OGW Report - Energy€¦ · Web viewFinally, in addition to the above, we note that the VEET scheme could also lead to an additional economic benefit, being an improvement in allocative

Energy market modelling of the continuation of the Victorian Energy Efficiency Target (VEET) Scheme, 2015 through 2017

prepared for: Department of State Development, Business and Innovation

DISCLAIMER

This report has been prepared for the Department of State Development, Business and Innovation (DSDBI) as an input to the Regulatory Impact Statement (RIS) of the continuation of the Victorian Energy Efficiency Target (VEET) scheme in the years 2015 through 2017. The analysis and information provided in this report is derived in whole or in part from information prepared by a range of parties other than Oakley Greenwood (OGW), and OGW explicitly disclaims liability for any errors or omissions in that information, or any other aspect of the validity of that information. We also disclaim liability for the use of any information in this report by any party for any purpose other than the intended purpose.

DOCUMENT INFORMATION

Project Energy market modelling of the continuation of the VEET, 2015 - 2017

Client Department of State Development, Business and Innovation

Status Final Report

Report prepared by Lance Hoch ([email protected])Rohan Harris ([email protected])Greg Thorpe ([email protected])

Date 6 December 2013

Energy market modelling of the continuation of the VEET, 2015 - 20176 December 2013

Final Report

Table of CONTENTS

1. Executive summary11.1. Project background and purpose 11.2. Approach 11.3. Findings and caveats 2

1.3.1. Findings 21.3.2. Caveats 8

2. Introduction 102.1. Overview of the Victorian Energy Efficiency Target (VEET) scheme 102.2. Purpose of this study 102.3. Overview of the scope of work 102.4. Organisation of this report 11

3. Key assumptions 133.1. General assumptions regarding the VEET and other factors 133.2. Assumptions regarding VEET impacts on the transmission and distribution com-

ponents of the retail bill 143.3. Assumptions regarding the VEET’s impact on the retail component of the bill

143.4. Key assumptions made in the analysis of the distributional impacts of the VEET

153.5. Key assumptions made in the analysis of the net economic benefits of the VEET

15

4. Impact of the VEET on energy consumption 164.1. Inputs provided regarding the VEET measures 164.2. Energy consumption impacts and participation under the VEET target scenarios

16

5. Impact of the VEET on energy markets 235.1. Purpose and overview of this task 235.2. Impact on wholesale electricity market and wholesale component of the retail

bill245.2.1. Overview of the approach used 245.2.2. Key inputs to the modelling 255.2.3. Estimation of the peak demand and load shape impacts of the VEET 315.2.4. Results of the CEMOS analysis 34

5.3. Impact on transmission and distribution components of the retail bill 39

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5.3.1. How energy efficiency affects network prices 395.3.2. Calculating the impact of the VEET on the transmission component of the re-tail bill 405.3.3. Calculating the impact of the VEET on the distribution component of the re-tail bill 415.3.4. Findings 42

5.4. Impact on retail operating costs and margin 445.4.1. Nature of the costs incurred by retailers 445.4.2. Findings 44

6. Distributional impacts of the VEET 486.1. Purpose and overview of this task 486.2. Findings 49

6.2.1. Costs of the scheme as allocated to participants and non-participants 496.2.2. Benefits of the scheme accruing to participants and non-participants 536.2.3. Net benefits accruing to participants and non-participants in Victoria 58

6.3. Net economic benefits 60

7. Conclusions and caveats 657.1. Conclusions 657.2. Caveats 70

Appendix A : Scope of Services 72

Appendix B : Allocation of annual VEET measure electricity savings to seasons and times of day to create load shape impacts for use in the market modelling 74B.1 Residential measures 74B.2 Business measures 78

B.2.1 Overview of data provided 78B.2.2 Measures in Group 1 businesses/buildings 79B.2.3 Measures in Group 2 businesses/buildings 81B.2.4 Measures in Group 3 businesses/buildings 83B.2.5 Measures in Group 4 businesses/buildings 85

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Table of FIGURES

Figure 1: Conversion of VEET CY impacts to FY impacts for use in the market modelling....................28

Figure 2: Delivered gas prices ($/GJ).....................................................................................................30

Table of TABLES

Table 1: Projected participation rates by target scenario..........................................................................3

Table 2: Impact of the VEET on customers’ bills, 2.0 million tonne target scenario.................................4



Table 5: Economic net benefit of the three target scenarios (total resource cost perspective), $2015 millions.......................................................................................................................................... 7

Table 6: Energy consumption impacts of 2.0 million tonne target VEET measures, 2015 – 2030.........16



Table 9: Participation in the three VEET target scenarios......................................................................18

Table 10: Percent contribution of residential and business sector measures, by target scenario..........18

Table 11: Percent of residential electricity impacts by end use and measure, by target scenario..........19

Table 12: Percent of residential gas impacts by end use and measure, by target scenario...................20

Table 13: Percent of business electricity impacts by end use, by target scenario..................................21

Table 14: Percent of business gas impacts by end use and measure, by target scenario.....................21

Table 15: Electricity and gas end-use consumption reductions by VEET target scenario......................22

Table 16: Victoria sent-out energy and demand forecast used in the ‘No VEET’ case...........................26

Table 17: Reductions in sent-out electricity in each of the three VEET target scenarios (MWh)............29

Table 18: Reductions in peak demand in each of the three VEET target scenarios (MW).....................33

Table 19: Victoria wholesale market price changes in the three VEET target scenarios (2013$/MWh). 34

Table 20: Impact of the 2.0 million tonne target on wholesale prices in other NEM regions (2013$/MWh)......................................................................................................................................... 35



Table 23: VEET impact on use of fuels for generation 2015 – 2030 (GWh)...........................................37

Table 24: VEET impact on amount and type of generation capacity 2030 (MW)...................................37

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Table 25: VEET impact on generation production costs ($millions 2013)..............................................38

Table 26: Carbon reductions expected due to the three VEET target scenarios (tonnes)......................39

Table 27: Network revenue reductions ($million 2015 at a 7% WACC).................................................42

Table 28: Network revenue reductions ($million 2015 at a 3.5% WACC)..............................................42

Table 29: Certificate price for each scenario..........................................................................................45

Table 30: Number of certificates created under the 5.4 million certificate scenario (‘000s)....................45



Table 33: Retailer costs under the 5.4 million target scenarios ($million 2015)......................................47



Table 36: Annual and total cost increase per customer, by eligible customer class, for the 5.4 million scenario ($2015)........................................................................................................52

Table 37: Annual and total cost increase per customer, by customer class, for the 2.7 million scenario ($2015)........................................................................................................52

Table 38: Annual and total cost increase per customer, by customer class, for the 2.0 million scenario ($2015)........................................................................................................53

Table 39: Annual benefit per customer under the 5.4 million certificate scenario ($2015).....................55

Table 40: Total benefit for other customer classes under the 5.4 million certificate scenario ($2015). . .56





Table 45: Benefit of the VEET accruing to non-Victorian customers in aggregate under each scenario ($2015)................................................................................................................. 58

Table 46: Distributional impacts – net annual and total financial benefit of the VEET per average customer for each customer class in the 5.4 million certificate scenario ($2015)...............59

Table 47: Distributional impacts – net annual and total financial benefit of the VEET per average customer for each customer class under the 2.7 million certificate scenario ($2015)........59

Table 48: Distributional impacts – net annual and total financial benefit of the VEET per average customer for each customer class under the 2.0 million certificate scenario ($2015)........60

Table 49: Economic benefits and costs of the 5.4 million certificate scenario ($2015, millions).............61



Table 52: Projected participation rates by target scenario......................................................................65

Table 53: Impact of the VEET on customers’ bills, 2.0 million tonne target scenario.............................66



Table 56: Economic net benefit of the three target scenarios (total resource cost perspective), $2015 millions........................................................................................................................................ 69

Table 57: Residential electricity measures by end use – impacts by season.........................................74

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Table 58: Residential electricity measures – impact by time of day in summer months by end use......75

Table 59: Residential electricity measures – impact by time of day in shoulder months by end use......76

Table 60: Residential electricity measures – impact by time of day in winter months by end use..........77

Table 61: End-use categories used in the market modelling..................................................................78

Table 62: Usage/profile groupings used in the market modelling...........................................................79

Table 63: Allocation of end-use savings by season and times of day in Group 1 businesses/buildings.79




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1. Executive summary1.1. Project background and purpose

The Victorian Energy Efficiency Target (VEET) scheme (promoted publicly as the "Energy Saver Incentive" or "ESI") is a market-based scheme designed to promote the uptake of energy efficiency improvements in residential and non-residential premises. The scheme works by setting a greenhouse gas (GHG) abatement target that is to be met through the uptake of prescribed energy efficiency activities for which certificates are granted. Each certificate represents an energy saving equivalent to one tonne of GHG abatement. Large energy retailers operating in Victoria are required to surrender certificates annually in amounts proportional to their energy sales.The VEET scheme is legislated to continue in three-year phases until 1 January 2030, with the target to be reset in the VEET regulations before the end of each of these phases. As stated in the Act, the target must be reset no later than 31 May in the year prior to each three-year period. With the scheme’s second phase due to finish at the end of 2014, regulations resetting the GHG abatement target for the next three-year phase (2015 – 2017) of the scheme are required by 31 May 2014. In line with the Subordinate Legislation Act 1994 a RIS providing justification for these new regulations is currently being undertaken by the Department of State Development, Business and Innovation (the Department).

As part of the RIS process, the Department is required to establish the costs and benefits associated with the introduction of regulation as well as key associated impacts. The establishment of new annual targets for the VEET scheme will have an impact on both the costs of the scheme and the benefits that can be expected.The purpose of this study is to undertake energy market modelling to ascertain the impact of the VEET target on the energy market, i.e. the economic and financial impact on wholesale electricity prices of reduced demand resulting from increased energy efficiency and whether the costs of a new scheme target imposes an appreciable burden on the liable businesses and thereby end users, including both those that participate in the scheme and those that do not.

1.2. ApproachThe Request for Quotation issued by the Department specified three different target scenarios for which costs and benefits were to be assessed. The three target scenarios were defined in terms of programs that, over the lifetime of the measures installed under the program, would achieve GHG reductions of 2.0 million, 2.7 million and 5.4 million tonnes respectively.The Department supplied spreadsheets that showed the specific measures installed in each of the three program years in each target scenario, the useful lifetime of each measure, the annual savings of each measure, the number of certificates awarded for each measure, and the cost of certificates for each year. The Department also provided information on the total costs incurred by end users participating in each of the target scenarios.

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The impact of the program on wholesale electricity prices resulting from the reductions in electricity consumption and peak demand for electricity due to the measures installed under the VEET in each of the three target scenarios was assessed through electricity market simulation modelling. This involved:

estimating the load profile impacts of each of the measures assumed to be installed under the VEET from 2015 through 2017 under each scenario by apportioning the deemed energy savings of each measure to different hours of the day for weekend and weekdays in each of three different seasons (winter, summer and shoulder);using the results to estimate the change in Victoria’s electricity load profile in each year from 2015 through 2030 due to the measures installed under each of the three target scenarios;running the CEMOS electricity market simulation model over the years 2015 through 2030 for the load profiles in Victoria in the ‘with VEET’ and ‘without VEET’ cases for each scenario; comparing the outputs of the two runs for each scenario with regard to key variables such as wholesale market energy price, generation by fuel type, and plant by capacity type.

The impact of the VEET on gas wholesale prices was also considered. However, even in the 5.4 million tonne scenario the reduction in annual gas consumption due to the VEET was never more than 0.9% of Victoria gas consumption in 2012. This was deemed to be much too small to have any impact on the wholesale price of gas in the state.The impact of each of the VEET target scenarios on electricity and gas transmission and distribution charges was also considered. This required consideration of:

the form of price control under which Victoria’s electricity and gas transmission and distribution businesses operate; andwhether the impact of the VEET would have been forecast by the regulated business as part of their pricing submission.

The change in retail charges due to the VEET in each of the three target scenarios was calculated by dividing the cost of certificates plus the administrative costs incurred by retailers in complying with the program in each of the years from 2015 through 2017 by Victorian electricity and gas retailers by the forecast sales volumes to the electricity and gas customer segments eligible to participate in the program. The impact of the changes in the charges for wholesale electricity, electricity and gas transmission and distribution, and electricity and gas retail services were then calculated for those residential and non-residential customers who participate in the VEET and those that don’t in each of the three target scenarios. The bills of participating and non-participating customers were then compared to assess the distributional impacts of the VEET in each of the three target scenarios.These undertakings are discussed in detail in sections 4 through 6 of this report.

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1.3. Findings and caveats

1.3.1. FindingsThis section presents the conclusions that can be drawn regarding the key questions to be addressed in this study based on the analyses undertaken. These conclusions should be considered in light of the assumptions presented in section 3, and the caveats discussed in section 1.3.2.The material provided by the Department shows that meeting each of the three VEET emission reduction targets will require a non-trivial level of take-up. However, in some scenarios, the take-up rates required, given the number and savings impacts of the measures included for the purpose of the analysis, are high enough to raise some questions regarding their achievability.

As shown in Table 1 increased participation from both residential and business customers is projected as the target of the scenarios increase. The participation rates in the 5.4 million tonne scenario are very ambitious, and would, if achieved, represent one of the largest energy efficiency program deployments ever undertaken. Table 1: Projected participation rates by target scenario

Sector% of segment projected to participate

2.0 million tonnes 2.7 million tonnes 5.4 million tonnes

Electricity

Gas Electricity

Gas Electricity

Gas

Segment sizeResidential 2,334,999 1,806,839 2,334,999 1,806,839 2,334,999 1,806,839

Business 316,377 55,024 316,377 55,024 316,377 55,024% segment participation

Residential 12.1% 0.8% 18.5% 1.6% 35.8% 12.8%Business 6.5% 0.6% 8.1% 0.7% 13.7% 0.9%

Source: OGW analysis of DSDBI-provided information

It should also be remembered that:a non-trivial number of residential consumers have already participated in the scheme – additional participation of these consumers will require that they adopt additional measures to those already installed, and the participation rates shown above represent the number of consumers required to meet the target assuming that each participant undertakes the average bundle of measures. In practice, more participation may be required, particularly if the applicability of some of the measures with larger lifetime savings is not as large as that of the measures with smaller lifetime savings.

On the other hand, additional measures may, in practice, be introduced within one or more of the scenarios. By introducing more measures, some of which may have lifetime savings larger than the average analysed here, required penetration rates may be reduced.

