simplyEnergy

Dear Mr Blowers

Review of the Energy Saver Incentive — Issues Paper

Thank you for the opportunity to comment on the Issues Paper considering the future of the Energy Saver

Incentive (ESI) in Victoria.

The objectives of the ESI were to:

  • Reduce greenhouse gas emissions
  • Encourage the efficient use of electricity and gas
  • Encourage investment, employment and technology development in industries that supply energy efficiency goods and services.

We do not support the continuation of the ESI scheme after 2014 on the basis of these objectives:

  • The ESI duplicates policy objectives being addressed at the national level by preferable schemes that spread their costs and benefits more equitably across customers.
  • The ESI may have contributed toward a decline in energy consumption but the weight of other contributing factors may be overstating the scheme's success. Solar panels, temperature effects, slower Victorian economic growth and the closure of manufacturing plant in Victoria may also be significant contributors to the decline in energy consumption. Neither has the scheme been successful in deferring the need for additional investment in the networks to meet growth in peak demand.
  • We do not support energy customers having to pay higher energy costs to provide support to an industry that relies on that government support. It creates inefficiencies across the Victorian economy and results in a direct cross-subsidy from energy customers to those employed in energy efficiency activities.

The impact of the ESI scheme on final energy retail prices is small relative to the the range of other costs that retailers incur. However, the ESI still adds to the cumulative cost of the regulations applying to the industry and impacts upon the affordability of an essential service. Discontinuing the ESI scheme would ease the pressure on increasing energy prices and thus address at least some of the cost of living concerns that Victorians have.

The cost of the scheme to energy consumption must also consider the cost to taxpayers of managing and enforcing the scheme. The ESI involves a significant investment in resources from scheme regulators, liable entities and third-party suppliers to undertake, audit and verify the activities associated with the schemes. Victorian energy consumers pay these costs on top of the costs the retailer incurs directly.

In the attachment, we have addressed the majority of the questions that have been raised in the Issues Paper. Where possible, we have used available data to support the statements that we make but it has not always been possible to find this data or isolate the impact of the ESI scheme itself.

If you have any questions regarding this submission, you can contact me on (03) 8807 1132 and I would be happy to discuss the matters with you.

Yours sincerely

Dianne Shields
Senior Regulatory Manager

Attachment: Key Issues for Consideration

In this attachment, we set out our response to the key issues raised for consideration in the Issues Paper.

Barriers to the uptake of energy efficiency measures

The ESI was designed to address a number of possible market failures or barriers to the uptake of energy efficiency measures. Simply Energy believes that since the introduction of the ESI, both public awareness and the adoption of energy saving measures have removed some of these barriers.

Information gaps

This market failure has been premised on a belief that customers do not have access to readily available information on their energy use and how that use impacts upon their bills.

"Gathering trustworthy information can be costly and time consuming for households and businesses and linking activity to energy bills may be difficult."

Obtaining information about energy use and how use impacts upon bills is no longer a barrier in Victoria. The widespread rollout of smart meters in conjunction with available web portals and IHDs mean that customers now have real time access to their energy information. Smart meters read energy usage on a half hour interval with this data streamed same day to available web portals that allow customers to track their usage as frequently as the customer requires. IHDs also provide this functionality for those customers without internet access.

Split incentives

Under this market failure, the proposition is that the incentive to invest in more energy efficient appliances can be weak where those who bear the cost do not enjoy the benefits. The tenant-landlord situation is often the only example cited as being a situation where split incentives may occur.

Simply Energy believes that this market failure is more perceived than real. For example, where energy efficiency was of value to a tenant, then the tenant would seek out a rental property that delivered that benefit to them. In reality though, a tenant will likely give more consideration to rental price, amenity and location than the energy efficiency of the appliances provided. As a result, landlords are unlikely to make the provision of energy efficient appliances a priority in marketing a property for rent.

However, assuming that such a market failure exists, we would query whether the ESI is the best regulatory tool for addressing the issue. In our view, the ESI will only address this market failure at the margin because tenants cannot approve capital infrastructure changes to a rented property.

Taking the list of currently approved activities for residential customers, we have analysed which of these activities would be readily available to tenants.

Activity Does landlord need to approve installation? Addressing market failure?
Installation of insulation, double glazing, weather proofing and gap sealing Yes No
Purchase of a high efficiency fridge or freezer and disposal of an old efficient model No Yes
Installation of a high efficiency heating system Yes No
Installation of a solar, heat pump or high efficiency gas water heater to replace a more GHG intensive system Yes No
Installation of a water saving showerhead Likely No
Replacement of an inefficient light globe with a low energy alternative Possible Unclear
Purchase and installation of a high efficiency television No Yes
Purchase and installation of a high efficiency clothes dryer If landlord provided, yes Otherwise, no Yes if tenant is bringing their own appliance
Purchase and installation of a high efficiency pool pump Yes No
Purchase and installation of standby power controller No Yes
Purchase and installation of in home display Yes No

The ESI may have had some effectiveness in addressing split incentive market failures as providers have pursued the 'low hanging fruit' of standby power controllers, high efficiency televisions and fridges and possibly energy efficient light globes. However, as these activities reach their saturation point in Victoria, the effectiveness of the ESI in addressing this market failure will diminish.

In Simply Energy's view, there are much more cost effective regulatory tools available to the Victorian Government to address any real or perceived concerns regarding the energy efficiency levels of rental properties. For example, a more effective regulatory tool that directly targets the market failure are standards that specify the minimum energy efficiency rating of appliances used in rental properties.

