Review of the Energy Saver Incentive: Issues Paper – June 2013
Envestra is pleased to have an opportunity to provide comments to the Department of State Development, Business and Innovation (DSDBI) in relation to the above paper, and commends DSBI for preparing the paper and inviting public comment.
Envestra is one of the largest natural gas distribution companies in Australia owning networks in four states and the Northern Territory. Envestra currently supplies around 120PJ of natural gas per annum to more than 1.1 million customers nationally, including around 600,000 customers in Victoria alone.
Benefits of Natural Gas
Natural gas is a key fuel as Australia transitions to a low emission economy.
Whilst natural gas is a fossil fuel, it is more greenhouse efficient than coal or oil. Natural Gas is only half as emission intensive as black coal and a third of that of brown coal. Natural gas is the cleanest burning of all fossil fuels. It is colourless, odourless, and non-toxic. Natural gas is currently the cleanest commercial form of reliable and scalable base-load generation.
Natural gas provides low emission energy for applications ranging from home appliances to commercial buildings through to large industrial processes and as a transport fuel.
Natural gas is also a suitable fuel for a range of distributed generation technologies including conventional engines, fuels cells, micro-turbines, co-generation and tri-generation.
The Energy Saver Initiative (the scheme) has been very successful. It has achieved its key objectives of reducing greenhouse gas (GHG) emissions, encouraged the efficient use of electricity and gas, and has encouraged investment, employment and technology development in supporting industries.
This has been achieved in a cost effective manner. This is supported by the scheme's results, which show consistent achievement of targets. The number of gas appliances installed on Envestra's networks also indicates the successful performance of the scheme. Not has only has the scheme created direct and indirect benefits for customers, but as a result of network extensions to connect new gas customers who have participated in the scheme, the footprint of the Envestra's gas network has been expanded. This facilitates the connection of yet more customers thereby further reducing GHG emissions and lowering home running expenses.
Envestra would also like to commend the fundamental design and operation of the scheme. Some of the features of the scheme that Envestra believes reflect good policy construction and execution are:
- The scheme does not favour a particular fuel type.
- The scheme is technology neutral in terms of the way certificates are generated.
- The scheme design encourages innovation.
- The scheme is not interventionist, as the certificates are tradeable and their value is therefore determined by a market.
- The scheme is generally complimentary with the schemes of SA and NSW.
- The scheme in terms of the current Federal government's approach to carbon pricing, is consistent with the principle of complementarity.
Envestra supports the overall intention of the scheme and recognises the potential for the scheme to evolve into a national white certificate scheme.
Envestra recommends that future targets be set for the scheme consistent with its current target setting approach. This recommendation is based on the view that the current targets are sufficiently aggressive to encourage performance, and at the same time the targets are sufficiently realistic so as not to be too easily achieved.
Envestra recommends that the scheme investigate and encourage the inclusion of additional appliances consistent with the scheme's objectives. Domestic gas powered air conditioners and potentially fuel cells represent examples of such appliances.
Envestra has undertaken an integrated marketing program in areas of regional Victoria where it is the sole gas network owner. This activity has involved (i) generic marketing (ii) the development of relationships with key intermediaries (e.g. plumbers, builders, appliance retailers and appliance manufacturers) (iii) the payment of rebates for the installation of incremental gas appliances (as justified by the future revenues received from the appliance), and (iv) efforts to simplify and lower the cost of connection processes. This marketing program aligns with the scheme, and seeks to leverage its benefits.
As part of its marketing program, Envestra has invested time and effort into activities such as website development and Plumber Night promotions with a key goal being to raise awareness of specific scheme activities that can assist customers to cost effectively transition their home to energy efficient hot water units and space heaters that operate on natural gas. As such Envestra is very keen to see the continuance of the scheme, and in particular the retention of gas appliance related activities in Water Heating (1A,1B,1D & 1F) and Space Heating (6 & 9). Hence much of this submission relates to the contribution these activities have made toward the VEET.
1) Barriers being addressed by the ESI
We are seeking your views on barriers to the uptake of energy efficiency measures and the effectiveness of the ESI in addressing these barriers. In developing your response we would like you to consider the following issues:
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?