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Customers that participate in the VEET save money, but the bills of non-participating customers generally increase in all three target scenarios

Table 2 though Table 4 provide a summary of the bill impacts of the three target scenarios on the bills of participating and non-participating residential and business electricity and gas consumers. Tick marks indicate that the consumer’s bill either goes down or does not change. Crosses indicate that the consumer’s bill increases. It should also be noted that gas measures for business customers do not begin to be implemented until 2016.

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Table 2: Impact of the VEET on customers’ bills, 2.0 million tonne target scenario

Customer class

Participant / non-participant

Electricity or gas

Bill savings in year NPV through 2030 at

1 2 3 7.0% 3.5%Residential Participant E

G X X X X XNon-participant E X X X X

G X X X X XBusiness Participant E

G NA Non-participant E X X X X

G NA X X X XSource: OGW analysis


Customer class


Electricity or gas



G X X X X XNon-participant E X X X X X


G NA Non-participant E X X X X X



Customer class


Electricity or gas



G Non-participant E X X X X X


G NA Non-participant E X X X X X

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The tables show mixed outcomes. Specifically,In the 5.4 million tonne scenario:

The average residential and the average business customer1 participating in the VEET experience savings on both their electricity and gas bills in the three years in which the program is implemented, and also on a net basis over the 2015 to 2030 period. This is due to the relatively large savings per participant in this scenario as compared to the other scenarios.However, non-participants – whether residential or business – experience higher electricity and gas bills in the first three years of the program and on a net basis over the 2015 through 2030 timeframe. This is because the costs of the VEET in this scenario are significantly higher than those incurred in the other scenarios.

By contrast, in the 2.0 million tonne target scenario:The electricity bills of residential non-participants are almost unchanged. They experience a very slight reduction in 2015 (though it is really essentially break-even) and a slight overall increase over the study timeframe as a whole (that is, the average non-participant would pay a total of about $7 more for all the electricity they use over the 2015 – 2030 period). This is because the reduction in wholesale price in this scenario is not quite large enough to outweigh the increases in retail and network costs that result from the program in this scenario. In addition, the gas bills of residential non-participants and both the electricity and gas bills of business non-participants increase in this scenario due to the fact that the cost of the program that is allocated to these customers exceeds the reductions the program causes in wholesale energy prices.The VEET results in lower electricity bills for both the average residential and average business customer that participates in the VEET and lower gas bills for the average business customer that participates in the VEET. By contrast, the gas bill of the average residential customer that participates in the VEET increases. This is because a significant number of the measures that are eligible under the residential program involve a switch from electricity to gas. As a result, the gas consumption of the average participating customer increases, as does their gas bill. The customer will still save money overall, however, as the electricity cost savings achieved by the average residential VEET participant more than offsets the increases they experience in their gas costs2.

1 The analysis of bill savings had to be undertaken on an average-participant basis. This was the case because the information provided by the Department only projected the number of each eligible measure expected to be taken up, and the total number of residential and business customers taking up one or more eligible electricity or one or more eligible gas measures. No information was provided on the specific combination of measures taken up by different customers or how many customers could be expected to take up electricity and gas measures. As a result, the analysis assesses the average impact of the VEET on the electricity and gas bills of program participants and non-participants.

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Large electricity consumers within Victoria and electricity users in other states benefit from the VEET

The outcome for large electricity users within Victoria and all electricity users in other states is different. These electricity users benefit from the lower wholesale electricity prices that result from the VEET, and do not incur any additional costs due to the VEET. In the case of large business customers within Victoria it can be assumed that (a) distributors will not seek to make up from these customers revenue reductions that result from consumption reductions among the smaller customers who are eligible and choose to participate in the VEET, and (b) retailers will not seek to recover from these customers the costs they incur to administer a program targeted at small customers. Similarly, because electricity distributors and retailers in other states do not lose revenue or incur additional costs due to the VEET, they will not pass on any costs associated with the VEET to their customers, meaning that those customers will experience only the impact of the VEET on wholesale electricity prices.In the case of gas, no wholesale price benefits are assumed in the modelling due to the very small reduction in gas consumption and the nature of gas contracting, so large gas users and interstate gas users do not accrue any benefits or incur any additional costs due to the VEET.None of the three VEET target scenarios are cost-effective from the total resource cost (TRC) perspective.

The total resource cost perspective is an economic test that assesses the cost of the VEET as a means for meeting consumers’ needs for energy. It takes as its benefits the reductions that the program induces in the cost of producing and delivering energy to consumers; its costs include all costs incurred in administering and delivering the program, plus any costs borne by customers in order to participate in the program.More specifically:

TRC benefits include reductions in fuel and other variable operating and maintenance expenses, and any reductions in capital or fixed operating and maintenance expensesTRC costs include:

The costs incurred by certificate providers in creating certificates (note that this is not the same as the cost of the certificates themselves)The costs incurred by end-use customers participating in the VEET for measures installed (in those cases where there is a net cost to the customer participating in the program)The costs incurred by the retailers in complying with the administrative and other requirements of the program.

2 It is important to recognise that the nature of the eligible measures ensures that where a residential customer’s gas consumption (and therefore gas bill) has increased due to their participation in the scheme, they must benefit from a lower electricity bill. Our analysis indicates that the reduction in the average residential participant’s electricity bill significantly exceeds the increase in their gas bill.

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As can be seen in Table 5 on the following page, the costs of the VEET exceed the reductions it engenders in energy production and delivery costs in all three target scenarios and under both discount rates tested.Table 5: Economic net benefit of the three target scenarios (total resource cost perspective), $2015 millions

Target scenario (millions of tonnes reduced)

7.0% discount rate 3.5% discount rate

2.0 2.7 5.4 2.0 2.7 5.4

Benefits (i.e., reductions in fixed and variable electricity production costs) 113.07 146.4 257.76 143.01 184.91 326.18

Costs, which are comprised of297.05 416.44 973.13 317.05 444.37

1037.64

Certificate creation costs 82.96 147.21 603.36 88.45 156.93 642.45 Administrative costs borne by retailers 4.28 5.80 11.63 4.57 6.19 12.42 Costs of measured borne by participants 209.81 263.43 358.14 224.03 281.25 382.77

Net benefit -183.98 -270.04 -715.37 -174.05 -259.46 -711.46

Benefit/cost ratio 0.38 0.35 0.26 0.45 0.42 0.31

Source: OGW analysis

Put simply, this indicates that it costs more to save energy through the VEET than it does to produce and deliver that same amount of energy.Interestingly, the table also shows that the smallest of the three target scenarios provides the best economic performance. This is due, at least in part, to the fact that the larger programs require higher certificate prices to drive the take-up needed to meet the higher target. However, a large portion of the measures taken up in the larger programs would also have been taken up in the smaller program – but at a lower certificate cost. In essence, the incremental certificate price in the larger program times the number of certificates taken up in the smaller program represents an additional cost of the larger target, but one that does not produce any incremental savings from those measures.The addition of a value for carbon improves the performance of the scheme, but it still fails to be cost-beneficial from a total resource cost perspective even using a 3.5% discount rate.

The results of the total resource cost test discussed above do not include any consideration of the positive or negative externalities that may result from the changes in energy consumption resulting from the VEET. The decision to not include a monetary value for the carbon emission reductions that result from the VEET was based on the stated policy of the Coalition government that was elected in September 2013 to repeal the carbon price.

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A test of the impact of including a carbon price was undertaken using the most recent projections of the European carbon price. With this price, the present value of VEET benefits would increase by the following amounts:

$87.34m in the 2.0 million tonne scenario; $112.00m in the 2.7 million tonne scenario; and $198.00m in the 5.4 million tonne scenario, if a 7.0% discount rate is used and $118.46m, $151.40m and $268.5m in the 2.0, 2.7 and 5.4 million tonne scenarios respectively, if a 3.5% discount rate is used.

Comparison of these figures to the net benefit figures shown in Table 5 show that the addition of a carbon externality value at the level currently projected in the European market would still result in the VEET failing to provide a positive cost/benefit outcome.

1.3.2. CaveatsOther benefits that may be provided by the scheme have not been considered in this analysis.

Only those benefits that could be readily quantified as part of consumers’ bills and energy sector production costs have been assessed in this analysis. Other potential impacts – which could include its ability to (a) address non-financial barriers to the deployment of energy efficiency measures, (b) build the capabilities of the energy services industry, and/or (c) create jobs – have not been assessed.

The energy savings of the VEET are not measured results – they have been have been derived from engineering estimates augmented by post-installation surveys to revise persistence assumptions.

The Department and Sustainability Victoria have made a thorough review and refinement of the deeming methodologies originally used to estimate the energy consumption impacts of the VEET measures. The methodologies themselves are quite sophisticated and take into account all of the factors that could reasonably be thought to affect scheme savings. The decision to commission fieldwork on the persistence of several measures – particularly standby power controllers – has also served to significantly refine and revise the estimated energy savings of the scheme.However, there has been no attempt to measure the actual, real-world impacts of the measures. As a result, these estimates may still over- or under- estimate actual, real-world energy savings and other impacts of the scheme.

There is significant uncertainty regarding the time distribution of VEET measure savings

There is no direct data on the time distribution of the energy impacts of the measures installed under the VEET. As a result, for the purpose of this study, these impacts have been estimated based on the professional experience of OGW.

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In addition, it has been assumed, based on the data provided by the Department and Sustainability Victoria, that the all of the water heating measures installed on residential electric water heaters and 72% of the shower roses installed in residences with electric water heaters will affect off-peak water heaters. This means that they will have no impact at times of generation system peak demand. These measures represent a sizable proportion of all residential electricity VEET savings (26.7%, 39.4% and 30.8% in the 2.0, 2.7 and 5.4 million tonne scenarios respectively). To the extent that a different proportion of these measures were installed on non-controlled electric water heaters, their impacts on peak demand would be larger.

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Benefits accruing from the deferral of network augmentation have not been considered

While we believe that this is unlikely to effect the overall assessment of the costs and benefits of the VEET measures installed from 2015 through 2017, due to their likely impacts on peak demand and geographic spread, it is an issue that may warrant consideration in future evaluations to the extent that (a) the measures to be assessed as part of such evaluations are likely to have larger impacts on peak demand, and (b) underlying growth in peak demand creates a situation in which capital expenditure for network augmentation can be expected to constitute a more important component of overall network costs than it is likely to be in the near- to mid-term.

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2. Introduction2.1. Overview of the Victorian Energy Efficiency Target

(VEET) schemeThe Victorian Energy Efficiency Target (VEET) scheme (promoted publicly as the "Energy Saver Incentive" or "ESI") is a market-based scheme designed to promote the uptake of energy efficiency improvements in residential and non-residential premises. It was established under the Victorian Energy Efficiency Target Act 2007 (the Act) and commenced on 1 January 2009.The scheme works by setting a greenhouse gas (GHG) abatement target that is to be met through the uptake of prescribed energy efficiency activities. These activities are specified in the scheme regulations and, when undertaken by scheme-accredited parties, result in the creation of Victorian energy efficiency certificates (VEECs); each VEEC represents one tonne of GHG abatement). The scheme also places a liability on large energy retailers that operate in Victoria to acquire and surrender VEECs in an amount that is proportional to their individual share of the sales of electricity and gas to residential customers within the state, and that in aggregate will meet the overall abatement target set by the scheme.The VEET scheme is legislated to continue in three-year phases until 1 January 2030, with the target to be reset in the VEET regulations before the end of each of these phases. As stated in the Act, the target must be reset no later than 31 May in the year preceding each three-year period. With the scheme’s second phase due to finish at the end of 2014, regulations resetting the GHG abatement target for the next three-year phase (2015 – 2017) of the scheme are required by 31 May 2014. In line with the Subordinate Legislation Act 1994 a RIS providing justification for these new regulations is currently being undertaken by the Department of State Development, Business and Innovation.

2.2. Purpose of this studyAs part of the RIS process, the Department is required to establish the costs and benefits associated with the introduction of regulation as well as key associated impacts. The establishment of new annual targets for the VEET scheme will have an impact on both the costs of the scheme and the benefits that can be expected.The purpose of this study is to undertake energy market modelling to ascertain the impact of the VEET target on the energy market, i.e. the economic and financial impact on wholesale electricity prices of reduced demand resulting from increased energy efficiency and whether the costs of a new scheme target impose an appreciable burden on the liable businesses and thereby end users, including both those that participate in the scheme and those that do not.

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2.3. Overview of the scope of workThe Department’s Scope of Services required market modelling to determine the impacts over the period 2015 through 2030 of the measures that could be expected to be installed under various targets that could be set for the VEET’s operation from 2015 through 2017. The modelling was only to concern the measures installed during that period; impacts of measures installed prior to 2015 were not to be included.The Department provided the specific scenarios to be analysed. The scenarios were defined in terms of three different annual emissions abatement targets: 2.0 million tonnes, 2.7 million tonnes, and 5.4 million tonnes respectively. For each target scenario the Department provided:

the expected average cost of certificates in each of the three years, 2015 through 2017;the list of energy efficiency measures eligible under the scheme, and whether each measure was to be installed in residential or business facilities;the number of installations expected to be completed of each measure in each year;the annual energy consumption impacts of each measure (in terms of both the reduction or increase in electricity and gas consumption as applicable);the expected useful life of each measure;the number of certificates associated with the installation of each measure;the cost that the participant would incur for each measure in those cases where the installed cost of the measure could be expected to exceed the value of certificates available for the measure; andan estimate of the number of unique participants in the scheme

The modelling to be undertaken was to assess the impact of the VEET in each of the target scenarios on both the electricity and gas markets in terms of:

changes in retail electricity and gas prices;changes in wholesale electricity and gas prices;changes in generation expenditure;changes to generator profits (including changes to carbon tax liabilities);changes to retailer profits;changes in gas and electricity bills for participants and non-participants in the scheme;scheme administration;transaction costs for retailers;transaction costs for accredited providers;up front purchase costs to participants;the distributional impacts of the scheme with regard to residential and business (both SME and large business) customers that participate in the scheme and those that do not (non-participants); and

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the net benefit of the scheme from a total resource perspective; that is whether and the extent to which the reduction in costs incurred by the energy markets in producing and delivering electricity and gas that is engendered by the scheme is greater than the costs incurred by the scheme and the customers participating in it.

Appendix A contains the full Scope of Services.

2.4. Organisation of this reportThe remainder of this report is organised as follows:

Section 3 presents a list of the key assumptions that were made in each part of the analyses undertaken;Section 4 provides an overview of the energy consumption impacts of the measures expected to be installed under the VEET from 2015 through 2017 as provided by the Department as an input to this study;Section 5 presents the results of the analysis of the impacts of the VEET on wholesale and retail energy prices;Section 6 discusses the distributional impacts of the VEET in terms of its impacts on the bills of participants and non-participants, and the net economic benefits of the scheme as a whole;Section 7 summarises the results of the modelling and analyses undertaken in the study;Appendix A contains the terms of reference for the study;Appendix B contains the allocation of VEET electricity measure impacts to seasons, day types and times of day.

