Energy Australia

8th July 2013

Dear Mr Blowers

Review of the Energy Saver Incentives: Issues Paper – June 2013

EnergyAustralia welcomes the opportunity to provide input to the Development of the Regulatory Impact Statement (RIS).

EnergyAustralia is one of Australia's largest energy companies, providing gas and electricity to over 2.7 million residential and business customers. EnergyAustralia owns and operates a multi-billion dollar portfolio of energy generation and storage facilities across Australia including coal, gas and wind assets with control of over 5,600 MW of generation in the National Electricity Market.

1. Executive Summary

EnergyAustralia supports energy efficiency. For us, energy efficiency is about customers having control over their energy use. We believe that when customers are empowered with the necessary information, tools, capabilities and price signals, they can best make decisions about the right level of energy consumption and energy efficiency for their needs and preferences.

Removing the barriers to optimal energy consumption/efficiency choices by energy consumers requires action by many parties including: suppliers of energy, suppliers of energy consuming goods and services, energy efficiency companies, consumer groups and of course, customers themselves.

There is also a role for a variety of government energy efficiency policies. The objective of energy efficiency policy should be to support customers making efficient trade-offs between energy consumption and other goods and services to achieve an optimal level of energy consumption for their needs and preferences. It should be about removing barriers to optimal outcomes and not necessarily targeting reduced energy consumption, although this will often be an outworking as consumers undertake energy efficiency activities and purchases.

In our view, the most appropriate uses of government regulation include: to target information barriers (such as through appliance labelling); address split incentives (such as through building standards); and to support lower income households that lack sufficient financial capability to undertake energy efficient investments (such a policy can overlap with more general social welfare policy).
One policy that a number of jurisdictions have used in Australia is 'white certificate' schemes. These schemes effectively prescribe a reduction in energy consumption and then levy all customers to fund energy efficient appliances and equipment to the benefit of subset of customers.

While white certificate schemes may have had an initial role in 'jump starting' the market for energy services and raising awareness about energy efficiency, EnergyAustralia does not consider they should continue to be part of the energy efficiency policy mix.

We therefore consider that white certificate schemes in all jurisdictions, including Victoria, should be phased out as soon a practicable. Our reasoning is summarised below.
White certificate schemes are no longer required to drive energy efficiency improvements across the economy.

In our view the Victorian Energy Saver Incentive Scheme is largely redundant in pursuit of its stated policy objectives; i) to 'reduce greenhouse gas emissions'; ii) to 'encourage efficient use' of energy; and iii) to 'encourage investment, employment and technology development' in the energy efficiency services industry.

In terms of the first objective, carbon policy and renewable energy policy are directly targeted at reducing the carbon intensity of the stationary energy sector and absolute emissions. In relation to the second objective, advances in energy appliance technology coupled with increasing final energy prices and growing awareness of energy efficiency options, have contributed to the declining energy intensity of the Australia economy (in GDP terms). Finally, rapid advances in energy appliance technology, and white certificate schemes to some extent, have fostered the emergence of a growing energy efficiency services sector in Australia.
Competitive retail energy markets will continue to drive energy efficiency improvements in the absence of such schemes.

The retail energy market in Victoria is extremely competitive and capable of delivering to customers the level of innovation and differentiation they demand with respect to energy efficiency. As an example, EnergyAustralia has delivered the free eWise product to our customers to provide information on energy use and customised energy efficiency tips. The commercial pressure on retailers to 'keep up' with customers demands coupled with accessible information about the energy efficiency appliances is a very powerful set of incentives for ensuring that customers continue to capture the potential benefits of energy efficiency available in the future.
By virtue of their design white certificate schemes have implications for equity across the broader energy customer base.

White certificate schemes are fundamentally inequitable and disempowering to energy customers generally, notwithstanding the benefits they confer to a subset of customers. The inequity derives from the fact that all customers are forced to pay for the installation costs of energy efficiency appliances delivered to a much smaller subset of customers. This is disempowering to customers generally because they are not able to opt in/out of the scheme (assuming they are even aware of its cost imposition on their energy bills).

