8 July 2013
Re: Review of the Energy Saver Incentive: Issues Paper – June 2013
Thank you for the opportunity to comment on the above mentioned Issues Paper. In 2009 Energy Makeovers joined the then Victorian Energy Minister to launch the VEET scheme at the premise of one of our customers. Energy Makeovers has been a major participant in the scheme since that time. We create VEECs from our own installation activities and act as an aggregator in creating VEECs for other companies undertaking qualifying energy efficiency installations. Energy Makeovers has created in excess of 1.7 million VEECs by installing energy efficient products in 175,000 Victorian homes.
The following comments are offered in response to the specific questions raised in the Issues Paper:
Complementarity with national emissions reduction schemes
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?
The barriers to energy efficiency have been well documented (eg. Victorian ESI RIS 2008, 2010, Productivity Report 2008) and include:
- Access to capital: In many cases energy consumers do not have available funds to pay upfront for energy efficiency improvements, irrespective of the investment payback period
- Information gaps: Energy consumers often lack the knowledge or information to assess and implement energy efficiency improvements
- Split incentives: In some cases, especially where the building structure is impacted, tenants need to gain permission from landlords to install carbon abatement / energy efficiency activities
Under the first and current phases of the scheme, is there evidence from household and business participants on the existence of these barriers?
Evidence does exist to demonstrate the existence of barriers to taking up energy efficiency measures. The most significant barrier observed is lack of available upfront capital funding. It is also important to note that a strong relationship between the quantum of consumer upfront capital required and the need for information has been observed.
Perhaps the greatest achievement of the VEET scheme has been the strong compliance environment that has been established by the Essential Services Commission (ESC) of Victoria. This has facilitated the large-scale rollout of "free-at-door" activities, where the value of VEECs has exceeded the cost of appliances and installation.
For example, Energy Makeovers has installed Standby-Power-Controllers (SPCs) in over 160,000 Victorian homes. We have found that there is very strong anecdotal evidence that if an upfront consumer charge for SPC installations was applied then installation rates would decline by more than 90%. This would result in energy efficiency and carbon emission reductions being an order of magnitude lower than has been achieved. It is also worth noting that the strong compliance regime established by the ESC has allowed high penetration rates to be achieved with very low levels of consumer complaints. The ESC, as administrator of the VEET scheme, has done an excellent job of ensuring a high level of compliance through the issuance and enforcement of scheme guidelines.
The Australian Industry (Ai) Group in its report, "Energy shock: pressure mounts for efficiency action (July 2012)" found that:
- "to date most efficiency improvements have been modest, indicating that business capital for investment is either not available or is largely reserved for other purposes"
- "While a growing number of businesses are taking action to improve their energy efficiency, most are looking for quick wins and would only consider an energy efficiency project where the expected payback period was less than three years"
- "The biggest drivers for efficiency action were concerns about energy prices and the desire to maintain or enhance business profit margins" Consistent with findings of previous Ai Group surveys:
- 46% of respondents reported an energy spend of less than 1% of revenue
- 27%of respondents spent more than 2%of revenue on energy (ie. 73% less than 2%)
What evidence is there to show that the ESI effectively addresses these barriers?
The very high penetration of SPCs into 1.2 million Victorian households over the past 18 months illustrates the key achievement of the VEET scheme in overcoming conventional barriers and unlocking access to low cost carbon abatement in the community. The reasons for this outstanding achievement are listed in Table 1 below:
|Barrier||How barrier addressed by SPC activity||Barrier removed?|
|1. Access to capital||VEEC revenue covers all supply costs and therefore activity is "free-atdoor" (ie. zero upfront capital required from consumer)||Yes, in 100% of cases|
|2. Information gaps||Information is provided by trained installers/call centre. However, busy consumers or those not able to fully comprehend the operation of SPCs at time of installation are prepared to "learn over time" as there is no financial risk||In vast majority of cases information gaps were not considered a barrier|
|3. Split incentives||SPCs do not affect building structure or finishes and therefore no permission is required by tenant from landlord||Yes, in 100% of cases|
Table 1 – SPCs Overcome Barriers
There are many activities in the VEET scheme that are not "free-at-door" (eg. hot water upgrades and pool pump upgrades). The VEET scheme has been important in addressing a number of barriers where activities have required upfront capital from consumers and provision of information services by:
- being able to reduce the payback period to more acceptable levels; and
- the creation of an energy services industry where service providers are able to bundle the value of the VEECs into packaged solutions to be promoted to potential consumers.