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3. Key assumptionsThis section of the report presents the key assumptions used in each of the various parts of the analyses undertaken within the study.

3.1. General assumptions regarding the VEET and other factorsThe following general assumptions were made and have impacts on various parts of the analysis:

VEET impacts can be acceptably represented on an average participant basis, rather than calculating the benefits and costs associated with each unique bundle of measures installed.VEET measures are installed at an essentially equal rate year-round, so that it can be assumed that half of the measures will be installed by June and the other half by December. The gas consumption impacts of the VEET in all three of the target scenarios are simply too small to reduce wholesale (i.e., city gate) gas prices. Even in the 5.4 million tonne scenario the reduction in annual gas consumption due to the VEET was only 0.5% of Victoria gas consumption in 2012. Where data provided by the Department stated that a VEET measure was applied to off-peak water heating, we assumed that all impacts affected only those hours when off-peak circuits are energised. No allowance was made for ‘drift’ in timers or controls, or for consumer bypass of the control.Some measures have useful lives that extend beyond the end of the study period (2030). The use of a longer study period would have shown higher benefits, though these benefits would contribute relatively little to the net present value of the scheme due to discounting.In addition, it was assumed that the benefits of the scheme will be limited to the useful life of the measures installed under the scheme. No assumption was made that participating households would permanently reduce their consumption in the end-uses affected by the scheme after the useful life of the initial measure(s) installed.It should also be noted that because our calculation of the benefits obtained by participants in the VEET scheme used the single rate tariff, program savings associated with water-heating measures will be somewhat over-valued (because the off-peak tariff rate is lower than that in the single tariff). Similarly, the network revenue reductions associated with these measures – which affect the distributional impacts of these measures on non-participants – will also have been over-estimated.Net present value results were calculated at two discount rates: 3.5% and 7%, the latter being the discount rate used in the first Regulatory Impact Statement (RIS) undertaken for the VEET.

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All dollar figures are reported in present value 2015 terms unless stated otherwise. We have assumed a rate of inflation between 2013 and 2015 of 2.5% - any other CPI conversions have been undertaken using actual December year-on-year inflation rates.All results are reported on a calendar year basis unless stated otherwise.

3.2. Assumptions regarding VEET impacts on the transmis-sion and distribution components of the retail billWith regard to the impact of the VEET on the transmission and distribution portions of the retail bill, it was assumed that:

Network-use-of-system (NUoS) charges to residential consumers continue to be levied through 2030 on the same tariff structure as at present.The transmission (TUoS) portion of NUoS charges to residential consumers continue to be levied in relative proportion to applicable distribution (DUoS) charges.The VIC network businesses continue to operate under a Weighted Average Price Cap (WAPC) form of price regulation through 2030, and the VIC transmission business operates under a Revenue Cap form of price control through 2030.Weighted average TUoS and DUoS charges at the state level are acceptable approximations of the charges that would apply to VEET participants and non-participants.The Victorian electricity and gas distribution businesses will forecast the impact of the VEET scheme in their upcoming determinations, which, for electricity, will be developed in 2014 and will affect prices from 2016 onwards, whilst for gas, this process will occur in 2016, and will affect prices from 2018 onwards.The actual reductions in sales volumes experienced by the Victorian distribution businesses throughout the study timeframe will be exactly equal to the reduction in sales that forecast by the businesses. The VEET will not have any impact on Victorian electricity or gas distribution businesses’ capital costs from 2015 through 2030, and the businesses will not forecast them to do so. This assumption was based on the relatively small impact on peak demand that was identified as having resulted from the VEET, and the relatively wide geographic spread of take-up of the scheme.The distribution businesses will seek to recover revenue shortfalls due to lower than forecast sales volumes from those customer classes whose consumption lagged forecasts.This revenue shortfall is approximated by multiplying the variable prices that would have applied to that lost consumption (TUoS and DUoS) by the amount of energy not consumed as a result of the VEET scheme.

3.3. Assumptions regarding the VEET’s impact on the retail component of the billWith regard to the impact of the VEET on the retail component of the retail bill, it was assumed that:

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Retailers will seek to recover in full any costs incurred due to the program.Retailers will seek to recover these costs from those customer classes that were eligible to participate in the program (and not from other customer classes).Retailers will seek to recover operating costs associated with the program in the same (or succeeding) year in which they are incurred.Retailers will have undertaken all capital costs required to implement and report on the VEET in previous years. Therefore, it was assumed that the retailers would not incur any additional capital costs due to any of the three target scenarios.The published information on monthly certificate prices multiplied by the number of certificates surrendered in that month represents an acceptable (though likely over-estimated) proxy for the actual cost incurred by retailers for certificate creation.Retailers will recover costs incurred through increases on variable charges rather than through an increase in a fixed charge.VEET participants have taken up market offers in the same proportion as Victorian residential customers overall.The variable charge paid by residential and small business customers on market contracts can be suitably represented by the straight arithmetic average of the variable charge of the market offers available in each distribution area, weighted by the proportion of the total consumption of each VEET-eligible customer class within each distribution area.The variable charge paid by residential and small business customers on standing offer contracts can be suitably represented by the variable charge in the standing offer of the host retailer in each of the distribution service areas, weighted by the proportion of the total consumption of each VEET-eligible customer class within each distribution area.

3.4. Key assumptions made in the analysis of the distribu-tional impacts of the VEETIn calculating the distributional effects of the VEET it was assumed that:

All costs related to the VEET (whether actual costs or reduced revenues) will be recovered from those customer classes eligible to participate, in proportion to the relative sales volumes of those classes.Changes to wholesale energy price are reflected instantly and in full in the retail prices charged by retailers to customers, and that this applies to customers in all customer classes, regardless of their eligibility to participate in the VEET, or whether they are located within or outside Victoria.The overall impact of the VEET was not large enough in absolute terms to change the costs incurred by retailers for financial hedging of their residential load.

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3.5. Key assumptions made in the analysis of the net eco-nomic benefits of the VEETIn calculating the net economic benefits of the VEET from the perspective of the electricity sector as a whole, we have not sought to quantify the allocative efficiency benefits stemming from the VEET (though, in fact, we believe these benefits to be immaterial in the case of the VEET).

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4. Impact of the VEET on energy consumption4.1. Inputs provided regarding the VEET measures

The modelling used information regarding the annual electricity and gas consumption impacts and useful lives of each of the measures that were eligible to be installed under the VEET in each of the three target scenarios from 2015 through 2017, and the number of each measure that was expected to be installed in each year in each target scenario. This information was provided by the Department with assistance from Sustainability Victoria and Energetics. The information provided by the Department addressed each of the following factors in relation to each measure:

Gross energy impacts per typical installation, including consideration of:the useful life and size of the equipment being replaced and installedthe impact of both energy reductions and increases where the measure included fuel switching (for example, where there was a switch from the use of electric end-use equipment to gas-fired equipment);

The number of installations per year; andThe number of certificates associated with the number of installations of each measure in each year;Any net costs incurred by participants in purchasing and installing the measure (i.e., costs not covered by the value of the certificates associated with the measure).

OGW was not asked to critically review any of the input data provided by the Department.

4.2. Energy consumption impacts and participation under the VEET target scenariosTable 6 through Table 8 provide a summary of the information provided by the Department regarding the energy consumption impacts expected to result in each of the three VEET target scenarios to be assessed. Table 9 then provides information on the level of participation forecast in each of the three target scenarios.Table 6: Energy consumption impacts of 2.0 million tonne target VEET measures, 2015 – 2030

FuelCustomer segment

Annual consumption impact Cumulative impact

2015-302015 2016 2017

Electricity (MWh) Residential 32,995 96,359 155,413 2,053,295

Business 143,237 307,7368 480,329 5,992,655Total electricity 176,232 3,173,727 635,742 8,045,950

Gas (GJ) Residential -1,338 -3,923 -6,315 -850,415

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Business 0 55,833 118,890 1,720,294Total gas -1,338 51,910 112,575 869,879

Source: OGW analysis of DSDBI-provided data

Table 7: Energy consumption impacts of 2.7 million tonne target VEET measures, 2015 – 2030



2015-302015 2016 2017


Business 164,917 362,124 568,491 7,083,001

Total electricity 218,984 519,631 823,903 10,450,434

Gas (GJ) Residential 10 -3,044 -9,093 -1,522,246

Business 0 66,405 140,830 2,038,019

Total gas 10 63,361 131,737 515,773


Table 8: Energy consumption impacts of 5.4 million tonne target VEET measures, 2015 – 2030



2015-302015 2016 2017


Business 220,843 516,779 862,183 10,677,230

Total electricity 341,997 873,763 1,444,947 18,340,072

Gas (GJ) Residential 158,885 435,723 655,550 6,736,800

Business 0.4 95,074 190,147 2,757,125

Total gas 158,885 530,797 845,697 9,493,925


As can be seen, and as is consistent with the objective of reducing emissions, the VEET results in significantly larger reductions in electricity consumption as compared to its impact on gas consumption. Electricity consumption reductions in 2017 in the 5.4 million tonne target scenario (which is when the annual electricity consumption reductions of the VEET are at their peak) represent approximately 3.9% of total Victoria electricity consumption in 2012. For gas the figure is 0.5%.

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Table 9: Participation in the three VEET target scenarios

SectorNumber of participants


Electricity

Gas Electricity

Gas Electricity

Gas

Residential 281,775 14,021 432,434 28,732 835,418 230,583

Business 20,491 309 25,596 366 43,400 494

Total 302,266 14,330 458,030 29,098 878,818 231,077

Segment size

Residential 2,334,999 1,806,839 2,334,999 1,806,839 2,334,999 1,806,839

Business 316,377 55,024 316,377 55,024 316,377 55,024

% segment participation

Residential 12.1% 0.8% 18.5% 1.6% 35.8% 12.8%

Business 6.5% 0.6% 8.1% 0.7% 13.7% 0.9%


Table 10 below shows the anticipated contribution of the measures installed in residential and business facilities to meeting each of the three VEET scenario targets. Table 10: Percent contribution of residential and business sector measures, by target scenario

SectorContribution to meeting the target


Residential 38.9% 45.9% 59.4%

Electricity 34.7% 40.3% 47.7%

Gas 4.2% 5.7% 11.6%

Business 61.1% 54.1% 40.6%

Electricity 60.1% 53.2% 40.1%

Gas 1.0% 0.8% 0.6%

Total 100.0% 100.0% 100.0%


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Table 11 through Table 14 on the following pages present additional information on the contribution anticipated from each residential and business energy efficiency measure eligible for installation under the VEET in each of the target scenarios.Table 11: Percent of residential electricity impacts by end use and measure, by target scenario

End use

No Measure 2.0 million 2.7 million 5.4 million

Water heating

17 Install low-flow shower rose 0.9% 0.9% 1.5%1AB Replace electric storage water heater

with gas or LPG storage or instantaneous water heater 22.1% 24.3% 26.8%

1CE Replace existing electric water heater with electric boosted solar or heat pump water heater 4.0% 4.4% 10.0%

1DF Replace existing electric water heater with gas or LPG boosted solar water heater 0.0% 1.3% 2.9%

Subtotal

26.9% 30.9% 41.3%

Space heating and cooling

6 Replace large central electric resistance space heating with high efficiency ducted gas heating system 15.8% 17.0% 7.8%

9B High efficiency gas room heater replaces existing electric heater 1.9% 2.0% 4.2%

10B High efficiency room reverse air-conditioner (RAC) replaces existing room RAC 0.5% 0.6% 1.3%

11 Insulate an uninsulated ceiling 1.1% 1.2% 2.7%15A General air sealing measures 1.7% 1.9% 2.2%

Subtotal

20.9% 22.7% 18.2%

Lighting

21A Replace incandescent lamps with CFLs 12.2% 7.4% 3.2%

21C Replace existing halogens with low energy lamp 6.3% 6.9% 10.5%

21D Convert existing halogen downlight fittings to CFL fitting 1.9% 2.1% 4.8%

LE New House with Low Energy Lighting System Class 1A or Other 0.4% 0.4% 1.0%

Subtotal

20.8% 16.9% 19.5%

Standby power controllers (SPC)

29A Install (one or more) stand-by power controllers on TV/entertainment equipment 21.3% 18.5% 8.0%

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29B Install (one or more) stand-by power controllers on IT equipment 2.4% 2.6% 1.2%

Subtotal

23.7% 21.1% 9.1%

Other

19 Remove existing fridge from service and destroy

1.1% 1.2% 0.6%

26 Installation of high efficiency pool pump 0.4% 0.4% 1.0%30 Installation of In-Home Display (IHD) 5.3% 5.9% 8.1%NA Miscellaneous measures 0.8% 0.9% 2.3%

Subtotal

7.6% 8.4% 12.0%

Total 100.0% 100.0% 100.0%


Table 12: Percent of residential gas impacts by end use and measure, by target scenario3

End use

No Measure 2.0 million 2.7 million 5.4 million

Water heating

17 Install low-flow shower rose 17.6% 17.8% 15.3%1AB Replace electric storage water heater

with gas or LPG storage or instantaneous water heater -223.6% -226.5% -130.8%

1DF Replace existing electric water heater with gas or LPG boosted solar water heater 0.0% -4.0% -4.8%

3 Replace existing gas water heater with gas-boosted solar water heater 0.0% 0.0% 6.4%

4 Solar preheater installed on existing gas water heater 0.0% 0.0% 0.1%

Subtotal

-206.0% -212.6% -113.8%

Space heating and cooling

5 Replace existing gas ducted heating with high efficiency ducted gas heating system 57.5% 57.3% 68.3%

6 Replace large central electric resistance space heating with high efficiency ducted gas heating system -184.0% -182.4% -43.6%

9A High efficiency gas room heater replaces existing gas heater 0.2% 0.6% 0.7%

9B High efficiency gas room heater replaces -20.7% -21.0% -22.7%

3 Negative numbers in this table denote increased gas use. This occurs where gas end-use equipment is installed to replace electric end-use equipment, for example, when electric resistance heat is replaced with gas heating. Total gas impacts due the VEET include both the increases in gas consumption due to these sorts of substitutions (which still reduce GHG emissions), and gas consumption reductions resulting from the use of higher efficiency gas equipment in place of lower efficiency ones, or other measures, such as the addition of ceiling insulation on a gas-heated home.

