National Energy Savings Initiative Progress Report · Web viewAn appropriate policy objective for a national Energy Savings Initiative 33 3.1 National consistency 35 3.2 Complementarity

Progress ReportNational Energy Savings Initiative

Department of Climate Change and Energy Efficiency

Department of Resources, Energy and Tourism

August | 2012

As part of the Clean Energy Future plan, the Australian Government is investigating the costs and benefits of national Energy Savings Initiative.

About the National Energy Savings Initiative Working Group

The Working Group has been established to prepare a report for the Minister for Climate Change and Energy Efficiency and the Minister for Resources and Energy on possible design options for a national Energy Savings Initiative. Full terms of reference are at Appendix A.

Working Group members

Department of Climate Change and Energy

Efficiency Dr Steven Kennedy

Ms Anthea Harris

Mr Brad Archer

Department of Resources, Energy and Tourism

Mr Martin Hoffman

Mr Brendan Morling

Advisory Group

Australian Council of Social Services

Australian Council of Trade Unions

Australian Energy Markets Commission

Australian Industry Group

Choice

Clean Energy Council

The Climate Institute

ClimateWorks Australia

Energy Efficiency Certificate Creators Association

Energy Networks Association

Energy Efficiency Council

Energy Retailers Association of Australia

Energy Users Association of Australia

Property Council of Australia

Mr Neil Marshman of Rio Tinto

State and Territory government officials

Written and published by the Department of Climate Change and Energy Efficiency and the Department of Resources, Energy

and Tourism.

© Commonwealth of Australia 2012

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view a copy of this license, visit http://creativecommons.org/licenses/by/3.0/au/. You are free to copy, communicate and adapt the Commonwealth copyright material, so long as you attribute the Commonwealth of Australia (Department of Climate Change and Energy Efficiency and Department of Resources, Energy and Tourism). Permission to use third party copyright content in this publication can be sought from the relevant third party copyright owner/s.

Disclaimer This document is made available to report progress in relation to policy investigation of a possible national Energy Savings Initiative. Material in this document should not be taken to indicate the Commonwealth's commitment to a particular policy or course of action. The Commonwealth does not make any representations or warranties that it will implement any or all of the options, preferred positions or dispositions set out in this document. Material in this document is made available for general information only and on the understanding that the Commonwealth is not providing professional advice. Different solutions and outcomes may apply in individual circumstances. While reasonable efforts have been made to ensure the accuracy, completeness and reliability of the material contained in this document, to the extent permitted by law, the Commonwealth provides no express or implied warranties and makes no representations that the information contained in this document is accurate, complete or reliable, and expressly disclaims liability for any loss, however caused and whether due to negligence or otherwise, arising directly or indirectly from the use of, inferences drawn, deductions made, or acts done in reliance on, this document or the information contained in it, by any person.

National Energy Savings Initiative Progress Report

Executive SummaryIn 2010, the Australian Government established a Prime Minister’s Task Group on Energy Efficiency (the Task Group). The Task Group reported to the Minister for Climate Change and Energy Efficiency and the Minister for Resources and Energy on options to deliver a step change in energy efficiency improvement by 2020 and place Australia at the forefront of the Organisation for Economic Co-operation and Development (OECD) energy efficiency improvement.

The Task Group report was published in October 2010. One of its six foundation recommendations was that the Australian Government:

Agree to the introduction of a transitional national energy savings initiative to replace existing and planned state energy efficiency schemes, subject to detailed consultation on its design.1

The Task Group noted that ‘significant further design work is necessary before the Government could consider whether to proceed with implementation of an energy savings initiative’.2

In response to the Task Group report and as part of the Australian Government’s plan for a Clean Energy Future, the Australian Government committed to undertake further analysis on the costs and benefits of a potential national Energy Savings Initiative (see Box E1 below).

Box E1: Commitment from the Clean Energy Future plan3

As recommended by the Prime Minister’s Task Group, the Government will undertake further consultation and design work on a national energy savings initiative. Factors that will be considered will include:

economy-wide targets to maximise the benefit of the scheme

sectoral and fuel coverage issues

incentives or requirements to create certificates in low-income households and in ways which reduce electricity demand at peak times

energy saving activities which would be eligible

1 Prime Minister’s Task Group on Energy Efficiency, Report of the Prime Minister’s Task Group on Energy Efficiency, Canberra, July 2010,

p.3.

2 Prime Minister’s Task Group on Energy Efficiency, Report of the Prime Minister’s Task Group on Energy Efficiency, Canberra, July 2010,

p.68.

3 Australian Government, Securing a Clean Energy Future – The Australian Government’s climate change plan, Canberra, July 2011, p.82.

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managing a smooth transition from state-based schemes.

Subject to economic modelling and a regulatory impact analysis, the Government will make a final decision on whether to adopt a national energy savings initiative. A national energy savings initiative would be conditional on the agreement of the Council of Australian Governments and the abolition of existing and planned state schemes.

It is important to note that no conclusions have been made on whether a national Energy Savings Initiative is in the public interest at the current time. To arrive at such a conclusion, the investigation of a national Energy Savings Initiative would need to demonstrate that:

there was a case for government intervention on the basis that market failures are currently preventing a socially optimal amount of energy efficiency activity occurring and that this will persist over the lifespan of a scheme;

a national Energy Savings Initiative is the most suitable policy instrument to address these market failures than other available tools; and

the benefits of a national Energy Savings Initiative would outweigh the costs over time.

These issues will be considered further throughout 2012.

Structure of the report

The Introduction to the report provides an overview of the policy work and stakeholder consultation that has occurred to date.

Chapter 1 provides context for the work being undertaken. It discusses the market failures that can affect energy efficiency and how these manifest in Australia. It briefly examines options for government intervention.

In Chapter 2, there is a deeper discussion of where energy efficiency or white certificate schemes could be considered as an appropriate policy instrument. It highlights the key advantages and disadvantages of white certificate schemes. This chapter also presents analysis of established schemes, in Australia and overseas.

Chapter 3 outlines the Working Group’s early thinking on an objective for a possible national scheme, and an assessment of complementarity with the carbon pricing mechanism, the Renewable Energy Target and the national energy markets. The issue of complementarity has gained additional significance following the agreement of the Council of Australian Governments in April 2012 to consider how to rationalise programs that are not complementary to a carbon price, or are ineffective, inefficient or impose duplicative reporting requirements on business. This chapter also discusses guiding principles to support further consideration of the design of a national scheme.

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Chapters 4 to 8 discuss key design elements. While a national Energy Savings Initiative could be designed in any number of ways, in order for subsequent cost-benefit analysis to be tractable, the Working Group has narrowed down possible design options that it will investigate more fully. Chapter 4 discusses the issues concerning market architecture.

All white certificate schemes have three key features: a target, parties who must meet the target, and a system of undertaking, measuring and verifying activity that is eligible to meet the target. Broadly, chapters 5, 6 and 7 are structured in line with these three features. These features can be mapped against the energy supply chain, as shown in Figure E1. Chapter 8 discusses issues of additionality and considers possible eligible activities.

Figure E1: White certificate scheme features and the energy supply chain

Sources of energy

Who delivers this energy, and where is it used?

Who uses this energy, how can they make savings, and how are savings measured and verified

Target

Parties who must meet the target

Undertaking, measuring and

verifying activity

Chapter 5

Chapter 6Chapter 7

Chapter 7Chapter 8

Scheme feature Energy supply chain Where discussed

Chapters 9 and 10 deal with specific issues that the government undertook to investigate as part of its commitment to do further work on a national Energy Savings Initiative. Chapter 9 discusses options for specifically targeting energy efficiency activities under a national scheme at low-income households. Chapter 10 considers possible options to incorporate activities that held reduce peak electricity demand within a national Energy Savings Initiative.

The final chapter – Chapter 11 – discusses the modelling work that will be used to test costs and benefits in the regulatory impact analysis.

Next steps

A central element of the investigation of a national Energy Savings Initiative is the input provided by stakeholders, including state and territory governments. Commonwealth officials will consult widely on the design elements discussed in this progress report and will continue to engage with stakeholders as further analysis is undertaken.

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In the remainder of 2012, the Working Group will focus on undertaking the regulatory impact analysis. This includes examining the case for a national Energy Savings Initiative, and alternative policy options that could deliver the same policy objectives, including:

the status quo (continuation of existing and planned state-based schemes);

possible harmonisation of state schemes;

different design options for a national scheme; and

a combination of other non-market based policy options such as standards, regulation and information programs.

The Working Group intends to release an assessment of regulatory impacts for public comment in the third quarter of 2012. The findings of the regulatory impact analysis and stakeholder views will be presented to the Australian Government in late 2012. As stated in the Clean Energy Future plan, any government decision to implement a national Energy Savings Initiative would be conditional on the agreement of the Council of Australian Governments and the abolition of existing and planned state schemes.

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ContentsEXECUTIVE SUMMARY................................................................................................................................... I

STRUCTURE OF THE REPORT..................................................................................................................................... II

NEXT STEPS.......................................................................................................................................................... III

CONTENTS.................................................................................................................................................... V

INTRODUCTION............................................................................................................................................ 1

Consultation process 1

Gathering better data 3

Investigating options for assisting low-income households 3

Investigating options for reducing electricity use at peak times 3

Improving inputs to future analysis 3

Working with other groups 4

ACKNOWLEDGEMENTS............................................................................................................................................4

1 ASSESSING THE CASE FOR A NATIONAL ENERGY SAVINGS INITIATIVE...............................................5

1.1 ENERGY EFFICIENCY IN AUSTRALIA...................................................................................................................5

1.2 MARKET FAILURES AND ENERGY EFFICIENCY.....................................................................................................10

Market barriers 11

Options for further intervention 13

1.3 DEMONSTRATING THAT BENEFITS EXCEED COSTS..............................................................................................14

2 MARKET-BASED INSTRUMENTS IN ENERGY EFFICIENCY POLICY......................................................18

2.1 WHAT IS A NATIONAL ENERGY SAVINGS INITIATIVE?.........................................................................................18

2.2 THE ADVANTAGES OF WHITE CERTIFICATE SCHEMES..........................................................................................19

2.3 DISADVANTAGES OF WHITE CERTIFICATE SCHEMES............................................................................................20

2.4 WHITE CERTIFICATE SCHEMES IN OTHER COUNTRIES..........................................................................................20

2.5 CURRENT ENERGY EFFICIENCY OBLIGATIONS IN AUSTRALIA.................................................................................22

Lessons learnt from the operation of schemes in Australia 22

Current reviews of existing schemes 25

3 OBJECTIVES AND PRINCIPLES......................................................................................................... 29

To reduce pressure on households’ and businesses’ energy bills 29

To support vulnerable energy users to adapt to higher energy costs 31

To help reduce Australia’s greenhouse gas emissions 32

An appropriate policy objective for a national Energy Savings Initiative 33

3.1 NATIONAL CONSISTENCY..............................................................................................................................35

3.2 COMPLEMENTARITY WITH OTHER MAJOR POLICIES............................................................................................37

Understanding complementarity to a carbon price 37

Complementarity of a national Energy Savings Initiative to a carbon price 37

Renewable Energy Target 39

Energy markets 40

3.3 DESIGN PRINCIPLES FOR A NATIONAL ENERGY SAVINGS INITIATIVE.......................................................................41

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Table 3.1: Design principles 42

4 SCHEME DESIGN FEATURES........................................................................................................... 45

4.1 MARKET FRAMEWORK................................................................................................................................45

4.2 FEATURES OF AN EFFECTIVE MARKET..............................................................................................................47

Trading 47

Certificates 48

Banking and borrowing 51

Other issues affecting market operation 52

5 NATURE OF TARGETS: ENERGY, FUELS AND FORM.........................................................................54

5.1 TYPES OF ENERGY TO BE INCLUDED IN A TARGET..............................................................................................54

5.2 TYPES OF FUEL TO BE INCLUDED IN A TARGET..................................................................................................57

Electricity and gas 57

Transport fuels 58

Other fuels 60

5.3 UNITS OF MEASUREMENT............................................................................................................................61

5.4 FORM OF THE TARGET.................................................................................................................................62

Absolute verses percentage 62

Annual versus multiple year 64

5.5 SINGLE TARGET VERSUS TARGETS FOR EACH FUEL TYPE......................................................................................65

5.6 MINIMUM TARGET FOR A NATIONAL SCHEME..................................................................................................66

6 OBLIGATED PARTIES...................................................................................................................... 68

6.1 APPROACH TO CONSIDERING GEOGRAPHIC COVERAGE.......................................................................................71

Impact of inclusion 72

Shared benefits 72

Equity 72

Retail contestability 73

7 SECTORAL COVERAGE.................................................................................................................... 75

7.1 APPROACH TO COVERAGE............................................................................................................................75

7.2 RESIDENTIAL SECTOR...................................................................................................................................77

7.3 COMMERCIAL SECTOR.................................................................................................................................78

7.4 INDUSTRIAL SECTOR....................................................................................................................................80

Emissions-intensive trade-exposed industries 82

7.5 ENERGY GENERATION SECTOR.......................................................................................................................85

7.6 ENERGY NETWORKS....................................................................................................................................86

8 MEASUREMENT AND VERIFICATION OF ENERGY EFFICIENCY ACTIVITIES........................................90

8.1 ADDITIONALITY OF ELIGIBLE ACTIVITIES...........................................................................................................90

Regulatory additionality 91

Technical additionality 93

Financial additionality 95

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8.2 APPROACHES FOR CERTIFYING SAVINGS..........................................................................................................97

Deemed or estimated savings 97

Measured savings 99

8.3 OPTIONS FOR EVALUATING EMERGING ACTIVITIES AND METHODOLOGIES............................................................100

8.4 AUGMENTING PEAK DEMAND IMPACTS.........................................................................................................101

9 SUPPORT FOR LOW-INCOME HOUSEHOLDS.................................................................................103

9.1 DEFINING LOW-INCOME HOUSEHOLDS FOR THE PURPOSE OF THE REGULATORY IMPACT ANALYSIS............................103

9.2 ASSESSING IF LOW-INCOME HOUSEHOLDS REQUIRE EXPLICIT SUPPORT................................................................105

Existing measures 105

Low-income household participation in existing schemes 107

Approach to considering if low-income households require additional support through a national

Energy Savings Initiative 108

9.3 COSTS, BENEFITS AND OPTIONS FOR PROVIDING SUPPORT TO LOW-INCOME HOUSEHOLDS......................................109

Options for supporting low-income households 110

10 ADDRESSING PEAK DEMAND.......................................................................................................113

10.1 REASONS TO ADDRESS PEAK DEMAND THROUGH AN ENERGY SAVINGS INITIATIVE............................................113

Price rises and impacts 113

Impact of energy efficiency on infrastructure productivity 114

10.2 OPTIONS FOR ADDRESSING PEAK DEMAND................................................................................................114

Option 1: Reflecting the impact of energy efficiency activities on peak demand into certificate

incentives 114

Option 2: Creating a sub-scheme with peak-specific certificates 115

Option 3: Establishing a ‘single buyer’ to purchase peak-demand-reducing activities 115

10.3 STAKEHOLDER VIEWS...........................................................................................................................116

10.4 ANALYSIS...........................................................................................................................................117

10.5 APPROACH TO MODELLING A PEAK DEMAND SCENARIO...............................................................................118

11 ECONOMIC AND ENERGY MARKET MODELLING...........................................................................120

11.1 MODELLING A NATIONAL ENERGY SAVINGS INITIATIVE................................................................................120

Previous modelling exercises for a national Energy Savings Initiative 120

Improving the modelling approach 121

11.2 MODELLING INPUTS TO THE REGULATORY IMPACT ANALYSIS........................................................................124

APPENDIX A: TERMS OF REFERENCE...................................................................................................... A1

APPENDIX B: SUMMARY OF FEATURES OF AUSTRALIAN SCHEMES.........................................................B1

APPENDIX C: LIST OF ACRONYMS......................................................................................................... C1

APPENDIX D: POTENTIAL IMPACTS OF ENERGY EFFICIENCY ON NETWORK CHARGES.............................D1

APPENDIX E: PEAK DEMAND TECHNICAL GROUPS MEMBERSHIP...........................................................E1

Appendix F: List of submissions received in response to the Issues Paper..................................................F1

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IntroductionThis report has been produced by the National Energy Savings Initiative Working Group to update the Australian Government on the progress of work investigating the costs and benefits of a possible national Energy Savings Initiative. The Working Group’s terms of reference are at Appendix A.

The purpose of this progress report is not to present the Working Group’s final recommendations for a national scheme. Rather, this report narrows down options to underpin further cost-benefit analysis through the regulatory impact analysis to be undertaken in the second half of 2012 (see Box A for a description of the regulatory impact analysis).

Box A: Regulatory impact analysis

Regulatory impact analysis (RIA) is the process of examining the likely impacts of a proposed regulation and assessing it against alternative policy options which could meet the same objective. The regulatory impact analysis is governed by the Australian Government’s Best Practice Regulation Guidelines, which have been designed to ensure that decision-makers are informed by a balanced assessment of the best available information.

Central to the regulatory impact analysis is the Regulation Impact Statement (RIS). A RIS is a document that provides evidence of the key steps taken during the development of the proposal, and includes an assessment of the costs and benefits of each option.

Consultation processA number of consultation processes have informed the analysis in this current progress report, including a series of workshops, written submissions, input from the Advisory Group, and meetings with individual stakeholders. A full list of events is in Table A overleaf.

In late 2011, the national Energy Savings Initiative Secretariat held a series of workshops with stakeholders to discuss peak demand, low-income households, possible objectives and outcomes of a national Energy Savings Initiative, and lessons learnt from Australian and international schemes.

In December 2011, the Working Group released an Issues Paper, which set out topics for consideration as part of further work on a national Energy Savings Initiative. The Issues Paper was developed with the assistance of the National Energy Savings Initiative Advisory Group and many other stakeholders who attended workshops in Adelaide and Melbourne in November 2011.

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Table A: consultation events and activities to date

Date Consultation event

September 2011 Presentation to Energy Efficiency Opportunities workshop – Sydney

Presentation to Energy Retailers Association of Australia – Sydney

October 2011 Bilateral meetings with state governments and stakeholder groups

Formal meeting of the Advisory Group

November 2011 Workshop on low-income households – Adelaide

Technical workshop on peak demand – Melbourne

Presentation to the Energy Efficiency Council annual conference – Melbourne

Presentation to Energy Efficiency Council workshop on possible objectives – Melbourne

December 2011 Formal meeting of the Advisory Group

Expert workshop on modelling of energy efficiency and peak demand savings within a national scheme – Melbourne

Release of Issues Paper

Workshop on international schemes (co-hosted by the International Energy Agency and the Regulatory Assistance Project) – Sydney

January 2012 Public workshop on Issues Paper – Brisbane

One-on-one meetings with stakeholders – Brisbane

February 2012 Public workshops on Issues paper – Melbourne, Sydney and Perth

One-on-one meetings with stakeholders – Melbourne, Sydney and Perth

Consultation with state and territory governments

Targeted workshop on low-income households – Adelaide

Public workshop on assumptions for modelling – Melbourne

Presentations to :

Energy Retailers Association of Australia – Melbourne

Clean Energy Council – Melbourne

Energy Efficiency Council – Melbourne

Energy Efficiency Certificate Creators Association – Melbourne

Australian Industry Greenhouse Network – Canberra

Expert workshop on modelling of distribution networks – Canberra

Technical workshop on peak demand – Melbourne

Submissions closed on Issues Paper and on Modelling Assumptions booklet

April and May 2012

Formal meetings of the Advisory Group

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In January and February 2012, the Secretariat held a series of workshops in capital cities to seek feedback on the Issues Paper. Around 150 people from a broad range of organisations attended. More than 80 submissions were received in response to the Issues Paper. These submissions have been used to inform this report, and will be considered further as work progresses.

A number of stakeholder submissions are directly quoted in this progress report. Statements, opinions and figures provided by stakeholders are their own, and should not be taken to represent the views of the Working Group.

Gathering better dataThe Secretariat has commissioned a number of consultancies to improve available data on energy efficiency improvement opportunities and to better understand the costs and benefits of energy savings schemes. These results will be used to inform the RIA, and include:

energy efficiency opportunities in the industrial sector;

energy efficiency opportunities in the commercial and SME sectors;

standardising energy efficiency savings in the residential sector; and

costs of complying with current state schemes.

Investigating options for assisting low-income householdsIn November 2011, the Secretariat conducted a workshop with welfare organisations, state government representatives and energy retailers, to discuss ways in which a national Energy Savings Initiative could be designed to assist low-income households. Topics discussed included appropriate ways to define and identify low-income households; existing measures to assist low-income households; and outcomes for low-income households under existing state-based schemes.

Investigating options for reducing electricity use at peak timesAs part of analysing ways in which a national Energy Savings Initiative could provide incentives or requirements to help reduce electricity use at peak times, the Secretariat established two technical working groups comprising experts from energy networks and energy market regulators. The Secretariat also commissioned a consultancy to advise on options for addressing peak demand in a national Energy Savings Initiative.

Improving inputs to future analysisIn December 2011, the Secretariat released a booklet of assumptions underpinning both the energy market and energy efficiency models. Seven submissions were received in response, and 25 people attended a public workshop in Melbourne to provide feedback. The Secretariat also held workshops with energy market organisations, energy network companies, academics and the CSIRO, and continues to consult with Commonwealth agencies on assumptions and scenarios to test through the energy efficiency and energy market models.

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This feedback and new data gathered through consultancies will be used to refine the energy efficiency and energy market models. The outputs from the modelling exercise will form a key part of the regulatory impact analysis (see Chapter 10 for a full outline of the modelling approach).

Working with other groupsThe Working Group and Secretariat are engaging with a number of other relevant processes currently underway. The Secretariat has worked closely with the Australian Energy Markets Commission as it undertakes the Power of Choice review into demand-side participation.

The Secretariat has also worked closely with the International Energy Agency and the Regulatory Assistance Project, who are undertaking a study on Policies for Energy Provider Delivery of Energy Efficiency (PEPDEE). The output of this work is providing valuable information to the Working Group on international experiences with white certificate schemes and principles for best practice policy design.

Updates on the investigation of a national Energy Savings Initiative have been provided to the Select Council on Climate Change and the Standing Council on Energy and Resources established under the Council of Australian Governments (COAG). The Working Group will engage closely with the New South Wales and Victorian governments’ Interstate Reform Partnership which will focus on aligning those states’ energy efficiency schemes.

As noted in the Executive Summary, COAG also agreed in April 2012 to undertake a review of unnecessary carbon reduction and energy efficiency schemes. At the time of writing, no further details were available on which programs would be considered by this review. Should the current investigation of a national Energy Savings Initiative fall within the scope of this COAG review, the Working Group will ensure future work aligns with the outcomes of this review.

Work investigating the costs and benefits of a possible national Energy Savings Initiative is also feeding into development of the Australian Government’s Energy White Paper. Information compiled through the data gathering and analysis exercises will also be used to inform Australia’s engagement with the International Energy Agency on energy efficiency matters.

Acknowledgements

The Working Group would like to thank those who participated in workshops, responded to the Issues Paper and Modelling Assumptions booklet and assisted the Secretariat with data, advice and input.

In particular, the Working Group is grateful for the assistance of the International Energy Agency and the Regulatory Assistance Project for bringing international experts to Australia to meet with the Secretariat and present at workshops. The Working Group would also like to thank those who supplied data sets for use in improving the energy efficiency and energy market models.

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1 Assessing the case for a national Energy Savings InitiativeThe Australian Government has a suite of energy efficiency policies and measures that support the efficient use of energy (Figure 1.1). Some of these are longstanding policies (such as the Minimum Energy Performance Standards (MEPS) for appliances and equipment); others, like the Clean Technology Investment Program are in the early days of deployment.

There are around 604 energy efficiency measures currently operating across different levels of government in Australia. The number of policies reflects to some extent the market failures5 around the efficient use of energy. However, shared responsibility for energy efficiency policy and delivery between the Commonwealth and state and territory governments has also affected the extent of policies, with governments choosing different ways to address these market failures for different groups and at different times.

In assessing whether further intervention is warranted in the form of a national Energy Savings Initiative, the Working Group will use the following analytical framework:

identify the existence of market failures and non-price barriers that are currently not addressed effectively, establish whether they impede energy efficiency improvement and determine if they are amenable to intervention;

consider alternative policy interventions and their suitability to address these market failures and non-price barriers; and

demonstrate whether the benefits of implementing a national Energy Savings Initiative outweigh the costs and in doing so compare such an initiative to alternative interventions and (importantly) not intervening at all.

4 Some reports quote up to 200 or 300 measures, however, this usually conflates climate change and energy efficiency programs. The figure

of 60 currently operating measures has been calculated from Appendix P of the Productivity Commission’s 2011 report Carbon Emission

Policies in Key Economies, by filtering out any that are not stationary energy efficiency programs or measures, then further removing any

that have ceased, including grants programs that are closed to new applicants, and adding in three new programs announced through the

Clean Energy Future plan. By type, the 60 measures break down to 20 regulatory measures, 15 that provide subsidies, 11 information

measures, eight measures for government investment or regulation of its own operations, one research and development measure, three

labelling measures, and two showcasing measures. It should be noted that some measures noted in the Productivity Commission list are a

combination of what could be considered separate measures (for example, mandatory disclosure of commercial building energy ratings is

listed, but the NABERS tool used as the metric for this measure is not); and others list separately measures that could be considered a single

measure (for example, the Productivity Commission lists mandatory energy performance standards (MEPS) for appliances as one measure,

and the South Australian MEPS for air conditioners as a separate measure, and it could be argued that they are a single measure).

5As noted on page 9 of this chapter, ‘market failures’ in this report refer to failures in the market for energy efficiency not the energy market,

unless otherwise indicated.

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1.1 Energy efficiency in Australia

While it is difficult to compare the energy efficiency of different economies, international comparisons suggest that Australia’s economy is not improving its energy efficiency at the same rate as comparable economies. The Report of the Prime Minister’s Task Group on Energy Efficiency discussed this in some depth, stating that:

Australia’s historical record of energy efficiency improvement has been poor compared to that of other countries. Currently we sit in the middle of the pack compared to other OECD countries. But our rate of improvement is falling behind.... Paradoxically, our history of poor performance has left Australia with a wealth of opportunities to improve our energy efficiency performance.6

This echoes more recent reports from the International Energy Agency (IEA)7, and work undertaken by the Australian Bureau of Agricultural and Resource Economics.8

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Figure 1.1: Commonwealth energy efficiency policies and programs by sector and type

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However, as the Prime Minister’s Task Group report made clear,9 comparing energy efficiency improvement between countries should be approached with caution, as many factors, such as climate, geography, travel distances, house sizes, electricity prices, economic structure, and natural resource endowment – will influence the degree of energy intensity in a given country. The choice of timeframe for any international comparison can also strongly influence results. For example the effects of when countries undertook substantive energy efficiency improvements (such as earlier movers), or the effects of economic downturns, structural change, and other factors, will vary between countries over time, as will the nature of the available data.

Stakeholders making submissions to the Issues Paper reiterated these themes:

AIGN members are not persuaded that industry energy efficiency performance has been deficient, but rather has been commensurate with the relatively low energy prices that have assisted in retaining that competitive advantage. Contrary to popular opinion, AIGN finds Australia is already at the forefront of the OECD in energy efficiency in many industries where relevant data exists.

Australian Industry Greenhouse Network submission

Australia is a high energy user compared to its GDP and the consumption of excess energy has a negative effect on Australia’s energy based productivity. A comparison of international productivity based on energy consumption versus overall GDP... reveals, while Australia is highly productive, our energy consumption is very high due to cheap energy and the low cost of energy provides a disincentive to being more energy efficient.

Sustainable Energy Association of Australia submission

Energy intensity is not an economy-wide proxy for energy efficiency. Australia’s energy intensity is a reflection of its geography, its economic structure and its resource endowments. ABARES’ analysis of the Australian economy highlights the important and rising contribution of the energy-intensive resources sector to exports and economic growth. On current projections, high rates of economic growth by the resources sector are expected to continue for at least the next two decades.

Rio Tinto submission

While electricity and gas prices have historically been relatively low in Australia compared with most other countries, this is changing. Australian energy prices are rising and are projected to continue rising for the foreseeable future. Various factors contribute to this projected rise (see boxes 1.1 and 1.2), and these factors are likely to remain and continue placing upwards pressure on energy prices well into the future.

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While longer-term forecasts project that demand for energy will grow as the economy grows and households grow wealthier,10 the Australian Energy Market Operator (AEMO) has recently identified a reduction in annual electricity use in the National Electricity Market (NEM) over the period 2010-11 to 2011-12.11 AEMO’s most recent forecasts also indicate that growth in annual electricity use to 2021-22 is significantly reduced from past AEMO projections.12 The reasons for this change are not yet fully understood, however possible contributing factors include:

the changing economic landscape: slower economic growth than expected occurred across the period in question, particularly from the large industrial and manufacturing sectors;

the impact of rooftop solar photovoltaic installations. For example, by the end of 2010, Australia had 479.3 megawatts (MW) of generation coming from rooftop solar and feeding into the grid, of which 379.5 MW was installed during 2010.13 This does not displace end-use energy, but does displace energy that would previously have been supplied from larger power stations;

changing response of electricity consumers to rising electricity prices: retail prices increased on average by 10.7 per cent in NEM states from 1 July 2010 to 30 June 2011,14 and this trend is expected to continue;15 and

energy efficiency activities: over the time in question, most states and the Commonwealth have made concerted efforts to encourage greater energy efficiency, particularly for households.16

Preliminary modelling of some of these factors is included in AEMO’s June 2012 forecasts.17 AEMO noted that it is not yet clear to what extent each of these factors contribute to falling demand but intends to undertake further work to explore these issues in greater depth.18

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Box 1.1: Factors affecting energy price rises

There are three major components of a typical electricity bill: wholesale electricity costs (electricity being bought from generators); network charges (paying for the reliable delivery of electricity from generators to end users via transmission and distribution networks); and a retail margin (retailer costs and profits). Schemes such as the Renewable Energy Target (RET) and state-based environmental schemes also make a comparatively small addition to a standard bill for a small customer – around 6.3 per cent in 2012-13 and 5.9 per cent in 2013-14 (not including the carbon price impact).

The main cause of recent and forecast price rises is increases in network charges (especially for distribution networks). This expenditure on ‘poles and wires’ reflects expenditure to replace aging assets and meet rapidly growing levels of peak demand. The figure below shows the components of projected future residential electricity prices (national average electricity tariff).

2010-11 2011-12 2012-13 2013-14other state-based schemes 0.22 0.22 0.2 0.21energy efficiency and demand management

state schemes 0.55 0.6 0.68 0.75

Small renewable energy scheme 0.21 0.53 0.29 0.14Renewable energy target / large-scale

renewable energy target 0.22 0.42 0.66 0.7

Retail 3.36 3.8 4.06 4.24Feed-in tariffs 0.02 0.07 0.19 0.26Distribution 8.35 9.57 10.61 11.15Transmission 1.73 1.92 2.08 2.23Carbon price impact 0 0 1.65 1.74Wholesale 7.74 7.63 8.74 9.33

0

5

10

15

20

25

30

35

c/kWh (nominal)

Source: Australian Energy Market Commission, ‘Possible Future Retail Electricity Price Movements: 1 July 2011 to 30 June 2014’ 2011. These projections relate to regulated electricity tariffs and prices have been weighted by the number of residential customers and the average residential electricity price in each state and territory. The Treasury estimates that the impact of the carbon price mechanism on average household weekly expenditure on electricity would be an extra $3.30 per week in 2012–13.

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Box 1.2: Factors affecting gas price risesOver the past decade, increases in capital and labour costs have seen the cost of gas production increase. The most significant factors in these increases are on the demand side: the price of natural gas is affected by rising demand from both increasing exports of Liquid Natural Gas (LNG) and increased domestic demand (primarily related to electricity generation).

However, natural gas prices have historically been low in Australia by international standards, although there have been differing experiences in the western and eastern markets. The western gas market is a large, self contained market that has been exposed to international prices for some time. It has undergone significant change in circumstances since 2007 as gas supply tightened. More recently, gas contract prices in the western market have risen above long-term North West Shelf establishment levels, reflecting the tight supply and higher costs of production.