White certificate scheme are compromised by 'technical' issues biased toward overstating the merit of measured outcomes.

By virtue of their design white certificate schemes suffer from efficacy problems relating to the verification of actual energy savings. The use of baselines and deeming can't fully capture the behavioural aspects of energy consumption. De-installation of energy efficiency appliances within deeming periods and the well established 'rebound' effect risk significantly overstating measured energy savings under the these schemes.

The technology deployment efficiency of white certificate schemes relies on policy processes being able to keep pace with advances in technology.

The fact that policy processes are relied upon to determine which energy appliances are subsidised by white certificate schemes risks creating a distortion of efficiency in terms of 'what' technology is deployed and 'when' it is deployed. Energy efficiency appliances deployed under such schemes will not reflect optimal patterns of capital replacement to the extent that scheme approval processes are inflexible or lagging relative to advances in technology.
Energy market reforms that increase cost reflectivity are the best way for policy-makers to contribute to improvements in the productivity of the NEM.

Accelerating energy market reforms to 'sharpen' cost reflectivity across the entire energy value chain improves the productivity of the NEM more generally, including end-use energy efficiency, going forward. This encompasses reforms to market system reliability and demand-side participation in the wholesale market; cost reflective pricing of network infrastructure; and the roll out of smart meters and related communications technology to end-users. The transition to more 'flexible' energy pricing is essentially about making it easier for customers to use energy at the time and in the quantity that is most valuable to them.

Energy Australia is committed to continuing to engage with its customers with a view to affording them ever greater control over the management of their energy requirements, integral to which is energy efficiency. White certificate scheme's no longer assist with this process.

2. Issues with the current scheme

EnergyAustralia has pressing concerns with the lack of empirical evidence regarding the scheme's efficacy. Based on the information publicly available, and through our role as Relevant Entity under the scheme considerable evidence exists to demonstrate significant shortcomings in the operation of the scheme.

The scheme has over it's lifetime been subject to a number of legislative and regulatory changes to address unintended outcomes, most recently the introduction of amendments to the VEET Act to change the definition of a Relevant Entity. While EnergyAustralia acknowledges that policy and law are continually evolving entities, the repeated requirement for alterations to address arising issues is an indication that a review of the scheme is warranted at this time regardless of the statutory requirement to undertake one.

EnergyAustralia views a suit of direct regulatory solutions including appliance labelling, efficiency standards and appropriate flexible pricing mechanisms as the most appropriate policy means of delivering an optimal level of energy efficiency. We further believe that the task of determining the optimal level of energy efficiency should not befall policy makers and that the market is the best means of reaching optimal levels of energy savings with an efficient distribution of costs and benefits and the lowest impact on consumers and productivity.

2.1 Energy Efficiency and Pricing

Retailers have long advocated for cost reflective pricing for a number of reasons and EnergyAustralia believes that it is crucial to facilitate the uptake of energy efficiency. At the commencement of the ESI the Victorian AMI rollout was in it's infancy, but with the rollout scheduled to be completed by the end of 2013, the infrastructure will exist to enable appropriate price signals to be delivered and for consumers to have close to real time access to the impacts of their behavioural and investment decisions via portals and in home displays.

The VEET scheme distorts the price signal overall as the costs of the scheme are spread across the entire customer base while the benefits are not distributed as equitably. This aspect is discussed at length later in this submission, however the notion that customers who are unable to take advantage of scheme activities, such as low income households and renters, should face a higher tariff (through the retailers' recovery of their certificate liability) to subsidise other consumers who are able to make considerable savings is a perverse outcome indeed.

An additional aspect of cost reflective pricing is the temporal aspect which more closely reflects energy costs at a point in time. Introduction of flexible pricing is a step towards greater reflectivity on this basis. Assuming an earliest possible scheme closure date of 31 December 2014, Victorian consumers would have had a full 18 months to adapt to flexible pricing and develop a greater understanding of the benefits that smart meters can bring. EnergyAustralia fully supports the Government's commitment to flexible pricing and notes that a significant media campaign will occur later in the year to communicate the benefits to consumers.