What evidence can you provide to indicate the extent to which the ESI is complementary to national emissions reduction schemes? Accessing low cost abatement using complementary ESIs: There is well established modelling to demonstrate that low cost (including negative cost) abatement is available through the introduction of energy efficiency measures in residential and commercial buildings (refer the McKinsey Australian 2020 carbon abatement cost curve in Figure 1 below):
Figure 1 - McKinsey Australian 2020 carbon abatement cost curve
"Externalities" such as an economy-wide price on carbon applied in a national emissions scheme, or the introduction of a Direct Action Fund, will not necessarily overcome the common barriers identified, such as access to capital, information gaps and split incentives. However, a properly designed ESI such as the VEET scheme can (as demonstrated above through the SPC example) successfully overcome the barriers and deliver low cost abatement that would otherwise not have been delivered.
Is there any further information in relation to this matter that we should consider?
Victorian ESI protects Victorian employment that may not exist under a national emissions reduction scheme. The existence of a Victorian ESI ensures the protection of an estimated 2,300 fulltime jobs that exist today as a direct result of the VEET scheme. There is no guarantee these jobs will be retained in Victoria under a future national emissions reduction scheme.
Refer below for further details.
Investment, employment and technology development
What evidence can you provide to demonstrate the impact of the ESI on energy consumption and retail prices?
Activities installed under the scheme over the last two years have resulted in electricity reductions of more than 500 GWh per annum (based on 10 year deeming factors used in calculating certificates).
The Australian Energy Market Operator (AEMO) in their 2012 National Electricity included estimates for energy efficiency contributions to reducing electricity consumption and peak summer demand. Over the 2011/12 to 2013/14 period, AEMO estimated that energy efficiency is contributing more than 500 GWh per annum in energy reductions and more than 50 MW per annum of peak summer demand reduction.
Based on the activities that have been installed since the scheme commenced on 1st January 2009, we estimate that by the end of 2012 the contribution will be more than 1,250 GWh per annum.
Average household electricity consumption has been falling. EnergyAustralia outlined in their most recent annual report that their Victorian residential customers have reduced their power consumption by around 10% from 6.5 MWh per household in 2011 to 5.8 MWh in 2012. This material reduction is considerably higher than they observed in other states and can be explained by the contribution the VEEC scheme is making.
The energy efficiency savings has resulted in a direct cost saving to energy consumers. It is estimated that in 2012 households and small businesses saved more than $250 million on their power bills as a result of the ESI. With rising electricity and gas prices these opportunities for savings are highly valued by consumers particularly when uptake is subsidised through a regulated market scheme such as ESI.
Has the mix of activities included in the scheme been appropriate to maximise energy efficiency uptake?
The current mix of activities has been appropriate to satisfy the objectives of the scheme during the first 2 phases. This is evidenced by the fulfilment of the schemes target each year without VEECs being subjected to periods of negligible value. The scheme is somewhat self-regulating in this regard as VEEC shortages prompt a higher VEEC price that in turn makes higher cost VEEC activities financially viable and more likely to occur. The practical result of this scheme design is that lowest cost abatement activities are undertaken first thereby ensuring Victorians are always getting the "best bang for their buck".
A broad range of energy efficiency activities have been accredited under the scheme. Nearly 2.1 million energy efficiency installations have occurred with more than 1.2 million households having benefited from the scheme. It is our strong contention that without ESI there would be a significantly lower proportion of these energy efficiency activities.