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existing electric heater11 Insulate an uninsulated ceiling 73.6% 74.3% 90.1%12 Install underfloor insulation to

uninsulated floor 0.0% 0.5%15A General air sealing measures 138.1% 139.9.9% 84.4%15B Install a chimney balloons 37.3% 37.8 24.1%20 Install a ducted high-efficiency gas

heater in a new home 1.9% 1.8% 2.0%28 Replace existing ductwork with upgraded

ductwork 0.0% 2.5% 7.5%Subtotal

104.0% 110.8% 211.2%

Other

NA Above 6-star house 2.0% 1.9% 2.6%Subtotal

2.0% 1.9% 2.6%

Total -100.0% -100.0% 100.0%


Table 13: Percent of business electricity impacts by end use, by target scenario

End use 2.0 million 2.7 million 5.4 million

Compressors 0.0% 0.0% 0.0%Appliances and equipment 2.3% 3.2% 8.0%Boilers 8.0% 8.0% 7.2%Building shell improvements 0.0% 0.0% 0.0%Standalone heating and cooling equipment 3.9% 5.1% 6.6%HVAC systems 23.1% 21.2% 18.8%Lighting 28.4% 28.8% 24.9%Pumps 26.4% 25.7% 24.6%Refrigeration systems 5.2% 4.4% 3.5%Ventilation and fans (non-HVAC) 1.0% 0.8% 0.5%Water heating 1.8% 2.7% 5.7%Total 100.0% 100.0% 100.0%


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Table 14: Percent of business gas impacts by end use and measure, by target scenario

End use 2.0 million 2.7 million 5.4 million

Compressors 0.0% 0.0% 0.0%Appliances and equipment 0.0% 0.0% 0.0%Boilers 100.0% 100.0% 100.0%Building shell improvements 0.0% 0.0% 0.0%Standalone heating and cooling equipment 0.0% 0.0% 0.0%HVAC systems 0.0% 0.0% 0.0%Lighting 0.0% 0.0% 0.0%Pumps 0.0% 0.0% 0.0%Refrigeration systems 0.0% 0.0% 0.0%Ventilation and fans (non-HVAC) 0.0% 0.0% 0.0%Water heating 0.0% 0.0% 0.0%Total 100.0% 100.0% 100.0%


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Finally, Table 15 shows the total electricity and gas consumption reductions provided by the Department for each of the three VEET target scenarios.Table 15: Electricity and gas end-use consumption reductions by VEET target scenario4

Calendar year


Electricity (MWh)

Gas(GJ)

Electricity (MWh)

Gas(GJ)

Electricity (MWh)

Gas(GJ)

2015 176,156 - 1,338 218,983 10 341,997 158,885 2016 403,876 51,909 519,631 63,361 873,763 530,797 2017 635,390 112,575 823,903 131,736 1,444,947 845,696 2018 663,938 111,429 872,319 128,752 1,555,417 947,569 2019 663,869 111,429 872,215 128,752 1,554,962 947,569 2020 659,511 99,970 864,208 107,641 1,531,804 893,459 2021 651,301 78,050 849,370 68,106 1,486,086 784,982 2022 625,834 57,772 815,784 31,691 1,416,775 676,305 2023 592,664 47,954 775,420 13,698 1,349,730 621,818 2024 563,590 47,954 742,345 13,698 1,307,809 621,643 2025 537,827 24,042 707,151 - 30,354 1,251,604 509,743 2026 511,205 - 21,695 666,525 - 112,849 1,175,999 285,943 2027 466,629 - 35,396 601,504 - 136,113 1,048,897 184,571 2028 404,779 - 1,155 509,818 - 74,929 876,734 317,522 2029 290,355 65,545 371,656 42,288 670,632 538,024 2030 193,599 120,835 239,601 140,285 452,916 629,398


4 Note that negative quantities indicate net increases.

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5. Impact of the VEET on energy markets5.1. Purpose and overview of this task

The overall purpose of this task was to assess the expected impact of the VEET scheme in each of the three target scenarios on the prices paid for energy by electricity and gas customers. The approach for doing this was, in general, to undertake separate assessments for electricity and gas of the impact of the VEET on:

wholesale energy production costs and prices,transmission and distribution system costs and prices through an assessment of the impact of the throughput volume changes caused by the VEET on network revenue, andenergy retailers’ operating costs, including the costs incurred in complying with the program.

Each of these analyses was undertaken with regard to electricity and gas under each of the three target scenarios. The final step was to combine the three analyses undertaken for each fuel for each target scenario to provide an overall assessment of each of the three VEET target scenarios on the prices paid by electricity and gas customers.In practice, however, there was one deviation from this overall approach. The very small level of impact of the VEET in any of the target scenarios on gas consumption5 was deemed, in consultation with the Department, to be too small to affect the wholesale cost of gas over the study timeframe. As a result, this aspect of potential VEET impacts was not quantified6.It is also worth noting that we did not try to assess whether the VEET in any of the three target scenarios would affect the capital costs expected to be incurred by Victoria’s electricity and gas distribution companies over the 2015 to 2030 period. This decision was based on the following considerations:

In the case of electricity, the expected impact on peak demand, while not negligible, is still expected to be relatively small – and geographically widespread. In the case of gas, the overall impact on consumption is expected to be exceedingly small in all three target scenarios. While the location of the gas reduction impacts is likely to be less geographically widespread than that of the scheme’s impacts on electricity, the impact is still unlikely to be sufficiently concentrated to be sufficient to defer any anticipated network augmentation – particularly given the relatively small net consumption change involved.

5 Even in the 5.4 million tonne scenario the reduction in annual gas consumption due to the VEET was only 0.5% of Victoria gas consumption in 2012

6 The impact of the reduction in gas consumption on gas network prices in each of the three target scenarios (and therefore gas retail prices and gas customers’ bills) was quantified, however, and is discussed in section 5.3.

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It should be recognised that these decisions are conservative in that, while we believe they are justifiable, there is a least a non-zero possibility that some network augmentation could be deferred.We also note that, to date, the distribution companies’ forecasts have not ascribed any impact of the VEET on capital expenditure – meaning that they have not felt that the scheme would reduce (or increase) their network augmentation programs. While this does not necessarily mean that the VEET will not do so, it indicates that the distribution companies’ anticipated capital requirements – which affect the level of the distribution tariffs charged to customers – is unlikely to change at least in the first regulatory period following the start of the 2015 – 2017 VEET program7.

5.2. Impact on wholesale electricity market and wholesale component of the retail bill

5.2.1. Overview of the approach usedThe impact of the VEET on the wholesale electricity market and wholesale electricity prices over the period of interest (2015 through 2030) was analysed through the use of the CEMOS market simulation model for each of the three target scenarios.CEMOS is a linear optimisation model set up to examine the NEM in either of two modes: least cost analysis or market behaviour analysis. In the former, the model uses only predicted costs for the capital and operation of different types of generation plant to determine the operation of and additional investment in plant for the market. The model then makes decisions regarding the dispatch of plant and the need to introduce additional plant purely on the basis of minimising cost, and the decision to introduce additional plant is made on the basis of a reserve margin provided as an input to the model. As a result, when run in the least-cost mode, the model cannot determine the market price of electricity. In the market behaviour mode, by contrast, the model forecasts likely generator bidding behaviour in the NEM and makes investment decisions based on the expected profitability of future price outcomes. As a result, market price outcomes are available as outputs. The cost of investment and operation across the generation sector is available in both modes, along with information on all other relevant operating parameters of the generation system.In this study we used the market behaviour configuration which includes a Cournot-Nash profit maximising algorithm to determine generator bidding behaviour. The Cournot-Nash algorithm takes account of generation portfolios and determines the price that should be set for each generator such the price-volume trade-off is optimised. The optimisation is such that (a) any generator that offers a higher price will lose more revenue due to reduced dispatch volume than it gains from a higher market price, and (b) any generator that offers a lower price in order to increase its dispatched volume will wind up with lower total revenue due to the lower market price.

7 While this is the case, it is also true that, all other things being equal, distribution companies will tend to prefer to over-forecast capital expenditure requirements as it provides more revenue which can be used to finance network augmentation should it be needed.

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In running the model for this assignment we have used the most recent publicly available data regarding forecast demand, and the costs, operating characteristics and capacities of existing and committed generation and transmission across the NEM, and the costs, operating characteristics and capacities of candidate generation facilities.Model outputs include:

Wholesale price by NEM price region (jurisdiction) and for the NEM as a wholeFor individual generators, portfolios and the generation sector as a whole:

capacity and fuel mix over time, including entry and exitdispatchfuel useemissionsspot market revenue.

5.2.2. Key inputs to the modellingThe model was run for the forecast period of 1 January 2015 to 31 December 20308 using publicly available, current information regarding forecast energy consumption and peak demand; the costs, operating characteristics and capacities of existing and committed generation facilities across the NEM; and the costs, operating characteristics and capacities of candidate generation technologies. The key inputs used by the CEMOS model include:

the energy and demand forecastthe costs and performance of existing, committed and new entrant generation planforecast fuel pricesthe carbon pricethe transmission network configuration, operating limits and loss factors.

The sources of information used for each of these inputs are discussed below.

Energy and demand forecasts – ‘No VEET’ caseThe energy and demand forecasts used in the study for the ‘No VEET’ case were taken from AEMO’s 2013 National Electricity Forecasting Report. The 2013 NEFR provides electricity and demand information by NEM region for the period 2005-06 through 2032-33. Actual consumption and peak demand data is available for the years 2005-05 through 2011-12. Information for 2012-13 is estimated and information for 2013-14 through 2032-33 is forecast.

8 The CEMOS model operates in financial years, while the VEET program operates in calendar years. VEET inputs were modified to correspond to financial years, and model outputs were re-translated back to calendar years unless shown in financial year terms.

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For the 2015 through 2030 period of interest in this study, we used the NEFR Medium Case forecasts, which are taken from the Scenario 3, Planning scenario of the National Transmission Network Development Plan (NTNDP), which is AEMO’s base forecasting case. The 2013 NEFR provides both native and operational forecasts for electricity and peak demand. The native forecast is the forecast of all end-use (i.e., residential, commercial and industrial) requirements on a sent-out basis (that is, after adjustment for losses so that it represents what the generation system needs to provide to meet those requirements). The 2013 NEFR also provides an operational forecast, which is the native forecast less the forecast contribution from small, non-scheduled generators. This equates to the energy and demand that will be required from the dispatched wholesale electricity market. The 2013 NEFR also provides separate forecasts of the electricity and peak demand requirements of residential and commercial (combined) end users, and large industrial end users. The residential and commercial forecast includes the requirements of residential, commercial and small industrial end users, net of the forecast impacts of energy efficiency and rooftop PV systems. The energy efficiency impacts that are taken into account in the 2013 NEFR are only those that result from known Commonwealth government policies and programs; energy efficiency impacts of state-based programs and policies are explicitly excluded from consideration in the forecasts9. As a result, the 2013 NEFR operational forecasts were used to represent the electricity and peak demand forecasts that could be expected to occur in the absence of the VEET.Table 16 displays the 2013 NEFR forecasts for Victoria’s sent-out electricity requirements and summer peak demand that were used in the ‘No VEET’ case.Table 16: Victoria sent-out energy and demand forecast used in the ‘No VEET’ case

Year (FY)Electricity requirements

(GWh)Summer

peak demand (MW)

2015-16 48,063 9,867

2016-17 48,674 9,953

2017-18 49,151 10,047

2018-19 49,567 10,072

2019-20 49,934 10,134

2020-21 50,458 10,217

2021-22 50,891 10,276

2022-23 51,098 10,328

2023-24 51,410 10,358

2024-25 51,932 10,443

2025-26 52,516 10,533

2026-27 53,138 10,616

2027-28 53,646 10,673

2028-29 54,069 10,739

9 AEMO, 2013 Forecasting Methodology Information Paper, 2013, p 5-42.

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2029-30 54,528 10,792

2030-31 55,049 10,859

Source: AEMO 2013 NEFR

Large Renewable Energy Target (LRET)At the time the analysis was the Large Renewable Energy Target (LRET) was in force in the form that came into effect in 1 January 2011 when the previous Expanded Renewable Energy Target was split into two parts to explicitly include a separate mechanism to support and acknowledge the contribution of small-scale renewable energy systems in meeting the overall renewable energy target. The LRET specifies an absolute level of electricity generation to be provided annually through 2030 at the wholesale level from renewable energy sources. From 2011 to 2030, the annual targets for LRET are set at 4,000 GWh per year less than the previous ERET targets, reaching 41,000 GWh by 2020. The ERET targets, which were established in 2009, were set to approximate 20% of the total electricity generation expected to be required annually through 2020. The downward adjustment in forecast electricity consumption has resulted in the specified LRET levels representing significantly more than 20% of forecast generation requirements. The Coalition Government that was elected in September 2013 has announced that it plans to review the LRET levels.As the review had not been undertaken at the time this analysis was undertaken, the existing LRET levels were used in the market modelling. More specifically, the levels were treated as a hard constraint, meaning that the model ensures that sufficient renewable generation capacity is in place to meet the target in each year.

Adjustment of plant operating profile – ‘No VEET’ caseInitial modelling results indicated that meeting the LRET in combination with the most recent electricity demand forecasts – in which forecast electricity consumption is flat or falling rather than rising -- resulted in wholesale electricity prices that are very low by historical NEM standards, and as compared to fossil plant short-run marginal costs. This issue has already begun to affect the NEM, and at least one generator (the Northern Power station in South Australia) has adopted a reduced operation schedule in response.

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In order to provide a price trace in the ‘No VEET’ case at levels reflective of marginally profitable generation operation, it was assumed that additional plant would adopt a reduced or cycling operating strategy. These changes were introduced to the operating characteristics of selected coal generators. It should be noted that, for the purposes of this study, the specific plants for which these changes were decided upon arbitrarily – they could have been applied as readily to other plants. The objective was to provide a price trace that left the generators operating in the NEM doing so at slightly better than breakeven prices, rather than to try to accurately predict the operational decisions of any particular plant(s). Given that the objective of the modelling was to identify the change in wholesale price between the ‘No VEET’ and ‘With VEET’ cases, the most important consideration was to produce an operational and financial ‘No VEET’ case that was reasonably reflective in aggregate of NEM outcomes, rather than a run which attempted to be as accurate as possible at the level of individual generating plants, which would have required predicting the commercial decision of the owners of specific generation plants.