EnergyAustralia further notes that an energy savings scheme which does not address peak demand such as the ESI can lead to increasing costs to consumers. The distribution networks' regulated returns on investment dictate that higher c/kWh network tariffs are required as total demand falls. Lower total demand does not remove the requirement for network investment as this is investment is largely required to ensure that networks can transmit the maximum level of instantaneous demand, ie the peak. Cost reflective pricing would rectify this issue by ensuring that the costs associated with peaks are reflected in the prices that customers face providing an incentive to use less at these times.
This issue also highlights a shortcoming of the scheme in that it can, to a degree, induce complacency about efficiency in consumers. With the exception of in home displays, scheme activities are largely "set and forget" measures which do not require interactivity with the consumer or the need to change behaviour to maximise energy and therefore cost savings. EnergyAustralia has in previous submissions on the range of activities under the scheme advocated for the inclusion of activities which lead to behavioural changes. These submissions have presented evidence from Opower, the developer of EnergyAustralia's eWise product, on the energy savings which can be realised as a result of the deployment of technologies which influence consumer behaviour. That the market has delivered technologies such as eWise (and other retailer equivalents) is evidence that the VEET scheme is no longer required to push consumers towards energy efficiency, and that is now appropriate that cost reflective pricing be introduced to drive further efficiencies through behavioural change.

2.2 Barriers to the uptake of energy efficiency activities.

The issues paper notes that that there is a perception that low income households do not have equitable access to the scheme due to the fact that many low income families live in rental properties and consequently cannot make decisions to invest in capital improvements to increase the energy efficiency of the property. Without incentives for landlords to invest in energy efficiency in investment properties, renters will largely miss out on the scheme benefits but will still be required to contribute to the costs of the scheme through increased electricity prices which factor in the costs of scheme compliance and surrender obligations.

Although it is true that renters have access to the scheme through the provision of efficient lighting, standby power controllers and weather sealing, sufficient evidence exists to indicate that these activities are largely "tapped out" in terms of certificate creation. While there may still be significant numbers of consumers who have not yet had access to these products on a free or heavily subsidised basis, indications are that they are sufficiently geographically dispersed that door knocking, the traditional means of provision of these products is no longer cost effective from an AP perspective.

Although not accredited as an AP under the VEET scheme, EnergyAustralia partners with APs who undertake these activities and has experienced lower than forecast certificate creation volumes as a result of market saturation, meaning that those consumers who have not already benefited from the provision of these products are less and less likely to do so as APs withdraw from this means of certificate creation or from the market all together.

Beyond the issue of renters being unable to make capital improvements to capture energy efficiency opportunities, low income consumers in general have difficulty accessing the benefits from the scheme. Even if the consumer is able to make decision on capital improvement on their dwelling, the upfront outlay required take up VEET activities beyond the low hanging fruit of lighting, weather seals and SPC can be considerable and out of the reach of those consumers who could benefit most.

The issues paper raises questions as to whether lack of information can be a barrier to the uptake of energy efficiency. In a competitive retail market, supported by a vibrant efficiency appliance market, customers will have access to large quantities of energy efficiency information if they want it. This is indeed the basis for competition among retailers seeking to differentiate their offering (e.g.eWise in EnergyAustralia's case). The quality of that information (from the customer's perspective) could however be limited to the extent that their energy prices reflect actual costs and therefore the true value of energy savings.

Greater visibility to the true cost of energy would provide a greater incentive to take action to reduce this cost, or at least provide consumers with the tools required to make a rational decision on investment in energy efficiency.

2.3 Market Saturation

EnergyAustralia has partnered with a number of APs to acquire the Victorian Energy Efficiency Certificates required to acquit it's liability as a Relevant Entity under the ESI. These partners primarily undertake commercial lighting upgrades and installation of lighting, weather sealing and standby power controllers in residential premises. As mentioned previously, within the current compliance year our partners have had difficulty in achieving forecast certificate creation figures. This is attributed to the saturation of the market in terms of the low hanging fruit having been picked. Reports on the VEET scheme since it's commencement have indicated that residential lighting upgrades and the provision of standby power controllers have been the primary source for the generation of certificates.