Table 2 below shows the breakdown of energy efficiency activities under the Scheme since 2009.
|Activity||Business VEECs||Business Installations||Residential VEECs||Residential Installations||Total VEECs||Total Installations|
|Low Flow Shower Rose||31,985||5,567||494,926||192,593||526,911||198,160|
|Standby Power Controller||42||23||8,550,365||1,020,857||8,550,407||1,020,880|
Table 2 – Activities creating VEECs (1 Jan 2009 to 6 March 2013)
Standby power controllers and lighting have been the dominant activities to date under the scheme accounting for 47% and 35% of certificates created respectively. However, Figure 2 below produced by ESC shows continued activity in the non SPC/lighting activities although with a significant drop off in residential lighting. Importantly there is continued and steady activity in hot water and space heating activities. New activities such as In Home Displays (approved in 2012) and high efficiency TVs are emerging. This is strong evidence of a broad mix of activities contributing to the overall ESI outcomes.
ESC PUBLIC FORUM: Scheme Update - Veecs by activity YTD
|Commercial Lighting (34)||23,761|
|In Home Displays||7,409|
Figure 2: VEEC Activities YTD 7th June 2013
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?
Low income households have been a significant beneficiary of the ESI. Energy Makeovers can provide commercial-in-confidence data to further substantiate this assertion if requested. In Energy Makeovers' experience, low income households are more willing to "open their doors" to energy efficient appliance installations to secure energy savings with no upfront financial costs.
On the other hand, high income households have been under represented as VEET activity recipients. We hypothesise that the main reason for this is that high income households only spend a small proportion of their income on energy and are not motivated to adopt energy efficiency activities to the same extent as low income households. In this sense, low energy spend as a percentage of income could be considered a barrier to activity uptake.
In an effort to reduce barriers to rural residential consumers, Energy Makeovers has successfully entered strategic alliances with partners with rural distribution networks (refer Bendigo Bank Press Release in Attachment 1).
Relatively few installations have occurred in the business and non-residential sector due to delays in implementing the commercial sector specific activities within the scheme. As a result there are significant potential energy savings that are yet untapped for businesses, local government and community groups.
How are the costs and benefits of the scheme distributed between different customers?
The cost of the VEET scheme is smeared across all energy consumers in proportion to their energy consumption while the benefits of the VEET scheme have largely accrued to lower to medium income socio-economic groups.
Most of the benefits of the scheme have accrued to the residential sector with the business sector recently introduced and now gaining momentum.
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 140 businesses accredited under the scheme and 66 of these have created certificates. The scheme has supported the creation of many new businesses and enabled the expansion of existing businesses (many SMEs). Many businesses have invested in Victoria as a result of the ESI, or have transferred operations from other jurisdictions to Victoria.
It has been estimated that over 2,300 full time employees are currently working both directly and indirectly within the scheme and that a further 800 jobs will be created in 2014 with the scheme expansion into the business sector continuing. These new jobs include business development, operational, project management and field services (refer Tables 3 and 4 below):
|2013 ESI Employment|
|Activity||Commentary||Full Time Jobs|
|Accredited Person (AP) management and administration overhead||Based on 75 active APS with 8 staff that provide management, compliance and administration services||600|
|SPCs||Extrapolation from Energy Makeovers SPC in-field workforce (note: Energy Makeovers currently has 25% of this activity by volume)||480|
|Other "free-atdoor" activities (eg. weather sealing, CFLs, showerheads, in-home displays)||Extrapolation from Energy Makeovers SPC in-field workforce (note: Energy Makeovers currently has 25% of this activity by volume)||120|
|Co-payment activities (eg. commercial and residential lighting, pool pumps, etc)||Based on known industry operations||50|
|Incremental 3rd party activity (hot water, lighting and other activities where installer is not an AP)||Equivalent to 20% jobs created by 1-4 above||313|
|Manufacturing and supply of products for VEET||Assume multiplier of 0.3 of direct jobs created||469|
Table 3 – 2013 ESI Employment
|2014 ESI Employment|
|Activity||Commentary||Full Time Jobs|
|Accredited Person (AP) management and administration overhead||Based on 80 active APS with 8 staff that provide management, compliance and administration services (7% growth versus 2013 in APs)||640|
|SPCs||Significant decline expected versus 2013 as saturation reached with small residual only||20|
|Other "free-atdoor" activities (eg. weather sealing, CFLs, showerheads, in-home displays)||Reduction as saturation levels increase - offset by increased access to wealthier socio-economic groups||80|
|Co-payment activities (eg. commercial and residential lighting, pool pumps, etc)||Significant expansion in lighting replacement activity and project based activity||1000|
|Incremental 3rd party activity (hot water, lighting and other activities where installer is not an AP)||Equivalent to 20% jobs created by 1-4 above||435|
|Manufacturing and supply of products for VEET||Assume multiplier of 0.3 of direct jobs created||653|
|Total 2013 FTEs||2828|
Table 4 – 2014 ESI Employment
Many new jobs have been created since the introduction of the VEET scheme since 2009. Accredited Persons have also contributed to green industry investments through the purchase of energy efficiency products.