Envestra acknowledges the barriers identified by the issues paper, i.e:
- Information gaps
- Split Incentives
- Access to Capital
- Behavioural, organisational and cultural factors
As an overall statement, Envestra agrees that these barriers exist. Envestra is confident that these barriers are being directly addressed by the scheme, however quantitative measurement of these barriers to show improvement is a substantial challenge.
Envestra is confident that the ESI is following an appropriate set of strategies to deal with the barriers. As evidenced in this paper, the scheme has achieved a steady rate of growth in the creation of VEECs, which reflects its popularity and level of awareness.
This growth reflects marked improvement over time as more information is made available to businesses and households. This addressing of the information gap barrier is being achieved via web sites, public forums, and publications. Envestra, as a strong proponent of the scheme, has assisted in raising awareness of the scheme by promoting the scheme concurrently with its own marketing.
As such, Envestra can confidently state that, in both metropolitan and regional areas, there has been significant improvement of awareness of the scheme, across the businesses and households.
Envestra's own marketing program is designed to addressing barriers that have been identified in its own consumer research. Like the barriers identified in this paper, these issues can only be solved by consistent action.
For example, for gas appliance installations there is an apparent barrier in regard to installation costs and the availability of a licensed plumber. However, requiring a licensed plumber to undertake such work does provide a high degree of validation that the activity has taken place, given it is authenticated by a Certificate of Compliance.
Considering customer behaviours, Envestra's experience is that customers typically replace an electric hot water appliance when it has failed. This usually happens without warning and with the urgency that follows, replacement is largely 'like for like', with little opportunity to research and select alternative replacement options. The existence of the scheme raises awareness of alternatives and encourages customers to make better decisions when replacing appliances which will lower greenhouse gas emissions.
This issue logically leads to a brief discussion about externalities. A particular benefit of installing a high efficiency gas appliance in place of a low efficiency electrical appliance is that electricity network expansion is delayed or deferred. Given that electric network investment has been a major contributor to rising electricity prices, there is an unrecognised benefit to the customer's energy costs, particularly in Victoria, where gas network capacity is underutilised in summer. The installation of gas powered air conditioning, for example, would mitigate increases in electricity demand.
This type of externality is often overlooked by critics of the scheme, given the broader debate of the last 2-3 years, in regard to the cost impact of renewable and energy efficiency schemes on electricity tariffs. For that reason, this 'unseen' benefit of the scheme that comes from gas appliance installation, should be measured and included in formal assessment of the scheme, as indeed should any appliance that reliably and measurably helps to put downward pressure on electricity prices for Victorian consumers.
In summary regarding externalities, it is recommended that consideration be given to recognising the benefits of deferred electricity network augmentation when establishing the number of certificates that accrue under the scheme.
In regard to split incentives, Envestra agrees that split incentives exist in cases such as where a landlord is disinclined to install an efficient hot water unit if the benefits accrue to the tenants. However, as Envestra's marketing rebates align with the scheme, the landlord is able to achieve lower costs than from the scheme alone, which should go some way to overcoming this split incentive, as the landlord also benefits from an upgraded capital asset.
The scheme and Envestra's marketing program, taken together, successfully reduce any barriers associated with access to capital, because customers benefit from the value of certificates created and Envestra's rebates. Taken together, they effectively lower the overall capital requirement for appliances.
Finally, on the subject of complementarity, Envestra believes that the current scheme is complementary and consistent with the national emissions reduction scheme. This complementarity with the national emissions reduction schemes is evidenced by (i) the scheme's objectives including GHG reduction (ii) certificates being created for each tonne of GHG emission avoided, and (ii) the value of the certificates being determined by a market via a trading process. As such, a key benefit of the scheme is that a market structure rewards low cost emissions reduction.
As a last comment, in regard to the principle of complementarity, Envestra's expectation is that regardless of Federal election outcomes, the policy focus on GHG emissions reduction will continue.
For that reason, any future Victorian scheme (ESI or other) would sensibly still focus on GHG emission reduction.
Envestra believes that the ESI has been successful in achieving its objectives, as evidenced by the high cumulative number of VEECs that have been registered (see table below).
|Total at 1 June 2013||Since 1 Jan 2013|
|Cumulative Registered VEECs||18,719,873||2,994,454|
|Currently Registered VEECs||4,822,200|
|Product Approvals (non-registered)||3916||2303|
Envestra is an enthusiastic supporter of the scheme. Envestra is confident that the scheme has benefited Victorian energy consumers.