The eastern gas market is currently experiencing a major transformation driven by the development of the coal seam gas export industry and exposure to international price. Although it is estimated that there are adequate gas reserves to meet both international and domestic demand, prices are expected to rise significantly. This is due to a combination of increasing demand, constrained supply, the need for producers to source relatively more expensive gas resources, and competition with higher oil linked international prices.

Natural gas prices in Australia are expected to continue to increase due to factors on both the demand and supply sides of the market.

1.2 Market failures and energy efficiency

While international comparisons and the pressures created by rising energy prices are worth consideration, they do not of themselves justify additional government intervention.

The difference between the observed levels of energy efficiency and the potential optimum levels of energy efficiency (often called the ‘energy efficiency gap’ or the ‘energy paradox’), has been the subject of extensive research. The gap is of interest to policy makers, because its existence may indicate that the market for energy efficiency is not efficiently allocating resources.19

Economists have proposed a variety of causes for the energy efficiency gap. Perhaps the best survey in recent times is in a 2009 discussion paper for Resources for the Future.20 This paper identified the following leading contributions to the energy efficiency gap:

hidden costs not accounted for in studies (such as search costs and changes in product attributes);

heterogeneity of consumers;

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uncertainty of future savings, implying that rational consumers should put more weight on initial costs;

irreversibility of energy efficiency investments and associated option value of waiting to invest later;

the possibility that consumers have appropriate expectations about future energy prices but analysis uses an incorrect proxy for these; and

market barriers.

Market barriers In the context of energy efficiency, ‘market barriers’ refers to any factor in the market for energy-efficient products and services that acts as a disincentive for uptake of these products or services. It is important to note that word ‘market’ does not refer to the energy market. This is because energy efficiency is generally a secondary attribute of another product or service, and other features of that product or service are generally of more importance to the consumer. The market for energy efficiency is therefore a function of markets for other goods and services, such as appliances, buildings, and the services delivered by energy itself. Throughout this report, unless otherwise stated, ‘market’ refers to the market for energy efficiency, not the market for energy.

There is an extensive literature on market failures and barriers in the energy efficiency market.21 The Productivity Commission, in a 2005 report, identified imperfect information, split incentives, and positive externalities as being the most relevant failures in the market for energy efficiency.22 The IEA adds distortionary fiscal and regulatory policies and unpriced public goods to this list.23 Gillingham et al include capital constraints, and specific types of information failures (such as lack of exposure to energy efficient practices and technologies) as relevant market failures.24

The Working Group’s Issues Paper25 identified six barriers affecting the efficient use of energy that are common to economies world-wide, the first three of which fit the definition of market failure.

The six barriers were:

imperfect/asymmetric information;

split incentives (principal/agent problems);

bounded rationality, behavioural norms and organisational barriers;

materiality barriers;

access to capital and other financing barriers; and

regulatory and planning practices.

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A number of submissions to the Issues Paper provided examples of how market failures or barriers arise (these are noted in italics after each example).

For example, a submission from an energy auditor noted:

...renters only look at the price of the rent and don’t consider the lighting or heating cost when signing a lease. It is quite common for renters (and home owners) to be shocked at their first winter bills when they have moved into a house with a very old gas heating system...electric heating system or electric hot water system.

Nicolas Delhorbe submission (Split incentives, bounded rationality)

Low Carbon Australia Limited, a government-owned company specialising in financing energy efficiency improvements in commercial buildings noted in its submission that:

...companies are generally risk adverse when considering investment in new capital projects that are non-core business.

Low Carbon Australia Limited submission (organisational norms, access to capital)

This was echoed by the Energy Users Association of Australia, which highlighted:

... the conflicting priority that alternative project options, including energy efficiency, can have and the resource constraints in dealing with technically complex, non-core issues.

Energy Users Association of Australia submission (information, organisational norms, access to capital)

A major metropolitan local government noted that in its experience in helping residents and businesses improve energy efficiency:

SME’s are resource poor, staff, time and money. They are also to a large extent unaware of how to improve their energy efficiency... Another significant barrier to energy efficiencies in common areas is issues with dysfunctional strata and body corporate groups.

City of Sydney submission (Information, bounded rationality, access to capital, split incentives, regulatory

barriers)

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An energy services company noted that for SMEs:

Often energy bills are paid as part of the lease and there is no visibility of [energy] use at the tenant level.

Ecovantage submission (split incentives, information)

Another submission noted that some sectors are less affected by these market failures and non-price barriers:

The commonly quoted market failures do not widely apply in the minerals sector. [The sector] is energy intensive, energy costs are high – there is a high incentive for the industry to focus on and contain energy costs ... there is a stronger inter-linkage between process efficiency and energy efficiency than in services, commercial and general manufacturing sectors.

Minerals Council of Australia submission

What is evident from these examples is that the way market failures and barriers to energy efficiency improvement manifest and interact varies across sectors. Examples of market failures in Australia may provide a case to consider government intervention. However, any decision by government to intervene should be based on an assessment of whether this intervention will have demonstrable positive economic impacts, alternative options available to address the problem and whether the benefits of intervening exceed the costs.

One submission noted:

... programs and policies should be targeted to address market and regulatory failures that impede the uptake of practicable energy efficiency actions. Governments have a legitimate role in addressing market failures, provided the action taken is cost-effective and leads to a demonstrable and significant improvement in national welfare.

Australian Industry Greenhouse Network

Any decision should also take into account the fact that there is an existing suite of measures in place to promote energy efficiency, which might successfully address the market failures that exist. These issues are addressed briefly below and elsewhere in this report, and will be the subject of further consideration through the regulatory impact analysis.

Options for further interventionAfter examining whether market failures exist in relation to energy efficiency for particular groups of customers and particular forms of energy consumed, the Working Group will examine whether a national Energy Savings Initiative could be a more cost-effective way of addressing those barriers compared with other options.

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Other types of policy interventions include:

regulation: minimum performance standards (such as those already in place for appliances and equipment and new buildings; or requiring network operators to examine energy efficiency options as an alternative to electricity network build (some requirements already exist in the current regulatory framework for network pricing);

information: policies that either provide information (such as the Australian Government’s Living Greener and Energy Efficiency Exchange websites) or require consumers to demonstrate that they have examined the potential to improve energy efficiency in their own businesses (such as the Energy Efficiency Opportunities program which requires liable entities to undertake rigorous energy efficiency assessments); and

direct subsidies: policies that subsidise the take-up of opportunities to improve energy efficiency (such as the Clean Technology Investment Program).

Where relevant, the contributions that existing policies make to overcoming identified market barriers, as well as any inherent limitations in terms of their scope or scale, should be taken into account in this analysis.

The Working Group will also examine whether a national Energy Savings Initiative could deliver greater net benefits compared with:

leaving state-based schemes in place in their current form; or

leaving state-based schemes in place, but with more harmonised designs.26

1.3 Demonstrating that benefits exceed costs

Once it is established that market failures exist, there is clarity on their scope, and alternative policy options have been identified, it remains to test the costs and benefits of any proposed regulatory approach. Even if it is found to be an appropriate policy tool at a particular point in time, a national Energy Savings Initiative (or another policy intervention) may not remain so as the economy develops and technology and behaviours change. Further consideration must therefore be given to the timeframe over which costs and benefits are assessed, and the times at which they are realised (noting that costs may occur at different times to benefits).

In addition, while energy efficiency improvements can deliver net negative costs and therefore benefits would generally outweigh costs over time, state-based schemes have been running for some time, and therefore many low-cost opportunities may already have been taken up.

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As discussed in the Issues Paper, there are many design options available in analysing the case for a national Energy Savings Initiative or white certificate schemes more generally. Key design features are influenced in large part by the scheme's objective. The Working Group has proposed a possible objective and narrowed down the set of key design features that will be used to test costs and benefits of a potential national scheme. These are set out in Chapters 3-6 of this report. Chapters 7-10 set out the Working Group's proposed approach to testing other features that may have a material effect on analysis of the costs and benefits, or that are key tasks set out in the Working Group's terms of reference.

Working Group view: approach to further analysisIn assessing the costs and benefits of a national Energy Savings Initiative, the regulatory impact analysis will examine and compare two scenarios for achieving a given level of energy efficiency improvement beyond that currently in train:

current policies remain in place, with a combination of further interventions (such as new grants, higher minimum performance regulations, and additional information programs) introduced to improve Australia’s energy efficiency.27

current policies (other than existing state white certificate schemes) remain in place, and a national Energy Savings Initiative is introduced to improve Australia’s energy efficiency.

These scenarios are implicitly compared against a third scenario (the business as usual case): no further policy intervention. Intervention may be justified when the potential benefits of the proposed policy outweigh the costs.

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2 Market-based instruments in energy efficiency policyThe Working Group has been asked to assess the costs and benefits of national Energy Savings Initiative, which would take the form of a ‘white certificate’ scheme. This chapter sets out the key design elements of white certificate schemes, as well as analysis of experiences to date from international and state-based schemes. It briefly summarises the key features of existing Australian schemes, and stakeholder views on a potential national scheme.

2.1 What is a national Energy Savings Initiative?

All white certificate schemes share three key features:

a target for energy efficiency improvement;

obligated parties that must meet a portion of the target (individual obligations collectively add up to the full target); and

a measurement and verification system that defines the activities that can be used to meet the target, their value (in terms of energy efficiency), and confirms that these activities took place.

6 Commonwealth of Australia, Report of the Prime Minister’s Task Group on Energy Efficiency, 2010, p25.

7 International Energy Agency, IEA Scoreboard 2011. Implementing energy efficiency policy: Progress and challenges in IEA member

countries (2011), p33.

8 Australian Bureau of Agriculture and Resources Economics, Energy In Australia, February 2012, p 41.

9 Commonwealth of Australia, Report of the Prime Minister’s Task Group on Energy Efficiency, 2010, p27.

10 See for example, supplementary reports published with Strong growth, low pollution: modelling a carbon price (Commonwealth of

Australia, 2011), viewed on 9 May 2012, http://archive.treasury.gov.au/carbonpricemodelling/content/consultantreports.asp.

11 The National Electricity Market covers New South Wales, the Australian Capital Territory, Victoria, Queensland, South Australia and

Tasmania. Australian Energy Market Operator, ‘2012 National Electricity Forecasting Report’, June 2012.

12 Australian Energy Market Operator, ‘2012 National Electricity Forecasting Report’, June 2012.

13 International Energy Agency, Trends In Photovoltaic Applications, Survey report of selected IEA countries between 1992 and 2010, 2011,

p4.

14 Australian Energy Market Commission, Possible Future Retail Electricity Price Movements: 1 July 2011 to 30 June 2014 – Final Report,

2011.

15 Australian Energy Market Operator, ‘2012 National Electricity Forecasting Report’, June 2012, p 3-1.

16 Australian Energy Market Operator, ‘2011Electricity Statement Of Opportunities: Update’, March 2012, p 2.

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http://archive.treasury.gov.au/carbonpricemodelling/content/consultantreports.asp


Within these broad parameters, there are myriad ways in which an energy efficiency obligation can be designed to achieve different outcomes and to suit different circumstances.

If an obligated party does not meet its allocated portion of the target it must pay a penalty. Those who are obliged to meet the target will seek out the cheapest way to do so amongst eligible activities. In this way, least-cost energy efficiency improvements (among those that are eligible) are delivered.

Obligated parties would be expected to pass through the costs of meeting the obligation to their customers. This means that energy prices would likely rise for some consumers in the first few years of a scheme. The New South Wales Energy Savings Scheme provides an example: in 2011-12, the third year of operation, the estimate of the cost of meeting the obligation was $1.09/MWh28 (0.11c/kWh, less than 1 per cent of the regulated tariff),29 which was all passed through to consumers. Table 2.1 has further examples.

17 Specifically: economic forecasts, small-scale generation (including photovoltaic) and existing energy efficiency policies were explicitly

modelled for the first time in the 2012 National Electricity Forecasting Report.

18 Australian Energy Market Operator, ‘2012 National Electricity Forecasting Report’, June 2012, p B-2.

19 A widely quoted 1994 paper by Adam Jaffe and Robert Stavins identified five possible measures of the gap mapped to market failures in the energy efficiency market and other barriers and market failures in the energy market. These were, from smallest to largest:

(1) The ‘narrow social optimum’ – the gap caused only by market failures whose elimination can pass a cost benefit test(2) The ‘economist’s economic potential’ – the gap that could be closed by eliminating market failures in the market for energy

efficient technologies(3) The ‘true social optimum’ – equal to closing the ‘narrow social optimum gap’ plus any gap caused by externalities(4) The ‘technologist’s economic potential’ – equal to closing the ‘economist’s economic potential’ gap plus any gap caused by high

discount rates, heterogeneity, and inertia(5) The ‘hypothetical potential’ – equal to closing all the previous gaps plus any gap caused by market failures in energy markets.

(AB Jaffe and RN Stavins, The energy efficiency gap: what does it mean?, Energy Policy 22(10) 1994, p808Jaffe and Stavins note that generally policy design would focus only on the ‘narrow social optimum’ or ‘true social optimum’.

20 Kenneth Gillingham, Richard G Newell, and Karen Palmer, Energy Efficiency Economics and Policy, Discussion Paper, Resources for the

Future 2009, p 9.

21 In the interests of brevity a full survey is not included in this report. A full literature survey will be presented as part of the Working

Group’s final report to Government.

22 Productivity Commission, The Private Cost Effectiveness of Improving Energy Efficiency, Inquiry report no. 36, 2005, p 47.

23 International Energy Agency, Mind the Gap: quantifying principal-agent problems in energy efficiency, 2007, p 22.

24 Kenneth Gillingham, Richard G Newell, and Karen Palmer, Energy Efficiency Economics and Policy, Discussion Paper, Resources for the

Future 2009, p 9.

25 Commonwealth of Australia, Issues Paper – National Energy Savings Initiative, 2011 Table 1.1, p3.

26 Noting that schemes do not currently exist in all states and that coverage of sectors and fuels differs between states.

27 It is a requirement of a Regulation Impact Statement to assess any proposed new policy against alternative policy scenarios.

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If the scheme is well-designed and the potential benefits outweigh the costs, this initial price rise could be offset in later years in two ways:

downward pressure on energy prices for all consumers, flowing from reduced energy demand (which can delay the need for spending on network augmentation and particularly augmentation to meet peak demand, a major driver of energy price rises in recent years (see Box 1.1 in Chapter 1); and

savings on energy bills for homes and businesses that access the scheme, when they upgrade products, services and processes that they use, through improved energy efficiency.

Table 2.1: allowable pass through costs for regulated electricity tariffs from state-based energy efficiency schemes

2009-10 2010-11 2011-12 2012-13

New South Wales Energy Savings Scheme A

(see note B) 0.07 c/kWh30 (2009-10 dollars)

0.11 c/kWh31 (2010-11 dollars)

0.146 c/kWh33

(2010-11 dollars)

South Australia Residential Energy Efficiency Scheme

$10.30 per customer C

(Dec 2009 dollars)

$12.55 per customer C

(Dec 2010 dollars)

$12.55 per customer32

(Dec 2010 dollars)

none set

NOTES:

A. Figures for NSW do not include energy losses, which can increase the allowances by between 5-9 per cent depending on the network in question.

B. Regulated tariffs for the period 1 July 2007 – 30 June 2010 were determined in June 2007, before the ESS was established. Hence there are no available data on pass-through costs for this period specific to the ESS. However, the predecessor for the NSW ESS, the NSW GGAS, contributed between 0.34c/kWh and 0.36c/kWh to the 2009-10 regulated tariffs.33

C. A REES pass through amount of $13.46 per average residential customer applied from 1 July 2009 to 30 June 2010. Following a review of actual REES costs incurred in 2009 and 2010, the efficient REES costs for those years were determined to be $10.30 per customer. Between August 2010 and January 2011, the REES pass through amount declined to $1.79 per customer, to account for the over recovery of revenue in 2009/10. The efficient REES cost in 2010/11 was determined to be $12.55 per customer. After that there is no specific allowance set, with standing contract prices now allowed to operate within a band set by the Relative Price Movement (RPM) process.

2.2 The advantages of white certificate schemes

There are two potential advantages of white certificate schemes compared with alternative policies.

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Firstly, white certificate schemes do not require Government to stipulate where and when energy efficiency activities must occur to the same extent as, for example, a grants program or a minimum standard.34 In this way, they may be suited to situations where government does not have good information about all available cost-effective energy efficiency opportunities. White certificate schemes rely on market participants, rather than government itself, to seek out and capitalise on energy efficiency opportunities. White certificate schemes focus on the outcome (improved energy efficiency) and leave it up to the market to determine the best way to achieve the outcome. In a well-designed scheme, the market will deliver the desired outcome at least-cost.

Second, white certificate schemes may be able to address multiple barriers to energy efficiency at once. For example, programs that rely on information provision will help address that barrier, but where information failures co-exist with, say, split incentive problems, information provision alone may not be sufficient.

By combining financial incentives with flexibility about how activities can be undertaken, white certificate schemes could promote more innovative ways of unlocking energy efficiency opportunities. In this way, white certificate programs may be suited to cases where government does not have good information about how multiple barriers manifest and interact.

2.3 Disadvantages of white certificate schemes

As is generally the case for regulatory policy interventions, the costs of a white certificate scheme, are mostly borne by energy end users including households and businesses. In the case of grant and rebate programs aimed at the same objective, the cost of a policy intervention is paid for by government, but ultimately borne by tax payers.

In addition to the potential costs of compliance within a national Energy Savings Initiative there is also a baseline cost to government of establishing a national scheme. Such costs stem from setting up and maintaining appropriate governance, administrative, and regulatory structures of a scheme. Maintaining additionality throughout the life of the scheme requires constant monitoring and verification.

While a national scheme could potentially remove duplicative regulations for participants operating in multiple existing state schemes, it would increase regulation on others. For example, entities that currently operate only in Western Australia, Queensland, Tasmania and the Northern Territory, where schemes currently do not exist, would face new liabilities under a national scheme.

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White certificate schemes are also subject to many of the challenges faced by energy efficiency policy interventions more generally. Determining the success of energy efficiency policy requires measuring and verifying an absence of energy use against a counterfactual situation, which can be difficult and contestable. This can be complicated by the ‘rebound effect’ – the idea that when people save money on energy they may spend that money on other services that increase energy use.35

2.4 White certificate schemes in other countries

White-certificate-style energy efficiency obligation schemes are in place in the United Kingdom (UK), France, Belgium, Denmark, India, Italy, Poland and some states of the United States (US). Korea, Ontario (Canada), and other states of the US have implemented other forms of mandatory energy efficiency obligations on energy retailers. In many of these countries, the schemes operate alongside and complement a carbon price.

The European Union is currently considering a proposed Directive that would require Member States to establish energy efficiency obligation schemes or policy measures to drive energy efficiency improvements in households, industries and transport sectors. A final decision on the Directive is expected in September 2012.36

Independent assessments of energy efficiency obligation schemes overseas have found that they can deliver energy efficiency improvements at net negative cost to the economy. Under the UK’s first Energy Efficiency Commitment (EEC, 2002-2005), when costs across the economy were taken into account, the cost of saving one kilowatt hour of electricity was estimated at 1.3 pence, compared to a retail electricity cost of 6.7 pence per kilowatt hour. Evaluation of the second UK EEC (2005-2008) found that the scheme delivered measures with a net present value of £3.1 billion.37 A recent assessment of the French Energy Efficiency Scheme found it has achieved net social benefits of €2.3 billion in the period 2006-2009.38

The International Energy Agency (IEA)’s Demand Side Management Programme and the Regulatory Assistance Project have recently published a comprehensive survey of energy efficiency obligation schemes worldwide. The survey includes the following recommendations for best practice design of white certificate schemes:39

simple and clear policy objectives focused on achieving energy efficiency improvement;

careful combination of legislation, regulation, ministerial and administrative processes to establish and operate a scheme;

linking fuel and sector coverage to the policy objectives and to the potential for energy efficiency gains in each fuel and each sector;

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when setting targets, aim to strike a balance between making progress on energy efficiency, costs to consumers, and what is practically possible based on an assessment of energy efficiency potential;

determine obligated parties according to fuel coverage and the type of provider that has the capability to manage an obligation;

allocate individual energy efficiency improvement targets to each obligated party based on market share of energy sales;

enable non-obligated third parties to implement projects, and establish a robust measurement, verification and reporting system; and

establish an appropriate mechanism to allow all obligated parties to recover their costs.40

The Working Group will take these recommendations into account through the regulatory impact analysis and in developing final advice to government.

2.5 Current energy efficiency obligations in Australia

As noted in Chapter 1 there are currently three energy efficiency schemes operating in Australia: in New South Wales (NSW), Victoria and South Australia (SA). The Australian Capital Territory (ACT) also recently passed legislation providing for a scheme, which is due to commence on 1 January 2013. A summary of key features of existing and proposed state schemes is provided in Table 2.1 below. Further information on the different design elements of each scheme is provided in Appendix B.

Lessons learnt from the operation of schemes in AustraliaIndependent assessments of schemes in Australia have found that energy efficiency obligation schemes can deliver energy efficiency improvement at net negative cost to the economy. For example, an evaluation of the New South Wales Energy Savings Scheme (NSW ESS) found that activities implemented in the first 18 months have a total net present value of $187 million over the life of the scheme. A Regulatory Impact Statement on the Victorian Energy Efficiency Target (VEET) scheme considered achievements to date and noted that the target for emission reduction had been achieved in the first two years of the scheme.41

In response to the Issues Paper, many stakeholders provided feedback on aspects of the current states schemes. These fell into three categories:

features that were inconsistent between schemes, leading to increased costs or inconvenience for participants;

features that stakeholders thought should be preferred in any national scheme; and

features that stakeholders thought should not be preferred in any national scheme.

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Table 2.1: Summary of key features of existing and planned Australian schemesNSW Energy Savings Scheme (ESS)

Objectives: Create a financial incentive to reduce the consumption of electricity by encouraging energy saving activities

Assist households and businesses to reduce electricity consumption and electricity costs

Complement any national scheme for carbon pollution reduction by making the reduction of greenhouse gas emissions achievable at lower cost

Reduce the cost of, and the need for, additional energy generation, transmission and distribution infrastructure.

Sub-targets

None Trading and certificatesTrading allowed between registered participants.

Issues certificates.

Fuel coverageElectricity only

Sectoral coverageResidential, commercial and industrial sectors

Victorian Energy Efficiency Target (VEET)

Objectives:Reduce greenhouse gas emissions

Encourage the efficient use of electricity and gas

Encourage investment, employment and technology development in industries that supply goods and services which reduce the use of electricity and gas by consumers

Sub-targetsNone Trading and certificatesAllowed between registered account holders

Issues certificates

Fuel coverageElectricity and gas Sectoral coverage

Residential sector and business

SA Residential Energy Efficiency Scheme (REES)42

Objectives:Improve energy efficiency and reduce greenhouse gas emissions within the residential sector

Assist households prepare for likely energy price increases from emissions trading

Reduce total energy costs for households, particularly low-income households

Sub-targets35% of annual energy efficiency target to be achieved in priority group households

Trading and certificatesTrading of energy credits amongst obligated energy retailers is permitted

No certificates

Fuel coverageElectricity and gas

Sectoral coverageResidential sector only

ACT Energy Efficiency Improvements Scheme (EEIS)

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Objectives:Encourage the efficient use of electricity and gas

Reduce greenhouse gas emissions associated with stationary energy use in the Territory

Reduce household and business energy costs

Increase opportunities for priority households to lower energy use and costs

Sub-targets

Obligated parties must derive a specified proportion (initially 25%) of energy efficiency improvements from low-income households Trading and certificates Transfer of credits between obligated parties is permitted if approved by the Administrator

No certificates

Fuel coverage

Target base considers electricity-related emissions only, however, savings can be made in other fuel sources, including gas Sectoral coverage

Residential sector and commercial (small-medium enterprises) sector

Inconsistent features

A number of stakeholder submissions suggested that the existence of multiple state energy efficiency schemes (each with different targets, objectives and design features) leads to duplication, inefficiencies and higher costs. The Energy Efficiency Council stated that there would be multiple benefits from moving to a national scheme, including:

Improved efficiency through economies of scale and a deeper pool of savings; reduced red-tape for households and businesses; and improved robustness and reduced administrative costs.

Energy Efficiency Council submission

In consultation workshops, some stakeholders raised examples of identical technologies that are deemed with different levels of energy efficiency improvements in different states.

Others raised that some technologies are eligible in some states and not others:

A good example is that in Victoria, the refrigerated transport and cold storage industries have been excluded from all past and present state and national energy efficiency incentive schemes on the grounds that they are not considered to be part of the manufacturing industry. In contrast the NSW government recognized the energy intensive nature of the cold storage industry and has commissioned subsidized energy efficiency surveys throughout the industry and is providing financial assistance towards cost effective energy efficiency improvements. However, many of the larger national cold store operators could not participate in the NSW scheme as it is restricted to companies operating in NSW only.

Refrigerated Warehouse and Transport Association of Australia submission

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Preferred Features

A variety of preferred features were raised by stakeholders. The most popular feature for retention was tradeable certificates (as found in the NSW and Victorian schemes); followed by retaining flexibility in measuring and awarding energy efficiency improvements through the use of deemed and calculated methodologies. These are discussed in more detail in Chapters 4 and 8 respectively.

Features not preferred

The feature that attracted the most opposition was the lack of certificates in the SA REES. The use of a sub-target in that scheme for energy reductions in low-income households attracted both opposition (mostly from energy retailers) and support (mostly from welfare groups). Sub-targets are discussed in more detail on Chapter 5, and low-income households in Chapter 8.

Current reviews of existing schemes As part of its current Power of Choice review, the Australian Energy Market Commission (AEMC) is investigating the effectiveness of regulatory arrangements for energy efficiency. This includes a stock take and analysis of regulatory arrangements for energy efficiency policies and programs that impact the National Electricity Market (NEM) by placing obligations on energy market participants or large users.

The AEMC is analysing the three existing state energy efficiency schemes as well as the Commonwealth’s Energy Efficiency Opportunities (EEO) program. This work is not assessing whether these schemes do and do not achieve their objectives, but rather how such schemes could better interact with demand side participation policies. The review is considering the linkages and role of energy efficiency policies and measures in the context of the market and regulatory arrangements that are required to facilitate efficient demand side participation.43

The Working Group is consulting with the AEMC on the investigation of a national Energy Savings Initiative and will continue to do so through the regulatory impact analysis.

In December 2011 the NSW and Victorian governments announced a process to promote alignment of their energy efficiency schemes under the Interstate Reform Partnership. While the NSW and Victorian schemes are broadly similar, there are key design differences. It is understood that this partnership aims to streamline the requirements for business operating under both schemes and to reduce associated costs. A Taskforce has been established to progress this work, which will report on options and recommendations by late 2012.

Harmonisation of existing state-based schemes could potentially affect any or all of the following:

procurement of energy efficiency products - allowing greater (or lesser) economies of scale for certificate creators and energy service companies (ESCOs));

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consistent accreditation standards across states;

common regulatory arrangements (such as allowing accreditation or compliance in one state to be considered as valid accreditation or compliance in another state);

interstate certificate trading - providing greater liquidity in the certificate markets; and

motivation for future state schemes to harmonise with existing ones.

Harmonisation could take different forms, and the spectrum of options is shown in Figure 2.1.

Figure 2.1: spectrum of harmonisation options

Stakeholder submissions noted the potential benefits of harmonisation:

Legislative and regulatory burden inconsistencies across state borders increase the administrative costs and burden for energy retailers. Energy market reform and liberalisation has endeavoured to minimise these inconsistencies by developing a national market with nationally consistent regulations. State based initiatives therefore potentially undermine the benefits of national consistency when they result in further administrative and compliance burdens associated with each jurisdiction.

Energy Retailers Association of Australia Limited submission

The costs of performing energy efficiency activities would be reduced significantly in the order of 12%, equating to an Australia-wide saving of at least $26m44 per year.

Clean Energy Council submission (Attachment 1)

Through the regulatory impact analysis, the Working Group will assess and (where possible) quantify the costs associated with having multiple different schemes in operation. The Working Group has commissioned a consultancy to analyse compliance costs under existing schemes. This study will also examine the costs and benefits with respect to compliance costs of harmonising existing schemes, and of moving to a single national approach. The outcomes of this consultancy will inform further testing of the broader costs and benefits of a potential national Energy Savings Initiative.

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Minimal harmonisation

activities

accreditation standards

interstate certificate trading

sectoral coverage

fuel coverage

single targetsingle regulator

Full harmonisation


3 Objectives and principlesThe Issues Paper sought views on possible objectives for a national Energy Savings Initiative, and put forward three proposals for discussion:

to reduce pressure on households’ and businesses’ energy bills generally, through either promoting energy efficiency improvements that would reduce the quantity of energy used, or targeting the price of energy, or both;

to support specifically vulnerable energy users to adapt to higher energy costs; and

to help reduce Australia’s greenhouse gas emissions.

It is quite possible that some energy efficiency improvements could contribute to all three of these objectives at the same time. However, prioritisation is important, since this will influence the range of policy options against which a national Energy Savings Initiative would be compared, as well as its potential design.

The following sections review stakeholders’ views concerning the advantages and disadvantages of the proposed objectives, and summarise the Working Group’s preliminary view on objectives when considering the case for a national Energy Savings Initiative.

To reduce pressure on households’ and businesses’ energy bills Several stakeholders, in responding to the Issues Paper, supported a scheme with an objective of helping households and businesses to manage their energy bills. For instance, the Energy Efficiency Council noted:

There is a clear case for establishing an Energy Savings Initiative to help households and businesses adjust to rising energy costs ... Energy prices are rising rapidly in Australia, and globally, because of expenditure on the network (sometimes called ‘poles and wires’), rising fuel costs and a shift to more expensive forms of generation. However, the structure of Australia’s energy market and a number of barriers make it hard for households and businesses to respond to rising energy prices.


The Issues Paper suggested that a national Energy Savings Initiative could reduce pressure on consumers’ energy bills by targeting energy prices (the price charged per unit energy) or energy costs (the product of the price and the volume of energy that a consumer uses). Many submissions advocated for a scheme which focused on the latter, noting that helping households and businesses to reduce the amount of energy they consume could help lessen the impact of rising energy prices and improve productivity. For instance:

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... the primary objective of a National Energy Savings Initiative (NESI) should be to help consumers improve the energy efficiency of their homes and businesses, as well as the appliances and equipment within them, thereby reducing their household expenditure on energy. This will enable households and businesses to reduce their energy consumption while also cushioning them from rising energy prices.

Mission Australia submission

The key objective of a national Energy Savings Initiative should be to improve the efficiency of energy across the economy; in particular to empower consumers to make efficient decisions about their energy consumption and to provide them with opportunities to use less energy per unit service/output.

Origin Energy Limited submission

Some stakeholders supported a scheme objective that targets energy prices by seeking to improve the productivity of Australia’s energy infrastructure. Submissions noted that such an objective would be effective if it targeted the factors that are presently driving energy price increases, particularly costs associated with network infrastructure upgrades and increasing peak demand:

Increasing national energy efficiency, especially targeted at reducing peak demand, will reduce the current level of expenditure required to augment networks to meet peak demand. In NSW, network charges are set to increase to more than 60% of the typical electricity bills by 2014. Reducing this component of electricity bills would benefit all energy users and should clearly be a priority of the scheme.

Council of Capital City Lord Mayors submission

While a number of stakeholders considered that addressing the growth in peak demand would be highly desirable, many also expressed reservations about whether a national Energy Savings Initiative was the most appropriate policy instrument for this objective. Even so, these submissions suggested that a national Energy Savings Initiative could help to lessen the growth of peak energy demand even without requirements that are specific to peak. For instance:

Peak energy demand and the rising cost of energy is an important issue, however, using the NESI to target this problem means that the NESI runs the risk of targeting too many goals with a single instrument ... The evidence suggests that a NESI that drives significant energy efficiency dividends will have substantial long-term benefits on peak energy use, and the price of energy.

Allens Consulting Group submission (on behalf of a number of building sector organisations45)

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It is Jemena’s strong view that a WCS [white certificate scheme] is not a core policy vehicle capable of efficiently and effectively responding to the complex energy efficiency and productivity issues associated with rising peak demand, which are inherently dynamic in both time and location. However, a WCS may be capable of making a passive contribution to the reduction of peak demand through the careful selection of eligible consumer-based energy efficiency activities.