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Energy forecasts – ‘With VEET’ caseElectricity requirements in each of the three target scenario ‘With VEET’ cases were estimated through the following steps:

Step 1 – Convert VEET calendar year impacts to financial year impacts Because the AEMO forecasts are in financial years and the CEMOS market simulation model provides outputs in financial years, it was necessary to convert the VEET impact information that was provided by the Department in calendar years to financial years. In doing this we assumed that:

Measures installed in the VEET are installed uniformly throughout the yearThe impacts of measures installed from 1 January 2015 through 30 June 2015 would first be felt in the July through December time period (i.e., the first half of FY2015-16).These impacts would also be felt in the second half of FY 2015-16, and all subsequent FYs in the study period, though their impact would be reduced as measures reached the end of their useful lives.However, the second half of FY 2015-16 (i.e., 1 January through 30 June 2016) would also experience the impact of measures installed in the second half of calendar year 2015 (i.e., measures installed from July through December 2015).

This pattern was then repeated for the measures installed in calendar years (CYs) 2016 and 2017 to estimate the impact of all of the measures installed under the VEET from 2015 through 2017. This process was repeated for each of the three target scenarios.Figure 1 page provides a diagrammatic representation of this process.

Figure 1: Conversion of VEET CY impacts to FY impacts for use in the market modelling

Jan 15 Jul 15 Jan 18Jul 16 Jul 17Jan 16 Jan 17 Dec 30

Programcommences

Impacts of measures installed

in H1C15 commence


in H2C15 commence


in H1C16 commence


in H2C16 commence


in H1C17 commence


in H2C17 commence

Source: OGW

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Step 2 – Convert VEET impacts at end-use level to sent-out levelThe VEET impacts provided by the Department are expressed in terms of energy saved at the end-use facility level. This was converted to the generation sent-out level by multiplying the VEET savings by 1 plus a combined transmission and distribution loss factor of 7.5%10. This is done to correctly estimate the reduction in the amount of electricity that needs to be generated due to the energy saved by the VEET at the end-use level.

Table 17 presents the reductions in generation system sent-out electricity requirements by financial year for each of the three VEET target scenarios that were used to create the electricity consumption forecasts used in the market simulation modelling.Table 17: Reductions in sent-out electricity in each of the three VEET target scenarios (MWh)

Financial year2.0 million tonne

target2.7 million tonne


target

2015-16 312,069 395,477 649,886 2016-17 559,976 720,961 1,242,855 2017-18 699,885 910,498 1,609,054 2018-19 714,426 937,842 1,670,744 2019-20 709,886 933,458 1,658,134 2020-21 703,099 921,117 1,620,954 2021-22 685,061 895,182 1,558,965 2022-23 653,448 855,482 1,485,851 2023-24 619,759 815,964 1,427,660 2024-25 590,024 779,180 1,375,303 2025-26 561,650 738,237 1,304,346 2026-27 524,086 681,806 1,196,109 2027-28 467,412 596,575 1,033,622 2028-29 373,472 472,968 830,702 2029-30 260,443 327,946 603,482 2030-31 208,403 256,631 485,730


The allocation of the energy savings produced by the measures installed under the VEET in each of the three target scenarios by season and time of day to assess their impact on Victoria’s overall electricity load profile and peak demand is discussed in section 5.2.3 below.

10 This is a rounded estimate of the state-wide average combined transmission and distribution loss factor based on typical values prepared for the AER.

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Costs and performance of existing, committed and new entrant generation planThe inputs to the modelling concerning the costs and performance of existing, committed and new entrant generation plant were taken from material published by AEMO. AEMO publishes data on the capacity and many other parameters needed to undertake modelling of the NEM, for example as part of its National Transmission Planning role. As the AEMO material is quite extensive, it is not repeated here but can be viewed at the following websites:

Information on generation ownership and capacity by unit for existing and committed plant can be accessed at http://www.aemo.com.au/Electricity/Planning/Related-Information/Generation-InformationInformation on the technical operating parameters, emission factors and new entrant technology costs can be accessed at http://www.aemo.com.au/Electricity/Planning/National-Transmission-Network-Development-Plan/Assumptions-and-Inputs

Information on the construction costs of new entrant generation plant can be accessed at http://www.aemo.com.au/Electricity/Planning/National-Transmission-Network-Development-Plan/~/media/Files/Other/planning/WorleyParsons_Cost_of_Construction_New_Generation_Technology_2012%20pdf.ashx

Note that where the data in these sources varies across different planning scenarios we have used the information for Scenario 3 or the Planning Scenario.

Fuel pricesAEMO also publishes fuel price information and forecasts. We have used the information available in Table 7 at http://www.aemo.com.au/Electricity/Planning/National-Transmission-Network-Development-Plan/Assumptions-and-Inputs for coal prices.For gas we have slightly modified those costs based on our own internal analysis. Figure 2 below shows the gas costs used in the modelling using a representative plant within each state. It should be noted that the costs for each plant are adjusted to include the cost of transportation, based on the plant’s location, and all OCGT plant costs for gas are increased by 25% to account for the lower utilisation of these plants.

35

http://www.aemo.com.au/Electricity/Planning/National-Transmission-Network-Development-Plan/Assumptions-and-Inputs


http://www.aemo.com.au/Electricity/Planning/National-Transmission-Network-Development-Plan/~/media/Files/Other/planning/WorleyParsons_Cost_of_Construction_New_Generation_Technology_2012%20pdf.ashx





http://www.aemo.com.au/Electricity/Planning/Related-Information/Generation-Information

http://www.aemo.com.au/Electricity/Planning/Related-Information/Generation-Information


Final Report

Figure 2: Delivered gas prices ($/GJ)


Transmission network configurationThe modelling is based on the inter-regional transmission configuration and announced future augmentations contained in the 2012 ESOO. It is assumed that intra-regional networks are augmented as economic and as needed to ensure network performance standards are met. Model outputs for operation at high transfer levels are reviewed for high price differences that would be indicative of a possible economic case for augmentation of inter-regional networks.

Carbon priceConsistent with the stated policy of the Coalition Government that was elected in September 2013 to repeal the carbon price, no carbon price was assumed to affect the price of wholesale electricity in the analysis.However, a value for carbon was used as an input to the economic assessment of the three VEET target scenarios, as discussed in section 6.3. This was done as a means for approximating the externality value of avoided GHG emissions.

5.2.3. Estimation of the peak demand and load shape impacts of the VEETIn order to assess the impacts of the VEET on the wholesale electricity market and wholesale electricity prices it was necessary to determine how the measures installed in each of the three target scenarios could be expected to affect the load profile that the generation sector would be required to meet. The load shape is defined by three parameters: total peak demand, total demand, and the amount of electricity required over each hour of the year11. The information provided by the Department did not provide any estimate of either the peak demand or load shape impacts of the energy efficiency measures that were installed – it only provided their annual energy savings. To assess the impacts of the technologies and programs, peak demand and load shape impacts had to be estimated.

11 Strictly speaking, the third of these includes the first two.

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Three sources of information were identified for this process: a set of Conservation Load Factors (CLF)12 assembled by the Institute for Sustainable Future and Energetics13, a set of peak demand factors14, developed by SKM MMA15, and a subsequent set of CLFs developed by SKM MMA16, presumably using their peak demand factors as input. All three of these sets of factors were commissioned by the Commonwealth Department of Climate Change and Energy Efficiency (DCCEE). Where the DCCEE material addressed measures that were included in the VEET, each of the DCCEE factors was applied to the annual energy consumption reductions provided by the Department to derive an estimate of the peak demand impact of each measure17. Review of the results revealed that the peak demand factor and the CLF produced materially different results for specific technologies, and that the direction of the difference was not consistent across technologies. As a result, we closely examined the peak demand impact for each technology that resulted from the application of each of the factors, and selected the factor that we believed was the most accurate, based on our experience with demand-side measures, or altered those factors as applicable. However, even after a factor was selected to derive the peak demand of each measure from its annual consumption there remained the need to distribute the annual savings over the course of the year – that is, to estimate the impact of each measure on the system load shape.This was done based on the nature of each measure, its annual energy consumption reduction, and its peak demand impact as determined by the following steps:

annual energy consumption reductions were allocated to three seasons, summer (3 months: December through February), winter (3 months: July through August), and shoulder (6 months: March through June, and September through November); seasonal energy reductions were allocated to each of four blocks of time on both weekdays and weekend days within each of the seasons (11PM to 7AM, 7AM to 3PM, 3PM to 7PM, and 7PM to 11PM); and within the seasonal allocation, the level of energy reductions allocated to the 3PM to 7PM weekday block was checked for the degree to which it approximated the selected CLF or peak demand factor.

12 The CLF of an energy saving technology is its average reduction in load, divided by its peak reduction in load, specifically: (annual savings in MWh / 8760 hrs in a year) / system coincident peak reduction in MW.

13 Institute for Sustainable Futures and Energetics, Building Our Savings: Reduced Infrastructure Costs from Improving Building Energy Efficiency, July 2010.

14 Defined by SKM MMA as the coincident peak demand impacts of the measure (in kW) divided by its annual consumption reduction impacts (in MWh).

15 SKM MMA, Energy Market Modelling of National Energy Savings Initiative Scheme – Assumptions Report, December 2011.

16 SKM MMA, Assessment of Economic Benefits from a National Energy Savings Initiative, March 2013.

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Table 18 on the following page presents the reductions in generation system capacity requirements by financial year for each of the three VEET target scenarios that were calculated using the approach described above, and that were used in developing the peak demand forecasts used in the market simulation modelling.

17 The DCCEE material provided significantly more information on residential measures as compared to business measures.

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Table 18: Reductions in peak demand in each of the three VEET target scenarios (MW)




target

2015-16 93 114 1922016-17 145 180 3182017-18 149 186 3362018-19 148 186 3362019-20 146 183 3272020-21 143 178 3102021-22 136 168 2852022-23 128 157 2622023-24 122 150 2492024-25 117 144 2382025-26 114 139 2252026-27 108 130 2082027-28 97 114 1782028-29 69 82 1372029-30 45 52 902030-31 45 52 90


Appendix B presents the results of this process for each type of electricity energy efficiency technology installed under each of the three VEET target scenarios.

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5.2.4. Results of the CEMOS analysisImpact of the VEET on average wholesale electricity priceTable 19 shows the impact of the three VEET target scenarios on the time-weighted price18 of wholesale electricity in Victoria over the study timeframeIt should be noted that the impacts in Table 19 are presented in terms of financial years, which is how the AEMO data that is used as input to market simulation modelling is provided. By contrast, the VEET program is run by calendar years. Therefore, the CEMOS outputs were re-organised to a calendar year basis in the assessment of the impacts of the VEET on the bills of participating and non-participating customers that is presented in section 6 below.Table 19: Victoria wholesale market price changes in the three VEET target scenarios (2013$/MWh)




target2015-16 -1.15 -2.13 -3.472016-17 -0.29 -0.43 -1.142017-18 -1.50 -2.03 -2.252018-19 -2.20 -2.25 -3.342019-20 -0.80 -0.87 -2.132020-21 -0.52 -0.59 -0.972021-22 -2.16 -2.20 -2.472022-23 -0.83 -1.12 -1.492023-24 -0.61 -0.72 -1.222024-25 -0.77 -1.18 -1.392025-26 -1.24 -1.56 -2.272026-27 -0.89 -0.93 -1.702027-28 -1.24 -1.48 -1.732028-29 -0.27 -0.30 -0.47

18 In this study we have assessed the impact of the VEET on the time-weighted price (TWP) at the Victorian reference point. TWP is calculated as the simple arithmetic average of all 17,520 half-hourly prices in the year. Other studies have used the load-weighted price, which is calculated as the product of the load and price that pertained in each half hour of the year, summed across all half hours and divided by the total consumption in the market over the course of the year. Neither approach is strictly speaking correct for use in the assessment of the impact of the VEET on the wholesale price applicable to any particular customer class. To calculate that impact correctly would require the following procedure: (1) identify wholesale market price in each half hour prior to the VEET and after implementation of the VEET, (2) for VEET participants, calculate the load weighted price of their load profile prior to installation of the VEET measures and then the load weighted price of their load profile after installation of the measures, with the difference in those two prices being the impact of the program on the average cost of wholesale electricity to serve them, and (3) for the market as a whole or for any particular segment of the market (for example, residential non-participants, other non-participants, etc.), calculate the load weighted price of the load profile of that segment based on the before and after VEET half-hourly prices. To our knowledge, this approach has never been used, and was beyond the resources of the present project. We chose to use the time weighted price because the load profile of the impacts of the VEET, based on the nature of the measures installed, was significantly skewed away from midday hours, and therefore would be likely to be characterised by prices that would be closer to the time weighted average rather than the load weighted average, given that the load weighted average will be more affected by periods of higher price.