Access to capital

Simply Energy recognises that the upfront cost of many energy efficiency initiatives may be out of reach of certain low income customers. At the same time, energy efficient products can assist low income individuals to manage their bills and help them stay out of energy hardship.

However, Simply Energy queries the logic of trying to assist low income customers manage their bills by increasing the cost of energy. Delivering on energy efficiency targets is not costless and we recover these costs through all our customers' bills. As discussed below, there may also be a flow on effect of the ESI scheme onto network prices which will further increase the cost of energy.

Our concern is that the ESI is making the cost of energy more expensive which is creating cost of living issues for low income households. There are far more effective tools available to assist low income households access energy efficient products that are better able to target those the assistance is attempting to reach. For example, government programs that provide direct financial assistance to qualifying low income households are preferable because they are targeted and the costs of the assistance transparent.

Externalities

Simply Energy has not been able to identify any up-to-date data on greenhouse gas emission levels in Victoria and whether the ESI scheme has contributed toward any reduction in these emissions if any reduction has occurred. As discussed in further detail below, energy consumption in Victoria has been declining over recent years which may have contributed to a decline in greenhouse gas emissions or at least may have stemmed the rate of increase. However, as we point out, this decline is not wholly attributable to the ESI scheme and other factors have played a role in this decrease.

We agree with the Issues Paper that the ESI seems to duplicate policy objectives being addressed at the national level. The carbon price mechanism and the direct action plan are both preferable means of addressing greenhouse gas emission concerns than an ESI scheme. In particular, the costs and benefits of these schemes are spread equally across customers and cross subsidies are avoided.

Conclusion

We do not support the use of an ESI to address any real or perceived market failures as ESI-style schemes are costly and complex tools for addressing those failures. Simply Energy believes that there are other more costeffective tools available to address any market failures that prevent customers from taking up energy efficiency opportunities that may be of benefit to them. 

Performance of the ESI to date

Impact on energy consumption

It is difficult to isolate the ESI scheme's direct impact on energy consumption. We anticipate that the ESI scheme has been contributing to reductions in energy consumption but other significant contributors would include the installation of solar panels, temperature effects, energy price rises making consumers more energy conscious and slower Victorian economic growth over the last 2 to 3 years.

Our analysis suggests that around 30% of the decline in energy consumption experienced since 2008 was due to temperature effects, and another 5% of the decline appeared to result from installation of solar panels. We were unable to determine what made up the remainder of the decline. The ESI would be a contributing factor but changing consumer behaviour and slower economic growth in Victoria, including the closure of manufacturing plant, would also be significant contributors.

At the same time, it is not definitive that the ESI is assisting in the avoidance or deferral of network augmentation investment needed to meet peak demand levels which Simply Energy understands was one of the objectives of the scheme.

Information available on maximum annual total demand at the state level shows that peak demand temporarily declined between 2009 and 2012 (see figure 1). However, in 2013 peak demand returned to trend and is now 14% higher than the level of peak demand in 2005. In our view, the decline between 2009 and 2012 is more likely a result of temperature and economic effects than any sustained impact arising from the ESI scheme.

Figure 1: Victorian maximum annual total demand, 2005 to 2013



Note: 2013 peak demand is year to date peak demand

We also note that the forecasts of peak demand made by the Victorian distributors at their last regulatory price reset seem to confirm the continued expected growth in peak demand (see figure 2). As a result, the Australian Energy Regulator approved higher levels of capital expenditure to augment the networks and meet higher customer peak demand.2

Figure: Forecasts of summer maximum demand, MW



Source: Pricing proposals submitted by the 5 Victorian distribution businesses for the 2011–2015 regulatory period

Impact on retail prices

The impact of the ESI scheme on final retail prices is small relative to the range of other costs that retailers incur. Network prices, the carbon pricing mechanism and Renewable Energy Target scheme are much larger contributors to the final price of energy than the ESI scheme.

However, the ESI still adds to the cumulative cost of the regulations applying to the industry and impacts upon the affordability of an essential service.

Beyond the direct cost of the ESI scheme to energy consumers, there is also the direct cost to Victorian taxpayers of managing and enforcing the scheme. The State-based schemes have shown that they involve a significant investment in resources from scheme regulators, liable entities and third-party suppliers to undertake, audit and verify the activities associated with the schemes.

In deciding upon the future of the scheme, the Department will need to consider whether the ESI scheme is achieving the objectives it was designed for or whether, as we believe, there are other cheaper and more effective tools for achieving those objectives.

Investment, employment and technology development

Simply Energy does not have any direct evidence of how the ESI scheme has impacted on the development of industries that supply goods and services which reduce the use of electricity and gas.

However, energy customers should not be paying higher energy costs to provide support to an industry that relies on that government support. This form of industry support creates inefficiencies across the Victorian economy and results in a direct cross-subsidy from energy customers to those employed in energy efficiency activities. There are better ways than direct government support to encourage investment in the Victorian economy.

Looking forward: the future of the scheme from 1 January 2015

The ESI scheme should not be continued into its next three year phase and should end in 2014.

There are other more cost-effective tools available to government to address any market failures that prevent customers from taking up energy efficiency opportunities that may be of benefit to them. There are a wide range of examples such as direct government assistance to assist the purchase of energy efficient appliances, general government communications about the benefits of purchasing more energy efficient appliances, minimum energy efficiency standards

Page last updated: 24/06/20