Jemena Limited submission

To support vulnerable energy users to adapt to higher energy costs The Issues Paper also proposed that a national Energy Savings Initiative could be designed to support sectors of the community that are particularly vulnerable to price rises, such as low-income households. Several stakeholders supported this objective, noting that low-income households are generally more likely to experience barriers to becoming energy efficient than other households, for example through poorer access to information or capital. In addition, some noted that low-income households tend to spend a much greater proportion of their income on energy, making them particularly vulnerable to energy price increases. For instance:

There is strong evidence that we are entering a new era of energy unaffordability for many Australians. The cumulative changes to electricity prices from 2007-12 demonstrates increases in excess of 60% in four states and territories ... Together with increasing disconnection rates reported by the Energy Industry Ombudsman nationally, this picture points to a trajectory entrenching ‘energy poverty’ for our low income earners.

United Voice submission

...it is appropriate to require a proportion of activities to take place in low-income and disadvantaged households because low-income households produce almost forty per cent less carbon emissions annually than high income households, yet spend a larger proportion of their weekly income on energy.

Australian Council of Trade Unions submission46

A number of submissions did not support a scheme with the objective of supporting low-income households. Some stakeholders suggested that a scheme which required a portion of all energy saving activities to be undertaken in low-income households could increase the cost and complexity of the scheme.

46 The Australian Council of Trade Unions notes that this figure is taken from the National Institute of Economic and Industry Research

Report for the Brotherhood of St Laurence, The impact of carbon prices on Victorian and Australian households, May 2007, p 14, available

at http://www.bsl.org.au/pdfs/NIEIR_Impact_of_carbon_prices_on_Vic_and_Aust_households_final_May2007.pdf.

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http://www.bsl.org.au/pdfs/NIEIR_Impact_of_carbon_prices_on_Vic_and_Aust_households_final_May2007.pdf


For instance, Simply Energy, an electricity and gas retailer, noted:

The imposition of a ring-fenced target increases the complexity of the scheme and reduces the flexibility that retailers have to manage the costs of the scheme.

Simply Energy submission

Some stakeholders noted that new evidence continues to emerge concerning the most effective policy options for supporting low-income households to improve their energy efficiency. In particular, Mission Australia noted that a number of Commonwealth programs that are part of the Clean Energy Future package have the objective of trialling different approaches for targeting low-income homes47 and stated that the design of any national scheme should be influenced by the findings of those programs.

Submissions from Low Energy Supplies & Services and CSR Limited cited evidence from the Victorian Energy Efficiency Target (VEET) that a scheme design without a low-income household obligation can still be effective in driving energy efficiency improvements in that section of the community. These submissions reinforced that any scheme design features aiming to support low-income homes should be based on the best available evidence.

To help reduce Australia’s greenhouse gas emissionsFinally, the Issues Paper proposed that another potential objective of a national Energy Savings Initiative could be to help reduce Australia’s domestic greenhouse gas emissions. This was supported by a number of submissions. For instance:

We submit that the primary objective must be to reduce greenhouse gas emissions. The NESI is first and foremost an emission reduction policy.

Australian Network of Environmental Defender’s Offices submission

Other submissions noted that, with the carbon price mechanism now legislated, and with an emissions cap to be in place from 2015, it would not be appropriate for a national Energy Savings Initiative to have greenhouse gas abatement as an explicit objective. Some submissions argued that a scheme with such an objective would duplicate the role of the carbon price mechanism and other key abatement policies:

The goal of GHG [greenhouse gas] reduction is addressed through the introduction of a price on carbon under the Government’s Clean Energy Future Program, and supported by existing complementary measures through the RET. As such, to add the issue of GHG reduction (which would occur as part of an overall demand reduction) is to add an unnecessary additional priority to a future scheme.


47 The Australian Government announced, as part of the Clean Energy Future package, the Low Income Energy Efficiency Program

(LIEEP), the Community Energy Efficiency Program (CEEP) and the Home Energy Saver Scheme (HESS).

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... the proposal for a type of trading system on energy efficiency, the so-called ‘white certificate scheme’, would duplicate and distort the actions of any broad emissions trading scheme.

Minerals Council of Australia submission

Many submissions proposed that, rather than directly reducing greenhouse gas emissions, a national Energy Savings Initiative could support Australia’s broader abatement effort by seeking to address non-financial barriers to energy efficiency, including those described in Chapter 1. A number of submissions noted that, if designed to target these barriers, a national scheme could complement the carbon price by unlocking a range of low cost greenhouse gas abatement opportunities. For instance:

The ESI and other complementary measures included in the Securing a Clean Energy Future Package are critical to unlocking the full potential of the package, as the carbon price alone will not overcome most barriers to the uptake of energy efficiency. ClimateWorks research suggests that an ESI can assist in addressing some of these non-price barriers to unlock at least 12 MtCO2-e that would not have been implemented with a carbon price alone, clearly showing the complementarity of an Energy Savings Initiative.

ClimateWorks Australia submission

We support a national ESI whose key objective is to unlock socially cost-effective emissions abatement opportunities across the Australian economy ... By unlocking such investment, a national ESI reduces the overall cost of achieving Australia’s emissions reductions targets.

The Climate Institute submission

An appropriate policy objective for a national Energy Savings InitiativeHaving reviewed the evidence presented by stakeholders and the arguments put forward in their submissions, the Working Group suggests that, for the purposes of further consideration of a national Energy Savings Initiative, an appropriate scheme objective is: ‘to improve Australia’s energy efficiency in order to help manage energy bills and improve productivity.’

A scheme with this objective could help consumers to manage energy costs by helping them to improve the energy efficiency of their appliances, equipment, processes and building fabric. This could enable consumers to reduce their energy consumption and cushion them from rising energy prices.

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Improvements to energy efficiency might also have broad productivity benefits across the economy. Of particular relevance to the energy sector, a national Energy Savings Initiative that improves the productivity of Australia’s energy infrastructure could influence factors that are presently driving energy price increases, particularly costs associated with network infrastructure upgrades and peak electricity demand. Options for influencing peak demand are discussed in Chapter 10.

The Working Group considers that a national scheme could assist low-income households to become more energy efficient. However, the Working Group also acknowledges that there may be more efficient and effective policy instruments for providing targeted support to this section of the community. It is also possible that a portion of activities may occur in low-income households even where a scheme does not specifically target this group. Through the regulatory impact analysis, the Working Group will assess whether specific incentives or requirements for a proportion of activities to take place in low-income households would be the most appropriate option. The Working Group will also be mindful that a national scheme should not adversely affect low-income households.

The Working Group considers that, with the carbon pricing mechanism now in place, further consideration of a national Energy Savings Initiative should not include a primary objective of reducing greenhouse gas emissions.

As discussed in Section 3.3, a scheme with the above objective could potentially be considered complementary to the carbon pricing mechanism.

Working Group view: objectives for a national Energy Savings Initiative For the purpose of the regulatory impact analysis, consideration of a national Energy

Savings Initiative should be based on the objective: ‘to improve Australia’s energy efficiency in order to help manage energy bills and improve productivity.’

Further consideration of a national scheme should analyse how it could assist low-income households to become more energy efficient. Through the regulatory impact analysis, the Working Group will assess whether specific incentives or requirements would be the most appropriate option for achieving this. The Working Group will also be mindful that the analysis should assess whether a national scheme could adversely impact low-income households.

Further analysis of a national scheme will not include consideration of an objective of reducing Australia’s greenhouse gas emissions. However the Working Group notes that further analysis will quantify the potential greenhouse gas abatement that could be delivered under a national scheme.

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3.1 National consistency

As discussed in Chapter 2, in investigating the case for a national Energy Savings Initiative, the Working Group will also consider whether there could be benefits to firms and households from harmonising the rules and regulations of existing (and proposed) state-based schemes.

There was broad support from a range of stakeholders for efforts to streamline and harmonise state-based schemes. A number of stakeholders argued that schemes that operated in adjacent jurisdictions have different objectives, rules and methodologies and this has introduced inefficiencies. Some stakeholders noted that the methodologies for a range of similar activities differ across schemes, with the effect that firms and households in different states can be provided with different levels of support for undertaking the same activity. Energy retailers with obligations under the state-based schemes and industry groups argued that needing to understand and comply with multiple schemes generates administrative and compliance costs that are higher than necessary.

...a nationally consistent and co-ordinated approach is necessary to maximise the potential benefits.... amongst other things, the implementation design of energy efficiency programs should aim to minimise transactions and compliance cost for all parties.

Australian Industry Greenhouse Network

A single national scheme would have two major impacts:

it would create a single set of rules, replacing multiple existing sets of rules; and

it would extend the scope of energy savings obligations to Queensland, Tasmania, Western Australia and the Northern Territory.

The majority of submissions that provided views on national consistency supported this approach, including Essential Energy:

A single national scheme would reduce costs for Accredited Service Providers and Accredited Certificate Providers (such as Essential Energy) through single accreditation costs, a single compliance regime, reduced audit costs, national accreditation of a product and lower administration costs.

Essential Energy submission

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Another option could be for the Commonwealth to work with those states and territories with existing or planned schemes to harmonise rules around a range of scheme design features. This approach would not extend the reach of energy efficiency obligations to jurisdictions that do not have existing or planned schemes, but it could potentially reduce any costs associated with having multiple different sets of rules. This approach could build upon work begun by the New South Wales and Victorian governments to harmonise the Energy Savings Scheme and Victorian Energy Efficiency Target.48

While most stakeholders that responded to this issue supported a single national approach over harmonisation, (with some stating that harmonisation should be pursued only as a first step towards a stand-alone national scheme), the Working Group is yet to explore harmonisation in detail with stakeholders. Examples of stakeholder responses on this issue included:

... a single national scheme is preferable to multiple disparate state schemes, and also to multiple harmonised schemes. It would not have barriers to trading between schemes, would have lower administrative costs and could have a greater pool from which to draw liquidity.

Australian Financial Markets Association submission

To expand these [existing state schemes] to a national scheme would be of benefit for those states where no opportunity currently exists.

Housing Industry Association submission

Total Environment Centre supports a national scheme and believes that a national scheme will be more conducive to meeting environmental and energy saving objectives. Experience with voluntary harmonisation has shown that the process is flawed and complex. For example, feed-in tariffs for distributed generation have been plagued in Australia by disparate and differing schemes. It is much easier to promulgate a strong national scheme from the outset.

Total Environment Centre submission

Working Group view: national consistencyThe regulatory impact analysis will explore the relative costs and benefits of harmonised state-based schemes compared with a single national scheme.

48 On 14 December 2011, the Premiers of New South Wales and Victoria announced that these states would be undertaking further work to

seek to harmonise their respective jurisdictional energy efficiency schemes.

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3.2 Complementarity with other major policies

The terms of reference (Appendix A) require the Working Group to:

consider and advise upon possible design options for a national Energy Savings Initiative that would... complement the carbon pricing mechanism and the Renewable Energy Target (RET), in line with the Council of Australian Governments’ Complementarity Principles... [and] complement wider Australian energy market development objectives, including effective retail competition; efficient network regulation; and increasing efficient demand-side participation.

This requirement recognises the importance of the carbon pricing mechanism, the RET and the Australian energy markets in achieving the Australian Government’s commitment to delivering a clean energy future and ensuring secure and efficient supply of energy.

Understanding complementarity to a carbon pricePrior to 2007, governments at both state and commonwealth levels implemented piecemeal and overlapping policies designed to abate greenhouse gases. Since that time, the Australian Government has made clear that pricing carbon is the central measure intended to achieve this policy objective.

In this context, the decision to introduce a price on carbon was accompanied by a commitment to review the variety of abatement policies already in place and to remove those where a carbon price was likely to be more effective in delivering abatement. In 2008, the Council of Australian Governments agreed a set of principles (the ‘COAG complementarity principles’ – Box 3.1) to guide this exercise. The COAG principles recognise that a price on carbon may need to be accompanied by a range of measures to address market failures that are not adequately addressed by the carbon price signal.

Complementarity of a national Energy Savings Initiative to a carbon priceThe preceding section highlights the Working Group's preliminary view on a possible objective as follows: to improve Australia’s energy efficiency in order to help manage energy bills and improve productivity.

This suggests a potential national Energy Savings Initiative would not prioritise or target greenhouse gas abatement, reflecting that the market failures identified in Chapter 1 are largely not associated with the externality of greenhouse gas emissions. However, as energy in Australia is greenhouse-intensive, a national Energy Savings Initiative is likely to result in some greenhouse gas abatement, regardless of its stated objective. The Working Group therefore considers that it should be assessed against the all of the complementarity principles to ensure that it complements the carbon pricing mechanism.

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Box 3.1 Council of Australian Governments – Complementarity Principles

Complementary measures should be assessed against the following principles.

1. The measures are targeted at a market failure that is not expected to be adequately addressed by the carbon price49 or that impinges on its effectiveness in driving emissions reductions.

For example, research and development failures, common use infrastructure issues, information failures and excess market power.

49 On 4 May 2012, the Select Council on Climate Change agreed that the COAG Complementarity Principles be updated to replace the

references to the Carbon Pollution Reduction Scheme to reference ‘the carbon price’.

28 Frontier Economics, Energy costs – annual review for 2011/12 and 2012/13, a final report prepared for IPART, July 2011, p54,

http://www.ipart.nsw.gov.au/files/95ea7bd3-3f2e-40e8-a93f-9f6b00ab73f0/Consultants_Report_-

_2011_Annual_Review_of_Wholesale_Energy_Costs_-_Final_Report_-_Energy_Costs_Annual_Review_for_2011-12_and_2012-13_-

_Frontier_Economics_-_June_2011_-_Website_version.pdf, accessed 10 May 2012.

29 Independent Pricing and Regulatory Tribunal, Changes in regulated electricity retail prices from 1 July 2011 Electricity — Final Report,

July 2011, p10, http://www.ipart.nsw.gov.au/files/d20dfe64-488a-4145-8582-9f6c00cd6fdf/Final_Report_-

_Changes_in_regulated_electricity_retail_prices_from_1_July_2011_-_June_2011_-_Website_version.pdf, accessed 10 May 2012.

30 http://www.ipart.nsw.gov.au/files/2f6f4bd8-118c-4de9-9428-9f6d00cc2431/Final_Report_-

_Review_of_regulated_retail_tariffs_and_charges_for_electricity_2010_to_2013_-_March_2010.pdf, p100, accessed 11 May 2012

31 http://www.ipart.nsw.gov.au/files/95ea7bd3-3f2e-40e8-a93f-9f6b00ab73f0/Consultants_Report_-

_2011_Annual_Review_of_Wholesale_Energy_Costs_-_Final_Report_-_Energy_Costs_Annual_Review_for_2011-12_and_2012-13_-

_Frontier_Economics_-_June_2011_-_Website_version.pdf, p54, accessed 10 May 2012

32 http://www.escosa.sa.gov.au/library/101208-ElectricityStandingContractPrice-FinalPriceDetermination-PartA.pdf, pii, accessed 11 May

2012

33 http://www.ipart.nsw.gov.au/files/8dc10897-35f0-4a6e-854e-9f6d00da1ba3/Electricity_Retail_Review_-

_Final_report_and_determination_-_Web_version_-_June_2007.pdf, p88, accessed 11 May 2012.

34 Governments still need to decide the rules for making, measuring and verifying energy efficiency improvements, but in a well-designed

scheme, these will be technology-neutral and transparent.

35 The literature on the severity and importance of the rebound effect remains somewhat contested. A full discussion of rebound effects will

be included in the regulatory impact analysis. It is worth noting, however, that the rebound effect can have both positive and negative

consequences depending on whether the success of an intervention is measured at a narrow, project level, or on a broader societal level.

36 Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on energy efficiency and repealing

Directives 2004/8/EC and 2006/32/EC

http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/12/433&format=HTML&aged=0&language=EN&guiLanguage=en

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http://www.ipart.nsw.gov.au/files/8dc10897-35f0-4a6e-854e-9f6d00da1ba3/Electricity_Retail_Review_-_Final_report_and_determination_-_Web_version_-_June_2007.pdf

http://www.ipart.nsw.gov.au/files/8dc10897-35f0-4a6e-854e-9f6d00da1ba3/Electricity_Retail_Review_-_Final_report_and_determination_-_Web_version_-_June_2007.pdf

http://www.escosa.sa.gov.au/library/101208-ElectricityStandingContractPrice-FinalPriceDetermination-PartA.pdf

http://www.ipart.nsw.gov.au/files/95ea7bd3-3f2e-40e8-a93f-9f6b00ab73f0/Consultants_Report_-_2011_Annual_Review_of_Wholesale_Energy_Costs_-_Final_Report_-_Energy_Costs_Annual_Review_for_2011-12_and_2012-13_-_Frontier_Economics_-_June_2011_-_Website_version.pdf



http://www.ipart.nsw.gov.au/files/2f6f4bd8-118c-4de9-9428-9f6d00cc2431/Final_Report_-_Review_of_regulated_retail_tariffs_and_charges_for_electricity_2010_to_2013_-_March_2010.pdf

http://www.ipart.nsw.gov.au/files/2f6f4bd8-118c-4de9-9428-9f6d00cc2431/Final_Report_-_Review_of_regulated_retail_tariffs_and_charges_for_electricity_2010_to_2013_-_March_2010.pdf

http://www.ipart.nsw.gov.au/files/d20dfe64-488a-4145-8582-9f6c00cd6fdf/Final_Report_-_Changes_in_regulated_electricity_retail_prices_from_1_July_2011_-_June_2011_-_Website_version.pdf

http://www.ipart.nsw.gov.au/files/d20dfe64-488a-4145-8582-9f6c00cd6fdf/Final_Report_-_Changes_in_regulated_electricity_retail_prices_from_1_July_2011_-_June_2011_-_Website_version.pdf





Complementary measures should adhere to the principles of efficiency, effectiveness, equity and administrative simplicity and be kept under review. They may include:

a) measures targeted at a market failure in a sector that is not covered by the carbon price.

b) measures for where the price signals provided by the carbon price are insufficient to overcome other market failures that prevent the take-up of otherwise cost-effective abatement measures.

c) measures targeted at sectors of the economy where price signals may not be as significant a driver of decision making (e.g. land use and planning).

d) some measures in (a) or (b) may only need to be transitional depending on expected changes in coverage or movements in the carbon price.

37 Eoin Lees, ‘European and South American Experience of White Certificates: WEC-ADEME Case study on Energy Efficiency Measures

and Policies’, The World Energy Council, March 2010, p 16: accessed 8 May 2012,

http://www.worldenergy.org/documents/ee_case_study__obligations.pdf.

38 G Louis-Gaëtan, L Bodineau and D Finon, The costs and benefits of white certificate schemes, Energy Efficiency 5:179-199, 2012.

39 D Crossley, J Gerhard, B Hausauer, C Kadoch, E Lees, E Pike-Biegunska, X Wang, and E Watson, Best Practices in Designing and

Implementing Energy Efficiency Obligation Schemes. International Energy Agency Demand Side Management Programme, Task XXII

Research Report, 2012, The Regulatory Assistance Project. http://www.raponline.org/document/download/id/5003 , accessed 14 May 2012.

40 In the Australian context, this has generally meant allowing obligated parties to treat the cost of meeting their obligation as a cost of doing

business, meaning that it is passed through to their customers. Some schemes overseas are structured very differently and therefore have

different cost recovery mechanisms in place.

41 Victorian Department of Primary Industries, Regulatory Impact Statement Victorian Energy Efficiency Target Regulations, March 2011, p

28.

42 The South Australian REES prescribes two targets: one target for energy reductions and a separate target for energy audits to be

performed in priority group households.

43 Ministerial Council on Energy, Terms of reference for the Stage 3 of the Demand-Side Participation in the National Electricity Market,

letter from the Ministerial Council on Energy to the AEMC, 29 March 2011, accessed 1 May 2012,

http://www.aemc.gov.au/Media/docs/MCE%20Terms%20of%20Reference-35e6904a-e39d-4348-8ad5-1a7970af354d-0.pdf.

Further general information on the Power of Choice review can be found at http://www.aemc.gov.au/Market-Reviews/Open/stage-3-

demand-side-participation-review-facilitating-consumer-choices-and-energy-efficiency.html

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http://www.aemc.gov.au/Market-Reviews/Open/stage-3-demand-side-participation-review-facilitating-consumer-choices-and-energy-efficiency.html

http://www.aemc.gov.au/Market-Reviews/Open/stage-3-demand-side-participation-review-facilitating-consumer-choices-and-energy-efficiency.html

http://www.aemc.gov.au/Media/docs/MCE%20Terms%20of%20Reference-35e6904a-e39d-4348-8ad5-1a7970af354d-0.pdf

http://www.raponline.org/document/download/id/5003

http://www.worldenergy.org/documents/ee_case_study__obligations.pdf


2. Complementary measures should be tightly targeted to the market failure identified in the above criteria that are amenable to government intervention. Where the measures are regulatory they should meet best-practice regulatory principles, including that the benefits of any government intervention should outweigh the costs.

3. Complementary measures may also be targeted to manage the impacts of the carbon price on particular sectors of the economy (for example to address equity or regional development concerns). Where this is the case, in line with regulatory best-practice, the non-abatement objective should be clearly identified and it should be established that the measure is the best method of attaining the objective.

4. Where measures meet the above criteria, they should generally be implemented by the level of government that is best able to deliver the measure. In determining this, consideration should be given to which level of government has responsibility as defined by the Constitution or convention/practice, the regulatory and compliance costs that will be imposed on the community, and how the delivery of the measure is best coordinated or managed across jurisdictions.

The Working Group’s terms of reference require it to provide advice on possible implementation arrangements for a national Energy Savings Initiative. The COAG principles also require consideration of which level of government is most appropriate to implement a policy. The Working Group’s final recommendations on which level of government (if any) would be best placed to implement a white certificate scheme will be guided by analysis considering the potential benefits of state-based schemes (which are perhaps better able to reflect local circumstances in designing eligibility rules) versus the potential costs associated with having multiple different sets of rules in operation.

On 13 April 2012, COAG established a cross-jurisdictional taskforce to consider how best to fast track and rationalise carbon reduction and energy efficiency schemes. The taskforce will provide a strategic oversight of COAG’s regulation and competition policy development work.

44 The CEC asked energy efficiency businesses in its membership to itemise the cost structure of creating certificates under each of the

schemes based on the 2010 compliance year. They were then asked to identify the potential cost savings from national settings, typically

represented by economies of scale and elimination of inconsistency and duplication. The savings identified were then summed across the

three schemes, and quantified against an aggregate target for Australia. The businesses that participated are active in all three state-based

schemes, and in 2010 delivered a significant portion of the energy efficiency activities performed (so the results do not include any cost

efficiencies that could be captured by energy retailers, who are the liable parties under the existing schemes). Savings include those that

follow from economies of scale, increased purchasing power for products, and elimination of inconsistency and duplication in

methodologies and compliance obligations. The full methodology and results of this work can be found in the Clean Energy Council’s

submission at: http://www.climatechange.gov.au/government/submissions/closed-consultations/national-energy-savings-initiative.aspx.

45 A joint submission was provided by the members of the Australian Sustainable Built Environment Council’s (ASBEC) Climate Change

Task Group, comprising the Australian Institute of Architects, the Property Council of Australia, the Green Building Council of Australia,

the Planning Institute of Australia, and the Facility Management Association of Australia.

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http://www.climatechange.gov.au/government/submissions/closed-consultations/national-energy-savings-initiative.aspx


To assist in progressing this work, COAG’s Select Council on Climate Change will develop advice on how to fast track a rationalisation of programs that are not complementary to a carbon price or are ineffective, inefficient or impose duplicative reporting requirements. The SCCC has agreed that the COAG-agreed Complementarity Principles will be updated to reflect the new legislation package to introduce a carbon price.

The Working Group will closely monitor progress in this area to ensure that work on a possible national Energy Savings Initiative is consistent with outcomes from this COAG process.

Renewable Energy TargetThe Renewable Energy Target (RET) scheme creates a guaranteed market (backed by legislation) for additional renewable energy, using a mechanism for tradeable certificates. The RET separately supports large-scale renewable projects such as wind farms, and small-scale systems such as rooftop solar photovoltaic (PV) systems and solar water heaters.

To complement the RET, consideration of a national Energy Savings Initiative should cover whether the scheme would duplicate the RET efforts, and test that it would not impede the ability of the RET to encourage production of renewable energy. A national Energy Savings Initiative that concentrated on consumption of energy (rather than production) would not duplicate the RET. If a national Energy Savings Initiative was to credit improvements in generation efficiency (discussed further in Chapter 7), careful consideration would need to be given to how this would affect the creation of renewable energy certificates through improvements to renewable energy generation.

The RET also supports ‘displacement technologies’: those that replace electricity with renewable energy. Examples include solar water heaters and heat pumps. Here, there is more potential for cross-over with a national Energy Savings Initiative. However, for the purposes of the regulatory impact analysis, the Working Group will assume that any technology currently supported by the RET would not be supported under a possible national Energy Savings Initiative.

Other types of displacement technologies may be eligible sources of credit under a national Energy Savings Initiative (for example, high-efficiency gas water heaters, commercial-scale water heating, and pool heating). Through the regulatory impact analysis, the Working Group will consider the role of other displacement technologies could play in a possible national Energy Savings Initiative.

Working Group view: complementarity with the Renewable Energy TargetFor the purposes of the regulatory impact analysis, the Working Group will assume that any technologies currently supported by the Renewable Energy Target would not be supported by a national Energy Savings Initiative.

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Energy markets The National Energy Market (NEM) is designed to interact with consumers by sending them efficient price signals. To the extent that consumers are able to respond efficiently to these price signals, this will ensure that demand is efficiently balanced with supply.

There is much work underway to improve the way that price signals flow through the NEM. The Power of Choice review undertaken by the Australian Energy Markets Commission (AEMC) is one such example. The introduction of smart meters in some jurisdictions is another.

As noted in Chapter 1, there are many factors that mean consumers find it difficult to respond to these price signals. As a general principle, measures that are designed to overcome non-price externalities (such as greenhouse gas emissions) or achieve environmental objectives in the energy market are applied from outside the NEM framework, so that they can be reflected solely in the price. This allows the NEM to continue to supply electricity in an economically efficient manner.

This discussion is similarly relevant to the Wholesale Electricity Market in the South West Interconnected System (SWIS), the major electricity grid that covers south-west Western Australia. Should the government decide to adopt a national Energy Savings Initiative, it will be important to ensure that activities taken up in Western Australia are transparent to the Western Australian Independent Market Operator. This would ensure that changes to the consumption profile in Western Australia are accounted for in its consumption projections, particularly in relation to the operation of the Reserve Capacity Mechanism. This transparency will also be crucial for other Australian energy market operators.

The Working Group notes that the AEMC’s Power of Choice review will consider the linkages and role of ‘energy efficiency policies and measures in the context of the market and regulatory arrangements that are required to facilitate efficient DSP’ (demand side participation).50 The Working Group is engaging closely with the AEMC as it undertakes this work, which will be an important input to the regulatory impact analysis. The Working Group also notes that the Western Australian Strategic Energy Initiative considers similar matters with regard to the SWIS and will monitor developments from this Initiative.

The Working Group’s views on the treatment of energy market participants under a national Energy Savings Initiative is discussed further in Section 6.1 (Obligated parties), Section 7.5 (Energy generation sector) and Section 7.6 (Energy networks sector). Possible options for the treatment of peak electricity demand under a national scheme, including possible implications for existing energy market arrangements and reforms, are outlined in Chapter 10.

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3.3 Design principles for a national Energy Savings Initiative

The Issues Paper proposed a set of design principles, included in Table 3.1 below, which was derived from the design principles previously recommended for a national Energy Savings Initiative in the report by the Prime Minister’s Task Group on Energy Efficiency.51

The Issues Paper invited stakeholders to comment on whether any additional principles should be considered for a national Energy Savings Initiative. Thirty-five submissions expressly indicated in-principle or qualified support to the principles proposed in the above table.

Stakeholders expressed broad support for designing a scheme around cost effectiveness, administrative simplicity, minimal compliance complexity and maximising net societal benefits. There was also broad support for designing a national Energy Savings Initiative that is not overly prescriptive in the methods for assessing savings, and provides flexibility for various types of entities (retailers, third party businesses or certificate providers/aggregators) to generate savings.

Some stakeholders advocated additional principles targeted at positive outcomes for low-income households. For example, the submission from Kildonan Uniting Care stated:

It is important for the NESI to include principles related to health and comfort of participating households ... It is suggested that another key principle for the NESI be ensuring positive outcomes for low income households. An emphasis on quality, and making a difference for households, as well as the potential incentives for organisations involved in carrying out activities related to the NESI, is required in order to balance principles of efficiency and equity.

Kildonan Uniting Care submission

The Working Group agrees that it is important to consider the impacts of any scheme on low-income households, and considers that this can be properly considered under the existing design principle concerning fairness and equity.

A small number of stakeholders advocated an additional principle to focus on larger scale energy efficiency improvements that involve higher upfront costs and longer pay back periods. For example, the submission from Low Carbon Australia Limited recommended more focus on large scale activities in the commercial and industrial sectors:

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Table 3.1: Design principlesPrinciple Intent

1. An efficient approach which maximises net benefits to society

The final design should represent the most efficient option that meets the scheme objective(s), minimising transaction costs including those associated with compliance with multiple schemes.

2. Effective at delivering additional improvements in energy efficiency

A national Energy Savings Initiative should be designed to realise energy efficiency opportunities beyond business as usual levels and in addition to the improvements that will be delivered by the Carbon Price Mechanism and by existing state schemes.

3. Complementary to the Carbon Price Mechanism and energy market arrangements

A national Energy Savings Initiative should overcome non-price barriers and address residual market failures to the uptake of low cost energy efficiency opportunities in accordance with the COAG Complementarity Principles.

A national Energy Savings Initiative should also be complementary with existing electricity and gas market arrangements, as well as wider energy market development objectives including: effective retail competition; efficient network regulation; and increasing efficient demand-side participation.

4. Transparency Governance arrangements such as setting and adjusting targets, and assessing and rewarding activity should be clear, transparent and easily understood to maintain investor confidence. The costs and benefits from a national Energy Savings Initiative should be clearly demonstrated and apparent to all.

5. Simplicity A national Energy Savings Initiative should minimise administrative and compliance complexity.

6.Fair and equitable The benefits of a national Energy Savings Initiative should be equitably distributed. Where a national Energy Savings Initiative imposes additional costs on energy end users, these should be borne as equitably as possible. Exclusions and offsets should be considered only where necessary for the scheme to remain fair, equitable and cost effective.

Where a national Energy Savings Initiative is the most appropriate way to deliver targeted assistance to disadvantaged and low-income households, it should be designed to do so, while minimising any impact on the wider costs and benefits of the scheme.

The design of a national Energy Savings Initiative should provide clear transition arrangements for individuals or organisations that have made investments under existing state-based schemes.

7. Flexibility Flexibility should be built into the design of a national Energy Savings Initiative to allow effective responses to changing circumstances and the uncertainties associated with the pace of technological development and market penetration; and to maintain the best possible mix of new and additional activities.

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In addition to the principles listed in Table 2.1 of the Issues Paper, we suggest that the proposed NESI should by design also encourage deeper retrofits involving equipment with longer useful lives and longer payback periods (e.g. chillers).

Low Carbon Australia Limited submission

The Working Group considers that the cost and scope of eligible activities under any national scheme should be guided by the principles of effectiveness and efficiency, and that there is no need for an additional design principle to guide outcomes along these lines.

Working Group view: design principlesWhile the suggestions concerning additional design principles are noted, the Working Group considers that the design principles outlined in Table 3.1 provide an appropriate overarching framework to guide the regulatory impact analysis.

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4 Scheme design featuresThis chapter sets out the Working Group’s views on design features of a national Energy Savings Initiative to be used as the basis for investigating the costs and benefits of a national scheme.

These features include whether to allow trading and certificates and banking and borrowing of certificates, and other market rules.

4.1 Market framework

Market-based policy instruments are often characterised as either cap-and-trade or baseline-and-credit.