Water Heating activities have accumulated 1,726,675 VEECs to June 1, 2013 and contribute 8.8% of all VEEC's. Within this group 917,367 VEEC's (or 53% of all Water Heating VEEC's) have been achieved through electric hot water change out by gas hot water units (activities 1A,1B,1D,1F). The below graphs show these activities have been conducted mainly in natural gas post code areas (86%), indicating customers desire to capitalise on low running costs of natural gas . Out of the three gas distribution areas, Envestra's area accounts for 35% of the units and 40% of the VEECs, which is testament to the high level of alignment between Envestra's marketing program and the scheme.
% Share all Gas related Units replacing Electric HWS (to Jun2013, for 1A,1B,1D,1F)
Graph 1: Gas Replacement of Electric HWS by network
VEECs by Gas Area : Gas related replace.t Electric HWS (to Jun2013, 1A,1B,1D,1F)
Graph 2: Gas Replacement of Electric HWS, VEECs by network
Further analysis of the gas hot water activities 1A,1B,1D,1F indicate that only 27% of the associated VEECs have been generated in metropolitan areas, leaving the balance of 73% generated in regional areas (see graph below). In metropolitan areas hot water units have largely switched over to natural gas as the network has been long established. As gas appliance and indeed gas penetration rates are significantly lower in regional areas, this result is not surprising. It follows that the VEECs gathered from these activities represent approximately 9% of the all Regional Area VEEC's but only 2% of the total VEECs for the metropolitan area to June 1, 2013. Replacing electric water heaters in rural areas with gas units will also avoid electrical transmission system losses adding to the efficiency of the changeover. Natural gas hot waters units also provide lower running costs.
% by Region VEEC's: Gas related HWS replacing Electric(to Jun2013, 1A,1B,1D,1F)
Graph 3: Gas Replacement of Electric HWS by region
Electric Changeouts/Yr involving Gas Units using VEECs (1A,1B,1D,1F)
Graph 4: Gas Replacment of Electric HWS by year
The year by year trend of installations where electric hot waters have been replaced by a gas appliance has steadily increased. This indicates that plumbers are becoming increasingly aware of the scheme and that there remains a growing demand from customers keen to replace their electric water heater to access lower running costs, and to do so in a planned manner.
Envestra advocates that the scheme continue to measure GHG emissions abatement given proven results to date. We understand that a re-specification of the scheme objective to reduce energy consumption rather than GHG emissions is being considered. Envestra does not support this change. The focus on GHG emissions is appropriate and will by definition facilitate improvements in energy efficiency. Adoption of the alternative energy reduction objective could result in energy consumption decreasing and GHG emissions increasing.
An example of this is Electric Heat pumps, which qualify under the ESI activity 1C, and also more recently 1E.
Electric Changeout to Electic boosted solar/Heat Pumps using VEECs (1C)
Graph 5: Solar/heat pump replacement of Electric HWS, by year
Falling installation numbers can be seen over some years for electric to electric boosted solar and heat pump replacements. During the early years, backing from Federal Government schemes (REC's/STCs) was very generous encouraging rapid uptake.
However there are many documented issues experienced by customers after the heat pumps have been installed:
- Units do not work efficiently in cooler climates – struggle to heat when it is 5oC outside
- Vessel heat loss is higher in colder areas-need to maintain 60oC to negate risk of legionella
- In cooler areas unit runs harder to extract heat from the atmosphere which costs more
- Vessel life is diminished because heat pump is working hard
- Poor response times are experienced with urgent maintenance calls as a refrigeration mechanic is required
- Maintenance costs (five yearly) are high
These issues have the effect of increasing operating costs to consumers, and where heat pumps operate in cold temperatures, increasing the reliance of the appliance on electricity (rather than heat extracted from the atmosphere) for heating water. As a result, even though heat pumps can reduce energy consumption, greenhouse gas emissions can be higher than alternatives such as natural gas.
Space Heating activities have accumulated 453,604 VEECs to June 1, 2013 and contribute 2% of all VEECs. Within this group 435,066 VEECs (or 96% of all Space Heating VEECs) has been achieved through replacement of electric heaters with gas heaters (activities 6 & 9). Envestra has worked closely with plumbers to make them aware of this opportunity. The high quality performance and economic running costs of natural gas heaters and the extremely high power bills associated with running electric central heating systems has been a key driver in this category. Knowing that a significant proportion of GHG emissions occur from heating of the home, Envestra suggests that Gas Powered Air Conditioners could be examined for qualification as an approved appliance within existing Space Heating activities 8 and 9, in order to lift the Space Heating group of activities above the 2% they currently occupy within the scheme.