The scheme has provided a platform for innovative program delivery – many certificate creators have partnered with other government agencies, business, community organisations and Councils to leverage certificate creation and to support other complementary programs (eg. the Energy Makeovers/Bendigo Bank SPC Campaign).
The ESI has provided financial incentives for consumers and a new market and demand for the provision of energy efficiency services. Over the past five years these businesses have matured and are now gearing up to deliver new solutions and options for the uptake of energy efficiency initiatives (eg. halogen downlight replacement). If the Scheme is not continued these businesses will either cease to operate or move to other jurisdictions that have schemes similar to ESI.
Has the scheme created any unintended consequences and what evidence can you provide to support this?
Whether unintended or not, energy demand reduction as a result of ESI will facilitate an earlier closure of brown coal fired generators in Victoria than would otherwise be the case.
Is there any further information in relation to the performance of the scheme to date that we should consider?
Tradeable certificates should be retained
Energy Makeovers strongly supports the continuation of a trading scheme whereby the supply and demand side of the ESI maintain their independence, with the scheme being administered by ESC and activities being selected by government. We would not support a scheme design where energy retailers are simply assigned abatement targets and not required to purchase certificates through a formal trading platform (eg. the current SA ESI). Such an approach does not encourage (as effectively) the development of an independent, competitive and innovative energy services industry capable of generating abatement from a wide range of activities. Further, while most VEECs are traded through forward contracts between Accredited Persons and energy retailers, the existence of a spot market for VEECs provides for "price discovery" and a basis upon which forward contracts can be priced.
Maintain focus on compliance
Given the high level of activity, the number of businesses, and the attractiveness of many of the energy efficiency offers, it is unsurprising that there have been some complaints. These have, on balance been low in number compared to the high level of customer satisfaction measured through ESC customer surveys. Energy Makeovers considers that where there have been issues (door knocking, telemarketing in particular) they have been effectively managed by the ESC, with measures put in place to mitigate against recurrence. Energy Makeovers supports strong and effective regulation to minimise and penalise poor and non-compliant practices. These isolated instances of poor practice can and should be addressed through regulatory penalties either under the VEET Act or the Australian Consumer Law. ESI has been cost effective The pass-through cost of the scheme was approximately $50 million per annum to end of 2011 and approximately $135 million in 2012 with the expansion of the scheme. The VEET targets have been met at a cost that has been significantly lower than that expected by ESC.
Alternatives to the ESI
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?
Energy Makeovers believes that the delivery of low cost energy efficiency activities under the ESI has been its key achievement.
The design of the scheme ensures that lowest cost abatement activities are delivered first. Higher cost abatement activities are delivered as supply adjusts to meet demand and as energy retailers bid higher prices to secure sufficient VEECs to meet their surrender obligations.
The first phase of the scheme was largely delivered by the installation of incandescent lamp and high flow showerhead replacements. Although these activities have continued through the second phase of the scheme, they have naturally and continually declined as a result of increasing market saturation. Energy Makeovers expects to continue to replace incandescent lamps and showerheads through Phase 2, but at a continually reducing volume due to the aforementioned market saturation.
The second phase of the scheme to date has been largely delivered by standby power controller installations. Market saturation has also affected the recent rate of standby power controllers installations combined with a reduction in VEEC market value resulting from an oversupply of VEECs in 2013. Energy Makeovers expects to continue to install standby power controllers through the remainder of phase 2 of the scheme in the context of a continually reducing available market (currently 60% saturated).