As a general rule, cap-and-trade schemes are used where the commodity being capped imposes external costs on other people or the environment. In a cap-and-trade scheme, there is a cap on the total amount a commodity that government is seeking to limit (such as sulphur dioxide or greenhouse gas emissions) that can be created. Tradeable permits are issued equivalent to units of the cap. For example, if the limit was 100 million tonnes of carbon dioxide equivalent, then 100 million permits (one unit per tonne) would be issued. Participants wishing to use the limited commodity must acquire and surrender a permit.

A cap-and-trade scheme for energy use would therefore cap total energy use. Permits would be issued up to the level of that cap, and those wishing to use energy would be required to acquire permits equivalent to their energy use.

In a baseline-and-credit scheme, there is a baseline for a commodity and credits are issued for activities that represent an improvement against the baseline.52 Key examples include existing white certificate schemes in Australia, the Carbon Farming Initiative and the Clean Development Mechanism (CDM) under the Kyoto Protocol. In the Carbon Farming Initiative credits can be created in relation to certain carbon sequestration activities, as well as reductions in emissions from agriculture and certain pre-existing waste streams. For the CDM, developing countries create project-based credits for reductions in emissions against a business as usual baseline, but there is no overall limit on emissions imposed on that country or sector.

The principal differences between these baseline-and-credit schemes and cap-and-trade schemes are that:

there is no overall limit imposed through the scheme – baselines do not add up to a cap;

52 Baseline-and-credit schemes can be structured in a variety of ways. Some of these ways are equivalent to cap-and-trade schemes. For

example, a scheme that imposed a baseline for energy use on all energy users (denominated in absolute gigajoules), where participants were

issued credits for using fewer units of energy, and were required to purchase credits when their energy use exceeded their baseline, would be

identical in its effects to a cap-and-trade scheme. In particular, in this case the sum of all of the baselines would equal the cap. However,

most baseline-and credit-schemes implemented in Australia and elsewhere in the world are not equivalent to cap-and-trade schemes.

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for parties who can create certificates, the scheme generally relies on ‘carrots’ but no ‘sticks’ – if they perform better than their baseline, they can create certificates, but if they exceed their baseline, in most cases no overt penalty is imposed; and

often baselines are expressed on an intensity basis, rather than in terms of absolute numbers (for example, a baseline could be expressed as energy use per unit of production, rather than as absolute energy consumed).

In a paper titled ‘Regulation of energy suppliers to save energy – lessons from the UK debate’, Professor Nick Eyre of the Environmental Change Institute at Oxford University notes that:

there is a fundamental difference in objectives between ‘baseline and credit’ and ‘cap and trade’ options – the former seeks to improve energy efficiency, the latter to reduce energy demand through either or both of improved efficiency and reduced demand for energy services.53

This is an important consideration in light of the Working Group’s proposed objective ‘to improve Australia’s energy efficiency in order to help manage energy bills and improve productivity’. A baseline-and-credit approach is expected to better align with this objective than cap-and-trade.

Almost all submissions which provided views on scheme architecture supported a baseline-and-credit approach. One submission, however, proposed establishing a separate cap-and-trade scheme for non-residential buildings.

…the non-residential building sector needs a mechanism that will create a market that prices carbon, directs private capital to energy savings investments and thereby drive energy savings initiatives across the sector through the refurbishment of existing buildings, by so doing future-proofing the non-residential building sector while at the same time capping growth in energy demand in cities to defer immediate infrastructure augmentation imperatives. …the framework that would best suit a national Energy Savings Initiative mechanism for the non-residential buildings sector is a cap and trade system.

Lend Lease Sustainability Solutions submission

The Working Group does not consider that capping energy use either across the economy or in a sub-sector is likely to be a desirable policy approach. First, placing a cap on energy implies that the government has better knowledge than the market of the amount of energy that is required for the efficient running of the economy. This is unlikely to be the case.

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Second, an increase in energy use is not always linked to a less efficient outcome. For instance, a manufacturing business may increase its energy use because it has built an additional production line, and it could be producing more output per unit of energy consumed compared to its previous performance. Under a cap-and-trade scheme, this would be penalised, but under a baseline-and-credit scheme it would be rewarded. As Orica noted in its response to the Issues Paper:

With a cap, a company that has efficiently increased production but has exceeded its cap will be penalised, even if the increased efficient production has displaced a competitor’s inefficient production.

Orica submission

4.2 Features of an effective market

The Issues Paper sought input on several key features of a potential market-based approach for improving energy efficiency. These included whether such a market should include trading, whether certificates should be issued, and whether banking and borrowing of certificates should be permitted. During consultation on the Issues Paper, stakeholders raised other features of market design, including transparency of supply and demand and certificate prices, surrender periods, and market rules.

TradingA scheme without trading would generally mean that obligated parties would be restricted to undertaking activities within their own operations. If all obligated parties had similar operations and faced similar costs to undertake activities, trading would bring little benefit. Where obligated parties have differing inputs, operations and costs, trading can ensure that the lowest cost activities across obligated parties are prioritised, leading to lower overall costs of a scheme.

No trading could lead to a disproportionate spread of costs and benefits across sectors and/or regions. For instance, if a scheme placed obligations to meet an energy efficiency target on energy retailers based on their sales, it is possible that retailers with largely residential customer bases could have more opportunities to improve energy efficiency cost-effectively in their customer base than retailers with largely industrial customer bases. Without trading, this could mean that the retailer with mostly industrial customers paid more to meet its obligation, yet the benefits that flowed to that retailer (and its customers) would be no greater than those that flowed to the residential retailer.

It would be possible to solve this by assigning targets based on the retailers’ ability to meet them at a particular cost, but this would imply that the government has better information than the retailers about the available activities in their customer base and the costs to the retailer of accessing those activities.

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Trading can make it easier for obligated parties to meet their obligations at least cost because they can purchase from a market rather than undertaking activity themselves. If barriers to improving energy efficiency vary between sectors or between geographical areas trading allows all obligated parties to gain equal access to the most cost-effective improvements. As noted in a joint submission:

In the VEET scheme, trading enables energy retailers that are not tier one retailers like AGL or TruEnergy [to] meet their obligations at least cost. This means the objective … is achieved at least costs while encouraging the development of the energy services industry. The retailers benefit from lower costs and the community benefits for lower energy prices.

Energy Makeover, Energy Renovations, Building Sustainability Training Institute joint submission

Trading also encourages competition between businesses that are able to deliver energy efficiency improvements (either in their own operations or by facilitating it for others). Evidence from schemes overseas and in Australia shows this tends to lead to the development of varying and innovative business models that can identify new ways to overcome combinations of market barriers (see Chapter 1).54

The NSW Energy Savings Scheme (ESS), the Victorian Energy Efficiency Target (VEET) and the SA Residential Energy Efficiency Scheme (REES) all feature trading.55 The ACT scheme does not allow trading or tradeable certificates. The Regulatory Impact Statement for the proposed ACT scheme notes that ‘market mechanisms dominated by a small number of buyers and/or sellers of certificates often result in illiquid markets’ and that ‘given the small size of the ACT, the implementation of its own market-based scheme would involve significant costs’.56

Submissions in response to the Issues Paper were mostly in favour of trading.

Trading will most likely lead to least-cost outcomes…Not having a tradeable scheme could increase barriers to entry for retailers entering the market and could inhibit the expansion of small retailers.

Energy Retailers Association of Australia submission

On balance, the Working Group considers that a model that allows trading should underpin the further consideration of the costs and benefits of any national scheme, on the basis that trading is more likely to lead to lower costs and greater innovation than a system that does not allow trading.

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CertificatesA decision to have certificates in a potential national Energy Savings Initiative would flow from a decision to have trading. Certificates are a form of currency that supports trading by making it easier for sellers of eligible activities to assure buyers that the activity is acceptable for surrender towards a target.

A certificate can summarise information needed for trade – it is a symbol of the elements that contribute to the value of the product. Without certificates, it is more difficult to record and trace where an energy efficiency improvement occurred and which obligated party has the right to ‘count’ a particular activity towards their obligation. This makes it difficult to know if the scheme’s target and overall objective has been met because there is more chance of double-counting of activity. Conversely, where a scheme allows certificates there is much less risk of double-counting as an obligated party which counts an activity against their liability must also own the associated certificates.

Generally submissions in response to the Issues Paper were in favour of certificates. One submission noted that a lack of certificates could drive up costs for obligated parties.

The key feature that makes the Victorian and NSW energy efficiency schemes more cost effective than the South Australian scheme is the fact that the Victorian and NSW schemes operate as tradeable certificate schemes. While REES legislation allows for trading of credits, in practice this is an option of last resort, meaning where credits are available they are offered at a significant premium. Tradeable certificate-based schemes are less resource intensive for liable entities and offer greater liquidity because they allow entities access to a broad range of energy efficiency credit providers. Certificate-based schemes also provide security of property right and a clear delineation of responsibilities associated with that right.


An issue related to trade and certificates is liability in the event that the certificate is ‘bad’ – that is, that it is subsequently found not to represent genuine energy efficiency improvements, as defined under the rules of the scheme. In the two energy efficiency schemes in Australia that issue certificates (the NSW ESS and the Victorian VEET), trading is based on a creator liability model. Under creator liability, if a certificate is ‘bad’, generally a good-faith purchaser can still use it for compliance, while the regulator will enforce sanctions (often including a make-good obligation) on the certificate creator.

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The chief advantage of a creator liability model is that it allows trade to proceed with low transaction costs57 – final purchasers only need to check that a certificate exists in the official registry – they do not need to check that all of the rules for creating a valid certificate had been met. Conversely, the chief disadvantage of a creator liability model is that it is only the regulator who checks the validity of activity: there is no incentive for buyers to take any extra care when deciding which certificates to buy. Under both models, buyers and sellers may put in place individual arrangements to reallocate liabilities between them. However, even in a final-purchaser-liability model (such as the SA REES), the regulator would still need to check that the rules had been followed.

It is likely that total transaction costs in a final-purchaser liability model would be higher than those in a creator liability model in a white certificate scheme. The Working Group has commissioned a consultancy to examine the costs of complying with current state schemes, including transaction costs. This will be a useful input to further analysis on costs and benefits of certificates.

One submission argued that a final-purchaser liability model created additional uncertainties for those undertaking energy efficiency activities:

The key drawback of the non-tradeable scheme design is the additional gap between the scheme regulator and the active parties delivering services on the ground. This produces a barrier to transparent and effective feedback between regulator and companies delivering services.

Low Energy Supplies and Services submission

The Working Group considers that, if a national Energy Savings Initiative includes trading, it should also include certificates and be based on a creator liability model.

Working Group view: market frameworks and featuresFor the purposes of undertaking the regulatory impact analysis on a national Energy Savings initiative, the Working Group will assume:

the scheme would be based on a baseline-and-credit framework;

the scheme would allow trading;

the scheme would have certificates; and

the scheme would be based on a creator liability model.

The Working Group notes that trading, certificates and the creator liability model are likely to provide the highest benefits through improved liquidity in a broad scheme. Should a scheme with narrow coverage be preferred, the suitability of these features should be reassessed.

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Banking and borrowingBanking allows obligated parties to over-achieve their target in one year and bank this activity against future target liabilities. Borrowing allows liable parties to carry a shortfall in meeting their target in one year, provided they make it up in a future year. In effect, they ‘borrow’ against future supplies of certificates. Borrowing provides an alternative to paying a penalty price. Having banking and borrowing means that scheme targets and scheme activity equalise over time rather than every year.

Banking

Banking helps provide greater certainty for companies and individuals investing in energy efficiency improvements, by increasing the chances that they will be able to find a buyer for eligible activity even when the scheme target has been met in a particular year. For example the individual/company that carried out the activity can hold onto the certificate for future sale, or a buyer can purchase it in an earlier year for compliance in a future year.

Banking can be unlimited such as in the NSW ESS where, once a certificate is created, it can be surrendered by an obligated party in that and any subsequent years. This flexibility can improve investor certainty by allowing the investor to hedge against a future year of their choosing (perhaps to align with a broader investment strategy), rather than being required to surrender a certificate in a specified year.

Alternatively, banking can be limited so that certificates expire after a number of years. Such an approach could help avoid creating large surpluses in early years that result in no additional activity being required at all in later years. This might be an important design feature where the shape of the annual flow of activity is an important determinant of its benefits. However, a possible downside of this approach is that it might provide less investor certainty, and may not encourage long-term investments in new business models because certainty of revenue from certificates is not guaranteed.

Borrowing

In practice, borrowing means that energy efficiency improvements and associated shared benefits are delayed to a future year. This is not necessarily a negative outcome, as a delay in achieving those benefits is likely to be better than foregoing the benefits altogether (which is what happens where a penalty price is paid by an obligated party in lieu of meeting its target).

Many market-based mechanisms that allow borrowing do so on a limited basis – for example by only allowing an obligated party to discharge a relatively small proportion (5 to 10 per cent) of their liability in a compliance period with certificates from a future period. Some schemes also include periodic ‘true-up’ years where no borrowing is allowed, to ensure that obligated parties do not carry borrowed amounts in perpetuity. These limits on borrowing can help minimise the risk that the overall objective of the scheme is not met, or is significantly delayed.

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Banking and borrowing are safety valves to ensure that, in the event of unforeseen circumstances, a white certificate scheme continues to operate smoothly and achieve its objective.

Working Group view: banking and borrowingThe Working Group considers that, for the purposes of the regulatory impact analysis, a national Energy Savings Initiative should feature a small amount of borrowing and either unlimited or limited banking.

Other issues affecting market operationIn workshops and in submissions, stakeholders raised a number of other issues around market transparency which affect the operation of current markets in state-based schemes, and provided suggestions to remediate perceived problems. Some accounts provided in submissions are anecdotal and further investigation would be required to determine the extent to which problems exist and any impact they may have.

The remainder of this chapter highlights the concerns raised by stakeholders, but does not provide further analysis. These issues will be considered as part of the regulatory impact analysis.

Price Transparency

Stakeholders from the energy retail sector and the energy efficiency industry suggested that most of the trading of certificates that occurs under current schemes is done through bilateral deals. They noted that the spot market is small and underdeveloped, making price discovery difficult for both buyers and sellers. Some attributed this to the relatively small overall market for certificates in each state scheme and suggested that a national scheme would improve liquidity simply by increasing the size of the pool – noting that the size of the target (see Chapter 5) and the level of penalty would also play a role in driving liquidity.

Others suggested that even with a deeper pool of certificates, measures would be required to increase visibility of price and allow better price discovery, perhaps by requiring all trades to be made through an online exchange.

A NESI should consider online trading through an online exchange – a step that could increase pricing transparency and strengthen control and security in certificate trading.


Disclosure around supply and demand

Some stakeholders suggested that existing state schemes do not have sufficient transparency around supply and demand to allow buyers and sellers to easily engage in business transactions. Stakeholders in the energy efficiency industry noted that while overall targets for each scheme in each year were visible, it was difficult or impossible to see how much of

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the target was already met at any given time. In addition, it was difficult for a seller of certificates to see which obligated parties had sufficient certificates to meet their targets and which parties were undersupplied.

Similarly, a number of energy retailers (as obligated parties under state-based schemes) noted that in some schemes, while there might be sufficient supply of certificates available to meet their targets in a given year, it was not possible to see which entities held these certificates. Some retailers noted that they sometimes opted to pay the penalty price (instead of meeting their target) even when there was a supply of certificates available, because the search cost was higher than the penalty.

The Working Group recognises that a degree of market transparency is likely to improve the efficiency of trade. However, these issues need to be balanced against a need to protect information that is genuinely commercially sensitive, and to avoid imposing unnecessary costs through mandating particular trading arrangements where the market would have chosen alternative arrangements. The Working Group will continue to assess these issues as part of its further analysis.

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5 Nature of targets: energy, fuels and formThis chapter discusses key issues related to targets to be considered in the regulatory impact analysis: including the types of energy, fuels, and units of measurement that could be appropriate for a national Energy Savings Initiative. It also considers the form of the target itself (absolute, percentage, annual, multiple year, single or per fuel-type, minimum target considerations). This chapter focuses on the nature of the overarching scheme targets, rather than which parties would be liable to meet the target, which is considered in Chapter 6 and Chapter 7.

5.1 Types of energy to be included in a target

When considering a target base, it is necessary to establish which types of energy could be included. This has implications for how the scheme objective could be met, the scope of potential activities under the scheme, and the ease with which this action could be taken, measured and verified.

Energy can be classified as: primary, secondary or final. Primary energy is energy in a form available in nature. Examples of primary energy include coal, oil, natural gas, wood, wind and solar energy.

Secondary energy is energy that has been converted from primary energy into a different form. Examples of secondary energy include refined petroleum products, electricity and briquettes. Secondary energy is usually in a form that is ready for transport or transmission.

Final energy is energy that is used by consumers to make a product or perform a task or function. The type of energy consumed as final energy can be in the form of primary or secondary energy. Common forms of energy consumed as final energy include electricity, gas, gasoline and diesel.

Figure 5.1 shows the relative proportions of primary, secondary (referred to as ‘other energy transformations’) and final energy consumption in the Australian economy. Primary energy is the largest proportion of energy in the Australian economy, but much of this is either exported as primary energy or used in a conversion (transformed) to secondary energy.58 Some of the primary energy, and most of the secondary energy, is used during final energy consumption.

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Figure 5.1: Relative proportions of fuel types exported, transformed or consumed in the Australian economy (units: petajoules)59

Source: Bureau of Resources and Energy Economics, Energy in Australia 2012, Commonwealth of Australia, Canberra 2012

page 25.

Australia’s existing state-based energy efficiency contain only final energy consumption in their target base.

Nearly all submissions to the Issues Paper that addressed energy and fuel inclusion in a target base proposed that total final energy be included in a consideration of a possible national Energy Savings Initiative. A focus on final energy is also consistent with the Working Group’s preliminary objective: ‘to improve Australia’s energy efficiency in order to help manage energy bills and improve productivity’ because:

improved energy efficiency of final energy consumption could benefit a larger portion of the economy than a focus solely on primary energy;

a national scheme that addresses peak demand in final energy, such as electricity, could improve the productivity of Australia’s energy infrastructure and could influence factors that are presently driving energy price increases; and

as final energy (electricity and refined transport fuels) contributes more to household and business energy bills, a scheme that includes final energy in its target base could enable consumers to reduce their energy consumption and cushion them from rising energy prices.

59 Bureau of Resources and Energy Economics, Energy in Australia 2012, Canberra, 2012, p 25.

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The benefits of a focus on final energy consumption include that it:

is usually easy to identify the point at which final energy consumption occurs;

avoids potential double counting of energy used as both primary and secondary energy; and

often involves a set of key market participants that are responsible for the final transaction prior to the consumption occurring (for example, retailers), which can have administrative benefits.

A disadvantage of focusing the scheme target base on final energy consumption is that energy efficiency improvements at the point of final consumption do not consider differences in whole of system efficiency. This means there is potential for improvements in the efficiency of final energy consumption to cause overall decreases in whole of system efficiency.

An example of this is where a gas fuelled water heater consuming two units of energy was replaced with an electrical water heater consuming one unit of energy, where additional units of energy were lost both in the combustion of coal into that electricity, and the transmission of electricity over several hundred kilometres of wires. This potentially perverse effect could be addressed in the method by which eligible activities are assessed and will be considered further through the regulatory impact analysis.

Another example of system efficiency is at the whole of a site level: this can be important in considering the point at which energy efficiency is measured in a scheme. For example, if a large retailer replaced its inefficient lighting in all its stores for highly efficient lighting, it may appear that this has achieved energy savings proportionate to the change between the old lights and the new. However, if the retailer had changed all its lighting, but then had to run its heating and ventilation system more (to account for the loss of heat provided by the less-efficient old lights), then there is not a net energy saving at the system level.

The potentially perverse effects discussed in the two paragraphs above could be addressed in the method by which eligible activities are assessed and will be considered further through the regulatory impact analysis.

The preliminary view of the Working Group is that the target base for consideration of a national Energy Savings Initiative should focus on final energy consumption. This approach appears to provide the simplest administrative approach to setting scheme targets and monitoring activities, while providing generous scope for improvement of energy efficiency, and is compatible with current state schemes.

Working Group view: types of energyFor the purposes of the regulatory impact analysis, the Working Group considers that the target base for a national Energy Savings Initiative should focus on final energy consumption.

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5.1 Types of fuel to be included in a target

The objective proposed in Chapter 3 is sufficiently broad that all fuels could conceivably be included in the target base of a national scheme. The proposed design principles in Chapter 3 are an appropriate frame for further consideration, particularly those that relate to efficiency and effectiveness, simplicity and fairness.

The following questions could help an assessment of which fuels best meet these design principles:

Is the fuel material to achievement of the Working Group’s preliminary view of an objective in terms of energy efficiency potential, contribution to management of energy bills, and energy productivity?

Are there clear impediments to improved energy efficiency for that fuel type which could potentially be cost-effectively addressed by an energy savings initiative?

Is there a cost-effective point of liability to allow that fuel to be included in a possible national scheme? The point of obligation should have small numbers, be readily identifiable and easily regulated (rather than just relying on customer relationships).

If the fuel is not included in the target base, would it lead to perverse incentives that cannot be overcome in the scheme design?

These broad questions underpin the discussion of different fuel types in the following pages.

Electricity and gasElectricity and gas are widely used in Australia in final energy consumption. This includes all electricity, regardless of the fuel used to generate it, or the purpose for which it is used (including transport). In 2009-10, electricity comprised 20.3 per cent of final energy consumption, and gas comprised 20.0 per cent.60 Electricity and gas could be included in the scheme target base, either singly, or together. Although they have different physical and market characteristics, electricity and gas share some key aspects in common. They are both:

used in industrial, commercial and residential processes;

have inter-connected distribution networks; and

have existing market and billing structures that allow for easy measurement of individual and wholesale consumption, and allow for cost-effective points of liability.

60 Bureau of Resources and Energy Economics, Energy in Australia 2012, Canberra, 2012, p 26-7.

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Two of the existing Australian state-based schemes include both electricity and gas in their target base (Victoria and South Australia). The New South Wales and the Australian Capital Territory schemes include only electricity in their target bases (although the ACT scheme allows energy savings to be made in other fuel sources, including gas). There is also extensive experience in inclusion of both gas and electricity in international schemes.

Submissions to the Issues Paper that considered fuel unanimously supported the inclusion of electricity in the target base. Many, though not all, submissions supported the inclusion of both gas and electricity in a scheme target. For example:

CHOICE considers that the NESI should encapsulate both electricity and mains gas. If mains gas is not included, consumers may switch to mains gas from electricity and then switch back when the cost of mains gas increases significantly, therefore having no effect in the long term.

CHOICE submission

Electricity and gas should be covered, given that economic and social objectives are part of the rationale.

Submission from Adjunct Professor Alan Pears

Many submissions also noted the potential effects of fuel switching, which could be affected by the fuels included in the target base of a national scheme, since electricity and gas can be used for similar end-purposes (such as heating water). Fuel switching can have positive or negative outcomes. An example of a potential perverse outcome from fuel switching (in terms of actual energy efficiency) is that an energy user may switch from the fuel included in the target base to one that is not, where the fuel not included in the target base is less energy efficient. There are also potential energy efficiency benefits from fuel switching, as highlighted by Origin:

Fuel switching is an important source of cost-effective energy efficiency that experiences barriers to implementation. For example, gas powered air conditioning could play a vital role in reducing energy consumption.

Origin submission

The Working Group intends to test through the regulatory impact analysis the costs and benefits of a possible national Energy Savings Initiative that includes both gas and electricity (from all sources of generation, including renewable energy) in its target base.

Transport fuelsTransport fuels include, but are not limited to: petrol, diesel, aviation gas and biofuels. Use as a transport fuel does not preclude the use of the same fuel for other purposes. For example, diesel is often used both as a transport fuel and a stationary energy fuel (common in remote locations).

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Transport fuel use was around 33.5 per cent of Australia’s final energy consumption in 2009-10: it is therefore likely to represent a material source of energy efficiency savings.61 However, including transport fuels in a possible national Energy Savings Initiative is likely to add a high degree of complexity and cost. Key complexities include:

for small consumers (many of whom change their transport fuel retailer weekly) a retailer-customer relationship similar to those seen in gas and electricity does not exist, hence it would be complex to measure their consumption in a consistent, reliable and cost-effective way; and

limited shared benefits for non-participants that use the same fuel-type, which raises concerns about fairness: benefits from more efficient use of transport fuel accrue mainly to the individual consumer, and do not have the scale of system-wide benefits seen in some other markets, such as the electricity market.62

There is currently limited experience in the inclusion of transport fuels in white certificate schemes (either in a target base or in other elements, such for obligation or certificate creation). None of the Australian state-based schemes include transport fuels, and only one international scheme does (the French scheme), though this only came into effect in 2011 and was part of a staged expansion of the scheme after it had run for an initial period.

Three submissions to the Issues Paper called for the exclusion of transport fuels from a national scheme until further study and consultation could be conducted on possible future inclusion. The Energy Efficiency Council noted that:

The scheme should initially exclude transport fuels, although the government could consider expansion to this sector later. The structure of the transport sector is very different to the stationary energy sector and there is no global model for an Energy Savings Initiative that covers the transport sector. As a result, considerable design and analysis work would need to be undertaken before the Energy Savings Initiative could be extended to the transport sector.


Six submissions supported the inclusion of transport fuels in a national Energy Savings Initiative, calling for a scheme that did not discriminate against one fuel type in favour of another. The Sustainable Energy Association of Australia provides an example of the views expressed in these submissions; arguing for the inclusion of transport fuels on the basis that:

The risk of not including transport is that there are significant savings in energy costs as well as the potential savings for the overall economy (balance of payments) from consuming less imported oil or oil products. Furthermore, more energy efficient transport reduces costs to consumers, particularly those who require the supply of essential foods, perishables etc. through long distance transport.

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Based on the complexity and potential additional costs of including transport fuels in the target base for a possible national Energy Savings Initiative, the view of the Working Group is that transport fuels should be excluded at the outset of such a scheme. This approach is consistent with the existing state based schemes and with the design principle of simplicity, but does not preclude further consideration of transport fuels at a later point, with appropriate additional analysis and consultation.

Other fuelsVery few submissions to the Issues Paper provided views on the inclusion of fuels other than gas, electricity and transport fuels, despite the use of a variety of other fuels in Australia (including briquettes, black liquor, coke and bagasse). While other fuels face well known impediments to improved energy efficiency, they also pose difficulties for identifying cost effective points of obligation, due to the ways that they are supplied to consumers and the nature of their use. Coke and bagasse are used below to illustrate some of the considerations involved.

Consumption of coke and bagasse is limited to specific locations, for example, sugar cane factories in Queensland and northern New South Wales, or iron and steel smelters located in several states. Shared benefits for non-participants are not readily available for either coke or bagasse. Prices for coke are set through bilateral contracts in the international market and there are no network effects likely to accrue from individual actions. Similarly, the price of bagasse is set by the internal production costs of each site (since bagasse utilises a waste fuel from sugarcane processing) and the savings made would not be passed on to other bagasse users.

Given that these ‘other fuels’ are typically used for specialised purposes, the costs and complexity of measuring consumption may not be commensurate with the potential for energy efficiency improvements of these fuels. The Working Group’s view is that only electricity and gas would be included in the initial target base for consideration of a national Energy Savings Initiative. Should a decision be taken to include other fuels in the future, this would require further consultation with relevant industries and a further regulatory impact analysis focused on these fuels.

Working Group view: types of fuel to be included in a targetThe regulatory impact analysis will be conducted on the basis that fuels included in the target base will be restricted to electricity and gas.

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5.2 Units of measurement

The target of a national Energy Savings Initiative, and the activities that may be credited within it, should be measured in a metric that reflects the objective of the scheme (see Chapter 3) and the energy and fuels included in the target base. The unit of measurement should also reflect the scale of potential activities (for example household equipment improvements deliver savings orders of magnitude smaller than industrial projects). For example, if a national scheme incorporated an approach to deal with peak demand, this would also have implications for scheme units.

The Issues Paper set out five options for the units of measurement.

Table 3.1 Units of measurement for a possible national Energy Savings Initiative

Unit Rationale

Megawatt hours (MWh) Appropriate for a scheme that focuses on improving the overall efficiency of electricity use. Does not reflect value of saving energy at different times of day.

Megawatts (MW) or Megavolt amps (MVA)

Appropriate for measuring electricity load (that is, the infrastructure capacity required to deliver electricity), and therefore may be used for a scheme that targets peak demand. Not appropriate for gas, liquid fuels, solid fuels or electricity consumption over time.

Gigajoules (GJ) Appropriate for all fuels, but not for peak demand. Appropriate for a scheme that focuses on improving the efficiency of overall energy use.

Tonnes of carbon dioxide equivalent (tCO2-e)

Can be derived from all fuels, but not from peak demand. Changes over time as the greenhouse intensity of electricity changes. Appropriate for a scheme where the objective is emissions abatement.

Financial value ($) Can be used to combine energy demand and energy consumption by assigning a market value to each. Financial value can, however, be difficult to accurately quantify, and is proportionally different for different energy users, depending on their level of income.

As the proposed objective of a possible national Energy Savings Initiative focuses on energy efficiency, an energy-specific metric seems best suited. Gigajoules is a recognisable metric for all fuel types. For example, while electricity use is often measured in megawatt hours, this can be readily translated into gigajoules through a simple calculation.

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The use of gigajoules as a metric for a national scheme would be consistent with the design principle of simplicity, as it applies one unit of measure for all fuels proposed to be included in the target base and allows for fungibility between savings made in each fuel. In addition, it is consistent with the design principles of flexibility (a unit of measure that can be easily applied to other fuels that may be brought into the scheme in the future), and transparency (one unit of measure that can be easily communicated to all participants of the scheme).

Of the submissions to the Issues Paper that proposed improved energy efficiency as the possible scheme objective, many suggested that MWh would be the appropriate unit of measurement for an electricity-only scheme and that gigajoules would be an appropriate unit for a scheme that included electricity and any other fuels, in its target base. Submissions that prioritised a greenhouse gas abatement objective proposed tCO2-e as the appropriate scheme unit.

Consistent with its preliminary views on possible scheme objectives and fuels that could be included in the target base, the Working Group considers that gigajoules are an appropriate unit of measurement for a possible national Energy Savings Initiative.

Working Group view: units of measurementFor the purposes of the regulatory impact analysis, gigajoules provide a suitable metric for further consideration of a national Energy Savings Initiative.

5.3 Form of the target

Through the regulatory impact analysis, the Working Group will evaluate the costs and benefits associated with a range of possible target levels that could apply under a national scheme. This will help determine the optimum target that could encourage the level of cost-effective energy efficiency activities that should occur in the absence of barriers to rational decision making (as discussed in Chapter 1).

Absolute verses percentageThis section focuses on how an overall scheme target can be set. It also briefly explores how scheme targets might be translated to obligations for individual liable entities, though this will be tested more fully through the regulatory impact analysis.

Targets can generally be set in two ways: as an absolute amount or as a percentage of a whole. These two methods can also be used in combination.

Absolute targets, set as X units in year Y, provide a clear indication of the amount of action required under a scheme. However absolute targets, in particular long term targets, can limit the ability for a scheme to be adjusted in response to changing conditions, such as economic down turns or significant technological advances. Conversely, if insufficient notice is provided before an absolute target is set, this may contribute to business uncertainty and limit the ability of business to plan ahead to effectively meet the target.

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Percentage based targets indicate action required relative to a whole. The benefit of a percentage approach is that it automatically adjusts the total amount of action required based on changes in the overall potential of a target base. This automatic adjustment, however, means that the final amount of required action can remain unclear until well into, or even after, a compliance period. If this happens, it can result in additional complexity for scheme administration and uncertainty for business due to incomplete information around which to plan. This uncertainty may be reduced by adjusting the timing at which an overall scheme target for a compliance period is converted to obligations for individual obligated parties.

Targets of existing state schemes are set as both finite amounts and as percentages. The NSW Energy Savings Scheme (ESS) sets its overall target as a percentage of the state’s electricity sales; the percentage is set over ten calendar years (from 2010 to 2020). The obligation for an individual obligated party is calculated by multiplying the obligated party’s total liable electricity sales by the scheme electricity savings target for that year.