The saturation of the market in terms of these low cost activities will have a number of impacts which will result in adverse outcomes for consumers. Accredited Persons will move into higher cost activities to create certificates. The increased cost of undertaking the activities will be reflected in the certificate price which will ultimately be passed on to consumers. This outcome will exacerbate the issues outlined with regard to low income households as their access to efficiency activities will be further limited while the costs arising from the scheme will increase.

The alternative scenario is that insufficient certificates will be created by APs inflating the price of certificates until it reaches or breaches the shortfall penalty price resulting in a situation where liable entities will simply accept the penalty rather than pay the inflated market price for certificates. This is the worst possible outcome in that it results in scheme costs being passed on to consumers with little or no benefit in terms of energy savings being realised. This is an eminently plausible scenario as a number of APs focussing on low cost activities operate on low sunk cost models employing students and backpackers to undertake marketing and could exit the industry rapidly if it became uneconomic to continue.

Although technological advances will see the cost of activities which are currently higher cost fall, it is difficult to see them having a significant impact on the market given the lead time required for product approval or the inclusion of new activity categories.

2.4 Cultural and behavioural change

There is little doubt the energy efficiency is closer to the forefront of the consumer mind now than it was at the commencement of the ESI. In the early stages of the scheme, one of the main sources of certificate creation came from the replacement of incandescent light globes with lower wattage compact fluorescent globes (CFLs). Incandescent globes are now a rarity in Australia with a phase out commencing in 2009, however, CFLS are also becoming less common in residential premises. The decrease in the price of halogen globes, another low energy alternative to incandescent, has led to them being installed in place of many CFLs as the lighting quality is regarded to be superior. This end result is a widespread penetration of halogen globes which could have been achieved at a lower cost to the consumer if incandescent globes were simply replaced with whichever low wattage product the consumer preferred at the end of the old globe's useful life. This indicates that the market for energy efficiency products has evolved, sometimes in spite of the ESI.

Evidence of this also lies in the fact that retailers (and other organisations) have developed other energy efficiency products and innovations independently of the ESI. EnergyAustralia has developed the eWise initiative to provide detailed information and a bigger-picture view of customers' energy consumption to enable them to make informed choices and save money. The increasingly competitive energy retail market in Victoria has necessitated that retailers differentiate their otherwise homogenous product in order to maintain or grow market share. EnergyAustralia understands that a number of its competitors have developed alternative initiatives which demonstrates the market's ability to foster energy efficiency activities in the absence of an ESI.

Further to this, although the ESI was expanded to cover the commercial sector from 2012 many of the products which APs have sought to use under Schedule 34 have only recently been approved. This lag time can stifle the advent of new initiatives as it can lead to uncertainty and consequently impact an organisation's business case for development. Although a product or initiative is more likely to be viable with the ESI providing an effective subsidy, the removal or the scheme levels the playing field and increases certainty and consequently speed to market.

2.5 Reponse to Questions Raised in the Issues Paper

nergyAustralia advocates for existing measures such as direct regulation, including minimum energy standards for appliances and buildings and appliance labelling and for a move towards greater cost reflectivity in pricing. Consequently we do not offer an opinion on the questions raised in the issues paper which relate to the continuation of the scheme beyond the end of the current phase as it is our strong view that the scheme should cease to operate at this point.
Answers to a number of the remaining questions which have not already been addressed in this submission are provided below. 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?

EnergyAustralia contends that without a move to cost reflective pricing, the barriers outlined in the issues paper will remain. Appropriate price signals will allow consumers to make choices about their own level of energy savings leading to an optimal outcome on a macro level. Under the first and current phases of the scheme, is there evidence from household and business participants on the existence of these barriers?

As above. What evidence is there to show that the ESI effectively addresses these barriers?