The additional benefit of utilising Gas Powered Air Conditioners for both commercial and domestic buildings is that this appliance has the capability to perform at lower temperature compared to standard electrical heat pumps and also to reduce peak electricity loads on individual sites and potentially wider networks.
The pie charts below indicate the prominence of customers in Envestra area in the taking up Gas Heating activities 6 & 9. The fact that Envestra's area yielded 53% of the installations and 72 % of the VEECs indicates that a large proportion of the bigger homes switching off electrical slab heating for gas heating are coming from Envestra's area.
Units by Gas area from Gas Space Heating replacing Electric (to Jun2013, 6 &9)
Graph 6: Gas Replacements of Electric Space Heaters, by network
VEECs by Gas area from Gas Space Heating replacing Electric (to Jun2013, 6 &9)
Graph 7: Gas Replacement of Electric Space Heaters, VEECS by network
Analysis of year by year trends for Gas Space Heating (6&9) units installed indicates that plumbers and customers have taken a while to become familiar with the scheme.
Envestra's proactive network marketing program has helped obtain the result below.
VEEC's supported Gas Space Heating (6&9) Installations by Year and Area
Graph 8: Space Heating VEECS by network
Using the scheme's regional classifications, the Gas Space Heating VEECs (for activities 6&9) have a very high degree of regional focus and therefore provide the added benefit of diminishing electricity transmission losses as well as providing lower running costs to regional households.
% by Region VEEC's for Gas Space Heaters replacing Electric (to Jun2013, 6 & 9)
Graph 9: Space Heating VEECS by region
We are seeking your views on the performance of the scheme to date. In developing your response we would like you to consider the following issues:
What evidence can you provide to demonstrate the impact of the ESI on energy consumption and retail prices?
Envestra estimates that with the assistance of VEEC's, 6777 inefficient conventional electric water heaters have been replaced on its network by high efficiency gas hot water heaters. These changes have contributed to reduced greenhouse gas emissions.
Envestra is unable to provide any information on retail prices, given that Envestra is a regulated gas network business.
Has the mix of activities included in the scheme been appropriate to maximise energy efficiency uptake?*
Although the scheme is performing well, Envestra recommends that it should strive for greater diversity of activities.
Envestra recommends that the scheme investigate and encourage the inclusion of additional appliances consistent with its objectives. Domestic gas powered air conditioners and potentially fuel cells represent examples of such appliances.
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?
Envestra is unable to provide evidence to answer this question. Envestra notes that its marketing campaigns have mitigated the effect of barriers.
How are the costs and benefits of the scheme distributed between different customers?
Envestra is unable to provide evidence to answer this question.
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?
Since 2009, Envestra through its marketing program together with the ESI program has added some 4800 existing home connections to its gas network that may not have been secured in the absence of the scheme. Securing these connections has resulted in investment in the extension of the gas network.
The scheme particularly increases Envestra's confidence in reticulating prospective new towns that have been scoped as part of the Victorian Government's Energy for The Regions Program. Envestra has secured agreement for an investment to increase the availability of gas in Mildura, and is progressing negotiations for the connection of Wandong –Heathcote Junction and Koo Wee Rup. The role of the scheme in assisting households to changeover to gas hot water is incorporated into the load forecast assumptions and is integral to investment confidence for these projects.
Several other towns are also due to be considered for mains extensions which are outside the scope of the Energy for The Regions Program. Projects such as the gas reticulation of regional townships (for example Eagle Point, 250 homes) are currently under consideration. Such proposals are based on the willingness of a reasonable percentage of homes agreeing to connect in the early years of a project. The availability of VEECs to support the changeover to gas hot water units (1A,1B and 1D) is key to obtaining customers' commitment and hence is underpinning such expenditure.
Further, the replacement of electric appliances in houses already connected to the gas network, as well as those newly connected to the network has required expenditure on gas appliances and the services required for their installation.
Has the scheme created any unintended consequences and what evidence can you provide to support this?
Envestra is not aware of any unintended consequences.
Is there any further information in relation to the performance of the scheme to date that we should consider?