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2029-30 -1.58 -1.61 -1.352030-31 -0.82 -0.48 -0.20


Because the NEM is an interconnected market, changes in the load in one region can have impacts on the prices in other regions as well as the region in which the load change takes place.Table 20 through Table 22 show the impact of the three VEET target scenarios on wholesale electricity prices in the other NEM regions.Table 20: Impact of the 2.0 million tonne target on wholesale prices in other NEM regions (2013$/MWh)

Financial year QLD NSW SA TAS2015-16 -0.38 -0.44 -1.09 -0.852016-17 -0.19 -0.21 -0.23 -0.092017-18 -0.17 -0.21 -1.53 -1.392018-19 -0.10 -0.25 -2.23 -2.032019-20 -0.07 -0.16 -0.62 -0.402020-21 -0.09 -0.23 -0.41 0.002021-22 -0.15 -0.34 -2.13 -1.692022-23 -0.07 -0.11 -0.58 -0.192023-24 -0.05 -0.09 -0.47 -0.022024-25 -0.49 -0.50 -0.64 0.002025-26 -0.11 -0.40 -1.09 -0.442026-27 -0.06 -0.27 -0.68 -0.282027-28 -0.10 -0.67 -1.19 -0.852028-29 -0.64 -0.38 -0.13 -0.132029-30 -0.19 -0.20 -1.41 -1.392030-31 -0.10 -0.15 -0.52 -0.34


Table 21: Impact of the 2.7 million tonne target on wholesale prices in other NEM regions (2013$/MWh)

Financial year QLD NSW SA TAS2015-16 -0.42 -0.49 -2.06 -1.762016-17 -0.21 -0.26 -0.32 -0.142017-18 -0.26 -0.30 -2.07 -1.912018-19 -0.13 -0.31 -2.28 -2.032019-20 -0.10 -0.22 -0.66 -0.412020-21 -0.11 -0.32 -0.46 -0.012021-22 -0.19 -0.43 -2.08 -1.702022-23 -0.19 -0.26 -0.84 -0.192023-24 -0.09 -0.14 -0.47 -0.032024-25 -0.52 -0.56 -0.90 -0.012025-26 -0.14 -0.61 -1.33 -0.48

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2026-27 -0.09 -0.35 -0.65 -0.322027-28 -0.14 -0.77 -1.20 -0.932028-29 -0.68 -0.44 -0.07 -0.132029-30 -0.24 -0.27 -1.29 -1.392030-31 -0.15 -0.18 -0.08 -0.03


Table 22: Impact of the 5.4 million tonne target on wholesale prices in other NEM regions (2013$/MWh)

Financial year QLD NSW SA TAS2015-16 -0.52 -0.63 -3.41 -3.032016-17 -0.26 -0.47 -0.95 -0.492017-18 -0.34 -0.56 -2.25 -1.952018-19 -0.26 -0.54 -3.36 -2.872019-20 -0.32 -0.62 -1.85 -1.152020-21 -0.21 -0.71 -0.66 -0.032021-22 -0.34 -0.93 -2.21 -1.722022-23 -0.39 -0.67 -1.07 -0.482023-24 -0.23 -0.43 -0.75 -0.252024-25 -0.77 -0.88 -0.82 -0.022025-26 -0.26 -1.04 -1.87 -0.852026-27 -0.35 -1.04 -1.13 -0.642027-28 -0.28 -1.17 -1.30 -1.202028-29 -0.84 -0.69 0.20 -0.162029-30 -0.39 -0.62 -0.75 -1.392030-31 -0.58 -0.63 0.65 0.28


Impact of the VEET on wholesale market fuel usage, capacity by plant type and production costsChanges in wholesale electricity price result from changes in production costs – which can include changes in the amount or price of fuels used to generate the electricity required by customers, changes in the amount or type of electricity generation capacity needed to meet peak demand -- and/or the bidding behaviour of generators.Table 17 and Table 18 above provided information on the impacts of the VEET in terms of end-use electricity and peak demand requirements. This section shows the impact on the wholesale electricity market of the difference between the electricity and peak demand requirements of the ‘without VEET’ and ‘with VEET’ scenarios.

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Table 23 shows the amount of electricity generated, by fuel type, in the ‘No VEET’ case and the amount by which the use of each fuel type is reduced in each of the three VEET target scenarios. As can be seen, the three VEET target scenarios result in a materially lower amount of electricity being generated over the 2015 through 2030 period. Almost all of the savings in each of the three target scenarios come from coal-fired generation, in large part due to the times of day at which the measures installed under the VEET have their greatest impact. For example, both the lighting and off-peak water heating measures in the residential sector (which constitute a significant proportion of total VEET impacts in the residential sector) will have the majority of their impacts at night, when coal is more likely to be the marginal fuel. Given the fact that the scheme seeks to reduce carbon emissions, the fact that its impacts can be expected to significantly reduce the use of coal indicates that the measures are well targeted.Table 23: VEET impact on use of fuels for generation 2015 – 2030 (GWh)

Generation fuel type ‘No VEET’ (GWh)

Impact of the ‘With VEET’ scenarios (GWh)

2.0 million tonnes

2.7 million tonnes

5.4 million tonnes

Wind 436,183 -49 -143 -328

Biomass 87,230 0 0 0

Hydro 247,541 0 0 0

Subtotal renewables 770,953

-49 -143 -328

Gas – CCGT 54,717 -10 -11 -17

Gas – OCGT 27,018 -93 -113 -185

Gas – cogeneration 50,736 -0 -0 -0

Subtotal gas 132,471

-103 -124 -202

Other (oil & steam gas) 15,279 -21 -33 -42

Sub-critical black coal 1,463,486 -6,729 -8,885 -15,580

Sub-critical brown coal 650,278 -1,070 -1,276 -2,558

Super-critical black coal 347,213 -279 -293 -345

Subtotal – coal 2,460,977

-8,078 -10,454 -18,483

Total 3,379,680

-8,252 -10,754 -19,055


Table 24 provides information on how each of the VEET target scenarios can be expected to affect the total amount of generation capacity required in the NEM, and the amount of total capacity that is provided by different plant types. Table 24: VEET impact on amount and type of generation capacity 2030 (MW)

Plant capacity type ‘No VEET’ (MW)

Impact of the ‘With VEET’ scenarios (MW)

2.0 million tonnes

2.7 million tonnes

5.4 million tonnes

Wind 10,078 0 0 0

Biomass 800 0 0 0

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Hydro 7,923 0 0 0

Subtotal renewables 18,801 0 0 0

Gas – CCGT 3,089 0 0 0

Gas – OCGT 5,663 0 0 0

Gas – cogeneration 492 0 0 0

Subtotal gas 9,244 0 0 0

Other (oil & steam gas) 2,367 0 0 0

Sub-critical black coal 14,645 0 0 0

Sub-critical brown coal 6,252 0 0 0

Super-critical black coal 2,917 0 0 0

Subtotal – coal 23,814 0 0 0

Total 54,227 0 0 0


As can be seen, results suggest that none of the three VEET target scenarios will reduce or defer the need for generation capacity of any kind between 2015 and 2030.These results are, at first glance, counter-intuitive given the fact that, as was shown in Table 18, the three VEET target scenarios can be expected to reduce peak electricity demand by anywhere from 149 to 336 MW in 2018, the year of the greatest impact of all three target scenarios19. The reason that no change in installed capacity takes place is due to the combined effects of (a) the amount of generation capacity already in place in 2015, (b) the relatively low level of growth in electricity consumption forecast for the period, and (c) the impact of the LRET, which sets absolute targets for the amount of generation required by renewables, and which therefore requires a corresponding amount of renewable electricity generation capacity.However, as shown in Table 25 below, the VEET still has a downward impact on electricity sector production costs in each of the three target scenarios. This impact is essentially entirely due to the reduced fuel costs and other variable operating and maintenance expenses experienced due to the scheme. As shown in Table 25, the net present value of these cost savings between 2015 and 2030 ranges from to is just over $104 million to $310 million (in 2015 dollars) depending on the scenario in question and the discount rate used.Table 25: VEET impact on generation production costs ($millions 2013)

Year ‘No VEET’

Impact of the ‘With VEET’ scenarios

2.0 million tonnes

2.7 million tonnes

5.4 million tonnes

2015-16 $2,868.3 -$6.5 -$8.4 -$12.72016-17 $2,880.3 -$9.9 -$13.0 -$23.42017-18 $2,801.4 -$15.8 -$20.5 -$36.3

19 The target scenarios have their greatest impact in 2018 because that is the first time that the effect of all of the measures installed between 2015 and 2017 are felt in the wholesale market, and before any of the measures reach the end of their useful lives.

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2018-19 $2,866.9 -$15.3 -$19.5 -$34.42019-20 $2,968.8 -$12.7 -$16.7 -$29.82020-21 $3,001.2 -$13.2 -$16.9 -$29.92021-22 $3,064.1 -$12.9 -$16.8 -$29.62022-23 $3,155.7 -$13.0 -$17.1 -$29.02023-24 $3,270.5 -$12.0 -$16.1 -$28.52024-25 $3,380.8 -$11.5 -$15.2 -$27.62025-26 $3,574.7 -$10.8 -$15.0 -$25.62026-27 $3,724.6 -$12.5 -$16.2 -$29.42027-28 $3,770.5 -$10.0 -$12.9 -$24.82028-29 $3,803.1 -$8.1 -$10.1 -$18.22029-30 $3,813.2 -$7.2 -$8.4 -$13.62030-31 $3,878.1 -$5.5 -$5.8 -$10.9

NPV (@ 7.0%) $30,116.6 -$107.6 -$139.3 -$245.3

NPV (@ 3.5%) $39,213.8 -$136.1 -$176.0 -$310.5


Impact of the VEET on carbon emissionsAs would be expected given the reductions expected to be produced by the three VEET target scenarios on the use of coal, the scheme can be expected to reduce carbon emissions correspondingly, as shown in Table 26 below.Table 26: Carbon reductions expected due to the three VEET target scenarios (tonnes)




target2015-16 299,981 388,875 609,455 2016-17 433,996 576,182 1,043,349 2017-18 732,400 934,345 1,541,274 2018-19 758,567 951,162 1,676,493 2019-20 612,981 803,305 1,479,643 2020-21 629,645 813,199 1,460,542 2021-22 665,633 864,926 1,491,935 2022-23 609,151 804,941 1,408,990 2023-24 568,522 763,980 1,357,887 2024-25 535,947 718,403 1,276,348 2025-26 495,894 665,114 1,205,252 2026-27 481,815 636,761 1,151,799 2027-28 428,996 552,736 996,719 2028-29 338,806 427,364 784,883 2029-30 279,700 342,716 576,054 2030-31 236,089 249,451 465,710 Total 8,108,124 10,493,462 18,526,339


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5.3. Impact on transmission and distribution components of the retail bill

5.3.1. How energy efficiency affects network pricesThe extent to which a change in energy consumption associated with a Government policy such as the VEET scheme impacts upon network charges is primarily a function of two issues:

the form of price control under which transmission and distribution businesses operate; andwhether the impact of that policy was forecast by the regulated business as part of their pricing submission.

In the case of the former, both gas and electricity regulated businesses operate under either a Revenue Cap or a Weighted Average Price Cap (WAPC) form of price control. If a business operates under a Revenue Cap, it means that its revenues are capped for the entire regulatory control period, no matter what level of sales occurs. Under a WAPC, a business’ revenue is a function of its sales volume.In the case of the latter (a WAPC), if, as part of its pricing submission, a business forecasts the impact of an energy efficiency policy, it will lead (all other things being equal) to a lower energy forecast than would have pertained otherwise. This, in turn, will result in higher overall unit prices.

5.3.2. Calculating the impact of the VEET on the transmission com-ponent of the retail billThe Victorian electricity transmission business has historically operated, and continues to operate, under a Revenue Cap form of price control. Therefore, its unit prices will automatically increase/decrease to compensate for the loss/gain of revenue that stems from any reduction/increase in energy throughput that results from the VEET. For electricity customers, transmission charges are included in the Network Use of System (NUoS) charge that the distribution business charges to the retailer, and that are included in the retailer’s bill to the customer. The gas transmission business also operates under a Revenue Cap; however, its prices are not included in the charges that the distribution business charge, rather, these are charged separately.

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To calculate the impact of the VEET scheme on the electricity transmission component (TUoS) of the final NUoS charges, we have simply multiplied the VEET scheme’s estimated impact on residential and business energy consumption, by the transmission component of the flat rate NUoS charge levied by each distribution business to those two customer classes in each year of the evaluation period. We have derived 2015 prices by escalating known 2013 prices by an estimated CPI of 2.5%, in conjunction with the x-factors that were adopted by the AER in their most recent Draft Decision20 applying to SP AusNet’s transmission business. Because the impacts of the VEET scheme were modelled at a state-wide level while TUoS prices vary by distribution business, we have determined a weighted-average TUoS price across the State, based on the proportion of residential (and separately, business) usage of each of the distribution businesses. It is this weighted average TUoS price in each of the years of the evaluation period that has been multiplied by the VEET scheme impacts in each year to determine the additional revenue that will need to be recovered from the remaining throughput of residential (and separately business) consumers in order to ensure that the transmission business recovers its overall revenue requirement. To calculate the impact of the VEET scheme on the gas transmission business (and therefore, gas customers), we have used a similar methodology to the above, whereby, we have multiplied the VEET scheme’s estimated impact on residential and business gas consumption, by the typical tariff charged by GasNet for gas transmission services (adjusted from 2013 to 2015 levels based on an assumed CPI of 2.5%, and the relevant x-factors from the AER’s most recent Final Decision). This typical tariff has assumed that the injection of gas is at Longford, and delivery is to metropolitan Melbourne21. Furthermore, as injection charges are based on the injections during the top 10 winter days, we have made two other simplifying assumptions, that being that the change in gas consumption stemming from the VEET scheme is spread:

Evenly across the year - excluding Summer and March22 – for residential customers, and that this daily average consumption is consumed during the top 10 days for the purposes of deriving part of the transmission impact; andEvenly across the year – including summer and March - for business customers (which implicitly assumes that they use gas constantly throughout the entire year), and that this daily average consumption is consumed during the top 10 days for the purposes of deriving part of the transmission impact.

20 The draft decision has been used, as the Final Decision has not been made at the time of compiling this report.

21 GasNet’s TUoS tariffs are disaggregated by over 30 supply points, and 7 injection points. Without a detailed breakdown of consumption and injection levels at each of these supply and injection points, we have no means of weighting these tariffs to ascertain an ‘average’ tariff across Victoria. As such, we have utilised what we consider is likely to be the most common supply and injection points.

22 Gas consumption generally falls to very low levels in these periods, as gas heating falls away.

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5.3.3. Calculating the impact of the VEET on the distribution com-ponent of the retail billEach of the Victorian distribution businesses has historically, and continues to, operate under a WAPC23. This means that any forecast reduction in sales would flow through to higher unit prices24. We think it is reasonable to assume that the distribution businesses will make a forecast of the impact of the VEET scheme in their upcoming determinations, which, for electricity, will be developed in 2014 and will affect prices from 2016 onwards, whilst for gas, this process will occur in 2016, and will affect prices from 2018 onwards.Up until 2016 (for electricity) and 2018 (for gas), it will be the shareholder that bears the cost associated with any changes in revenue stemming from the VEET scheme scenarios modelled. This is because these changes in consumption could not have been foreseen by gas and electricity distribution businesses as part of their last determination process, and thus, their shareholders bear this volumetric risk under WAPC. For the purposes of identifying the impact on distribution prices from 2016 onwards (for electricity) and 2018 onwards (for gas), we estimated each distribution business’ residential (and separately, business) single rate prices that would apply over the evaluation period based on escalating their 2013 price by the an assumed CPI of 2.5% and the X-Factors in the AER’s most recent Final Decision pertaining to those business (or those imposed by the Australian Competition Tribunal, if that decision was successfully appealed). Where a business applied a tariff with multiple tiers (i.e., a block tariff), we determined the marginal block level that would apply to the average customer in the customer class (based on each specific businesses’ average consumption for that customer class)25. Using these rates, we determined a weighted average marginal DUoS price for residential (and separately, for business) customers for the distribution businesses, based on each distribution business’ contribution to state-wide residential consumption (and separately, their contribution to business consumption). These weighted average prices were then multiplied by the estimated energy impacts of the VEET scheme26 for residential (and separately, business) customers to estimate the impact on their respective network prices.

23 For completeness, we note that this does not necessarily mean that this same form of price control will be adopted in future regulatory control periods.