The ESI has lowered some of these barriers to a limited degree in that the development of an AP industry has taken the issue of energy efficiency to the consumer at a household or small business level through door to door provision of devices. Once low cost products such as lighting, SPCs and weather sealing have been disseminated however, the engagement with the consumer ends and it has been competition in the retail market which has led to the development of initiatives such as eWise which continue the conversation with customers and lead to true engagement and action. What evidence can you provide to indicate the extent to which the ESI is complementary to national emissions reduction schemes?

Given the existence of a carbon price as the primary emissions reduction mechanism in Australia the ESI is only complementary to the extent that it addresses market failure specific to investments energy efficiency (as distinct from seeking reductions in emissions). As argued above, the ESI is no longer required to stimulate optimal levels of investment on energy efficiency. What evidence can you provide to demonstrate the impact of the ESI on energy consumption and retail prices?

It is difficult to demonstrate the impact of the ESI on energy consumption in Victoria. AEMO has indicated that energy efficiency generally is a significant but not major factor,1 however this relates to all the drivers of energy efficiency and not simply the impact of the ESI.

There are however some clearly demonstrable costs arising from the ESI which are borne by consumers which must be questioned in light of any benefit to the broader consumer base and the distribution of those benefits when such matters as access to the scheme are included. Direct costs associated with the ESI (including certificate and compliance and administration costs) are around 0.4c/kWh2 for electricity (marginally less per kJ for gas) which although minor in the context of the overall retail tariff, is paid by all consumers regardless of their capacity to gain benefits from the scheme. These costs do not include the increase in network tariffs brought about by the failure of the scheme in terms of reducing peak load.

As previously indicated, low income households can have difficulty accessing the savings arising from the scheme and the imposition of additional costs directly attributable to the ESI, even in a moderate consumption home, there can be a considerable impost if there is no corresponding benefit.

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

Scheme figures show that the majority of certificates have been created by the provision of lighting upgrades and standby power controllers. Although these products have proved to be extremely popular, the actual energy savings which can be attributed to them are uncertain. This is a fundamental problem with deemed savings values ascribed to these products as the savings can never be reconciled with the number of certificates created.

Although lighting products provided to customers are likely to remain in use in residential and commercial premises (ignoring the example of consumers subsequently replacing CFLs provided under the scheme with halogens), attaining the deemed level of energy savings is entirely dependent on product usage patterns. These are generally trackable in commercial premises with minimum usage requirements being in place, but are subject to considerable variation in residential premises. Although the deemed values assigned by the Essential Services Commission are based on modelled behaviours, there is still potential for considerable variation between actual savings and certificates created. Because of this variation it is impossible to gauge whether maximum uptake has been achieved.

The problem is exacerbated in the case of standby power controllers. Considerable anecdotal evidence exists that many SPCs provided under the scheme were removed from operation.3 Many consumers found them to be inconvenient due to appliances (particularly televisions) being turned off when in use and the fact that many audiovisual and personal computer peripheries are rendered useless as much of their functionality is based on quick switching from standby mode (ie, printer/copiers when used independently of the PC or timer recording on Foxtel units). In these cases the products have clearly not met the deemed value of energy savings.

Although these are only two of the range of activities available under the ESI the fact that they dominate the certification creation market so heavily suggests that the mix of activities may not be appropriate. The market will always seek to exhaust the lowest cost options for creating certificates first, but the reliance on these two activities leaves the VEEC market exposed to price shocks when these low cost options are exhausted.

The activity mix problem has been exacerbated by the administrative burden of product accreditation. EnergyAustralia understands the Essential Services Commission has recently implemented changes to expedite the product approvals process however the example of schedule 34 lighting products lagging 18 months behind the expansion of the scheme to include businesses highlights the risk that relatively inefficient products will be deployed in the market while more technologically advanced products await approval. Has the scheme created any unintended consequences and what evidence can you provide to support this?

The scheme has created a number of unintended consequences which have required further regulatory intervention to address.