The target for the Victorian Energy Efficiency Target (VEET) is an annual amount of tonnes of carbon dioxide equivalent set in Regulations. This greenhouse gas emission reduction occurs over the life of the activities. Targets are set in three year phases (the first from 2009 to 2011, the second from 2012 to 2014). Under the scheme energy retailers are required to acquire certificates representing their share of the target. Certificates represent tonnes of greenhouse gas emissions saved over the lifetime of that activity. Retailer liabilities are calculated by multiplying their acquisitions of electricity and gas that are relevant for the purposes of scheme acquisition in that year by the relevant greenhouse gas reduction rate.

The South Australian Residential Energy Efficiency Scheme (SA REES) sets out energy reduction targets63 in absolute amounts of greenhouse gas abatement. These targets are set out in three year blocks, with specific requirements for each year identified. The current block is from 2012 to 2014. Individual targets are allocated to obligated parties based on their energy sales to residential customers, greenhouse gas emissions factors for energy supplied to residential customers and GreenPower sales. The Australian Capital Territory (ACT) scheme target is expressed as a percentage of total electricity sales in the ACT. The target is set out initially over three years (2013 to 2015), but with specific target values for each year. Obligations are proposed to be placed on individual electricity retailers based on emissions related to electricity sales in the ACT.

63 The SA REES also has energy audit targets, but this section of the Progress Report focuses on energy-specific targets, so these audit based

targets are not considered in detail here.

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The large-scale component of the Renewable Energy Target (RET) scheme includes legislated annual targets (expressed in units of renewable electricity generation) through to 2030. The legislated target for 2020 was calculated to deliver the bulk of generation to meet 20 per cent of Australia’s projected electricity in 2020 using renewable sources. These annual generation targets are translated into obligations for individual parties on an annual basis through the regulations. In terms of the small-scale renewable energy scheme, annual estimates of uptake of small-scale renewable technology are translated into obligations for individual parties through the regulations. The underlying generation from this component of the RET also contributes to achieving the 20 per cent by 2020 policy commitment.

Annual versus multiple yearTargets for a national scheme could be set annually or projected out over multiple years.

Annual targets could be set directly before the compliance period to which it applies, or for future years. Setting targets annually allows for regular variation of the magnitude of activity required under the scheme, but this may be at the expense of longer term planning certainty for participants.

A target trajectory can also be set, indicating the intended scope and direction of a scheme into the future. This provides an indication to participants (both obligated parties and others) of how much activity is likely to be required over the time period of the trajectory, and could facilitate planning. Target trajectories are often set in increments of five or 10 years though can be set in any increment that suits the purpose. Once set, a target trajectory could be adjusted (though this would need to be done in a transparent and timely way) allowing businesses adequate time to adjust. Consideration should be given to the timely setting of new target trajectories to ensure adequate signalling to market.

The critical aspects of a scheme target are that it provides a clear indication to participants of the amount of activity required in a given timeframe and that it is flexible enough to ensure that the scheme can adjust to changing conditions without causing unnecessary market uncertainty.

Stakeholder views expressed through the Issues Paper consultation process, while recognising the need for a scheme to have flexibility, resoundingly advocated for targets that indicate intended scheme direction over the medium term and are expressed in ways that facilitate business planning. The following selection of quotes from submissions is indicative of this perspective.

A future trajectory of annual targets should also be set to provide certainty for liable parties and broader energy efficiency market participants (e.g. energy service companies).

The Climate Institute submission

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The target defines the path to achieving long-term energy savings goals and should be determined in at least 3 year terms in order to create industry stability and employment assurances.

Green Energy Trading submission

Upfront targets are required to provide certainty to all participants and allow them to prepare their business plans and investments with some confidence.

Clean Energy Council submission

It is important that these targets are set in advance (a minimum of 2 years ahead should be maintained at all times to allow sensible investment planning in programs) and should not be adjusted in response to supply/demand issues.

Low Energy Supplies and Services submission

Working Group view: form of the target For the purposes of the regulatory impact analysis, possible percentage-based targets will be set out over the medium term.

5.4 Single target versus targets for each fuel type

Sub-targets, sometimes called ring-fences, could be used to ensure that a portion of activity under an overall scheme target is achieved in a specific sector, for a particular fuel type, or for some other sub-set of the economy or society.

Sub-targets are often used for a range of reasons, including, but not limited to:

targeting special interest groups, such as low-income households, or other priority groups;

managing the distribution of costs and benefits in a market-based scheme to account for variations in climate, geography, market characteristics or other factors; and

ensuring specific action in target fuel types or activities, particularly those that have co-benefits (such as greenhouse gas reduction).

This section focuses on the potential use of sub-targets for different fuels. The potential use of sub-targets for low-income households and peaking are discussed in Chapter 9 and Chapter 10 respectively.

The majority of submissions that commented on the suitability of fuel-based sub-targets in a national Energy Savings Initiative recommended a single target. Reasons presented focussed on scheme efficiency and reduced scheme complexity.

For example, Energetics and AGL state respectively that:

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Having separate targets for each fuel type almost certainly guarantees that the NESI will be less economically efficient than with a unique target covering all fuels.

Energetics submission

Sub-targets have the potential to add a layer of unnecessary complexity to the scheme and lead to increased costs.

AGL submission

This view was echoed in submissions from Energy Makeovers, Energy Renovations, and the Building Sustainability Training Institute (joint submission), EcoVantage and others.

Differences between fuels, may, however, justify separate fuel-based targets on the basis that the potential additional costs are balanced out by the benefits. The following quote highlights the importance of considering whole of system efficiency and shared benefits in setting any scheme sub-targets:

If the scheme is developed to include more than one fuel source, targets should be established based on total and peak energy savings potential in common units to ensure that the least energy intensive option is adopted irrespective of fuel source. Separate targets should be established for different fuels.

Council of Capital City Lord Mayors submission

Fuel based sub-targets are likely to add cost and complexity to a possible national scheme, but may be useful if the benefits accrued outweigh the costs. The driving consideration regarding fuel-based sub-targets should be whether the different fuel types have a materially different impact on scheme objectives.

Rather than setting different targets for different fuels, the Working Group considers that differences between gas and electricity could be accounted for by applying different values (of certificates) to activities and by setting different liabilities for individual obligated parties – both taking account of the fuel used/saved. This approach would be similar to the Victorian VEET, which covers both gas and electricity, but uses a conversion equation to express the use of both fuels as an amount of greenhouse gas emissions.

A number of potential applications of sub-targets have been raised by stakeholders. These include state-based sub-targets, sectoral sub-targets, and activity-based sub-targets. The Working Group will consider these additional types of sub-targets as it progresses its assessment of a potential national scheme.

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5.6 Minimum target for a national scheme

In order to inform the regulatory impact analysis, this section considers how a minimum target level could be set in light of the scheme objective and design principles, and the Working Group’s terms of reference. The terms of reference specify that the Working Group:

[W]ill consider and advise on possible design options for a national ESI that would be capable of delivering energy efficiency improvements at least as great as those being delivered by the New South Wales Energy Savings Scheme (ESS), the Victorian Energy Efficiency Target (VEET) and the South Australian Residential Energy Efficiency Scheme (REES).

The general view from stakeholders who provided submissions on potential minimum targets is that they should be high enough to support investments made on the basis of existing schemes and encourage energy efficiency activities to be implemented in states and sectors not currently included in a scheme.

Working Group view: minimum targetFor the purposes of the regulatory impact analysis, a minimum target for a potential national Energy Savings Initiative will be set on the basis of the percentage of energy savings currently expected to be achieved in the states and sectors included in existing (and planned) schemes, extrapolated to reflect coverage under a national scheme.

Due to the significant differences in key design features of sub-national schemes, determining an appropriate percentage of energy savings to apply to a national scheme will require a detailed review of the existing schemes and an assessment against the proposed design principles for a national Energy Savings Initiative. Such an assessment should consider:

state schemes’ targets in terms of energy savings and the energy consumption of the sectors included in the schemes’ target base;

activities being implemented to achieve existing state targets; and

improvement in energy savings this represents over and above current policy settings.

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6 Obligated parties As outlined in the Issues Paper, the obligation to meet the energy efficiency target under any energy efficiency obligation scheme must be placed on a party (or parties) somewhere along the energy supply chain of the eligible fuels (Figure 6.1).

Figure 6.1: Participants in the energy supply chain

A key consideration in selecting the obligation point(s) is ensuring that the scheme meets the design principles of efficiency and simplicity. The choice of obligation point should minimise the administrative and compliance costs of the scheme. A practical point of liability would therefore be one that:

captures all the energy in the target base;

results in a manageable number of obligated parties;

allows the liability to be readily calculated; and

has competition between obligated parties to minimise costs.

Those who have the greatest ability to affect the end use of energy are generally best placed to meet a target. Generally these would be located towards the end of the supply chain. However, where the number of individual energy users is large, and therefore the administrative cost and complexity of putting an obligation on them would be high, placing the obligation point further up the energy supply chain reduces the number of obligated parties and focuses the obligation on parties that have the capability to manage it.

For a national Energy Savings Initiative covering electricity and gas, there are three main possible points of obligation: on retailers; on distributors of electricity and gas; and on large energy users. These large users could include entities that purchase their energy from the wholesale market (although there are very few of these in the National Electricity Market (NEM)) or directly from a generator or other supplier for users not connected to the NEM.

Most NEM jurisdictions have introduced full retail contestability in electricity64 and all jurisdictions have introduced full retail contestability in gas retail markets.65 Origin Energy, AGL Energy and TRUenergy jointly supply over 80 per cent of small electricity retail customers in the NEM.66 A range of retailers operate in the market, with 46 electricity and 26 gas retailers currently licensed in NEM jurisdictions.67

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In Western Australia, the government-owned retailer Synergy, is the sole supplier to customers that consume less than 50MWh per annum and supplies the vast majority of electricity customers on the South West Interconnected System. Horizon Power, a vertically integrated utility, services the regional areas of the state. In the Northern Territory, Power and Water Corporation (the government-owned retailer) and QEnergy Limited provide electricity services to customers.

In contrast, electricity and gas distributors are regulated monopolies. Of the 13 electricity distributors operating in the NEM, around half are government-owned entities.68 Western Power, a government-owned corporation, operates the SWIS electricity network in Western Australia. Across the state of Western Australia, there are a number of private electricity networks including the Northwest Interconnected System and the Leinster/Mt Keith network. In southern and eastern Australia, the gas distribution market is dominated by three privately owned companies: Jemena, APA Group and Envestra.69 The Northern Territory has two gas retailers – Envestra and NT Gas, though these operate in different geographic areas.70

The New South Wales Energy Savings Scheme places its energy efficiency obligation on electricity retailers, market customers (large users which purchase energy from the wholesale market) and some electricity generators (or ‘direct suppliers of electricity’). Liable parties under the Victorian Energy Efficiency Target (VEET) and South Australian Residential Energy Efficiency Scheme are electricity and gas retailers who have 5000 or more customers (the Victorian VEET refers to liable parties as relevant entities).

The Australian Capital Territory scheme will place an obligation on all electricity retailers. However, ‘Tier 2’ retailers with annual sales of less than 500 GWh and/or less than 5000 customers may meet their obligation by carrying out activities and/or by paying a contribution fee for each tonne of CO2-e abatement required.71

The broad view of stakeholders that provided submissions to the Issues Paper was that retailers represented the most appropriate entity on which to place an obligation. Supporting arguments included that retailers have an existing relationship with customers, the necessary systems and capabilities to manage the obligation and that this approach is used in existing state schemes:

68 Australian Energy Regulator (AER), State of the energy market 2011, December 2011, p 56.

69 Australian Energy Regulator (AER), State of the energy market 2011, December 2011, pp 97-98.

70 Frontier Economics, Review of Implications for energy markets from climate change policies – Western Australian and Northern Territory

Elements – report to the Australian Energy Market Commission, November 2008, p 17.

71ACT Department of Environment and Sustainable Development, Energy Efficiency, viewed on 13 April 2012,

http://www.environment.act.gov.au/energy/energy_efficiency

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http://www.environment.act.gov.au/energy/energy_efficiency%20


An annual obligation to pursue and facilitate energy efficiency projects should be placed on holders of electricity and gas retail licences in each jurisdiction. Retailers have existing relationships and obligations with consumers, and optimally these would be capitalised on.

AGL Energy submission

Origin recommends retailers as best suited as the obligation point. In terms of successful transition from existing state schemes, all existing state schemes have retailers as the obligation and subsequent harmonisation into a national scheme will therefore be more expedient by retaining this central feature.

Origin Energy submission

The Working Group notes that both electricity and gas retailers possess the billing, marketing, trading and reporting systems and expertise to manage an obligation. Retailers’ relationship with energy consumers could also facilitate the implementation of energy efficiency activities and the pass-through of scheme costs. This relationship with consumers does not currently exist for energy generators or distributors. The issues discussed are applicable to both gas and electricity retailers.

Importantly, competition in the energy retail sector means that there is an incentive for retailers to minimise the costs of the scheme. As there is no competition between energy distributors, there is no scope for competition pressures to ensure that the costs passed on to consumers are minimised. Furthermore, as energy distributors are regulated monopolies, the process of adjusting prices to account for scheme costs would be more complex than for retailers.

The Working Group also notes that retailers are the primary obligated parties under the existing and proposed state schemes. If a decision was taken to implement a national Energy Savings Initiative, placing an obligation on retailers would assist in managing a smooth transition from existing state schemes.

For the purposes of further analysis, the Working Group will use an obligation point that requires electricity and gas retailers to meet an energy efficiency target under a possible national Energy Savings Initiative.

Some large users that purchase energy from a retailer may prefer to take on a direct obligation. 72 This would give them the flexibility to manage their own obligation, rather than receive a pass-through cost from their retailer. The Working Group will look further at whether it is a viable option to allow these users to opt to be an obligated party, noting that this approach would support the principle of building flexibility into the design of a national scheme.

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Some large energy users do not purchase their energy from a retailer but from the wholesale market or (for those outside the NEM) from a generator or supplier. If this energy use is to be included in the target base, an additional obligation point should be selected to ensure the relevant loads are captured.

These large users themselves could be a point of obligation because they have the resources and expertise to administer an obligation and are in a good position to manage their energy use in response to an obligation. Where it was not possible to place an obligation on these users, the next best point in the supply chain for an obligation would be on the entity that supplied the large user (which may be an electricity generator or a gas supplier). Further consideration will be given to the most appropriate obligation point for large users that directly source energy once the loads in the target base are determined.

Further consideration will also be given to the question of whether to apply a threshold to the obligation. Ideally, an obligation would be placed on all retailers to maximise the target base. However, the cost of administering an obligation on smaller retailers may outweigh any benefit. Accordingly, consideration will be given to excluding small retailers from an obligation if the compliance costs would materially affect their competitiveness and thus reduce competition in the retail market. Equally, consideration will be given to ensuring that any threshold would not distort the market in favour of smaller retailers.

Working Group view: obligated partiesThe Working Group will use as the basis for further investigation through the regulatory impact analysis, a national Energy Savings Initiative where the obligation to meet an energy efficiency target would be placed on electricity and gas retailers.

6.1 Approach to considering geographic coverage

The Working Group will analyse the impacts of geographic coverage on a potential national Energy Savings Initiative, through both modelling and boarder analysis work, as part of the regulatory impact analysis. Since the regulatory impact analysis cannot test all possible inclusion and exclusion combinations for all potential geographic locations, some form of rationalisation needs to occur.

For the purposes of the regulatory impact analysis, the Working Group intends to apply a principles-based analysis of the potential geographic coverage of a national scheme. This will allow modelling and analysis of different geographic coverage scenarios, both qualitatively and quantitatively. This will be relevant for both an area’s inclusion in the target base and eligibility to create certificates. This will assist in defining scenarios to be modelled in the regulatory impact analysis, but will not limit analysis of broader geographical coverage. The proposed process for narrowing down the approach to assessing the scheme’s geographical coverage considers the following elements, which relate to the proposed design principles discussed in Chapter 3:

impact of inclusion;

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shared benefits;

equity; and

retail contestability.

This will better enable the Working Group to test the potential impacts of including or excluding various on-grid (major and minor) and off-grid users from a possible scheme.

Impact of inclusionThe inclusion of any area in a possible national Energy Savings Initiative is likely to create costs for the area by way of the obligation to undertake activities, and to create benefits from activities undertaken. Inclusion of each area will result in the distribution of costs and benefits between users, and will also impact on this distribution throughout the broader scheme. This relates to the second design principle in Chapter 3 regarding additionality. By considering the potential costs and benefits of including any geographic area it is possible to draw conclusions on the likely impact of inclusion on the area and the subsequent interaction between that area and the scheme as a whole.

For example, areas which consume a large amount of energy and/or have the potential to produce a large number of low cost certificates will likely have a greater impact on the outcomes of an Energy Savings Initiative than areas without these characteristics.

Shared benefits The operation of a white certificate scheme can generate both private and public benefits since an activity which generates public benefits (for example deferment of network infrastructure investment) can place downwards pressure on energy costs for non-participants in the scheme. This relates to the first design principle related to efficiency.

An analysis of shared benefits will consider the likely impact of an area’s inclusion in the scheme and the proportion of private versus public net benefits that this inclusion will generate. Where the costs of inclusion align mainly with private benefits, this could justify exclusion of the area from a broader scheme.

EquityAlthough the geographic scope of a scheme target (and therefore obligation costs) should as closely as possible reflect the geographic scope of certificate creation, in some cases it may be inequitable to include or exclude certain areas. In these cases, the benefit of inclusion needs to be weighed against the costs such an inclusion will present to the scheme as a whole. Design principle six, relating to fairness and equity, is most relevant here.

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For example, an analysis of the scale of opportunities for an off-grid mining site may reveal a substantive quantity of low cost energy efficiency opportunities. Inclusion of this area could capture a significant proportion of the national market for activities, but provide no shared benefits to on-grid users who would effectively be paying for the realisation of these opportunities. An equity consideration could help reduce the likelihood of these types of impacts occurring in a national scheme.

Another example of an equity consideration might include where an area would experience high costs in complying with the scheme but not have many opportunities to offset these. Similarly, there may be areas that would not experience high costs for inclusion in the scheme, nor have a material impact on the scheme itself, but could potentially derive material benefits from eligible activities. For example, the latter might apply to a small remote community, and an equity consideration could support consideration of their treatment under a possible national scheme.

Retail contestabilityThe final element of the geographic coverage analysis considers whether the geographical region in question has retail contestability. Simply, do end users have a choice of retailer? This will assist the Working Group to analyse whether the inclusion of certain geographical areas might unfairly impose costs on end users in those areas. In satisfying the design principles of simplicity, and fairness and equity, maintaining a single point of obligation for all users of similar sectors (for example, retailers for residential users) may be desirable.

This is an important consideration, as having a choice of retailer implies that there should be a certain level of competition. Competitive forces pressure retailers to find the lowest cost options under a scheme, and to pass through to end users costs which more closely represent the marginal costs of scheme compliance.

Conversely, in areas where there is no choice between retailers, the supplier still passes through the cost of scheme compliance, but they experience significantly less competitive pressure to find the lowest cost approach to achieving compliance. Similarly, in areas where there are high barriers to retail-market entry the incumbent retailer will experience no material competitive pressure to minimise the cost pass-through of a scheme.

Final recommendations on geographic coverage cannot be made until further analysis is undertaken on the implications of including particular areas in the scheme’s target base, as well as the potential for those areas to create certificates. The regulatory impact analysis will assess the potential inclusion of different areas quantitatively (for example, through the modelling process) and qualitatively (for example, when undertaking equity considerations). The Working Group will undertake further investigation to ensure that the regulatory impact analysis is adequately informed.

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Working Group view: approach to considering geographic coverageFor the purposes of the regulatory impact analysis, a principles-based analysis of geographic coverage will be adopted to assess (quantitatively and qualitatively) the potential impacts of different geographic coverage for obligated parties.

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7 Sectoral coverageRecommendations on which sectors would be covered in considering a national Energy Savings Initiative are likely to influence the costs and benefits of a scheme and how they are distributed. This will also influence how any national scheme could meet the design principles of efficiency, fairness and equity.

This chapter discusses:

which sectors will be included in the central scenario used by the Working Group in the regulatory impact analysis;

sector-specific concerns raised by stakeholders in response to the Issues Paper; and

a proposed approach to test scenarios for the treatment of emissions-intensive trade-exposed (EITE) industries to determine if their exclusion would result in the loss of significant cost-effective opportunities.

7.1 Approach to coverage

Under the Clean Energy Future plan, the Australian Government committed that investigation of a potential national Energy Savings Initiative would start from a basis of broad coverage (residential, commercial and industrial). However, the commitment noted that further design work and consultation should include consideration of sectoral coverage issues.

Broad coverage allows the greatest scope for the market to find and implement the least-cost energy efficiency improvements to meet the target, which would minimise the cost of a scheme compared to the likely benefits. This maximises the overall efficiency of a scheme, in line with the first of the design principles outlined in Chapter 3.

However, the overall costs and benefits of the scheme are only one part of the picture – the distribution of costs and benefits across and within sectors is also a relevant factor. In light of the proposed design principles of fairness and equity, there is also cause to consider whether a scheme can provide all sectors with benefits that are fair when compared to the costs borne by that sector.

The Working Group’s approach is therefore to start with broad sectoral coverage, with exclusions considered only where necessary for a scheme to remain fair, equitable and cost-effective.

When assessing sectoral coverage, there are two separate issues to consider: whether the sector's energy use would be included in the target base; and whether the sector would be allowed to carry out accredited energy efficiency activities.

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Generally, a sector should be treated equally under both scenarios – that is if a sector is captured in the target base of a scheme, that sector should also be eligible to undertake activities – unless there is a particular reason to depart from this approach. A sector would therefore have the opportunity to receive direct benefits from a scheme (through carrying out accredited activities) when it also faces the costs (through being included in the target base). Discussion of coverage in this chapter thus refers to both the inclusion of a sector in the target base and accredited activities, unless otherwise specified.

As outlined in Section 6.1, an approach to considering geographic coverage will also be applied through the regulatory impact analysis. Thus any exclusion of geographical areas, including specific networks, will be overlaid on sectoral coverage (as well as fuel coverage) to determine the overall coverage of a possible national Energy Savings Initiative. In this way, while a sector may be covered by a scheme, some parts of the sector may be considered for exclusion based on geographical location and some energy use of the sector may be excluded where a fuel it uses is not covered.

The Issues Paper discussed the definitions and characteristics of commercial, industrial and residential sectors in Australia. Comments were invited on a range of issues, including:

whether any sectors or sub-sectors could be excluded from coverage;

whether there may be sectoral-specific barriers to the uptake of energy efficiency improvements;

what potential for energy efficiency improvement exists in each sector; and

whether there are aspects of sectoral coverage in existing schemes that a potential national Energy Savings Initiative could leverage.

A wide range of stakeholder submissions – including from industry associations, energy companies, environmental associations and community welfare groups – supported a national Energy Savings Initiative with a broad sectoral base. Stakeholders provided various reasons for supporting broad sectoral coverage, including that it would:

ensure the maximum number of opportunities to improve energy efficiency are available;

keep the cost of potential certificates down;

make it easier to transition from existing schemes with different (and narrower) sectoral coverage;

most effectively target cross-sectoral barriers; and

result in a greater net benefit to the economy.

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Some submissions raised potential difficulties that would need to be overcome if a national scheme had broad coverage. These included different set-up costs for participants operating in jurisdictions with different coverage under existing schemes and the possibility that private benefits could accrue to one sector while associated costs accrue to another. These issues will be considered further through the regulatory impact analysis.

For the purposes of the regulatory impact analysis, the Working Group intends to start with a central scenario that covers the commercial, industrial and residential sectors (allowing for geographically-based or fuel-based exclusions). A discussion of each of these sectors and relevant issues raised by stakeholders is provided below.

The costs and benefits of excluding particular sectors will be tested against the central scenario to determine the overall impact on a national scheme, and on other individual sectors.

Working Group view: sectoral coverage in the central scenario For the purposes of the regulatory impact analysis, a central scenario will be established to test the costs and benefits of a possible national Energy Savings Initiative with broad sectoral coverage, including the commercial, industrial and residential sectors.

The regulatory impact analysis will also test the costs and benefits of excluding particular sectors against this scenario.

7.2 Residential sector

The residential sector is included in all existing state schemes in Australia, as well as the Australian Capital Territory (ACT) scheme, due to commence on 1 January 2013. The residential sector represents a high proportion of overall implemented activities in state schemes. Most existing international schemes also include the residential sector.

A range of non-price barriers mean that, for many households, cost-effective energy efficiency improvements will not be taken up. These barriers include information failures where households do not have access to sufficient or accurate information about their options, or split incentives between landlords and tenants. In addition, even where people have access to sufficient information, they may be overwhelmed by its size and complexity, or may not have the time to carefully process it.

Stakeholder submissions on the Issues Paper supported this assessment of barriers and also referred to households not having access to capital to carry out some energy efficiency measures, as well as the transaction costs in time and effort to source equipment suppliers.

Many stakeholders supported covering the residential sector in a potential national scheme, suggesting that there are untapped opportunities to improve energy efficiency in this sector, including in states with existing schemes. Examples given include floor and wall insulation and glazing upgrades.

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The NESI is an important consideration for the residential building industry given its potential to create incentives and opportunities for improvements to the more than 8 million existing homes in Australia that were constructed before the introduction of mandatory energy efficiency regulations.

Housing Industry Association submission

Although generally supportive of a scheme which covered the residential sector, community welfare organisations raised several issues, in particular the costs and benefits that could be experienced by vulnerable and low-income households. These issues are discussed in Chapter 9.

Several other concerns about residential coverage were raised in submissions. A tertiary education organisation questioned the inclusion of the residential sector in a potential national Energy Savings Initiative, arguing that residential activities carry a higher overhead of labour and transport per kilowatt hour of energy saved compared to larger programs in the commercial and industrial space. Orica noted the potential for the relative scale of activities in the residential sector to adversely affect energy prices for industrial customers.

The Working Group notes the concerns raised by stakeholders and will consider these through the regulatory impact analysis. However, based on experience from existing schemes, the residential sector appears suited to an energy efficiency obligation scheme and a well-designed scheme can help address barriers to energy efficiency in this sector. There are a range of opportunities to improve energy efficiency in the sector and these are well suited to standardised approaches to measurement and verification which would allow the efficient implementation of activities across the sector. Thus for the purposes of the regulatory impact analysis, the residential sector will be included in the central scenario.

7.3 Commercial sector

The commercial sector is included in the New South Wales Energy Savings Scheme (NSW ESS). The Victorian Energy Efficiency Target (VEET) was extended to include the business sector from 7 December 2011, however large commercial sites captured by the Victorian Environment Protection Agency (EPA) Environment and Resource Efficiency Plan (EREP) program are not eligible to participate in the VEET.

A number of international schemes, including in France and Italy, cover the commercial sector. Conversely, the sector is not included in the South Australian Residential Energy Efficiency Scheme (SA REES). In the scheme for the ACT, SMEs are to be covered, but not the entire commercial sector.

While there was generally support from stakeholders for the inclusion of the commercial sector in a national Energy Savings Initiative, Lend Lease Sustainability Solutions questioned whether such a scheme would drive energy efficiency improvements in commercial buildings:

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...there is no evidence anywhere in the world of white certificate schemes working (in the sense of succeeding) in driving energy efficiency in the non-residential building sector.....

Therefore to pursue this policy option with respect to the non-residential building sector would be to miss a huge abatement opportunity for Australia, as well as the many social and economic benefits that accompany such abatement.

Lend Lease Sustainability Solutions submission

The Refrigerated Warehouse and Transport Association of Australia and the Tourism & Transport Forum noted that their sub-sectors or operations are currently excluded from some state-based schemes such as the Victorian VEET, and that this meant they were not able to access the same opportunities as other commercial entities that participated in state schemes.

A number of submissions specifically discussed small and medium enterprises (SMEs).73 Some submissions drew on experience with existing schemes to support the inclusion of SMEs:

Excluding sectors such as the commercial and industrial sector from a scheme reduces the effectiveness of the scheme. For example, the first 3 years of the VEET scheme commenced with activities restricted to the residential sector only. Small businesses were not able to benefit from improvements/activities over the same period. Similar incentives provided by the NSW ESS (electricity only) within the commercial and industrial sector are assisting organisations such as Essential Energy to carry out energy efficiency activities for these small medium enterprises (SME) and commercial & industrial customers.


While broadly supportive of the inclusion of SMEs and noting the potential to improve energy efficiency in this sector, some stakeholders noted that SMEs face particular constraints which would need to be addressed if the commercial sector was covered by a possible national Energy Savings Initiative. These included a lack of resources, informational barriers, split incentives and the large variance in scope for energy efficiency improvements between different SMEs.

The Working Group notes a number of studies that support the availability of cost-effective energy efficiency improvements in the commercial sector74 as well as experience from existing schemes which suggests these improvements can be unlocked through an energy efficiency obligation scheme.

73 It should be noted that SMEs can also include small and medium industries, and some of these comments could equally apply to the

industrial sector.

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The Working Group has engaged a consultancy firm to further examine energy efficiency improvements in the commercial sector in Australia. The data from this work will support further analysis through the regulatory impact analysis, including modelling the uptake of energy efficiency improvements in the commercial sector. Unless evidence is obtained to the contrary, the commercial sector will be included in the central scenario for the purposes of the regulatory impact analysis.

7.4 Industrial sector

The industrial sector is covered by the NSW ESS, with the energy use of EITE industries being partially or fully excluded from the target base. The Victorian VEET has been extended to businesses, however industrial sites captured by the Victorian EREP program are not eligible to participate in the Victorian VEET. A number of international energy efficiency obligation schemes also include the industrial sector. The SA REES does not include the industrial sector, and, while the ACT scheme does not specifically exclude the industrial sector, its inclusion will depend on the activities approved for eligibility under the scheme.

In their response to the Issues Paper, stakeholders from industry generally advocated for the exclusion of the sector from a national Energy Savings Initiative, given their relatively large energy use and the presence of existing measures targeting energy efficiency in the sector.

Large energy users have, obviously, very different needs to smaller energy users and will not be a market for the energy efficiency products and services that we would expect the NESI is seeking to promote. As such, we suggest that large users should be excluded from the NESI altogether... Some of our members have been supportive of the Energy Efficiency Opportunities program, specifically in the effect that it has had in raising the profile of energy efficiency in their companies. This would seem to be the most appropriate approach to energy efficiency improvement in the industrial sector.

Energy Users Association of Australia submission

Orica suggested that thresholds could be included to determine inclusion or exclusion of industrial entities:

The industrial sector should be included with rewards and penalties. There should however be a minimum threshold for inclusion to minimise set up costs to government. The EEO threshold of 500,000 GJ per year energy use for a company seems a good start as these companies already should have a good understanding of energy flow.

Orica submission

Some stakeholders suggested that the industrial sector (along with energy retailers) was more capable than other sectors of generating certificates:

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Certificates will be generated only in sufficient numbers for trading purposes by large energy using entities and electricity retailers who aggregate the energy efficiency improvements for small energy users. The trading scheme should be limited to those who can provide tradable volumes of certificates. This would include large users and energy retailers.

Major Energy Users Inc. submission

Industry stakeholders also indicated that barriers to investment in energy efficiency improvements in the industrial sector include a lack of access to capital, internal competition for capital, the lower priority placed on energy efficiency as a non-core business issue, and the high capital cost and inefficiency associated with the early replacement of long-lived assets.

Views from stakeholders outside the industrial sector were varied. A number of submissions (for example, Low Carbon Australia Limited, ClimateWorks Australia, Energetics, Ecovantage, and The Climate Institute) suggested that industrial energy efficiency projects could account for significant energy and greenhouse gas emissions savings within a national scheme. ClimateWorks Australia noted that:

Despite the large volume of profitable opportunity that exists in the industrial sector (23 MtCO2-e), it is not covered by most state schemes... given the significant opportunity in this sector, and the fact that a carbon price alone is unlikely to be sufficient to drive the uptake of much of this energy efficiency potential, there is clear need for additional mechanisms to successfully drive emission reductions in this sector.


Other stakeholders raised concerns about the equity of industry sector coverage:

The large scale business sector already has an Energy Efficiency Opportunities Program. Ordinary electricity consumers should not be burdened with paying for large scale energy efficiency projects of the large players in mining and manufacturing. We suggest restricting this program to the residential and community sector.