24 This may be offset by lower capital and operating costs, if the scheme impacts upon a network business’ cost drivers. This issue is discussed later in this section of the report.

25 For example, if a business’ average residential consumption was 5500kWh, and a block tariff applied different rates between 0-4000 kWh, 4001-6000kWh, and greater than 6001 kWh, then we applied that tariff that applied to consumption within the 4001-6000kWh band, as average consumption sits within this price band.

26 In practice, the unit prices that would have occurred in the absence of the VEET scheme would have been slightly lower, given the higher volumes that would have been forecast in the absence of the VEET scheme. However, calculation of those prices would require re-running the tariff models of each distribution company which would be a complex task well beyond the time and budgetary resources of this assignment. In addition, given the overall magnitude of the impacts of the VEET scheme relative to total consumption, the added accuracy of such iteration is likely to be very small, and therefore, we have used the simplified approach presented above.

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Exactly the same approach was utilised to estimate the impacts of the VEET scheme on gas distribution businesses.

5.3.4. FindingsThe following table outlines the total NPV of the estimated reduction in network revenue (both TUoS and DUoS) that will need to be recovered over the 2015 through 2030 period from all residential and business customers (both participants and non-participants) as a result of the implementation of the VEET scheme, based on the considerations above.Table 27: Network revenue reductions ($million 2015 at a 7% WACC)

Network revenue impact

Residential Electricity

Business Electricity

Residential Gas Business Gas

NPV – 2015 – 2030 NPV – 2015 - 2030NPV – 2015 -

2030NPV – 2015 -

20302.0 million

target $129,659,819 $413,480,242 -$12,602 $25,695

2.7 million target $212,752,193 $489,658,874 -$22,626 $30,436

5.4 million target $481,884,423 $739,117,287 $102,164 $41,095


Table 28: Network revenue reductions ($million 2015 at a 3.5% WACC)

Network revenue impact

Residential Electricity

Business Electricity

Residential Gas Business Gas

NPV – 2015 – 2030 NPV – 2015 - 2030NPV – 2015 -

2030NPV – 2015 -

2030

2.0 million target $165,508,055 $530,090,578 -$18,157 $34,998

2.7 million target $271,510,743 $627,730,836 -$32,643 $41,456

5.4 million target $616,222,285 $947,831,526 $131,991 $55,974


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It is noted that the negative numbers indicate that network prices for residential gas customers will actually reduce under the 2 million and 2.7 million target. This is because gas consumption increases in those scenarios, which in turn leads to lower prices. More broadly, the results in the table indicate that the overall impact on gas network prices is immaterial; however, the impact on electricity network prices is material, in NPV terms. This impact is skewed towards business customers in all of the target scenarios, primarily because the VEET scheme impacts (in terms of kWh reductions) are substantially larger for business customers, than for residential customers. One final caveat to note is that theoretically, the VEET scheme may impact on peak demand and energy at risk, both of which are cost drivers for network businesses. We have not sought to quantify this impact as part of our analysis. We do not consider that this exclusion will materially impact on the overall results, given the scheme is estimated to have had only a relatively small impact on peak demand – with this estimated to range from 0.9% to 1.9% in the three VEET target scenarios in 2015-16 and between 1.5% and 3.9% in 2017-2018 total network demand in Victoria, as determined in the CEMOS modelling (see Table 16 and Table 18). Moreover, we note the scheme’s impact on a distribution business’ augmentation program will be a function of:

the location of the peak demand impacts stemming from the VEET scheme; whether those impacts coincide with when that particular part of the distribution system peaks;the extent to which there are capacity constraints in that part of the system that are driving the need to undertake augmentations in the future;whether the peak demand reductions are sufficient to defer the need for the augmentation; andwhether the peak demand reductions are recognised by the distribution and are in place or anticipated to be in place prior to the time the augmentation is expected to be needed to ensure reliability of supply.

All in all, this sort of assessment is complex and must be undertaken on a location-specific basis. As such it was well beyond the scope of this assignment. Notwithstanding this, we would make a general observation that much of a distribution network business’ augmentation is likely to be driven by demand increases occurring in the growth corridors that it serves. For example, in its most recent electricity distribution pricing submission, SP AusNet stated that27:

“Maximum demand for the SP AusNet network is expected to continue to increase on average by 4.4% per annum over the forthcoming regulatory period, principally as a result of further development in the northern and south-eastern growth corridors, and continued growth in air conditioner penetration.” [Emphasis added]

27 SPI Electricity Pty Ltd, “Electricity Distribution Price Review 2011-2015 Regulatory Proposal - Public Version”, November 2009, page 9

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It is likely that customers in these areas are less likely to take up activities under the VEET scheme, due to the fact that, as growth corridors, they will have a substantially higher proportion of newly constructed houses, which are therefore likely to have newer appliances, which are likely to be higher than average in energy efficiency, and in any case for which an early change-out under the VEET would be unlikely to be financially justifiable.

5.4. Impact on retail operating costs and margin

5.4.1. Nature of the costs incurred by retailersThe impact of the VEET on retailers’ internal costs comprises the following:

costs incurred in creating or purchasing certificates, including transaction costs associated with identifying and negotiating with certificate sellers in those cases where the retailer purchases certificatescosts associated with complying with the obligations of the scheme, including the costs incurred in first developing systems and procedures to ensure that the retailer can conform to the requirements of the VEET, and then, subsequently, the on-going costs associated with scheme requirements in terms of recordkeeping and reporting.

We assumed, for the purposes of this assignment, that: the retailers will seek to recover these costs in full, and they will seek to do so from the customer classes that are eligible to participate in the VEET in any particular year, andthat all back-office system related costs have already been recovered from the existing tranches of the VEET scheme, however, we assume that these systems still have the functionality to cater for the VEET scheme over the period 2015-2017 (that is, there are no incremental back-office system capital costs incurred by the retailers to cater for the extension of the VEET scheme out to 2017).

We consider the first two assumptions to be non-controversial, as both are consistent with the outcomes that would be expected to occur in a perfectly competitive market. For example, any move to recover the costs of the scheme from customers that are ineligible to participate in the scheme would, in theory, lead to prices for those customers deviating from what would otherwise be the efficient level for that price. In a perfectly competitive market, any retailer that adopted this approach would lose market share, to other retailers operating in that segment of the market. This, in turn, would reduce their ability to recover the costs of the scheme, which was the original objective. In addition, if a retailer chose to not recover the costs of the scheme in full, they would lower their financial, potentially risking their long-term financial viability.We have applied the third assumption to recognise the fact that IT systems such as the ones required to participate in the VEET scheme are generally depreciated over lives of around 5 years (which covers the duration of the existing VEET scheme); and moreover, that a retailer is unlikely to risk not recovering these costs over such a time period, when there are no guarantee that the scheme will continue in the future.

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5.4.2. FindingsThe Department provided information on the expected average cost of certificates in nominal terms for each year between 2015 and 2017. This certificate price, adjusted to $2015 using an assumed annual inflation rate of 2.5%, was then multiplied by the number of certificates that were created in year, for each customer class and for each of electricity and gas, to provide an approximation of the overall certificate costs for each calendar year, by customer type, by product type.It should be noted that this price represents the marginal price of certificates – that is, it is the price that ‘clears’ the market under the VEET scheme. It will not represent the actual cost to the certificate creators (including retailers) of producing those certificates, and because of this should be seen as the upper-end estimate of the costs incurred by retailers in meeting their certificate obligations under the program. The table below outlines the certificate prices – in both nominal and $2015 - that are assumed to apply in each of the years between 2015 and 2017.Table 29: Certificate price for each scenario

Certificate Price 2015 2016 2017

5.4 million target Certificate price - Nominal

$57.00 $49.75 $46.00

Certificate price - $2015

$57.00 $48.54 $43.78


$23.75 $22.25 $22.00


$23.75 $21.71 $20.94


$17.75 $17.00 $16.50


$17.75 $16.59 $15.70

Source: DSDBI and OGW analysis

The following table highlights the number of certificates that are expected to be created under the 5.4 million target scenario.Table 30: Number of certificates created under the 5.4 million certificate scenario (‘000s)


ResidentialElectricity 2,765,077 2,549,784 2,435,778

Gas 728,546 608,289 552,633

BusinessElectricity 1,942,876 2,208,235 2,358,133

Gas - 46,321 46,321


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ResidentialElectricity 1,154,546 1,061,784 1,045,198

Gas 169,706 146,295 142,897


Gas - 32,353 36,261




ResidentialElectricity 736,756 685,606 652,811

Gas 91,303 83,312 78,256


Gas - 27,202 30,722


We also included within our analysis the estimated administrative and infrastructure costs associated with the scheme. The administrative costs associated with the VEET that are incurred by the retailers are not publicly available. Therefore, we used the information provided in a report published by the Department of Climate Change and Energy Efficiency (DCCEE) entitled Analysis of Compliance Costs for a National Energy Savings Initiative28, which includes information on these costs that was developed through interviews with a subset of retailers with obligations under the VEET (including all three of the largest retailers), and certificate creators. These were then converted to $2015.

28 NERA Economic Consultants and Oakley Greenwood, Analysis of Compliance Costs for a National Energy Savings Initiative, Final Report for the Department of Climate Change and Energy Efficiency, December 2012) available at www.ret.gov.au/energy/efficiency/savings/nesi_consultant/Pages/index.aspx.

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It should be noted that the costs incurred by the ESC in administering the scheme have not been included in these calculations, as it is our understanding, based on information provided by the ESC for the DCCEE report, that these costs are recovered from a $1 charge included in the cost of registering each certificate and the fees paid by certificate creators in registering to be approved to install specific VEET measures. The estimated certificate and administrative costs associated with the 5.4 million certificate scenario are outlined in the table below.Table 33: Retailer costs under the 5.4 million target scenarios ($million 2015)

Product Cost Component 2015 2016 2017Electricity VEET Certificate costs $268.35 $230.94 $209.89

Compliance costs $3.85 $3.89 $3.92Gas VEET Certificate costs $41.53 $31.77 $26.22

Compliance costs $ 0.60 $0.54 $0.49

Source: OGW analysis of certificate price and volume data provided by DSDBI and information on compliance costs incurred by liable retailers in the DCCEE report, Analysis of Compliance Costs for a National Energy Savings Initiative.

The estimated certificate and administrative costs associated with the 2.7 million certificate scenario are outlined in the table below. Table 34: Retailer costs under the 2.7 million target scenarios ($million 2015)

Product Cost Component 2015 2016 2017

Electricity VEET Certificate costs $60.47 $54.23 $52.91Compliance costs $2.08 $2.04 $2.07

Gas VEET Certificate costs $4.03 $3.88 $3.75Compliance costs $0.14 $0.15 $0.15


The estimated certificate and administrative costs associated with the 2.0 million certificate scenario are outlined in the table below.Table 35: Retailer costs under the 2.0 million target scenarios ($million 2015)

Product Cost Component 2015 2016 2017Electricity VEET Certificate costs $33.56 $31.29 $29.72

Compliance costs $1.55 $1.54 $1.55Gas VEET Certificate costs $1.62 $1.83 $1.71

Compliance costs $0.07 $0.09 $0.09


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6. Distributional impacts of the VEET6.1. Purpose and overview of this task

The purpose of this task was to assess the impact of the VEET scheme on the bills of customers who had participated in the scheme and those that had not. To do so, we defined the following groups of participants and non-participants:

program participants were disaggregated as follows:residential electricity participants;residential gas participants;business electricity participants – being customers that were not residential customers, who were connected to a distribution business’ low voltage network; andbusiness gas participants – being customers that were not residential customers, who were connected to a distribution business’ network and who consume less than 10,000 GJ per annum.

non-participants, who were further disaggregated as follows:residential electricity non-participants – being residential electricity customers within Victoria that were eligible to participate in the scheme but who are assumed not do so at any time over the 2015 - 2017 period;residential gas non-participants – being residential gas customers within Victoria that were eligible to participate in the scheme but are assumed not do so at any time over the 2015 - 2017 period;business electricity non-participants – being non-residential customers who are connected to the low voltage network of a Victorian distribution network, who are eligible to participate in the scheme but who are assumed not do so at any time over the 2015 - 2017 period;business gas non-participants – being a non-residential customer consuming less than 10,000 GJ per annum who is connected to a Victorian gas distribution business’ network, who is eligible to participate in the scheme but who are assumed not do so at any time over the 2015 - 2017 period29;high voltage electricity non-participants – being all non-residential customers connected to the high voltage component of a Victorian electricity distribution business’ network, all of whom are assumed not to participate in the scheme30;sub transmission electricity customers – being all non-residential customers connected to the sub transmission networks of Victoria’s

29 There are estimated to only be around 780 customers in this category across Victoria.

30 There are estimated to only be around 480 customers in this category across Victoria. The average usage of these customers is estimated to be around 180 times the average consumption of the average non-residential customer that is connected to the low voltage electricity distribution network.

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electricity distribution businesses, all of whom are assumed not to participate in the scheme31;large non-residential gas customers – gas customers connected to a gas distribution network who consume above 10,000 GJ per annum, all of whom are assumed not to participate in the scheme; large electricity customers who are connected to the electricity transmission network, all of whom are assumed not to participate in the scheme; andall customers in other NEM jurisdictions – these customers are unable to participate in the scheme; however, they could be impacted by any change brought about by the program in wholesale electricity prices in their jurisdictions.

Then, to calculate the impact of the VEET scheme on the bills of each of those groups of customers, we split our analysis into two discrete calculations regarding:

the financial costs of the scheme, which are borne by both participants and non-participants, and comprise:

network costs (which accrue to residential and business customers only); andretail costs (which accrue to residential and business customers only).

the financial benefits of the scheme, which accrue to both participants and non-participants, and include:

reductions in the wholesale energy price as a result of the VEET scheme (which accrue to all participants and non-participants in Victoria, as well as non-participants from other NEM States); and reductions in electricity usage, and the consequent impact on bill amounts (which accrue to participants only).

6.2. Findings

6.2.1. Costs of the scheme as allocated to participants and non-par-ticipants To derive the costs of the scheme, we:

ascertained the number of unique participants that have taken part in the scheme by:

applying the ratio of unique participants to total participants that characterised the VEET from 2009 through June 2013 (0.588235) to the total number of participants expected in each year of each of the three target scenarios (as provided by the Department) to estimate the number of unique participants in each year each of the three target scenarios;

determined the average usage per residential and business electricity participant, as well as residential gas participant, by:

31 There are estimated to only be around 30 customers in this category across Victoria. The average usage of these customers is estimated to over 1200 times the average consumption of the average non-residential customer that is connected to the low voltage electricity distribution network.

