - 65 Years
Number of Respondents in Sample 248 51 83 71 43
How likely would you be to purchase the LED downlight globes if they cost $40? 20% 27% 23% 17% 12%
How likely would you be to purchase the LED downlight globes if they cost $35? 25% 35% 29% 21% 12%
How likely would you be to purchase the LED downlight globes if they cost $30? 33% 51% 35% 27% 16%
How likely would you be to purchase the LED downlight globes if they cost $25? 41% 59% 43% 38% 19%
How likely would you be to purchase the LED downlight globes if they cost $20? 48% 61% 52% 45% 30%
How likely would you be to purchase the LED downlight globes if they cost $15? 57% 71% 61% 54% 40%
How likely would you be to purchase the LED downlight globes if they cost $10? 69% 80% 75% 62% 58%

Therefore it is likely that another 9-10m VEEC's can be created from these two activities, in the residential sector alone. Activity in the commercial sector will increase with time, and this along with the other accredited activities, should see a Phase 3 target equal to, or slightly greater than, Phase 2 easily met at a competitive cost.

Reductions in the scheme target would lead to the withdrawal of AP and manufacturer participants, with loss of jobs and contraction in investment. Significant capacity to provide energy efficiency activities would be lost from the economy.

Possible Reforms

As the price of certificates has dropped, and the competition for customers for energy saving activities has increased, a significant flaw in the system has been exposed. The scheme relies on accreditation of supplier participants (APs) in order to ensure that the scheme rules are complied with so that the aims of the scheme are achieved. The ESC is vigilant in oversight of the APs, but it cannot, and was never intended to, perform 100% audits of AP activities. While the ESC deals effectively with breaches of the scheme rules which it detects, it lacks a means to address systemic failures by an AP. This should be addressed by giving the ESC powers to enforce compliance with the aims and spirit of the scheme, rather than merely the rules. A means to do this would be the introduction of a "fit and proper person" test to the requirements to hold accreditation as an AP. This would allow the ESC leverage to address patterns of behaviour which could bring the ESI program into disrepute.

Large Energy Users

The inclusion of large energy users in the ESI needs to be carefully considered. There is a risk that the inclusion of such enterprises may unbalance supply and demand or sector (residential, commercial or industrial) participation levels. This could occur initially because their inclusion in the retailer's "scheme acquisition" increases demand before there is "project based" capacity to meet that demand. Later the reverse may be true, where small numbers of very large "projects" may dominate the market, reducing the amount of activity in the residential sector. 

To avoid these problems as much as possible, it would be important that deemed savings for currently approved activities be accepted for large energy users, whether as part of defined projects or stand alone. This would provide a springboard, allowing large energy users to be brought into the scheme quickly and smoothly.

END

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