In summary the available market for low cost abatement activities has reduced significantly during the 2nd phase of the scheme but is expected to continue at a modest rate for the remainder of the scheme.
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?
The emergence of new, cost effective technologies, such as LED downlights are expected in the short term to deliver co-payment opportunities to both residences and businesses.
It is estimated that there are 20 million eligible downlights in Victoria that ESI has not yet penetrated. Recent and rapid developments in LED technologies mean that this energy efficiency measure is now well placed for market uptake. The ESC have put in place regulatory measures to ensure that appropriate performance standards exist so that only high performing LEDs will be installed (replacement of inefficient halogen downlights). There will be significant energy savings of in excess of 40W per lamp replaced. This represents potential state-wide annual energy savings of around 290 GWh.
With scheme costs and technology limitations in mind, if the scheme were to continue what would be an appropriate target for its next phase?
There may be a significant oversupply of VEECs throughout the current (second) phase of the scheme largely due to the success of standby power controller installations during this phase. This has generated a significant risk that the VEEC price will collapse prior to the end of this phase of the scheme and destroy the operation and reputation of the scheme. This can be addressed by the Government confirming its intention to extend the scheme into the 3rd phase and provide market participants with confidence that the oversupply of VEECs from the 2nd phase of the scheme can be carried over into the 3rd phase of the scheme.
Based on the current level and rate of VEEC creation and the emergence of new low cost abatement activities, Energy Makeovers believes there is ample room to double the current annual deemed abatement target during the 3rd phase of the scheme to become 10.8M tonnes per annum (10.8M VEECs per annum). We believe that modelling will confirm that a doubling of the target would an economically effective and efficient way to further improve energy efficiency and reduce carbon emissions in Victoria. Further we believe the 3rd VEET scheme period should run for 6 years, that is, until the end of 2020. This will harmonise the VEET scheme with the NSW ESI which runs until the end of 2020.
Is the ESI the most appropriate scheme in which to encourage energy efficiency uptake for large energy users?
The ESI should be extended to include large energy users. There are significant efficiencies in having a single ESI that encompasses all energy users. We believe different schemes for different classes of energy users is likely to be confusing for consumers and more administratively burdensome for all market participants.
The ESI expansion to the commercial sector has not been fully realised. There have been significantly fewer commercial certificates created than forecast in the Regulatory Impact Statement for Phase 2. Following a concerted effort by DPI and ESC the commercial framework is now in place. We anticipate that commercial activities and related energy savings and carbon abatement will continue to grow over time. It is noted that the NSW Energy Saving Scheme experienced a similarly slow uptake in the first two years of the introduction of the Scheme to commercial customers.
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 ?
Energy Makeovers strongly believes that large energy users should not be excluded from the scheme. We not believe that there should be a distinction between large, medium and small energy users.
Is there any further information in relation to the continuation of the scheme that we should consider?
To strengthen the scheme in the future, Energy Makeovers suggests the following improvements:
Introduce "fit and proper person" test
Energy Makeovers believes that the continuing success of the scheme will be delivered by participants that can demonstrate a commitment to fulfilling the objectives of the scheme in the long term. The relatively short term of each phase of the scheme may attract individuals that seek to exploit short term profits from the scheme without investing in scheme compliance measures that will ensure public confidence. Accordingly Energy Makeovers recommends that a "fit and proper person" test for APs be included in the regulations.
Quarterly surrender by energy retailers
Currently there is mismatch between the constant rate of VEEC creation and the buying intentions of energy retailers, who are required to surrender VEECs only once per year. This has resulted in energy retailers potentially having little appetite for VEEC purchases in the period April through September with a consequential negative impact on the value of VEECs during this period and the working capital of APs. APs face significant cash flow problems during this period and resources and skills are lost. The net impact on this is revenue risks and employee turnover which both result in higher costs to the industry and increased compliance issues. Moving from an annual to quarterly surrender basis (similar to the national REC scheme) will smooth out this "feast or famine" and enable APs to optimally plan and retain their resources resulting in lower VEEC creation costs and much tighter control on compliance.