Conservation Council of South Australia Submission

Similarly, Ausgrid cautioned that while large industrial customers and mining customers have the potential to implement a few large-scale energy efficiency initiatives and these may deliver large volumes of savings at a more effective cost than implementing many small projects, this:

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... may not meet objectives regarding scheme accessibility and participation and providing a broader opportunity for a large group of customers to become more energy efficient and lower their energy expenses.

Ausgrid submission

This view was shared by Energetics:

...were the scheme to include all sectors and all energy types, it could be that the most cost effective energy saving initiatives are associated with the mining fleets and all benefits of the NESI go to the large resources companies at the cost of all residential energy consumers.


For the purposes of the regulatory impact analysis, the industrial sector will be included in the central scenario (notwithstanding any geographically-based exclusions – see Section 6.1). The issues raised by stakeholders regarding the distribution of accredited activities will be tested through this central scenario and through broader analysis.

50 Australian Energy Market Commission, ‘Power of choice – giving consumers options in the way they use electricity: Directions Paper’,

2012, p. 188.

51 The Clean Energy Future plan and the carbon pricing mechanism were released in 2011 after the Task Group’s Report was prepared in

July 2010. To reflect these developments, the Issues Paper proposed a revised set of design principles.

53 N Eyre, ‘Regulation of energy suppliers to save energy – lessons from the UK debate’, Proceedings of the British Institute of Energy

Economics Conference, September 2008.

54 Roland Berger Strategy Consultants, Green Growth, Green Profit: How Green Transformation Boosts Business, Palgrave MacMillan,

London 2011, pp 122-123.

55 The NSW ESS and the Victorian VEET both feature trading and certificates. The SA REES allows for trading of credit between energy

retailers, but does not issue certificates.

56 See: http://www.environment.act.gov.au/__data/assets/pdf_file/0003/244434/Energy_Efficiency_Improvement_Bill_-

_Regulatory_Impact_Statement_2012.pdf, viewed on 24 April 2012.

57 Whilst this is an advantage for the buyer, it may not necessarily mean the scheme has lower costs. In both buyer and seller models,

someone is responsible for the validity of an activity.

58 As a national Energy Savings Initiative would focus on improving the efficiency of energy use, it should focus only on energy that is used

in Australia. Primary energy that is used in Australia is part of Australia’s final energy consumption. Any primary, or other, energy that is

exported, is not used in Australia, and therefore does not fit well for consideration under an energy savings initiative.

61 Australian Bureau of Statistics, Energy Account 2009-10 (4604.0), Canberra, 2011, p 19-21.

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http://www.environment.act.gov.au/__data/assets/pdf_file/0003/244434/Energy_Efficiency_Improvement_Bill_-_Regulatory_Impact_Statement_2012.pdf

http://www.environment.act.gov.au/__data/assets/pdf_file/0003/244434/Energy_Efficiency_Improvement_Bill_-_Regulatory_Impact_Statement_2012.pdf


Emissions-intensive trade-exposed industries75

Within the industrial sector, emissions-intensive trade-exposed (EITE) industries were raised by some stakeholders as requiring particular consideration. EITE stakeholders advocated strongly for the exclusion of EITE industries and large energy users from the target base. This was based on the view that a possible national Energy Savings Initiative could have a negative effect on their international competitiveness in a difficult economic climate. For instance, the Australian Aluminium Council stated:

A national ESI would need to recognise the vulnerability of EITE industries in the absence of similar cost imposts on global competitors, and put in place measures to minimise the adverse impacts on local producers. In the AAC’s view this would be best achieved by removing EITE industries entirely from coverage of a national ESI.

Australian Aluminium Council submission

In addition, EITE industries argued that they have sufficient incentive to carry out energy efficiency improvements as energy is a significant proportion of their total costs, they will face a carbon price from 1 July 2012 and they have obligations under other programs such as the Australian Government’s Energy Efficiency Opportunities (EEO) program which requires liable entities to identify energy efficiency improvements.

62 While there may not be specific network benefits from energy efficiency improvements made to the use of transport fuels (such as might

accrue in an electricity network, for example), there may be broader general benefits that accrue to the Australian economy from the more

productive use of transport fuels, since this would free up resources for new purposes.

64 Victoria, South Australia, New South Wales, Queensland and the Australian Capital Territory, from Australian Energy Regulator (AER),

State of the energy market 2011, December 2011, p 108.



67 Licensed retailers obtained from the registers published online by regulators in each jurisdiction.

72 Large users may include, but are not exclusively, emissions-intensive trade exposed (EITE) entities. Consideration of EITEs is discussed

in Section 7.4.

74 ClimateWorks Australia, Australian Carbon Trust Report: Commercial buildings emissions reduction opportunities, 2010; Allen

Consulting Group, The Second Plank Update: A review of the contribution that energy efficiency in the buildings sector can make to

greenhouse gas emissions abatement, Report for the Australian Sustainable Built Environment Council (ASBEC) Climate Change Task

Group, 2010.

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For example:

There are already strong commercial incentives and internal programs for [large and very large industrial energy users] to improve the efficiency of energy use at their operations without additional government policy intervention. A significant duplication of effort would also result from applying any NESI to large industrial energy users already participating in the EEO program.

Rio Tinto submission

Other large energy users argued that, while energy efficiency improvements are available, they are difficult to unlock due to their complexity, capital costs and timeframes required to implement and realise the benefits.

A number of stakeholders, including ClimateWorks Australia and the Energy Efficiency Council, advocated that any national scheme should have broad sectoral coverage. Arguments for inclusion of EITE industries included the need to capture the least-cost energy efficiency improvements across the economy and the availability of cost-effective energy efficiency improvements in the industrial sector in general.

EITE industries’ electricity use represents about 21 per cent of national electricity consumption,76 so exclusion from a potential national Energy Savings Initiative could reduce the scheme’s target base and affect its overall costs and benefits.

Box 7.1 Coverage of EITE activities or EITE companies?

Under the Clean Energy Future plan, 38 industry activities (covering around 137 businesses) have initially been identified as being emissions-intensive and trade-exposed and are eligible for assistance in relation to the carbon price mechanism. This assistance is specifically applied to EITE activities, rather than to all operations carried out by EITE companies.

The Working Group will consider whether any special treatment of EITE industries should be applied only to EITE activities (for example, the manufacture of high-purity ethanol) or to the entire operations of a company (which could also include the manufacture of low-purity ethanol, which is not an EITE activity, at the same site). This section refers generically to ‘EITE industries’ noting that the distinction between EITE activities and EITE companies will be considered further through the regulatory impact analysis.

As outlined in Section 7.1, there are two separate issues to consider when discussing coverage of EITE industries: whether EITE industries’ energy use would be included in the target base and whether EITE industries would be allowed to carry out accredited energy efficiency activities.

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Accordingly, there are three approaches for the treatment of EITE industries under a possible national scheme:

include EITE industries in the target base and allow them to carry out accredited activities;

exclude EITE industries from both the target base and carrying out accredited activities, with the option for EITE industries to choose to opt into the scheme (target base and activities); or

exclude EITE industries from the target base but allow them to carry out accredited activities on a voluntary basis.

If EITE industries were included in the target-base, they would bear a proportion of the scheme’s costs. If EITE industries were eligible to carry out accredited activities within a national scheme, they would have the ability to directly benefit through the revenue stream generated from certificate creation and through reduced energy consumption. In both scenarios, EITE industries on shared electricity or gas grids would access indirect shared benefits, and their participation in the scheme would have an impact on shared benefits for others. However submissions suggest the potential benefits may be offset by the negative impact on international competitiveness.

The third approach does not sit neatly with a desire to align costs and benefits with individual sectors as discussed in Section 7.1. However if the EITE sector was a potential source of low-cost energy efficiency improvements, such an approach on a voluntary basis may increase the overall benefits of a scheme while lowering the costs (scheme costs and potentially energy costs) both for EITE industries and for other energy users.

Existing state schemes have different approaches to the coverage of EITE industries. Under the NSW ESS, EITE industries' energy use is partially or fully excluded from the target base, broadly in line with their assistance under the carbon pricing mechanism. EITE sites are, however, able to carry out accredited activities and create certificates under the Scheme.77 Between the Scheme commencement on 1 July 2009, and 2011, EITE sites have created around 437,900 certificates for some 14 projects, about 22 per cent of total ESS certificates in that period.78 Other Australian state schemes are focussed on residential use; the Victorian VEET only recently expanded to include the business sector.

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Further analysis will be undertaken through the regulatory impact analysis to support a recommendation about whether EITE industries should be included under a possible national Energy Savings Initiative. As the first step, the Working Group is investigating whether sufficient opportunities exist for a national Energy Savings Initiative to significantly improve energy efficiency in the EITE sector, while taking into account the effect of existing incentives and requirements such as the EEO program. The results will provide important inputs into the economic and energy market modelling of a possible national Energy Savings Initiative by indicating whether the exclusion of EITE industries would have a significant impact on a national scheme and the extent to which potential decreased international competitiveness would affect EITE industries.

The central scenario in the regulatory impact analysis will assume that EITE industries are excluded, both in the target base and as a source of energy efficiency activities. This scenario will be tested against another in which EITE industries are included so that the level of any foregone benefits can be examined to determine whether they are significant enough to warrant further consideration regarding the inclusion of EITE industries. The Working Group may also test a third option, where EITE industries’ energy use could be excluded from the target base but EITE industries could be allowed to carry out energy efficiency activities.

Working Group view: coverage of EITE industriesResults of the regulatory impact analysis will be used to support a recommendation on the treatment of emissions-intensive trade-exposed (EITE) industries under a potential national Energy Savings Initiative. The central scenario for modelling will exclude EITE industries' energy use in the target base and EITE industries as a source of energy efficiency activities.

The regulatory impact analysis will also test the impacts of including EITE industries' energy use in the target base and EITE industries being allowed to carry out energy efficiency activities. Based on these results, the regulatory impact analysis may also test the impacts on costs and benefits of allowing EITE industries to undertake activities, but excluding their energy use from the target base.

These scenarios will take into account existing incentives and programs to improve energy efficiency such as the Energy Efficiency Opportunities program. The potential impact on international competitiveness will also be considered in the analysis.

7.5 Energy generation sector

As discussed in Chapter 5, electricity generation converts primary energy sources,79 such as coal or natural gas, into electricity. While this process can have varying levels of efficiency, some of the primary energy will always be lost in the conversion process. A generation business is also a consumer of final energy in its wider operation and secondary services (for example, lighting the rooms in which its employees work), though some areas of its operations may be considered to belong to another sector (for example, if a generation business maintains offices in a commercial office block, this energy end use would be considered part of the commercial sector, not the generation sector).

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Generators currently face competitive dispatch arrangements which provide an incentive to improve energy efficiency. The recent extension of the EEO program to cover generators has increased the likelihood that generators will investigate potential energy efficiency activities. Furthermore, the carbon price mechanism is expected to motivate carbon intensive generators to improve their energy efficiency. The existence of several policy measures to encourage improvements in generator efficiency was raised in the submissions:

It is expected that opportunities for operational energy efficiency for power generators will be captured by the carbon price. However, additional potential exists in the sector for capital intensive energy efficiency improvements. Capturing this potential for emissions reductions is crucial in Australia’s transition to a low carbon future, however it is likely that these high cost opportunities are better targeted by other policy instruments than the national ESI.


Working Group view: inclusion of generatorsFor the purposes of the regulatory impact analysis, the Working Group considers that a possible national Energy Savings Initiative would not include the final energy consumption of generators in the scheme’s target, and that generators would not be eligible to receive certificates for activities undertaken.

Additional consideration will be given to the treatment of co-generation, tri-generation and embedded-generation.

7.6 Energy networks

Energy networks, which transport electricity and gas from the source to end users, experience losses of the energy transported: estimates suggest losses of around one to seven per cent may be experienced by distribution networks.80 Losses occur though a range of processes, such as heat loss in wires and transformers, gas leakage and gas used in compression. In operating their business, energy network companies are also consumers of energy, through activities such as construction, monitoring and maintenance.

Network companies that participate in the National Energy Market are already obliged to consider improvements to the efficiency of transporting electricity across their networks. These obligations occur in conjunction with most network investments, and are derived from the current Regulatory Investment Test for Transmission (RIT-T) and the proposed Regulatory Investment Test for Distribution (RIT-D), which form part of the National Electricity Rules (NER). Furthermore, efficiency improvements are also considered through the revenue and pricing principles of the NER.81

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The proposed RIT-D requires distribution companies to consider network losses as part of their assessment of each option under applicable network investments.82 The RIT-D is intended to ‘increase the efficiency in the development and operation of distribution networks’.83 The current Chapter 5.6.5B of the NER imposes the same obligation upon transmission companies. Similarly, electricity networks in the South West Interconnected System (SWIS) are also required to undertake a regulatory test (that requires the solution to maximise the net benefit after considering alternative options) when planning major network augmentations. This requires considering demand side management options and generation solutions including distributed generation alternatives to network expansion or reinforcement.84

Beyond these existing requirements, the proposed expansion to the EEO program will require network businesses to investigate whether cost-effective efficiency improvements can be made to their networks.85

A number of submissions raised concerns that additional policy intervention could interact negatively with existing requirements. For example:

[Inclusion of] electricity network sector activities ... is likely to distort our current regulatory settings which already act to minimise energy losses to the extent that the economically efficient transportation of the energy is achieved for consumers.

Jemena submission

In an examination of network regulation, the Australian Energy Regulator (AER) found a lack of evidence that Australian networks have inefficient levels of network losses.86 Should it come to light in the future that network businesses are affected by interacting market failures and non-price barriers (like other sectors) that are not overcome by the existing measures, the Australian Government could consider whether this could be overcome by including improvements to network efficiency as a source of eligible activity in a future national Energy Savings Initiative.

Working Group view: inclusion of network businessesFor the purposes of the regulatory impact analysis, the Working Group considers that a possible national Energy Savings Initiative would not include the final energy consumption of networks in the scheme’s target, and that network businesses would not be eligible to receive certificates for activities undertaken.

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8 Measurement and verification of energy efficiency activitiesApproaches to measurement and verification of energy savings play an important part in determining the overall effectiveness, simplicity, flexibility and transparency of a national Energy Savings Initiative. This chapter sets out the options for assessing energy efficiency improvements potentially driven by a possible national Energy Savings Initiative, to ensure that they are additional to those which would have occurred in any event (Section 8.1). It also sets out relevant considerations in choosing methodologies to certify energy savings under a possible national scheme (Section 8.2). Section 8.3 sets out considerations around pathways for new technologies; and Section 8.4 touches briefly on taking account of peak demand impacts when calculating savings.

8.1 Additionality of eligible activities

As stated in Chapter 1, the energy efficiency of the Australian economy has been improving over time. Asset replacement, general technological progress and other energy efficiency policies could continue to drive ongoing improvements in Australia’s energy efficiency. The Working Group considers that designing a scheme with a relatively high degree of additionality is important to ensure it achieves ‘real’ improvements in energy efficiency, in line with the proposed objective and design principles in Chapter 3.

However, it is important to balance additionality with other design principles as there could be tradeoffs between them. For example, scheme costs would rise if a very high level of additionality was enforced, as this would require a more complex and resource-intensive monitoring and verification system.

This view was generally supported by stakeholders, including Origin Energy Limited, and the Energy Efficiency Council:

Energy efficiency can be difficult to measure and verify as additional, in large part due to its link with behaviour change. Therefore, Origin recommends an ESI encourage additional energy efficiency, but not at the expense of complex verification which unnecessarily increases scheme costs.


...while the ESI must overall drive additional demand-side measures, it is not critical to ensure that every single project it drives is additional. In fact, while the ESI is likely to support some projects that are non-additional (‘free-riders’), it will change market conditions in ways that drive many additional projects without financial support (‘free-drivers’). The scheme needs to be designed to ensure that, overall, it drives additional demand-side measures, while minimising transaction costs. In fact, if the transaction costs are too high it won’t generate additional projects.


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As noted in Chapter 4, the preferred scheme architecture for a possible national Energy Saving Initiative is a baseline-and-credit scheme. A common feature of all baseline-and-credit schemes is that their effectiveness is measured against a projection of what would have happened without the scheme, known as a ‘business as usual’ scenario. The premise is that effective schemes only credit activities that would not have happened anyway (additional to business as usual).

Designing a scheme that only credits activities additional to business as usual is difficult, if not impossible, because determining exactly what would have occurred without the scheme relies on a counterfactual projection. However, careful scheme design and verification processes can help maximise the likelihood that credited activities are truly ‘additional’.87 Broadly, there are three types of additionality to consider:

1) regulatory additionality: a scheme only credits activities that achieve a level of energy efficiency beyond that required by laws or regulations;

2) technical additionality: a scheme only credits activities that achieve a level of energy efficiency that is beyond market average for that activity (in other words, not crediting an energy efficiency improvement that would have been likely in the absence of a scheme, due to performance available from the current market for that activity); and

3) financial additionality: a scheme only credits activities that achieve a level of energy efficiency improvement beyond that driven by financial support (from government measures designed to finance energy efficiency improvements) that has already been provided for that activity.

Regulatory additionalityWhile the principle of only crediting activities that are not required by existing laws or regulations can seem relatively straightforward, it can be challenging to apply in practice.

For energy efficiency improvements that are covered by uniform national regulation, (such as Minimum Energy Performance Standards (MEPS) for appliances and equipment, or building code provisions for buildings), a national Energy Savings Initiative could be designed to exclude any activity that merely satisfies the relevant regulatory instrument.

However, regulatory minimums in different states and territories can vary, making it difficult to determine a nationally consistent additionality test. For example, some states and territories have mandated performance requirements that go beyond MEPS for certain appliances sold in that state.

87 For a discussion on the additionality of white certificate schemes, see O Langniss and B Praetorius, ‘How much market do market-based

instruments create? An analysis for the case of “white” certificates’, Energy Policy, vol. 34, 2006, pp 200-211, 207.

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Similarly for buildings, the Building Code of Australia mandates minimum energy efficiency standards, but the actual standards enforced by state and local governments can go beyond these minimum standards. The Energy Efficiency Opportunities program applies to large energy users nationally, but some states have similar programs for smaller energy users requiring implementation of projects. Environment Protection Authority (EPA) Victoria’s Environment and Resource Efficiency Plan (EREP) regulations require large energy-consuming businesses to identify energy savings opportunities and to invest in opportunities that achieve a payback period of three years or less. The Victorian Government currently excludes EREP sites from creating certificates under the Victorian Energy Efficiency Target (VEET) Act.

This makes is difficult, if not impossible, to settle on a universally applicable regulated minimum for an energy efficiency activity. One option could be to identify the jurisdictional laws and regulations that apply to an activity on a case-by-case basis, and only award credits if that activity exceeds the regulated minimum.

This approach was supported by several submissions, including from the Australian Network of Environmental Defender’s Offices:

The scheme administrator should be required to ensure that an activity passes an ‘additionality test’ before approving it as an eligible activity. The additionality test should ensure as a minimum that the activity is not already required by law. This should exclude activities that are required by legislation (for example, under minimum efficiency standards, or the Victorian EREP program).


On the other hand, adopting a blanket ban on any activity covered by regulation may not be optimal, because regulation may itself apply different tests or criteria. For example, the EREP program requires the mandatory implementation of any activity that has a payback period of three years or less. Therefore, an activity that has a payback period of more than three years (which is nevertheless identified under the EREP program) could benefit from participation in a possible national Energy Savings Initiative.

This complexity implies that decisions on the additionality of particular activities may need to be evaluated on a case-by-case basis, which could inevitably increase the overall complexity and administrative cost of a national scheme.

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Technical additionalityFor energy efficiency improvements where there are no regulated minimum standards (national or otherwise), a technical additionality test may be more appropriate.

Technical additionality would require an eligible activity to exceed an energy efficiency performance baseline that reflects the market average performance for such activities. The degree to which an activity is technically additional could range from above market average to best in class performance, as illustrated in Figure 8.1.

Figure 8.1: Conceptual representation of energy efficient activities according to performance

High energy

performance

Above market average energy performance

Below market average energy performance

Market average energy performance

Regulated standard

Strongest additionality

Weakest additionality

Regu

lato

ry

addi

tiona

lity

Tech

nica

l ad

ditio

nalit

y

A strong approach to technical additionality would award credits only for activities that represent the very best energy efficiency performance (top segment of Figure 8.1). This approach was supported by some stakeholders, such as ClimateWorks Australia:

Given that there is room for substantial improvement in most energy efficiency standards in Australia compared to international best practice, this approach will ensure that it is only opportunities that can lead to a step-change in energy efficiency that are incentivised. Also evidence shows that such technologies are now readily available.


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Energetics expressed a similar view:

Additionality should also be defined as being beyond industry standard practice and in line with industry best practice to avoid granting certificates for activities to free riders i.e. participants who would have undertaken an activity regardless of whether there was a NESI promoting that activity or not.


75 This section considers the treatment of “EITE industries”, rather than “large energy users”. This reflects that EITE industries could have

limited ability to pass on costs because they are primarily in export competition with countries which may not have an explicit energy

efficiency obligation. The consideration of EITE industries also aligns with mechanisms such as the Renewable Energy Target, the carbon

price mechanism, and the NSW ESS. Further consideration will be given to whether any large energy users fall outside of the definition of

EITE industries (as they are not trade exposed) and if they warrant special consideration with respect to the coverage of a possible national

Energy Savings Initiative.

76 EITE industry consumption is sourced from Department of Climate Change and Energy Efficiency models using actual 2009-10 data for

facilities. The Australian total consumption is sourced from http://www.bree.gov.au/documents/publications/energy/energy-in-australia-

2012.pdf, p 32.

77 The exempted load represents either 60 or 90 per cent of the total load used by the specified EITE entity at specified locations, as granted

under a Ministerial Order. New South Wales Energy Savings Scheme, Exemptions, viewed on 4 April 2012,

http://www.ess.nsw.gov.au/For_Liable_Entities/Exemptions.

78 New South Wales Energy Savings Scheme, GGAS and ESS Registry - ESS Scheme Totals by Type, viewed on 4 April 2012,

https://www.ggas-registry.nsw.gov.au/searching/totalsbytype.aspx?scheme=ESS; NSW ESS, GGAS and ESS Registry - ESS Accreditation

and Participants, viewed on 15 March 2012, https://www.ggas-registry.nsw.gov.au/searching/totalsbytype.aspx?scheme=ESS

79 Primary energy is the initial fuel, such as coal or natural gas, which is converted or transformed into final energy. Logically, final energy

is the form of energy which end users consume, generally electricity. Total primary energy equals final energy plus any transportation or

conversion losses.

80 Australian Energy Regulator, State of the energy market 2009, pp 156.

81 For example, National Electricity Rules, 2012, Version 49, Rule 6.18.

82 Australian Energy Market Commission, National Electricity Amendment (Distribution Network Planning and Expansion Framework)

Rule 2011: Proposed Rule (marked up), clause 5.6.5CA (c)(4)(vii).

83 Australian Energy Market Commission, National Electricity Amendment (Distribution Network Planning and Expansion Framework)

Rule 2011: Consultation Paper, 2011, p 23.

84 Electricity Networks Access Code 2004 (WA), subchapter 9.1.

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https://www.ggas-registry.nsw.gov.au/searching/totalsbytype.aspx?scheme=ESS

https://www.ggas-registry.nsw.gov.au/searching/totalsbytype.aspx?scheme=ESS

http://www.ess.nsw.gov.au/For_Liable_Entities/Exemptions

http://www.bree.gov.au/documents/publications/energy/energy-in-australia-2012.pdf

http://www.bree.gov.au/documents/publications/energy/energy-in-australia-2012.pdf


However, this approach would reduce the number of eligible activities, potentially increasing the marginal cost of a scheme88 and representing a larger burden on the public. This may not strike an appropriate balance between additionality and maximising overall net benefit. This view was noted by Origin Energy Limited in its submission:

...while Origin supports the intent [of awarding only high-efficiency improvements], there is a risk that this will narrow energy efficiency opportunities to those most expensive, ignoring the low hanging fruit.


An alternative approach would be to award incremental credits on a sliding scale to products that perform better than a market average baseline, where the highest-efficiency activities receive proportionally more credit. While not cost-free, this approach could be adopted for activities covered by appropriate performance benchmarking tools, such as Minimum Energy Performance Standards and Greenhouse and Energy Minimum Standards. Figure 8.2 shows how this approach might work for refrigerators, using market penetration of each star rating to establish the baseline (orange and blue bars). The blue line shows how a sliding scale of credit could be awarded to those that are beyond the market average. This approach has been adopted by existing state-based schemes for some appliances which have star rating indices.

Figure 8.2 Proposed technical additionality principle as applied to one model of refrigerator

Source: Public data on 5T type refrigerators from the E3 website (http://www.energyrating.gov.au).

A similar incremental approach could be applied to commercial buildings where information on market averages is readily available through benchmarking systems such as the National Australian Built Environment Rating System.

85Australian Government, Extension of EEO to electricity and gas transmission and distribution networks: Options Paper, 2012.

86 Australian Energy Regulator, Final decision: Electricity distribution network service providers – Efficiency benefit sharing scheme, 2008,

pp 14-15. Although not directly discussed by the AER, the ‘Efficiency Benefit Sharing Scheme’ for transmission networks also did not create

additional incentives for transmission network efficiency improvements.

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For activities involving equipment without appropriate benchmarking systems (such as bespoke industrial activities or emerging products such as standby power controllers), one approach could be to determine technical additionality by market penetration alone. For instance, a new energy saving device that is yet to enter the market would have a technical additionality factor of 100 per cent which would decline over time. For bespoke activities, engineering assessments could provide a basis for determining appropriate benchmarks for apportioning credits.

For the purposes of the regulatory impact analysis, the Working Group considers that to ensure an acceptable level of technical additionality, credits should only be awarded for activities performing above market-average levels. Should a possible national scheme adopt such an approach, updating methodologies over time would be crucial to maintaining technical additionality, in line with changes to the market averages over time. The Working Group is also open to considering additional approaches for recognising the relative values of energy efficiency activities and technologies which are highest in their class.

Financial additionalityDetermining financial additionality requires an assessment of whether investment in an energy efficiency improvement would have occurred had a national Energy Savings Initiative not been in place. This can be difficult because there may also be several financial incentives for the one project. For example, depending on how any requirement for financial additionality is applied, a business may be able to claim a tax benefit for an energy efficiency improvement, as well as being eligible for a grant from a state government, and potentially claim credit from a national Energy Savings Initiative.

Furthermore, the threshold for an investment decision varies between and within different groups. For example, one household may be willing to invest a large amount of money in improving energy efficiency (so very few activities may be considered financially additional), while another household may only be willing to invest a small amount of money (so most activities could be considered additional). Similarly, different businesses will have different hurdle rates for investing in energy efficiency improvements.

For these reasons, it would be extremely difficult to assess whether an activity was driven by the financial incentive offered by a possible national scheme, other financial incentives, non-financial drivers such as information provision, or a combination of these. Such an assessment would essentially be qualitative and applied on a case-by-case basis.

None of the existing Australian schemes apply a strict financial additionality test, though the Victorian VEET includes a mechanism for the regulator to reduce the credit awarded for activities if they are being supported through other financial incentives.89 Similarly, the Italian scheme does not include a financial additionality criterion largely due to practical reasons: the regulator does not have an oversight of all financing support schemes in place at regional level.90 Despite this, the scheme is cited as being governed by a ‘strong additionality criterion’ due to its technical additionality principles.91

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Even if it were possible to design a robust financial additionality test, it is likely this would be resource-intensive given the due diligence checking of a project’s financial history that would be required.

Despite these difficulties, it is not desirable to design a scheme which provides financial incentives for activities that attract other government benefits. Doing so would mean that households and businesses pay twice for the same benefit: once through the tax system (given government programs are resourced through tax revenue) and once through pass-through costs from a scheme via energy retailers. In addition, if strong financial incentives are available for an activity that is also credited in a market-based scheme, this can skew scheme activity away from potential improvements that may be lower cost, thereby driving up the cost of the scheme.

One approach could be to determine whether other financial subsidies or incentives are already supporting an energy efficiency activity, and exclude that activity from claiming credits under a national Energy Savings Initiative. A number of stakeholders supported this approach. The Sustainable Energy Association of Australia suggested that ‘there should be exclusions for activities that have accessed other support schemes’ to prevent ‘double dipping’. The Energy Retailers Association of Australia noted that some activities under state-based schemes were being rewarded both by existing state schemes and the Commonwealth Renewable Energy Target, and that artificially cheap supply from these sources had ‘crowded out many other efficient abatement options.’

Consideration will need to be given by applicable governments whether to continue these financial subsidies or incentives where the activities would also be supported by the national Energy Savings Initiative. Another approach would be for governments to design the additionality principles for future subsidies on the basis of the credits issued under a possible national scheme.

The Working Group considers that at a minimum, a national Energy Savings Initiative should not credit activities already receiving financial assistance from other Australian Government programs or schemes. This approach would be consistent with practices under both domestic and international schemes.92 There may be design options (for example adjusting the level of credit awarded) that could be used in enforcing financial additionality.

Working Group view: additionalityFor the purposes of conducting further investigation through the regulatory impact analysis, the Working Group will assume that:

credits would not be awarded for activities that are required by existing laws or regulations;

credits would only be awarded for activities that go beyond the ‘market average’ energy performance, with more credits awarded for activities with higher efficiency; and

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credits would not be awarded for activities that receive direct financial assistance for improving energy efficiency from other Commonwealth schemes or programs over the likely timeframe of a possible national scheme.

The above assumptions are made only for the purposes of testing costs and benefits of a potential national scheme as part of the regulatory impact analysis. Should the Australian Government decide to proceed with a national Energy Savings Initiative, the final mix of eligible technologies and activities would be determined at a later date.

8.1 Approaches for certifying savings

The Issues Paper identified two approaches that are widely used to certify energy savings: deeming; and measurement-based certification. Many submissions commented on certification methods and indicated that the choice of methodologies could substantially influence the take-up rate of activities and consequently the effectiveness of the scheme across different sectors.

The Working Group considers that, in choosing appropriate certification methods, it is important to apply the design principles of transparency, simplicity and flexibility.

Deemed or estimated savingsThis approach involves making an upfront estimate or ‘deeming’ the lifetime energy savings from an activity at the time when the activity commences. There are two ways in which deeming can be applied: rules based, or project specific. These are contrasted in Figure 8.3

There was broad support for including both these deeming approaches under a national scheme. Stakeholders noted that deeming aligns the generation of credits with the timing of capital expenditure, thus encouraging upgrades in sectors where capital is a major barrier.

Nevertheless, the deeming approach does have limitations, particularly where different savings may be achieved by installing the same technology in different climates. For example, insulation activities in cold climates typically generate higher savings than the same insulation installed in more moderate climates with typically lower heating loads. In some state-based schemes deeming equations for residential activities such as space conditioning are weighted to reflect that they generate different amounts of savings based on the climate zone where the activity is undertaken. 93

The Working Group will consider the extent to which location and climate should be factored in certifying deemed savings. Such an approach would need to be balanced with any increased complexity, and consequently, the expertise and cost involved in certifying savings.

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Figure 8.3: Approaches to deeming

Detailed deeming rules or equations Project-specific deeming

Regulations set out how to calculate and claim savings

Activities and savings assessed on a case-by-case basis

Preferable where: an activity can be standardised; it is possible to make a reliable upfront

estimate of the lifetime savings associated with it; and

the unitary value of savings delivered by an activity is relatively small and a prescribed equation could significantly minimise transaction costs.

Preferable where: an activity is bespoke and its

associated energy savings are relatively small compared to the overall facility’s energy use;

changes may be difficult to measure against background changes to overall use;

it is not cost-effective to measure and establish the baseline consumption; and

it is not feasible to prescribe standardised deeming equations due to the unique nature of the activity.

Allowed in all state-based schemes for activities undertaken in the residential sector. Allowed in Victorian VEET and New South Wales ESS for particular end-use activities in SMEs, commercial and industrial sectors.