The consequence of most concern to EnergyAustralia arose from the definition of Relevant Entity. When the scheme was expanded to include business customers, the Relevant Entity definition was not altered meaning that those retailers who were exclusively retailing to commercial and industrial consumers were exempt from the scheme on the basis that they had fewer than 5000 customers. This led to a situation where these retailers were able to cherry pick major commercial load as they were not required to pass on costs associated with the scheme. Although this issue is close to resolution via legislative amendment, as at time of writing this submission the loophole remains open meaning that the scheme has been subject to gaming by some retailers and commercial and industrial customers for the past 18 months.

Similarly, the exemption of some commercial and industrial customers via their inclusion on the Environmental Protection Ageny's EREP Register led to considerable confusion as the register did not provide sufficient information to allow retailers to define exempt load. The subsequent abandonment of the EREP scheme led to further confusion and highlighted a contradiction in government policy which left Relevant Entities under the scheme in an uncertain situation.

EnergyAustralia also highlights the timings of scheme milestones as leading to higher than necessary costs to consumers. Retailers typically set prices on a calendar year basis in line with network price determinations as these are the major cost component of the retail tariff. Environmental charges such as those attributable to the VEET scheme make a significantly smaller component of the tariff however this component may be overstated by retailers to reflect that the actual scheme costs aren't known until a full five months into each year when the Greenhouse Gas Reduction Rates (GGRRs) are made available. Once again, retailers are in discussions with Government to address this issue however it has meant that retailers have been conservative when anticipating GGRRs, further reducing cost reflectivity of retail tariffs and increasing the burden on consumer.

Although the outcomes above could have been avoided with alternate drafting of the Act and Regulations, they demonstrate the dangers of having a scheme of this nature interfere with a market mechanism.

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?

As previously indicated, EnergyAustralia is not an AP under the scheme however our partner organisations have had considerable difficulty achieving forecast certificate numbers through the provision of residential and commercial lighting upgrades, standby power controllers and weather sealing 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?*

EnergyAustralia has previously submitted on the inclusion on behavioural based activities such as benchmarking activities to be included in the scheme in light of the imminent exhaustion of low cost deemed activities. Once again, we highlight that cost reflective pricing is again a key for driving energy efficiency rather than a white certificate scheme such as VEET as it will complement the behavioural based activities which have developed organically and maximise their effectiveness.

We note that behavioural based activities are considered valid energy efficiency measures as they have been included in the scheme in the form of In-Home-Displays and consider energy benchmarking, such as eWise, to be an extension of this theme. Further, benchmarking can be rolled out at zero cost to the consumer and does not require the same degree of technical sophistication on the part of the customer. Benchmarking activities (in excess of regulatory obligations where applicable) can however be best utilised in an environment a cost reflective pricing where consumers are able to respond to gain the actual benefit of their energy savings rather than taking a muted price signal which does not reflect the true value of their behavioural change.

Behavioural programs provide the additional benefit of instilling lasting energy savings. Where a consumer may replace an inefficient product such as an air conditioning system or refrigerator and achieve instant energy savings, the consumer's underlying behaviour has not changed and the consumer will likely continue to use the appliance in an inefficient manner. Further, when this appliance needs to be replaced, there is no guarantee that the consumer will again choose an efficient appliance, potentially eliminating the initial energy savings. Engagement in behavioural programs can lead to consumers maintaining a focus on energy efficiency beyond the initial purchasing decision which ensures that energy savings are not negated by future actions.

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

ESI has never been appropriate for large energy users. Large energy users are typically sophisticated enough to make commercial decisions which result in energy efficiency. Given the significant cost of energy as an input in many commercial activities, large users have an incentive to take measures to reduce energy usage even in the absence of the ESI. 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?

The difficulty in quarantining certain customer segments from the ESI has been demonstrated when the scheme expanded in 2012 and when EREP businesses were excluded later that same year. The consequences of these scheme amendments have been detailed previously in this submission.

3. Summary

EnergyAustralia considers that the Scheme should be discontinued following the completion of the current phase.

If you would like to contact me about this submission, please call me (03) 8628 1731.

Yours sincerely

Joe Kremzer
Regulatory Manager

Page last updated: 24/06/20