New energy efficiency "assessment activity"
Energy efficiency assessments are considered to be the most successful tool to promote behavioural change. The benefits of this activity cascade into investment in other activities within the scheme so the benefits multiply. Customers will be informed on the most appropriate energy efficiency investments and educated in how to optimise their investment. This activity could also link to COAG's national Residential Building Mandatory Disclosure initiative and stimulate the link between energy efficiency rating and property value.
More regulatory investment to ensure high quality appliances
There is a proliferation of LED manufacturers that are seeking to offer products to the market. A regulated screening and approval process for energy efficiency technologies increases consumer confidence in new
products. The ESC has recently been instrumental in establishing high standards for LED products for inclusion in the ESI. This will minimise the number of low performing/poor quality LEDs being installed into
Victorian households and is considered critically important.
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?
No. Energy Makeovers believes the ESI has proven itself to be a cost effective way of delivering direct and indirect benefits to Victorians associated with energy efficiency and carbon abatement. Energy Makeovers maintains contact with regulators and energy efficiency service providers nationally and internationally and considers the ESI to be the most successful energy efficiency and carbon abatement scheme in existence.
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?
There is a current expectation in the VEEC market that there may be an oversupply of VEECs in the current phase of the ESI ending in 2014. If the ESI is not extended past 2014 soon then supply-side energy services companies (VEEC creators) will begin to windup their businesses and withdraw resources from the ESI. To close the scheme equitably, the Government will need to buy back VEECs from market participants that are surplus to market requirements at a price that allows VEEC creators to recover costs and a reasonable return on their investments.
Is there any further information that we should consider if the scheme were not continued?
Through the ESI, Victoria has established a global leadership position in the development of energy efficiency programs that has resulted in a significant reduction in energy consumption and carbon abatement benefitting all Victorians. It is Energy Makeovers opinion that for a national ESI to be successful, it should be modelled on the Victorian ESI.
Please do not hesitate to contact me should you wish to discuss any of the matters raised in this correspondence further.
Chief Executive Officer
Press Release: Bendigo Bank launches Switch to Save
1 June 2012:
Bendigo Bank's Generation Green™ initiative has launched a new energy saving program called Switch to Save which will see thousands of Victorians lower their energy bills and reduce their impact on the environment.
From today, customers and members of the community (including those who don't bank with the Bendigo) will be able to visit a Bendigo Bank branch and sign up to have Standby Power Controllers, called Embertec SmartSwitches™, valued at $100 each installed in their homes for free.
Bendigo Bank has partnered with Energy Makeovers, an Australian company dedicated to assisting families and businesses with energy efficiency solutions, to deliver and install the switches in participating households.
Bendigo Bank's Head of Environment and Sustainability Trudy Ellery said the simple switch could save households as much as $200 a year, when you consider this saving will apply for 22,000 homes that's a saving of $44 million in energy costs over the next 10 years.
"The switches look like a double adapter and manage energy consumption on televisions and computers; two appliances which significantly contribute to our power bills," Ms Ellery said. "For example if a TV remote or computer keyboard isn't touched for a few hours, the switch will ensure the energy supply is shut down," she said.
Ms Ellery said the Bank's 228 Victorian branches are aiming to register 22,000 homes by the end of July, which will see almost 60,000 switches installed.
"Each house can receive up to four controllers and we estimate Switch to Save will not only save people money, but also reduce greenhouse gas emissions by 220,000 tonnes; that's the equivalent of taking more than 50,000 cars off the road for a whole year," Ms Ellery said.
In addition to saving money and the environment, Bendigo Bank is adding another initiative to the Switch to Save program.
"For every participating household our branches will distribute $15 to help support a neighbouring school undertake sustainable projects," Ms Ellery said.
"We hope this will not only provide an additional incentive to encourage community participation, but more importantly help to educate young people about the benefits of thinking green." To register or for more information please visit your local Bendigo Bank branch, go to www.bendigobank.com.au or call Energy Makeovers on 1300 98 26 28.
For inquiries contact Trudy Ellery, Bendigo Bank, Head of Environment and Sustainability on 03 5485 6787
Page last updated: 24/06/20