Most likely to be used in New South Wales ESS for commercial and industrial activities.94

A further limitation to deeming is it may under-or-over-estimate savings because other factors such as installation defects, lifestyle changes, weather patterns or material deterioration will affect actual performance. Where a large proportion of lifetime savings are deemed upfront, overestimation could be concerning, as there would be greater uncertainty as to whether the scheme is actually delivering on in reported savings. To minimise uncertainty and align the issue of certificates with realised savings, it may be preferable to calculate the energy savings upfront, and proportion the corresponding credits incrementally.95

Measured savingsThis approach involves certifying the savings generated by an activity after it has occurred and awarding credits or certificates on the basis of the actual savings delivered over a set period of time (for example, 12 months). Here, the energy consumption of a facility is measured before an activity commences to establish a baseline which is later used to compare the facility’s consumption after the completion of the activity to verify actual savings.

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A number of stakeholders suggested that the Australian Government prescribe a set of specific measurement and verification rules to suit particular sectors. This is the approach taken under the NSW ESS, which prescribes four methods for certifying savings from activities in all sectors but is most likely used for commercial and industrial projects under the Metered Baseline Method.96

There was broad support for adopting this approach for assessing eligible activity where operational or process variations significantly influence actual energy performance. In particular, this approach would be suitable for industrial and commercial projects where activities are more complex or uncommon.

Awarding credits on the basis of measured savings would remove any uncertainties about actual savings (as with the deeming approach), and bring greater alignment between flow-through costs and realised demand reduction benefits.

The ESS is the only state-based scheme that allows savings to be measured and verified. Some stakeholders noted that a national scheme could leverage from the measurement methods prescribed under the ESS, and examine how these could be expanded to a national level.

However, there are some limitations associated with measured savings. The higher transaction costs for certifying savings may create an entry barrier for certain SMEs, where the value of energy savings may not be sufficient enough to justify an expensive measurement and verification exercise. Consequently, some stakeholders suggested developing simplified measurement and verification methods which are specifically designed to suit SMEs and minimise transaction costs. This approach could have potential trade-offs in terms of the accuracy and validity of savings reported under such methods.

On the other hand, some stakeholders suggested that measurement and verification methods should be broad and flexible enough to be applied across a range of technologies, building types and production processes. For example, the Energy Efficiency Council recommended that ‘the ESI adopt the International Performance Measurement and Verification Protocol as one option for estimating actual savings from projects’. However, the cost of applying such methodologies may be higher as more expertise would be required to assess these broad methodologies.

The Working Group considers that the balance between specialised and more generic measurement and verification methods should be carefully examined to ensure that measurement methods follow the principles of simplicity, cost effectiveness and flexibility.

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International and domestic schemes that prescribe measurement based certification methods require project proponents to seek approval for activities before commencing projects.97 A similar approach could be appropriate for a possible national Energy Savings Initiative. This may require greater administrative capacity to manage these functions in a timely and effective manner, and increase the overall cost of a possible national scheme.

Working Group view: approaches for certifying savingsThe Working Group agrees that the deeming and measurement methodologies prescribed in existing state schemes would be a useful starting point for considering the development of similar arrangements for a possible national scheme.

For the purposes of conducting the regulatory impact analysis, the Working Group will assume that a national scheme adopts a range of approaches to certify savings, including:

deeming equations for appropriate end use activities;

project specific deeming methods for bespoke activities; and

measurement methods for appropriate industrial and commercial activities.

8.2 Options for evaluating emerging activities and methodologies

Some stakeholders called for the establishment of flexible and transparent approval processes for new activities and methodologies to be included under a possible national Energy Savings Initiative. It was suggested that processes which encouraged the development of new methodologies (rather than overly prescriptive and cumbersome processes) could minimise transaction costs, while increasing innovation and flexibility to unlock energy savings:

Establish an independent Measurement and Verification Authority to establish and approve certificate methodologies, similar to the Domestic Offsets Integrity Committee. The Authority should develop certificate-generation methodologies including deeming, project based-assessment, guaranteed energy saving projects and use of the International Performance Measurement and Verification Protocol. Private proponents should also be able to develop methodologies for consideration by the Authority.


There could be some benefits in engaging an independent panel of experts. For example, it may be more credible and transparent to have external experts assess methodologies adopted by the government. The process of assessing and approving new methodologies could also be shortened.

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On the other hand, this may represent an unnecessary use of resources. None of the state schemes have an independent authority to evaluate and admit new methodologies. While statutory authorities administer the schemes, the task of assessing new methodologies is effectively handled by relevant state government agencies, in collaboration with the public and scheme administrators. These agencies perform functions such as reviewing eligible activities, investigating emerging activities, and consulting with the public on draft methodologies and rule changes. Any recommendation to establish an independent body to approve methodologies and activities would need to assess the relative costs and benefits and potential trade-offs in administrative simplicity that this may imply.

8.3 Augmenting peak demand impacts

Certification methods for activities could be augmented to include consideration of the impact of each activity on peak demand. This option was noted by Green Energy Trading Proprietary Limited in its submission:

Part of the certificate value would need to capture a locational element, based on existing constraints in the network – in other words, additional value will be ascribed to peak demand reduction in a local area that is expected to see load growth or assets needing to be augmented.

Green Energy Trading Proprietary Limited submission

The option of augmenting peak demand impacts through the certificate creation process is discussed in greater detail in Chapter 10. A potential trade-off in including peak demand management approaches is an increase in the complexity of certification methodologies. Any added complexity and cost would need to be assessed against the potential benefits of such an approach.

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9 Support for low-income householdsAs indicated in earlier chapters, the Working Group’s terms of reference (Appendix A) require it to consider how a national Energy Savings Initiative could create incentives or requirements for activity to improve energy efficiency in low-income households. A particular focus of this further work will be to assess the costs and benefits that would flow from such an approach. In addition to the potential costs and benefits to low-income households, this analysis will consider potential impacts on broader sectors, as targeted support for this group could effectively provide a cross-subsidy to low-income households from all energy consumers covered by the scheme.

This chapter sets out how the Working Group intends to test approaches to this area of special focus through the regulatory impact analysis process.

9.1 Defining low-income households for the purpose of the regulatory impact analysis

Low-income households are a very diverse group crossing many other demographic definitions, including renters, homeowners, pensioners, remote area households and non-English speakers. It is therefore extremely difficult, if not impossible, to accurately identify low-income households. AGL’s submission commented on the complexity of this in the energy sector:

... not all low-income households struggle to manage their energy bills. Rather, it comes down to the capacity of the household to meet its financial commitments, and research recently undertaken by AGL suggests that many young working families may be as likely to be struggling to make ends meet as those households in receipt of government assistance.

AGL submission

Given the complexities, the Working Group has not at this stage arrived at a suitable energy-specific definition of low-income households that could simply and practically be used to identify households that might be specifically targeted under a potential national Energy Savings Initiative. Stakeholders proposed a range of commonly used measures to determine which households could be considered eligible for support. Suggestions included:

those in the bottom two income quintiles;

those eligible for concession cards;

those eligible for a low-income health care card; and/or

those in receipt of maximum rate income support or Family Tax Benefit.

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Each of these definitions has limitations. For example, definitions based on concession cards, health care cards and the receipt of maximum income support are considered likely to underestimate the number of low-income households because not everyone eligible for these benefits applies for, or receives them. Conversely, some households with a high income and high wealth include a person with a concession card. However, from a practical standpoint of operating a scheme, concession cards provide an easy way for participants to identify low-income households. As another example, the bottom income quintiles definition may overestimate the number of low-income households requiring assistance, because a significant number of households in these quintiles are home owners with low incomes but also low expenses (often with no mortgage), which significantly increases the proportion of their income that is expendable.98

A recommendation on what operational definition of low-income households is most appropriate would follow from a recommendation to specifically target this group, and is therefore not critical at this stage. However for the purposes of the regulatory impact analysis, in particular the modelling exercise, a generalised definition of low-income households which fits the characteristics of this heterogeneous group in terms of geographic distribution, energy consumption patterns and expendable income is needed. In order to closely align with the operation of a national scheme, any definition applied in the modelling should be one that could be practically implemented.

The possession of a health care card appears to be the most practical definition of a low-income household, noting there are some drawbacks with this approach as described above. Modelling of low-income households for the cost-benefit analysis will use Australian Bureau of Statistics (ABS) data showing the number and location of households where at least one person has a health care card.

Working Group view: definition of low-income householdsThe regulatory impact analysis will test the costs and benefits of approaches to support for low-income households. This requires a generalised definition of low-income households which best fits the characteristics of this heterogeneous group in terms of energy consumption patterns and expendable income, and which can be implemented in practice.

98 The Australian Bureau of Statistics (ABS) has adopted the practice of using persons in the second and third deciles, rather than the bottom

two quintiles, of the income distribution when describing the characteristics of persons on low incomes. This is because there are significant

numbers of households in the lowest quintile that have considerable wealth to support levels of consumption not possible on their incomes

alone. When looking at ‘equivalised’ measures of disposable household income and net worth from 2009-10, a third of the population in the

lowest income quintile were also in the top three wealth quintiles (Equivalised household income is total household income adjusted by the

application of an equivalence scale to facilitate comparison of income levels between households of differing size and composition,

reflecting the requirement of a larger household to have a higher level of income to achieve the same standard of living as a smaller

household). Source: Australian Bureau of Statistics, viewed on 8 May 2011

http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/6523.0Explanatory%20Notes12009-10?OpenDocument and personal communication

with Stephanie Cornes, Director, Household Economic Resource Surveys, Australian Bureau of Statistics, Canberra, 18 April 2012.

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http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/6523.0Explanatory%20Notes12009-10?OpenDocument


The most practical method of identifying households likely to have a low income is to require the possession of a health care card by at least one member. Consequently ABS data showing the number and locations of residents with a health care card will be used in modelling.

9.2 Assessing if low-income households require explicit support

When considering whether explicit support for low-income households is required within a potential national Energy Savings Initiative, it is helpful to take stock of the existing measures targeting energy efficiency in this group and any available information on the outcomes of these measures.

Existing measuresA range of energy efficiency assistance is currently provided to low-income households through government, energy industry and third sector policies and programs. Some energy retailers offer hardship programs that provide home energy assessments and assistance to purchase energy-efficient appliances and equipment.99 Governments and the not-for-profit sector operate various rebate, concession, information, support schemes and/or basic energy efficiency measures including home audits and energy assessments.100 Some community sector organisations also provide support to assist low-income households improve household energy efficiency,101 some attracting credits from existing state schemes.

Under the Clean Energy Future plan, the Australian Government committed $130 million (in addition to household assistance payments through the tax and transfer system) to support low-income households to adjust to higher energy prices.102 This includes assistance through the Low Income Energy Efficiency Program, which will support trials of energy efficiency approaches in low-income households, and the Household Energy Saver Scheme, which will help low-income households manage their energy consumption.

Stakeholder submissions also referred to the broad range of special assistance currently targeted at low-income households, citing the achievements of some programs. For example, Mission Australia praised the New South Wales (NSW) Office of Environment & Heritage’s Home Power Saver Scheme, which has conducted 73,435 assessments and resulted in average savings of $265 per household each year, as of 31 December 2011.

Some submissions expressed a preference for continued support for low-income households via these existing mechanisms rather than including explicit support for low-income households in a potential national Energy Savings Initiative. Others noted that if a social policy outcome is primarily being sought, then a social policy intervention (rather than an energy efficiency mechanism) is appropriate.

Targeted policies could be better used to achieve the reasons for which a sub-target may be considered.


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There are ... more efficient and effective ways of addressing disadvantage where this exists. For example, if disadvantage is a concern then revising concession arrangements for energy would be a more efficient and effective way of addressing that disadvantage.


Others stressed the importance of building on existing assistance programs when designing a scheme:

The design of the NESI should be informed by evidence of ‘what works’ from schemes the Federal Government is currently piloting such as the Low Income Energy Efficiency Program, Community Energy Efficiency Program and the Home Energy Saver Scheme.

Mission Australia submission

Low-income household participation in existing schemes

Low-income households in New South Wales, Victoria and South Australia are currently eligible to receive energy efficiency assistance under the existing state schemes. Available information on these existing schemes suggests that low-income households have been able to benefit from participation in existing state schemes, with or without targeted support.

The South Australian Residential Energy Efficiency Scheme (SA REES) explicitly targets low-income households by establishing a ‘priority group’ of households in which a person resides who receives one of a range of Commonwealth and State concessions or is actively participating in retailer hardship programs. 103 Thirty-five per cent of activity must be undertaken in priority group households. Across the first two years of the scheme, 2009 and 2010, uptake of compact-fluorescent lighting and water-efficient shower heads by the priority group exceeded the 35 per cent target. Upgrades to hot water heaters and ceiling insulation were also strongly represented across the priority and non-priority household group.104

The Brotherhood of St Laurence (BSL) has found that the Victorian Energy Efficiency Target (VEET), which has no priority group provisions, has supported substantial energy efficiency improvements in low-income households. In its submission, BSL details the results of an analysis of the VEET (in Melbourne only), highlighting that relatively disadvantaged areas have received a greater share of the total benefits (measured by Victorian Energy Efficiency Certificates (VEECs)) than more advantaged areas and a high proportion of replacement light globes and replacement high-efficiency showerheads, which were provided free of charge. However, BSL also found that low-income households have received fewer of the measures which cost more to install (often requiring a household co-payment) but have markedly higher energy efficiency returns and cost savings, such as hot water services, space heating and insulation.

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Further, there is evidence in the SA REES of declining uptake in the priority group over time. More than 50 per cent of benefiting households were in the priority group in 2009 compared to less than 35 per cent in 2010. Retailers in South Australia have also reported difficulties in meeting the low-income household requirements in 2011, possibly caused by market saturation entering the sector.105

This pattern of low-income household participation in the SA REES and Victorian VEET implies that, where low-cost residential activities are included in a potential national Energy Savings Initiative, it may be possible to assist low-income households without establishing a priority group. However, it also implies that it could be more difficult to encourage low-income household participation should the opportunities for low-cost activities be reduced, especially if the remaining activities require a co-payment from the household. Furthermore, since some low cost activities (such as energy efficient lighting and low-flow showerheads) already have achieved a significant market share in some states, the potential to assist low-income households without establishing a priority group could be limited to those geographic areas where penetration remains low.

While there is no published evidence of a geographic bias towards activities being undertaken in particular areas under any of the existing state schemes, there is anecdotal evidence that activities only begin to occur in regional and rural areas as the metropolitan market dries up.106 Also, in the SA REES, just nine per cent of the energy audits that retailers are obligated to conduct were carried out in regional areas,107 though 18 per cent of the population live in regional areas.108

Approach to considering if low-income households require additional support through a national Energy Savings InitiativeIn light of the extent of existing assistance for low-income households to improve their energy efficiency, any decision to provide additional support through a potential national Energy Savings Initiative should be clearly justified. Two possible justifications that could apply include:

1. to provide for an equitable distribution of scheme benefits to low-income households; and

2. to shield low-income households against any adverse impacts that may result from the introduction of a national Energy Savings Initiative.

In considering these, three of the design principles discussed in Chapter 3 are most relevant, namely: equity, efficiency and simplicity.

Equity: A potential national Energy Savings Initiative could result in public benefits in the form of less rapidly increasing energy prices, which would be shared by all energy consumers covered by the scheme. Equity questions arise regarding the private benefits that accrue only to households and businesses that improve their energy efficiency under the scheme. As a result, non-participants in the scheme would not benefit from the scheme to the same extent as participants.

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Efficiency: Including explicit support for low-income households could increase the cost of a scheme and these additional costs would flow through to all energy users (this also relates to equity).

Simplicity: Including explicit support for low-income households could increase the complexity of scheme administration and compliance.

While justification 1 above would seek to ensure that the equity principle is satisfied, it is at odds with the other two principles as it is expected to reduce scheme efficiency and increase scheme complexity. On the other hand, while a scheme that did not provide targeted support for low-income households would satisfy the principles of efficiency and simplicity, it may not satisfy the equity principle.

Through the regulatory impact analysis, the Working Group will assess the need for targeted assistance and the cost of providing this support through the scheme.

Working Group view: targeted support for low-income householdsThrough the regulatory impact analysis, the Working Group will assess whether targeted assistance through a national Energy Savings Initiative is justified, and the cost of providing this support.

The Working Group considers that, based on the experiences to date under the South Australian Residential Energy Efficiency Scheme and the Victorian Energy Efficiency Target, regional and remote low-income households may face different costs and benefits under a national scheme.

These issues will be considered further through the regulatory impact analysis.

9.3 Costs, benefits and options for providing support to low-income households

Providing explicit support for low-income households within a national Energy Savings Initiative could increase the overall costs of the scheme, including through:

reduced scope for the market to seek out the lowest-cost opportunities across all covered sectors to improve energy efficiency; and

additional complexity for participants regarding administration and compliance.

Some submissions noted that any increase in scheme costs associated with supporting low-income households is likely to increase energy prices, which in turn would hit low-income households hardest.

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... the added costs incurred by retailers in complying [with] the scheme will be distributed across all energy users and energy bills account for a greater proportion of an income in a low-income household.

Energy Retailers Association of Australia submission

Other submissions made reference to the cost of the SA REES compared to other existing state schemes. For example:

The result of splitting the total supply of energy efficiency credits into separate markets is reduced liquidity, and therefore higher costs. As these commodity prices fluctuate independently, liable entities are not able to restrict contracting options to those available at least cost.


While increased cost is a legitimate concern, it is important to assess any costs against the benefits that could be delivered through a national scheme. The potential benefits of providing explicit support for low-income households within a national Energy Savings Initiative are likely to be broadly the same as those benefits sought through other policy mechanisms which aim to improve the energy efficiency of low-income households. These typically include helping with energy bills and increased amenity and health benefits.

It is also important to note that low-income households would share in any public benefits associated with a national scheme (even if they don’t participate), if the scheme successfully reduces future infrastructure costs and, therefore, energy prices.

Options for supporting low-income householdsThere are two main design options for a national Energy Savings Initiative that could explicitly support low-income households:

a ‘requirements-based’ scheme: set a sub-target that requires a certain amount of energy savings to be achieved in low-income households through regulation, similar to the SA REES and the United Kingdom’s Carbon Emissions Reduction Target; or

an ‘incentive-based’ scheme: provide specific incentives to encourage savings in the low-income household sector. These could include a certificate ‘multiplier’ for activities carried out in low-income households, or crediting particular activities designed specifically for low-income households (for example a deemed savings methodology for a package of activities undertaken in low-income households);

Stakeholder submissions expressed varying views on these options:

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A sub-target for low-income households will reduce the efficiency of the scheme, but the EEC does not object to the Government considering a sub-target for low-income households as one of the options for ensuring that low-income households secure an appropriate portion of the benefits of the ESI.


Sub-targets are almost certain to increase scheme costs and it will be the low-income group that will end up worse off as energy bills form a larger proportion of their income.

Origin Energy submission

One risk [of a multiplier for low-income household activity] is that if both residential and industrial certificates are combined, then the price [of certificates] can be depressed by a large influx of smaller energy efficiency projects.


Some submissions expressed a clear preference for a scheme that provided no explicit support to low-income households, with assistance to low-income households being provided via other mechanisms.

... a program for this group should be a standalone program, possibly administered by the social housing agencies. This can properly consider entitlements, means testing as appropriate and better define the problem to be solved.

CSR Limited submission

... the Clean Energy Council does not advocate for sub targets for low-income households but recommends linkages to support low-income household through separate programs administered by community and welfare organisations to educate and encourage the uptake of the energy efficiency activities included in the scheme.

Clean Energy Council submission

The use of a sub-target enables a high degree of certainty that the prescribed level of activity will take place in low-income households. This, in turn, leads to a relatively high level of confidence in the projected additional costs of including requirements in a scheme.

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Alternatively, providing support for low-income households via incentives provides no certainty that the desired amount of activity will take place in low-income households. This, in turn, leads to a relatively low level of confidence in the projected additional costs of a including incentives in a scheme. In addition, incentives typically distort energy savings via a scheme and can lead to unforeseen difficulties in the certificate market, such as driving down the overall price of certificates, which can discourage investment in other activities eligible under a scheme.

Working Group view: requirements or incentives for low-income householdsIf the regulatory impact analysis finds that a national Energy Savings Initiative could provide explicit support for low-income households in a cost-effective manner, the Working Group considers that requirements are preferable to incentives. This is because they provide greater certainty with regard to activities undertaken in low-income households and the additional costs of including explicit support for this group.

Nevertheless, the regulatory impact analysis may include consideration of the relative costs and benefits of incentives.

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10 Addressing peak demandThe Australian Government commitment to investigate a national Energy Savings Initiative included considering “incentives or requirements to create certificates…in ways which reduce peak electricity demand”. The Working Group’s investigation of peak demand is focused only on electricity as the issue is more particular to electricity than gas.

This chapter outlines reasons why the design of a possible Energy Savings Initiative might include considerations of peak demand and discusses three possible scheme design options to do so. The relative merits of these three options are considered. The chapter concludes by discussing the proposed approach to modelling the costs and benefits of adopting a possible ‘peak demand option’ that will be taken in the regulatory impact analysis. The Working Group has not yet determined that a peak demand option should be incorporated in a possible national scheme. A recommendation on this issue will be made after further analysis.

10.1 Reasons to address peak demand through an Energy Savings Initiative

There are two important reasons to consider peak demand in a possible Energy Savings Initiative with a working objective to ‘improve Australia’s energy efficiency in order to help manage pressure on energy bills and improve productivity’. Firstly, peak demand is a central driver of electricity price rises and, as such, actions to manage peak demand will place downwards pressure on energy bills. Secondly, a poorly designed national scheme has the potential to decrease the productivity of Australia’s electricity infrastructure.

Price rises and impactsRising peak demand has been a key aspect of recent electricity price increases, primarily through new distribution network augmentation projects undertaken to meet this demand.109 The costs of peak demand are forecast to continue to rise, with distribution network costs in 2010/11 comprising 37.3 per cent of the standard residential retail bill, and projected to increase by 33.5 per cent from 2010/11 to 2013/14.110 One stakeholder noted in its submissions to the Issues Paper:

A key objective of a National Energy Savings Initiative should be to help reduce peak load demand and also reduce overall consumption with an objective being to ease upward pressure on energy prices.


Another stakeholder, while not supportive of a national Energy Savings Initiative in general, noted that:

109 Australian Energy Market Commission, ‘Power of choice – giving consumers options in the way they use electricity: Directions Paper ’,

2012, p 18-20.

110 Data from Australian Energy Market Commission, ‘Possible Future Retail Electricity Price Movements: 1 July 2011 to 30 June 2014’, 2011, p 18.

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The one area where a NESI may have some potential to offer overall benefits is if targeted towards peak demand. Western Power has estimated that peak electricity demand could increase by as much as 90 per cent to 2030 in the South West Interconnected System, at a cost of as much as $7.5 billion.

Chamber of Commerce and Industry of Western Australia submission

Impact of energy efficiency on infrastructure productivityAnother aspect of peak demand is the underutilisation of electricity network and generation infrastructure. In Australia, electricity generators and networks are built and augmented to meet the forecast peak demand, such that they can reliably supply electricity during future peak periods. One indicator of the reduction in network utilisation is the growing gap between average and peak demand. For example, in Victoria the ratio of average to peak demand in 1999/2000 was 68 per cent, in 2008/09 this dropped to 57 per cent and is forecast to drop to 52 per cent in 2018/19.111

The issue for a possible national Energy Savings Initiative is that a poorly designed scheme has the potential to reduce infrastructure productivity, and increase electricity unit prices through higher network tariffs (for further discussion see Appendix D). As raised in submissions:

If Australia successfully reduces total electricity consumption, but does not reduce peak electricity demand, total electricity costs will go down but the cost per unit of electricity will increase.


10.2 Options for addressing peak demand

The Working Group commissioned analysis on options for how a possible national Energy Savings Initiative could address peak demand. This work was undertaken in close consultation with a Peaking Technical Group and Network Modelling Group of various experts (membership of these groups is at Appendix E). This work has identified three possible approaches:

Option 1: Reflecting the impact of energy efficiency activities on peak demand into certificate incentives

Under a national Energy Savings Initiative that used an energy metric but did not target peak, a certificate could represent a certain quantity of kilojoules. These certificates are then awarded to eligible energy efficient activities under the scheme. Each activity, however, has a different impact on peak demand and infrastructure utilisation and can therefore generate positive or negative effects for other consumers in a shared grid.

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Under Option 1, the predicted public benefit or disbenefit from each eligible activity is incorporated into its certificate value. This is to encourage the uptake of activities which maximise the positive public benefit outcomes, and disincentivise those that could have negative outcomes.

As well as the overall annual savings in energy that an eligible activity is predicted to produce, certificates awarded under this approach could also reflect the predicted impact on:

wholesale market peaks;

relevant transmission and distribution network peaks; and

energy infrastructure utilisation.112

Option 2: Creating a sub-scheme with peak-specific certificatesUnder this option, a separate target and certificate type would be created for peaking-specific activities. The obligated party would have to annually surrender a number of these ‘peaking certificates’ to reach a separate peaking target. The peaking target could be based on peak demand reductions, peak demand reductions in localised zones, or on achieving deferment activity (for example, by obligating a network business to defer a percentage of its planned network investment by using non-network options such as load curtailment activities). Given their unique characteristics, it is unlikely that certificates from a peak sub-scheme would be fungible with those from a broader Energy Savings Initiative scheme. Depending on the design features of a peak sub-scheme, the differing value of peak reductions in different networks may mean that certificates would be non-fungible between network service territories.

While retailers are commonly the obligation point in market-based energy efficiency schemes, a separate sub-scheme for peak reductions would provide the option to place a peaking specific obligation on network businesses. This could be preferable as they are best placed to identify opportunities to reduce peak demand in their own networks.

Option 3: Establishing a ‘single buyer’ to purchase peak-demand-reducing activitiesThis option explores the possibility of establishing a separate entity that would contract with parties for the option to purchase kilowatt reductions at some point in the future. The single buyer could aggregate benefits across the supply chain, and purchase demand reductions that have the highest value in the wholesale market and for network deferral. Currently, it can be difficult for any one party to monetise or aggregate these benefits.113 This is considered to be one reason the demand side of the market has traditionally been ‘passive’ towards wholesale market and network peaks.

This approach would require funding to undertake the requisite contracting, which could theoretically come from a market levy (on electricity consumers) or consolidated revenue.

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10.3 Stakeholder views

Numerous submissions to the Issues Paper commented on the issue of peak demand. Views were highly varied, reflecting the complexity of the issue. Given the relationship between peak demand and energy price rises, many stakeholders were supportive of action to reduce peak demand. However, a number of stakeholders noted that a possible national Energy Savings Initiative which targeted peak demand specifically might undermine the current regulatory and market reform environment. Concerns were raised included:

...demand side management (DSM) is better managed by the electricity market rather than an ESI.

Amcor submission

as existing regulatory frameworks for monopoly distributors are designed to ensure efficient network investment, it is important to ensure obligations proposed under the NESI do not add to these requirements [and costs] without providing additional value.

Western Power submission

...establishing a demand reduction incentive scheme outside of the main energy regulatory and market frameworks (i.e. the national electricity rules and national gas rules) would add additional complexity and governance challenges.

Energy Users Association of Australia submission

A separate peak demand scheme would need to be very complex to be effective ... [and] may adversely impact on networks and energy prices if the Government is to adopt a separate non-market peak demand reduction scheme.

Energy Networks Association submission

Some stakeholders were supportive of a separate peak demand reduction sub-scheme, similar to Option 2 above. For example, Green Energy Trading Pty Ltd provided a detailed method of designing specific peak reduction certificates.114 Other submissions expressed the view that a cohesive and sensible way to address peak demand through a possible national Energy Savings Initiative was to amend the incentives given to energy efficiency activities which reflect their impact on peak demand, similar to Option 1:

Within [an energy efficiency scheme] there is also an ability to identify those [activities] that will more specifically impact peak demand like air conditioning.

Ecovantage submission

114 Green Energy Trading Proprietary Limited (Creating a Community Financial Dividend through Managing Peak Electricity Demand: A

Discussion Paper) submission, p 3.

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... some devices in the built environment also provide benefits to peak power reduction. To encourage the take up of these devices, credit multipliers could be applied to the certificate calculation to reflect this.

CSR submission

10.4 Analysis

Evidence and submissions raised through the investigation to date indicate that it may not be sufficient for a scheme to ignore the issue of peak demand and expect to have no negative impact on network tariffs. This is because some energy efficiency improvements have the potential to place upwards pressure on energy prices through their influence on network utilisation. Since a possible national Energy Savings Initiative is expected to incentivise greater uptake of energy efficiency, and therefore has the potential to adversely impact network utilisations and tariffs, it is desirable that scheme design should be based on the principle of ‘do no harm’.

The Working Group’s preliminary view is that dedicated peak demand measures, such as regulatory reform and the introduction of time of use pricing, are the appropriate primary mechanisms to address peak demand.115 However, the introduction of a possible national Energy Savings Initiative may provide an opportunity to encourage activities that reduce peak demand (and equally discourage those that reduce network productivity) through a national scheme. Therefore the Working Group intends to further consider ways to reflect potential impacts on peak demand and network productivity through a certificate creation process (Option 1).

The issue of peak demand is currently being addressed through a number of reform and investigation processes, including the new Regulatory Investment Test for Distribution (RIT-D) and the Australian Energy Market Commission’s Power of Choice Review. As these market reforms are intended to facilitate more efficient levels of peak demand in the electricity market, the introduction of a scheme which requires network companies to undertake peak reduction activities (Option 2) may introduce scheme costs without additional benefits.

Establishing an entity which purchases and exercises peak demand (Option 3) is a process completely detached from the operation of a standard white certificate scheme. It would also require considerable consolidated revenue or a new market levy. The actions of a single buyer would not be consistent with the current market based reform agenda, which is aimed at structuring the market such that peak demand response outcomes are achieved through well-balanced regulation and natural incentives. Based on this analysis, Option 3 is not viewed as either practical or desirable in the context of a possible national Energy Savings Initiative.


2012, pp 138-9, 54.

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Working Group’s view: approach to peak demandThe Working Group considers that a practical approach to address peak demand through a possible national Energy Savings Initiative could be to weight activity value to reflect the likely impact of each activity on peak demand and network productivity.

A final recommendation on whether to incorporate an approach to respond to peak demand will be taken following further analysis through the regulatory impact analysis.

10.5 Approach to modelling a peak demand scenario

As discussed in Chapter 11, the modelling that will be undertaken during the regulatory impact analysis involves deriving iterative ‘bundles’, or plausible combinations, of energy savings activities that could be undertaken across households and businesses in order to meet a scheme target.

The first step for the modelling process is to determine the impact of a scenario without peak weighted certificates on infrastructure deferments and network tariffs (the central scenario). This scenario will identify the potential impacts of a possible national Energy Savings Initiative on different networks. It is quite possible that a well designed scheme which solely incentivises energy efficiency (rather than targeting peak demand) may in itself reduce peak demand sufficiently to counterbalance any adverse affects on network productivity and tariffs.116

For the purpose of comparison, a ‘peaking scenario’ will then be modelled to determine the possible impacts of an approach in line with Option 1 above on the net outcome of a national scheme.

To do so, the certificate incentive that each activity receives in the modelling will be adjusted to represent the assumed impact that the activity will have on peak demand and network productivity. By applying this approach, the modelling will produce a different bundle of activities and associated net costs and benefits. The results of this scenario can then be carefully compared to the central scenario to determine the net costs and benefits, of a ‘peaking scenario’ (including network impacts and pricing) and the distribution of these impacts.

Working Group’s view: testing the net costs and benefits of a peak demand scenarioThrough the modelling, the net costs and benefits of a possible peak demand scenario will be quantitatively compared to the central scenario. This and other qualitative analysis will be considered through the regulatory impact analysis.

116 As noted in the submission from the Australian Sustainable Built Environment Council, ‘a well-rounded package of energy efficiency

measures should reduce the size of the peak’.

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11 Economic and energy market modellingIn the Clean Energy Future plan the Australian Government committed to undertake further work – including quantification of costs and benefits – on a possible national Energy Savings Initiative. The commitment also indicated that a final decision on whether to adopt a national scheme would be subject to economic modelling and regulatory impact analysis.

This chapter provides an overview of the approach that will be applied to model the costs and benefits of a possible national scheme.