The graph below demonstrates the performance of the scheme and in doing so provides clear evidence of its success. Envestra takes great confidence from the fact that the trend line is stable and consistent, with little volatility, indicating sound management of supporting processes, as well scheme target setting.
Graph 10: VEEC Registrations against Target – ESC Public Forum presentation – 7th June 2103
Further evidence of the scheme's success to date, can be seen from the graph below, which indicates that the scheme has recorded approximately 2.3 million installations since its inception.
Graph 11: VEET Registrations by Geography – ESC Public Forum presentation – 7th June 2103
This graph also demonstrates the strong regional result being achieved by the scheme. The scheme's regional activities are consistent with the Victorian Government's regional focus. One such example of that focus is the Regional Development Victoria (RDV) scheme. From Envestra's perspective, this commonality of purpose of government schemes give Envestra confidence in the nature of the integrated policy making processes of the Victorian Government.
3) Looking Forward - the future of the scheme from Jan 1st 2015
The scheme is performing well and continuing to achieve its objectives.
Opportunities for extension of the scheme are available through the inclusion of other appliances, for example domestic gas powered air conditioners and fuel cells.
We are seeking your views on the future of the scheme from 1 January 2015. The continuation of the ESI requires the consideration of a number of issues. In developing your response we would like you to consider the following:
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?
Envestra is aware that in regional Victoria gas network penetration is typically 25 – 50% lower than in metropolitan Melbourne. This suggests that at least 50,000, and possibly in excess of 100,000 dwellings exist on Envestra's networks in regional Victoria that could connect to gas and install more GHG and energy efficient appliances, if supported by the scheme. For this reason alone, Envestra is confident that there is significant unexplored demand for the scheme. Further, as decisions on appliance replacement are typically made only on appliance failure, and as appliance life is often 10 – 15 years, it is highly likely that there exists a material population of appliances that are likely to fail over the future years of the scheme. The operation of the scheme will greatly increase the likelihood that these appliances will be replaced with GHG and energy efficient appliances.
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?*
As set out above the opportunity to introduce gas powered air conditioning and fuel cells represents activities that could be included in the scheme.
With scheme costs and technology limitations in mind, if the scheme were to continue what would be an appropriate target for its next phase?
Envestra recommends that due to the successful performance against targets to date of the scheme, that similar processes are used for future target development.
Is the ESI the most appropriate scheme in which to encourage energy efficiency uptake for large energy users?
Envestra notes that the ESI is an effective scheme to encourage energy efficiency uptake for large users. Options for future development of the scheme could be to (i) incorporate additional technologies consistent with the schemes objectives, for example cogeneration or tri-generation, or (ii) operate alongside other schemes such as for example the national EEO scheme.
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?
Please see Envestra's response to the previous question.
Is there any further information in relation to the continuation of the scheme that we should consider?
Envestra has no further comment on this issue.
As outlined above, an outcome of the RIS process may be that the ESI is not continued, either with or without an alternative mechanism in its place. In developing your response on the future of the scheme, we would also like you to consider the following:
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?
Subject to the acceptance of the comments and recommendation made by Envestra in this paper, Envestra urges the Victorian government to ensure the scheme's continuance. The scheme's closure would not be in the long term interest of Victorian energy users.
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?
Envestra believes that if the ESI was to be discontinued, that barriers to uptake of energy efficiency that have been discussed in this paper would still be present. Although we are confident that the ESI has correctly identified the key barriers involved and that the scheme is addressing those barriers, if the ESI was to be discontinued, then future gains would likely be lost.
As Envestra has already stated in the paper, schemes like ESI, are medium to long term in nature. Given the nature of the barriers involved, and appliance replacement cycles being 10-15 years, it means that these schemes naturally need time to develop as planned to deliver their full promise.
Is there any further information that we should consider if the scheme were not continued?
If the scheme was to be discontinued, Envestra would be very disappointed, given not only the benefits the scheme has achieved in recent years, but also the likely prospect of even stronger results being achieved in future years.
Envestra recommends that the recent discussions between states on the issue of the harmonisation of the white certificate schemes, currently operating in Australia (such as the ESI, ESS and REES) should continue. The outcome of such discussions will hopefully be one scheme, thus effectively reducing compliance costs; lessening confusion for customers; and facilitating the adoption of the best aspects of each of the schemes.
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