11.1 Modelling a national Energy Savings Initiative

Scenario modelling is an established method for improving understanding of the strengths and weaknesses of a given policy option. Scenarios can provide information about potential policy impacts, how different policy designs compare, and the relative importance of different policy inputs or parameters to the modelling results.

Scenario modelling does not predict what will happen in the future, rather it is a projection of what could happen. This projection will be influenced by the structure of the model and its input data and assumptions (among other things) and does not include events that are very uncertain (such as future technology breakthroughs) or that are outside the boundaries of the model.

Previous modelling exercises for a national Energy Savings InitiativeThe potential economic and energy market impacts of a national Energy Savings Initiative have been examined through two previous modelling exercises. In 2010, the Prime Minister’s Task Group on Energy Efficiency commissioned modelling on the impacts of a highly stylised scheme with different targets and emissions abatement assumptions. In May 2011, the Department of Climate Change and Energy Efficiency commissioned further work to test the sensitivity of the approach used in the Task Group modelling to a range of assumptions concerning consumer behaviour and scheme coverage.

The Working Group has engaged Sinclair Knight Merz McLennan Magasanik Associates (SKM MMA) to model a range of scenarios for the regulatory impact analysis. This work will further build on and refine the methodology developed through the previous two modelling exercises.

An overview of this methodology is provided in Box 11.1.

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Box 11.1 Overview of the SKM MMA modelling methodology

The SKM MMA modelling approach estimates the potential impacts of a national Energy Savings Initiative on Australia’s electricity and gas markets, for a given set of targets.

The potential impacts of a national Energy Savings Initiative on energy prices would largely flow from the price of the energy savings certificates that (under a typical white certificate scheme) would be acquitted by liable parties to meet their share of the chosen target. SKM MMA has developed a National Energy Efficiency Model (NEEM) to derive a plausible combination of energy efficiency activities that could be undertaken across households and businesses in order to generate certificates that are used to meet the scheme target. The NEEM draws from a wide inventory of possible activities, including appliances, equipment and processes available to the residential, SME, commercial and industrial sectors.

The NEEM assumes that liable parties would preference the cheapest available certificates, and therefore sequences low cost activities ahead of higher cost ones. However, the model also accounts for factors that could limit the availability of, and market for, low cost activities. For instance, the NEEM assumes that the take-up of different activities will be constrained by the size of the market for an activity, rates of take-up, and the degree to which energy efficiency is an important consideration for different households and businesses. By applying these assumptions, the model ensures that the combination of energy efficiency activities taken up is as realistic as possible.

The NEEM derives the scheme cost in any given year by multiplying the marginal certificate price (that is, the cost of the last certificate created to fulfil the target in a given year) by the scheme target for that year. Since scheme costs and benefits would likely be passed through to end consumers, the SKM MMA modelling approach also estimates the net costs and benefits of a national scheme on retail energy bills, by using established energy market models. The energy market models include quantification of private benefits (such as reduced energy costs for households and businesses that adopt energy efficiency improvements under the scheme) and shared benefits (such as reduced wholesale energy prices and deferred network infrastructure expenditure, which would be felt by all consumers).

More detail about the scenario modelling approach employed by SKM MMA can be found in the Modelling Assumptions Report, which is available on the website of the Department of Climate Change and Energy Efficiency.117

117 SKM-MMA, Energy Market Modelling of National Eneryg Savings Initiative Scheme – Assumptions Report, 2011,

http://www.climatechange.gov.au/en/government/initiatives/~/media/publications/energy-savings-initiative/20111215-skm-report-energy-

marketing-modelling-pdf

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http://www.climatechange.gov.au/en/government/initiatives/~/media/publications/energy-savings-initiative/20111215-skm-report-energy-marketing-modelling-pdf

http://www.climatechange.gov.au/en/government/initiatives/~/media/publications/energy-savings-initiative/20111215-skm-report-energy-marketing-modelling-pdf


Improving the modelling approachThe extent to which estimated costs and benefits can be relied on will depend on the quality of the input data and assumptions that underpin the models. The Working Group has sought views on the modelling approach, its assumptions and input data from a range of experts (including energy sector, industry, and academia) and the public. In December 2011, a Modelling Assumptions Report, outlining the modelling approach and key assumptions used in the 2011 exercise, was released for public comment.

A range of stakeholders provided feedback to the Working Group through formal submissions in response to this report and during targeted expert and public consultation workshops. In broad terms, many stakeholders at the workshops expressed support for the modelling approach as a sensible way to model the potential economic and energy market impacts of a national Energy Savings Initiative, and acknowledged the difficulties involved.

Stakeholders asked for further explanations about:

whether the models could accurately project impacts on particular sectors or states;

how energy market features are modelled, including wholesale prices, the impact of the Renewable Energy Target on electricity prices, and the patterns of network investment assumed; and

whether the models include assumptions regarding administration costs for participating businesses.

Areas of concern raised by stakeholders included ensuring that:

underlying data was as granular and accurate as possible;

energy demand forecasts upon which the modelling is based are as up to date as practical and the modelling approach accounts for carbon prices (and potential rises) beyond 2025; and

payback thresholds assumed in the modelling are an accurate proxy of decision-making in different sectors (see Box 11.2 for an explanation of how the modelling approach accounts for decision-making).

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The Working Group is grateful for this feedback and has incorporated improvements to address these issues in the next modelling exercise. In particular, the Working Group has worked with SKM MMA and other consultants to improve and enhance the data and assumptions that underpin the models. As noted in Chapter 7, significant effort has been made to gather better data about energy consumption and energy efficiency in the industrial, commercial and small and medium enterprise (SME) sectors. SKM MMA has also worked with consultants to increase the resolution of the modelling approach so it can estimate the potential impacts of a national scheme on distribution networks (such as distribution infrastructure deferrals and possible changes to network tariffs).

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Box 11.2: How the modelling approach considers decision-making

The modelling uses an ‘adjusted payback period’ approach to decision-making concerning energy efficiency activities. This is different to a conventional financial payback period, which simply compares the upfront cost of an investment with its expected financial returns to determine the period of time it takes for future returns to offset the upfront cost.

The ‘adjusted payback period’ approach builds on this basic financial tool to more accurately reflect observed consumer behaviour. This approach incorporates information from the extensive literature on consumer decision-making, including the known tendency of consumers to discount future gains or losses and inflate present gains or losses. For example, consumers frequently buy household appliances based on their sale price alone without considering the ongoing energy cost of running these appliances.

If this behaviour is taken into account when calculating the balance of costs and benefits around a decision, it appears that consumers have a very high ‘personal discount rate’ – that is, they will agree to decisions where the benefits outweigh the costs at or very close to the time of purchase, even though in the longer term the decision may make them worse off.

To simulate the operation of a national Energy Savings Initiative, the National Energy Efficiency Model (NEEM) must account for how decision-making by consumers changes in response to the incentives offered by the scheme. Not all households and businesses make decisions about energy efficiency in the same way. Rather, consumers’ decision-making is affected by a range of commercial considerations and behavioural factors, and these can increase or decrease the balance between costs and benefits that any given consumer is apparently willing to accept before adopting an energy efficiency improvement.

The NEEM assumes that consumers will purchase an efficient appliance if the energy savings provided by it balance out the upfront costs within a given period of time. This period of time (sometimes called the ‘payback threshold’) is determined by the range of factors mentioned above, including the average consumer’s apparent ‘personal discount rate’ – the extent to which present costs are inflated and future gains are discounted. This period is therefore likely to be significantly shorter than the period over which the capital cost of the appliance is offset by the value of the energy savings.

Within this context, energy savings certificates can reduce capital costs to the point where efficient appliances fall within the average consumer’s ‘payback threshold’. The NEEM applies different assumptions about this ‘payback threshold’ for different sectors and sub-sectors, based on what is known about decision-making in these sectors.

The modelling approach aims to simulate how an average consumer in a given sector or sub-sector may respond to the incentives offered by the scheme. These assumptions, like all those applied in the modelling, are intended to be plausible central estimates within a range of uncertainty.

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As a result, the modelling approach and its underpinning data and assumptions have been improved in a number of ways:

areas where the models can incorporate more accurate or up-to-date data have been identified, and steps have been taken to access and incorporate this data. As a result, the models’ inventory of energy efficiency activities available to the residential, commercial and industrial sectors is underpinned by more, and better, data, and the models now include take-up of energy efficiency activities by SMEs;

the models now include energy market impacts at the resolution of distribution network zone (rather than state border), critical for analysing a scheme’s potential impact on peak demand; and

a range of minor assumptions around the models’ treatment of different energy generation and network technologies have been improved.

11.2 Modelling inputs to the regulatory impact analysis

The Working Group is now working with SKM MMA to model a range of scenarios. These examine how different scheme targets and sectoral and geographical coverage settings could affect the overall costs and benefits of a national scheme. The modelling work will also estimate the costs and benefits of a scheme where peak demand impacts are reflected in certificate incentives and a scheme that supports energy efficiency improvements in low-income households. The outputs of this scenario testing will be important inputs to the regulatory impact analysis.

As part of the modelling work, the Working Group will also test the models’ sensitivity to a number of key assumptions around which there is some uncertainty. In particular, a number of industry stakeholders have suggested that decision-making around energy efficiency is influenced by broader economic circumstances. For example, stakeholders highlighted that firms may have shorter payback thresholds for energy efficiency investments during times when broader economic circumstances reduce the availability of credit, but longer payback thresholds when business confidence is high.

A number of scenarios will therefore be tested to establish the degree to which the models’ outputs are sensitive to decision-making assumptions. The Working Group also intends to test the sensitivity of the modelling approach to other key assumptions, including consumer behaviours and the inclusion of distribution networks.

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In addition to economic and energy market modelling, the Working Group will continue to gather other qualitative and quantitative analysis to inform the regulatory impact analysis. One important research task focuses on how compliance costs faced by obligated parties and firms that create certificates may change under two possible scenarios: if existing state schemes were harmonised; or if the government decided to pursue a stand-alone scheme. The Working Group is also supporting a survey by the Australian Industry Group to improve understanding concerning Australian businesses’ awareness of and attitudes to energy efficiency. Chapter 1 includes an overview of the analytical tasks currently commissioned by the Working Group.

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Appendix A: Terms of reference

1 The national Energy Savings Initiative Working Group (‘the ESI Working Group’) will prepare a report for the Minister for Climate Change and Energy Efficiency and the Minister for Resources and Energy on possible design options for a national Energy Savings Initiative (ESI, or ‘white certificate scheme’).

2 In preparing its report, the ESI Working Group will consider and advise upon possible design options for a national ESI that would:

2.1 be economically efficient and environmentally effective;

2.2 complement the carbon pricing mechanism and the Renewable Energy Target (RET), in line with the Council of Australian Governments’ Complementarity Principles (Attachment A);

2.3 be capable of delivering energy efficiency improvements at least as great as those being delivered by the New South Wales Energy Savings Scheme (ESS), the Victorian Energy Efficiency Target (VEET) and the South Australian Residential Energy Efficiency Scheme (REES);

2.4 complement wider Australian energy market development objectives, including effective retail competition; efficient network regulation; and increasing efficient demand-side participation;

2.5 be capable of supporting the deployment of a broad spectrum of technologies; and

2.6 be capable of delivering energy efficiency improvements across all sectors, including the commercial, industrial and residential sectors.

3 The ESI Working Group will also consider and advise upon options for using a national ESI to create an incentive or requirement to undertake energy efficiency improvements in low income homes, and ways to reduce peak electricity demand.

4 The ESI Working Group will also consider how a national ESI could streamline the delivery of energy efficiency improvements by replacing existing white certificate programs.

5 The ESI Working Group will consider and advise upon possible implementation arrangements for a national ESI, including arrangements for ensuring a smooth transition from existing State-based schemes.

6 In considering possible design options, the ESI Working Group may examine:

6.1 lessons learned from existing State and Territory energy efficiency programs, including the ESS, the VEET and the REES;

6.2 international energy efficiency programs, trends in energy efficiency policy, and recommendations of foreign and international organisations, such as the International Energy Agency;

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6.3 impacts and interactions between a national ESI and:

a. the carbon price mechanism;

b. the RET;

c. the National Electricity Market, South West Interconnected System and other relevant energy markets; and

d. other regulatory obligations including, but not limited to, the National Greenhouse and Energy Reporting Scheme, the Energy Efficiency Opportunities program and the Greenhouse and Energy Minimum Standards scheme; and

6.4 the co-benefits of certain energy efficiency improvements, including reductions in non-greenhouse gas air pollution, health benefits, improved energy security, reduced energy costs for households, and infrastructure savings.

7 In considering possible design options, the ESI Working Group must examine the views and ideas of experts, and key stakeholders including representatives of the energy industry, end users, States, Territories, industry, environment and community groups.

8 The ESI Working Group will release one or more Issues Papers in 2011 and, before the end of March 2012, will present its report that updates the Minister for Climate Change and Energy Efficiency and the Minister for Resources and Energy on possible design options that warrant more detailed consideration.

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ATTACHMENT A TO THE TERMS OF REFERENCE

C O U N C I L O F A U S T R A L I A N G O V E R N M E N T S ’ C O M P L E M E N T A R I T Y P R I N C I P L E S

Complementary measures should be assessed against the following principles.

1. The measures are targeted at a market failure that is not expected to be adequately addressed by the carbon price mechanism or that impinges on its effectiveness in driving emissions reductions.

- For example, research and development failures, common use infrastructure issues, information failures and excess market power.

Complementary measures should adhere to the principles of efficiency, effectiveness, equity and administrative simplicity and be kept under review. They may include:

a) measures targeted at a market failure in a sector that is not covered by the carbon price mechanism.

b) measures for where the price signals provided by the carbon price mechanism are insufficient to overcome other market failures that prevent the take-up of otherwise cost-effective abatement measures.

c) measures targeted at sectors of the economy where price signals may not be as significant a driver of decision making (e.g. land use and planning).

d) some measures in (a) or (b) may only need to be transitional depending on expected changes in coverage or movements in the carbon price.

2. Complementary measures should be tightly targeted to the market failure identified in the above criteria that are amenable to government intervention. Where the measures are regulatory they should meet best-practice regulatory principles, including that the benefits of any government intervention should outweigh the costs.

3. Complementary measures may also be targeted to manage the impacts of the carbon price mechanism on particular sectors of the economy (for example to address equity or regional development concerns). Where this is the case, in line with regulatory best-practice, the non-abatement objective should be clearly identified and it should be established that the measure is the best method of attaining the objective.

4. Where measures meet the above criteria, they should generally be implemented by the level of government that is best able to deliver the measure. In determining this, consideration should be given to which level of government has responsibility as defined by the Constitution or convention/practice, the regulatory and compliance costs that will be imposed on the community, and how the delivery of the measure is best coordinated or managed across jurisdictions.

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Appendix B: summary of features of Australian schemes

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New South Wales Victoria

Scheme NSW Energy Savings Scheme (ESS) Victorian Energy Efficiency Target Scheme (VEET)

Objectives - To create a financial objective to reduce the consumption of electricity by encouraging energy savings activities

- Assist households and businesses to reduce electricity consumption and electricity costs

- Complement any national scheme for carbon pollution reduction by making the reduction of greenhouse gas emissions achievable at lower cost

- Reduce the cost of, and the need for, additional energy generation, transmission and distribution infrastructure.

- Reduce greenhouse gas emissions

- Encourage the efficient use of electricity and gas

- Encourage investment, employment and technology development in industries that supply goods and services which reduce the use of electricity and gas by consumers.

Target Type State-wide energy saving target.

Measured as percentage of total retail electricity sales.

State-wide greenhouse gas abatement target.

Measured as megatons of avoided GHG emissions.

Target Level Starts at 0.5 per cent of liable NSW electricity sales in 2009, increases to 5 per cent by 2014.

NSW Government estimates that by 2014, 8.5 million megawatt hours of electricity will be saved (8.5 MtCO2-e).

VEET operates in 3 year phases.

Phase One (2009 – 2011):

- Target is 2.7 MtCO2-e avoided per year.

Phase Two (2012 – 2014):

- Target is 5.4 MtCO2-e avoided per year.

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South Australia Australian Capital Territory

Residential Energy Efficiency Scheme (REES) Energy Efficiency Improvements Scheme (EEIS)

*Note: the EEIS legislation has recently been passed by the ACT parliament and the scheme is scheduled to commence on 1 January 2013.

- Improve energy efficiency and reduce greenhouse gas emissions within the residential sector

- Assist households prepare for likely energy price increases from emissions trading

- Reduce total energy costs for households, particularly low-income households.

- Encourage the efficient use of electricity and gas

- Reduce greenhouse gas emissions associated with stationary energy use in the Territory

- Reduce household and business energy costs

- Increase opportunities for priority households to lower energy use and costs.

Two targets:

- Energy efficiency activities (measured as avoided greenhouse gas emissions)

- Energy audits for priority group (low-income) households.

Annual greenhouse gas reduction target.

Expressed as a percentage of total electricity sales-related emissions in the ACT.

REES runs in 3 year phases. Targets have been set for each year of two phases.

The energy reduction targets (in ktCO2-e avoided) are:

Proposed targets (as a percentage of total electricity sales):

2013: 7%

2014: 13%

2015: 14%2009: 155

2010: 235

2011: 255

2012: 255

2013: 335

2014: 410


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Target level

(cont)

Sub-targets No sub-target No sub-target

Fuel coverage Electricity only Electricity and gas

Obligated Parties

Electricity retail suppliers, direct suppliers of electricity and market customers who purchase their electricity directly from the National Electricity Market.

Electricity and gas retailers who supply to more than 5,000 customers in Victoria.

Trading Yes, between registered participants. Yes, between registered VEET certificate account holders.

Certificates Yes – Energy Savings Certificates (ESCs or ‘eskies’).

Yes – Victorian Energy Efficiency Certificates (VEECs)

Banking Yes, unlimited. Yes, though a banked certificate cannot be older than 6 years from the date of the installation activity.


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The energy audit targets (expressed as number of audits delivered) are:

2009: 3,000

2010: 5,000

2011: 5,000

2012: 5,667

2013: 5,667

2014: 5,667

35% of an obligated retailer’s annual energy reduction target to be achieved in priority group households.

Obligated parties (Tier 1 only) must derive a specified proportion (initially 25%) of energy savings from low-income households.

Electricity and gas Target base considers electricity-related emissions only. However, savings can be made in other fuel sources, including gas.

Electricity and gas retailers who supply more than 5000 residential customers in SA.

Obligated parties are:

- ‘Tier 1 retailers’; electricity suppliers with electricity sales of at least 500 GWh to ACT customers in a compliance year and at least 5,000 customers.

- ‘Tier 2 retailers’; a retailer that is not a tier 1 retailer.

Tier 2 retailers may elect not to undertake energy savings and instead pay a fee of $37 per tonne of CO2-e.

Trading of energy credits amongst obligated energy retailers is permitted.

Transfer of credits between obligated parties is permitted if approved by the Administrator.

No certificates. No certificates.

Yes, obligated parties may ‘bank’ their eligible activity to meet target for subsequent years if in excess of current target.

Yes, obligated parties may ‘bank’ their eligible activity to meet their target for the coming year if in excess of current target.


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Borrowing Limited – obligated parties may carry forward to the next year a shortfall of up to 10% of their liability for a given year.

None.

Sectors where activity can be undertaken

Residential, commercial and industrial sectors

Initially the residential sector, extended to the business sector in December 2011.

Methodologies used

Deeming, calculation, and combination.

To date, deeming only, proponents have been invited to submit potential project-based methodologies for further consideration by government.


Limited – obligated parties may carry forward to Limited – obligated parties may carry

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the next year a shortfall of up to 10% of their liability for a given year.

forward to the next year a shortfall of up to 10% of their liability for a given year.

Residential sector only. Residential sector and commercial (small-medium enterprises) sector.

To date, deeming only. Deeming. Project-based assessment is available upon application by retailers or other interested parties.

Page | B7


Appendix C: List of acronyms

ABS Australian Bureau of Statistics

ACP Accredited certificate provider (NSW)

AEMC Australian Energy Market Commission

AEMO Australian Energy Market Operator

AER Australian Energy Regulator

AiG Australian Industry Group

ASBEC Australian Sustainable Built Environment Council

CERT United Kingdom’s Carbon Emissions Reduction Target

CFL compact fluorescent light

CO2e carbon dioxide equivalent

EEIS Energy Efficiency Improvements Scheme (ACT)

EEO Energy Efficiency Opportunities Initiative (Cth)

EITE emissions-intensive trade-exposed

EREP Environment and Resource Efficiency Plan

ESC Energy Savings Certificates (NSW)

ESCO(s) energy service company

ESI Energy Savings Initiative

ESS Energy Savings Scheme (NSW)

GGAS Greenhouse Gas Reduction Scheme (NSW)

GJ Gigajoules

HESS Home Energy Saver Scheme

IEA International Energy Agency

JCP Jobs and Competitiveness Program (Cth)

ktCO2e kilotonnes of carbon dioxide equivalent

kWh kilowatt hours

LIEEP Low Income Energy Efficiency Program (Cth)

LNG liquefied natural gas

LPG liquefied petroleum gas

LRET Large-scale Renewable Energy Target (Cth)

Page | C1


MEPS minimum energy performance standards

MRET Mandatory Renewable Energy Target (Cth)

MtCO2e megatonnes of carbon dioxide equivalent

MW megawatt

MWh megawatt hours

NABERS National Australian Built Environment Rating System

NEM National Electricity Market

NER National Electricity Rules

REES Residential Energy Efficiency Scheme (SA)

RET Renewable Energy Target (Cth)

RIT-D Regulatory Investment Test for Distribution

RIT-T Regulatory Investment Test for Transmission

SME Small and medium enterprise

SRES Small-scale Renewable Energy Scheme (Cth)

SWIS Western Australia’s South West Interconnected System

tCO2e tonnes of carbon dioxide equivalent

UK CRC United Kingdom’s Carbon Reduction Commitment

UK EEC United Kingdom’s Energy Efficiency Commitment

VEET Victorian Energy Efficiency Target

Page | C2


Appendix D: Potential impacts of energy efficiency on network charges

The ‘load duration curve’ (LDC) illustrates the system capacity requirements to meet demand for different periods of time. Figure D.1 below shows a stylised LDC; as the horizontal x-axis shows per cent of time, the left most point on the curve represents the small amount of time (less than one per cent) that the maximum ‘peak’ level of demand occurs. Networks are built to meet the peak demand, but the associated expenditure (or system costs) is smeared over all the kilowatt hours (represented as the area between the x-axis and the curve) which consumers receive.

Energy efficiency can increase network charges when energy savings are made mainly in off-peak times. This does not minimise expenditure over time (as peak demand, and hence infrastructure needs, is not reduced) but reduces the total number of kilowatt hours delivered. As there are fewer kilowatt hours over which a distribution network business can recoup its expenditure as revenue, the cost to all end users of each delivered kilowatt hours increases.

The two curves in Figure D.1 show this change: assume an energy efficiency scheme changes the LDC from curve ‘A’ to curve ‘B’, the peak point (far left) remains the same and drives the same level of network expenditure, but there are fewer kilowatt hours under the curve over which to smear this expenditure. This drives network charges upwards for consumers and reduces network utilisation by the amount of the shaded area between curves A and B. Hence, end users who do not participate in the aforementioned energy efficiency scheme may face higher overall electricity costs as they do not reduce their energy usage to balance this increase.

A deteriorating LDC can also increase generation costs over time, as a more expensive generation mix is required, and existing generators may seek to recoup investment over fewer kilowatt hours delivered by placing higher bids into the market.

Page | D1


Figure D.1: Electricity network revenue and costs under different consumer demand profiles

Page | D2

100%

This area represents the

total number of kWh over

which network revenues

are smeared

This point represents the

system capacity and costs

required to reliably supply

electricity

Consumption profile

Consumption profile (with increased off-peak energy efficiency)

% of time at consumption level

Leve

l of c

onsu

mpt

ion

(kW

) / S

yste

m c

osts

AB

<1%


Appendix E: Peak demand technical groups membership

Peaking Technical Group Australian Energy Market Commission

Australian Energy Market Operator

Australian Energy Regulator

Commonwealth Scientific and Industrial Research Organisation

Energy Networks Associations

Energex

AusGrid

Ergon Energy


ERM Power

Origin Energy

EnerNOC

UTS Institute for Sustainable Futures

Office of Environment and Heritage (NSW)

Network Modelling Group Australian Energy Market Commission

Australian Energy Market Operator

Australian Energy Regulator

Commonwealth Scientific and Industrial Research Organisation

Energex

AusGrid

Office of Environment and Heritage (NSW)

Page | E1


Appendix F: List of submissions received in response to the Issues Paper

Amcor Council of Capital City Lord Mayors

Ausgrid Council of the Aged

Australian Aluminium Council CSR Limited

Australian Capital Territory Government Ms Margaret Dingle

Australian Council of Trade Unions Ecovantage

Australian Financial Markets Association Energetics

Australian Gas Light Company Energy Efficiency Certificate Creators

Australian Industry Greenhouse Network Energy Efficiency Council

Australian Network of Environmental Defenders Offices

Energy Makeovers/Energy Renovations (Joint Submission)

Australian Pipeline Trust and APT Investment Trust (APA Group)

Energy Networks Association

Australian Solar Energy Society of South Australia


Australian Sustainable Built Environment Council Energy Supply Association of Australia

Better Place Energy Users Association of Australia

BlueScope Steel Enernoc

Brotherhood of St Lawrence Envestra

Mr Phil Browne Essential Energy

Business South Australia General Electric Power & Water

Cement Industry Federation Green Energy Trading

Chamber of Commerce and Industry Western Australia

Grid Australia

Choice GWA Heating and Cooling

City of Sydney Horizon Power

Clean Energy Council Housing Industry Association

The Climate Institute Hydro Tasmania

ClimateWorks Jemena

Conservation Council of South Australia Kildonan Uniting Care

Page | F1


Lend Lease Sustainability Solutions Adjunct Professor Alan Pears

Low Carbon Australia Mr John Pockett

Low Energy Supplies and Services Queensland Murray Darling Committee Inc

Loy Yang Marketing Management Refrigerated Warehouse and Transport Association

Macquarie University Rio Tinto

Major Energy Users Inc Simply Energy

Minerals Council of Australia Southern Sydney Regional Organisation of

88 P Bertoldi and S Rezessy, ‘Tradable white certificate schemes: fundamental concepts’, Energy Efficiency¸vol.1, 2008, pp 237-255, 242.

89 For example, when a Commonwealth rebate was introduced, the Victorian VEET discounted ceiling insulation so that effectively

certificates could not be created. Note also that under the South Australian REES, one of the principles scheme administrator is obliged to

consider when approving an activity is whether the activity encourages energy savings that are additional to those which would otherwise be

achieved under current and planned regulatory requirements; and/or which are otherwise occurring through business as usual or consumer

behaviour (see the REES protocol: http://www.escosa.sa.gov.au/library/081111-REES-ProtocolSetByMinisterForEnergy.pdf ).

90 P Bertoldi, ‘Energy supplier obligations and white certificate schemes: Comparative analysis of experiences in the European Union’,

Energy Policy, vol. 38, 2010, pp 1455-1469, 1459.

91 See: M Pavan, ‘Tradable energy efficiency certificates: the Italian experience’, Energy Efficiency, vol. 1, 2008, pp 257-266, 259.

92 In NSW, activities undertaken as part of the Government-funded Home Power Savings Program do not generate ESCs. Similarly, in the

UK’s Energy Efficiency Commitment Phase 1 (EEC-1), Government-funded insulation installations as part of the Warm Front program

were not eligible to count towards the EEC-1 target.

93 The Victorian VEET scheme prescribes weightings for activities undertaken in metropolitan, regional and remote areas and for some

activities also weights savings according to climate zones. However, the New South Wales ESS takes the approach of recognising all

deemed energy savings equally, regardless of the region or climate zone where an activity was undertaken. Under the South Australian

REES, general weightings do not apply. However, for water heater activities there are different deeming values for different geographic

areas to account for the fact that in some parts of the state, installing a low-emission water heater is additional to state requirements whereas

in other parts this is not the case.

94 The Project Impact Assessment Method under the NSW ESS allows project proponents to make an upfront estimate of future savings via

an engineering assessment.

95 M Pavan, Tradeable energy efficiency certificates: the Italian experience’, Energy Efficiency, vol 1, 2008, pp 257-266.

96 The NSW ESS prescribes Baseline per unit of output, Baseline unaffected by output, Normalised baseline and the National Australian

Built Environment Rating System baseline methods as four sub-methods under its Measured Baseline Method for measuring savings.

97 For example, the NSW ESS requires proponents to seek accreditation for Recognised Energy Saving Activities prior to their

commencement.

Page | F2

http://www.escosa.sa.gov.au/library/081111-REES-ProtocolSetByMinisterForEnergy.pdf


Councils

Mission Australia Stiebel Eltron Australia

Multiple Sclerosis Australia Sustainable Energy Association of Australia

National Generators Forum Total Environment Centre

New South Wales Government Tourism and Transport Forum

News Limited United Voice

Nicolas Delhorbe University of Technology Sydney Physics and Advanced Materials

99 For example, see: AGL, Staying Connected Program, viewed on 8 November 2011,

http://www.agl.com.au/home/billing-and-payments/Pages/Staying-Connected-Program.aspx ; and TRUenergy, Hardship Policy, viewed on

9 May 2012, http://www.truenergy.com.au/residential/youraccount/hardshippolicy.xhtml

100 Queensland Government, viewed on 9 May 2012, http://www.deedi.qld.gov.au/energy/rebates-and-concessions.htm; and New South

Wales Government, Information for energy consumers: Energy rebates, viewed on 9 May 2012,

http://www.trade.nsw.gov.au/energy/customers/rebates.

101 For example, see Kildonan Uniting Care’s program: Kildonan Uniting Care Energy Efficiency Audits, viewed on 9 May 2011, <

http://www.kildonan.unitingcare.org.au/energy_services.php>; and the NSW Government’s No interest loans scheme program managed by

Good Shepherd Youth & Family Service: NSW Government, No interest loans scheme program – NSW NILS® services, viewed on 8

November 2011, http://www.fairtrading.nsw.gov.au/About_us/Our_services/Grants/Nils_auspice_for_nsw_state_coordinator.html

102 Australian Government, Securing a Clean Energy Future – The Australian Government’s climate change plan , Canberra, July 2011,

p 83.

103 Essential Services Commission of South Australia, Residential Energy Efficiency Scheme (REES) FAQs, Who are the priority group

households? http://archive.escosa.sa.gov.au/site/page.cfm?u=298.

104 M Philipson, Low-income Aspects of REES, Presentation to National Energy Saving Initiative Low-income Household workshop

Adelaide, November 2011.







108 Australian Bureau of Statistics, 1345.4 - SA Stats, June 2011, viewed on 9 May 2012,

http://www.abs.gov.au/ausstats/[email protected]/Products/1345.4~Jun+2011~Main+Features~Demography?OpenDocument.

111 Australian Energy Market Operator, ‘Submission to Prime Minister’s Task Group On Energy Efficiency – Issues Paper’, 2010, p 9.

Page | F3

http://www.abs.gov.au/ausstats/[email protected]/Products/1345.4~Jun+2011~Main+Features~Demography?OpenDocument

http://archive.escosa.sa.gov.au/site/page.cfm?u=298

http://www.fairtrading.nsw.gov.au/About_us/Our_services/Grants/Nils_auspice_for_nsw_state_coordinator.html

http://www.trade.nsw.gov.au/energy/customers/rebates%20

http://www.deedi.qld.gov.au/energy/rebates-and-concessions.htm

http://www.truenergy.com.au/residential/youraccount/hardshippolicy.xhtml

http://www.agl.com.au/home/billing-and-payments/Pages/Staying-Connected-Program.aspx


Opower Wesfarmers

Orica Western Australian Council of Social Services

Origin Energy Western Power

112 In regard to modelling the possible peak demand design options, the value of the reduction in network peaks and impact on load factor

will require the calculation of network service territory-wide load factors and $/kVA reduction values.


2012, p 102.

Page | F4

Documents

National Energy Savings Initiative Progress Report · Web viewAn appropriate policy objective for a national Energy Savings Initiative 33 3.1 National consistency 35 3.2 Complementarity