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dividing the estimated impact of the VEET scheme in each year by the cumulative number of participants partaking in the scheme in that year (from the step above) to work out the average yearly reduction in consumption that each participant would achieve as a result of participating in the scheme; anddeducting that reduction in consumption from what the overall average residential consumption in each year would have been, had the VEET scheme not existed, to determine the post-VEET average consumption per participant; and

determined the average usage per business gas participant by:dividing the estimated impact of the VEET scheme in each year by the cumulative number of participants partaking in the scheme in that year (from the step above) to work out the average yearly reduction in consumption that each participant would achieve as a result of participating in the scheme; anddeducting that reduction in consumption from an estimate of the average consumption of those customer types specifically assumed to participate in the scheme. This estimate is based on information provided by the Department32.

Assumed that residential and business non-participants’ average consumption:remains at existing levels for electricity; butdeclines at levels consistent with those assumed in the most AER’s most recent Gas Access Arrangement Decision for Victorian Electricity Distribution businesses33.

Then, to attribute network costs between residential and business participants and non-participants, we:

multiplied the overall impact that the VEET had on residential consumption, in each year, by the weighted average residential network price in that year, to determine the increase in the bills of both residential participants and non-participants that were caused by higher network costs; but

32 The reason we adopted an alternative approach to deriving the average consumption of business gas participants was because it was quite clear from average reduction per participant that participating customers exhibited quite different usage characteristics, relative to the “average” business gas customer. In particular, these customers are assumed to have a much larger average consumption relative to the business customer class as a whole.

33 The reason for the different treatment is due to the fact that our base case for the modelling of electricity wholesale electricity prices utilises a forecast of demand/energy consumption provided by AEMO, which is not broken down to its constituent components, or by customer class, thus it is unclear the proportionate impact of changes in consumption of existing customers, versus changes in consumption resulting from the addition of new customers. As such, our simplifying assumption is that the change in electricity load year on year is driven by changes in the number of customers, For gas, we have not undertaken any wholesale modelling, therefore, we have instead reverted back to the most recent, publically available forecasts of gas consumption from recent pricing decisions, which in turn provides information as to how the average consumption of different customer classes is assumed to change year-on-year.

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multiplied the overall impact that the VEET had on business consumption, in each year, by the weighted average business network price in that year, to determine the increase in the bills of both business participants and non-participants that were caused by higher network costs.

This same approach was adopted for the determination of both electricity and gas network impacts.To attribute retail costs between participants and non-participants, we:

first determine the total dollar value of certificate costs and administrative costs in each year based on the number of certificates that were created, by product (gas and electricity), and by customer types assumed to participate in the scheme (residential and business); we then divided the total of those costs in each year (disaggregated by product, and by customer type), by the total estimated consumption of that customer type for that product in that year, and we then multiplied this cost per kWh (and GJ for gas) by the respective average usages for the participants and non-participants in each of the customer classes for that each product34; andwe did not attribute any retail costs to customer types that were not assumed to participate in the scheme. For completeness, these are:

High voltage electricity customers;Sub transmission electricity customers;Transmission connected electricity customers;Electricity customers in other States; andLarge non-residential gas customers assumed to use over 10,000 GJ per annum.

Table 36, 37 and 38 on the following pages outline the costs (per customer) attributable to each customer class eligible to participate in the scheme, for the 5.4 million, 2.7 million and 2.0 million certificate scenarios respectively. Note that customer classes not mentioned in these tables (e.g., HV electricity, large non-residential gas customer consuming greater than 10,000 GJ per annum) face no change in either their network or retail costs.

34 It should be noted that this approach implicitly assumes that these costs are apportioned on throughput basis. In practice, retailers may seek to recover these costs simply on a per customer basis. If this were to occur, it would, ceteris paribus, lead to a slight increase in costs apportioned to participants, and a slight decrease in the costs apportioned to non-participants, because in the present approach, non-participants are assumed to have a higher average consumption than participants (except for residential gas customers under some of the scenarios tested), and thus, under our proposed methodology, they attract a slightly larger proportion of overall costs relative to if the apportionment was done on a per-customer basis. Overall, we do not consider this issue to be material, particularly given that the difference in the average consumption of participants and non-participants is not significant.

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Table 36: Annual and total cost increase per customer, by eligible customer class, for the 5.4 million scenario ($2015)

Customer class*

Product

Component 2015 2016 2017

NPV@7%2015-2030

[email protected]%

2015-2030

Residential participants

Electricity

Network costs $0.00 $13.99 $22.47 $165.96 $211.66

Retail costs $61.64 $46.03 $39.10 $129.73 $137.80

Residential participants Gas

Network costs $0.00 $0.00 $0.00 $0.05 $0.06

Retail costs $19.81 $14.52 $11.82 $40.85 $43.36

Residential non-participants

Electricity

Network costs $0.00 $15.82 $25.93 $191.33 $243.38

Retail costs $66.17 $52.05 $45.11 $144.13 $153.21

Residential non-participants Gas

Network costs $0.00 $0.00 $0.00 $0.05 $0.06

Retail costs $22.15 $15.52 $12.52 $44.48 $47.19

Business participants

Electricity

Network costs $0.00 $121.31 $203.34 $1,453.50 $1,868.54

Retail costs $221.63 $214.89 $208.20 $564.78 $602.52

Business participants Gas

Network costs $0.00 $0.00 $0.00 $23.13 $31.61

Retail costs $0.00 $1,225.20

$1,094.77 $1,963.79 $2,131.15

Business non-participants

Electricity

Network costs $0.00 $187.82 $314.82 $2,163.64 $2,759.81

Retail costs $343.14 $332.70 $322.34 $874.42 $932.85

Business non-participants Gas

Network costs $0.00 $0.00 $0.00 $0.72 $0.98Retail costs $0.00 $40.93 $36.84 $65.82 $71.43


Table 37: Annual and total cost increase per customer, by customer class, for the 2.7 million scenario ($2015)

Customer class*

Product

Component 2015 2016 2017

NPV@7%2015-2030

[email protected]%

2015-2030


Electricity



Network costs $0.00 $0.00 $0.00 -$0.01 -$0.02Retail costs $2.19 $1.71 $1.59 $4.84 $5.15


Electricity


Residential non- Gas Network costs $0.00 $0.00 $0.00 -$0.01 -$0.01

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participants Retail costs $2.19 $1.70 $1.58 $4.83 $5.13


Electricity

Network costs $0.00 $78.82

$123.33 $894.35 $1,151.34

Retail costs $62.79 $59.01 $58.57 $158.03 $168.58


Network costs $0.00 $0.00 $0.00 $17.08 $23.35

Retail costs $0.00 $382.91

$418.08 $675.73 $734.54


Electricity


$204.44 $1,411.45 $1,800.09

Retail costs $104.08

$97.81 $97.09 $261.95 $279.43


Network costs $0.00 $0.00 $0.00 $0.53 $0.72

Retail costs $0.00 $13.05 $14.07 $22.88 $24.87


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Table 38: Annual and total cost increase per customer, by customer class, for the 2.0 million scenario ($2015)

Customer class*

Component 2015 2016 2017

NPV@7%2015-2030

[email protected]%

2015-2030


Electricity





Electricity


Residential non-participants Gas



Electricity


$100.01 $728.60 $939.04

Retail costs $37.78 $36.50 $35.57 $96.23 $102.67


Network costs $0.00 $0.00 $0.00 $14.40 $19.68

Retail costs $0.00 $248.74

$269.00 $436.85 $474.83


Electricity


$172.58 $1,186.23 $1,512.95

Retail costs $65.16 $62.98 $61.39 $166.02 $177.12




6.2.2. Benefits of the scheme accruing to participants and non-par-ticipantsTo derive the benefits of the scheme, we first calculated the reduction in electricity bills accruing to participants of the scheme through the following steps:

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First, deriving the average variable price35 in the host retailer’s standing offer and the average variable price across the various market offer prices available within each distribution area in 2013, for both residential and business customers, and for both gas and electricity consumption. This was based on information from the YourChoice website36, as well as the various Government Gazettes that publish each host retailer’s standing offer price; For electricity, we escalated these 2013 prices to 2015 levels, based on a combination of:

An assumed inflation rate of 2.5% across all components that make up the retail price; plusForecast real changes in the wholesale price of electricity, from our wholesale market modelling, multiplied by the estimated proportion of the end retail bill that the wholesale energy component makes up; plusForecast changes in the network price attributable to electricity, from our modelling of network prices, multiplied by the estimated proportion of the end retail bill that the network component makes up.

For gas, we escalated these 2013 prices to 2015 levels, based on a combination of37:

An assumed inflation rate of 2.5% across all components that make up the retail price; plusForecast changes in the network price attributable to electricity, from our modelling of network prices, multiplied by the estimated proportion of the end retail bill that the network component makes up.

We then derived a state-wide weighted average market offer variable price and average standing offer variable price, for each product type and for both residential and business customers, by separately weighting each distribution business’ average market and average standing offer variable price for each product type and customer class, by that distribution business’ contribution to total consumption for that customer class for that product type; We then worked out an average retail price, based on weighting the average standing offer and market offer prices by the estimated number of customers on market offers versus standing offers. We used the latest information available (June 2012), which was provided by the Department38. This indicated that 25% of customers were still on standing offer prices, whilst 75% had moved to market offers. This percentage was applied to both gas and electricity, and to both residential and business customers.

35 Where a multi-tier tariff was applied, we used the tier that captured the last kWh of usage of the average consumer. For example, if a business’ average residential consumption was 5500kWH, and a block tariff applied different rates between 0-4000 kWh, 4001-6000kWh, and greater than 6001 kWh, then we applied that tariff that applied to consumption within the 4001-6000kWH band, as average consumption sits within this price band.

36 http://www.yourchoice.vic.gov.au/ downloaded on the 31st October, 2013.

37 No change in gas wholesale prices was included, as this was not modelled as part of this assignment.

38 Email from David Blowers to Lance Hoch dated 14 August 2013.

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This 2015 price (in $2015) was assumed to remain constant in real terms over the entire evaluation period. The calculated price for each product type, and for each customer class, was multiplied by the total volumes estimated to be saved under the VEET scheme for that product by that customer class, to determine the overall reduction in participants’ bills as a result of participating in the scheme. We then divided this number by the estimated cumulative number of unique participants in each year to determine the per-participant benefit in each year.

In addition, we calculated the benefits that accrue to residential and business electricity39 participants and non-participants, as well as to all other non-participating electricity customers (e.g., high voltage electricity customers, sub transmission electricity customers, electricity customers in other NEM States), from the reduced wholesale price that results from the measures installed under the VEET. This was calculated by:

multiplying the respective average usages for the residential and business participants and non-participants within Victoria by the time-weighted average wholesale price reduction in Victoria (details of which have been provided in section 5.2.4) to determine the benefits that those customers would accrue from the reduction in wholesale price stemming from the scheme40; andmultiplying the average usage for each of the customer classes assumed to not be eligible to participate in the scheme (e.g., high voltage connected customers, sub transmission connected customers, customers directly connected to the transmission network) by the time-weighted average wholesale price reduction in Victoria to determine the benefits that would accrue to each of these non-participants from the reduction in wholesale price stemming from the scheme; andmultiplying the estimated electricity consumption in each other NEM jurisdiction, inclusive of an estimate of losses, by the change in the time-weighted wholesale price in the respective jurisdiction.

The following table shows the per-customer benefits accruing to residential and business Victorian customers under the 5.4 million certificate scenario.Table 39: Annual benefit per customer under the 5.4 million certificate scenario ($2015)

Customer class*

Product

Component 2015 2016 2017

NPV@7%2015-2030

[email protected]%

2015-2030

Residential Electrici Wholesale $11.71 $11.20

$8.08 $85.62 $106.19

39 After discussions with DSDBI, it was agreed that we would not model the impact of the VEET scheme on the wholesale gas price due to the immateriality of the changes in gas consumption stemming from all of the target scenarios, therefore, this benefit is not relevant to gas customers.

40 Implicitly, this assumes that any reduction in the wholesale price of electricity flows directly through to retail tariffs. This is consistent with the assumption that the electricity market is perfectly competitive.

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participants ty Bill Reduction $83.52 $141.30

$162.80 $1,370.86 $2,493.76

Residential participants Gas Bill Reduction $81.46 $48.8

3 $41.72 $357.13 $565.25


Electricity Wholesale $12.57 $12.6

6 $9.32 $97.65 $120.98

Residential non-participants Gas Bill Reduction $0 $0 $0 $0.00 $0.00


Electricity

Wholesale $86.85 $87.48 $64.41 $699.25 $873.98

Bill Reduction $4,653 $4,653 $4,653 $39,462 $69,001

Business participants Gas Bill Reduction $0 $2,77

1 $5,542 $44,750 $86,954


Electricity Wholesale $134 $135 $100 $1,044 $1,294

Business non-participants Gas Bill Reduction $0 $0 $0 $0.00 $0.00


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Table 40 below shows the total benefits accruing to customers that are not categorised as residential or business Victorian customers under the 5.4 million certificate scenario.Table 40: Total benefit for other customer classes under the 5.4 million certificate scenario ($2015)

Customer class*

Component 2015 2016 2017NPV@7%

[email protected]%2015-2030

High voltage non parti-cipant

Wholesale Reduction $23,412 $23,582 $17,362 $181,849 $225,308

Sub transmis-sion non-par-ticipants

Wholesale Reduction $173,152 $174,415 $128,412 $1,344,955 $1,666,377

Transmission Connected non-parti-cipants

Wholesale Reduction

$20,408,648

$20,811,117

$15,319,508

$160,237,777

$277,533,985


Table 41 shows the per-customer benefits accruing to residential and business customers under the 2.7 million certificate scenario.Table 41: Annual benefit per customer under the 2.7 million certificate scenario ($2015)

Customer class*

Product

Component 2015 2016 2017

NPV@7%2015-2030

[email protected]%

2015-2030


Electricity

Wholesale $8.29 $6.30 $5.98 $61.17 $76.91

Bill Reduction $82.56 $125.17

$137.85 $1,183.95 $2,137.16

Residential participants* Gas Bill Reduction $0.01 -$2.25 -$4.64 -$368.84 -$761.40


Electricity Wholesale $8.89 $7.02 $6.75 $68.32 $85.75



Electricity

Wholesale $57.36 $45.32 $43.53 $465.35 $591.57

Bill Reduction $5,213 $5,213 $5,213 $44,137 $77,188


0 $5,540 $47,154 $90,996


Electricity Wholesale $95 $75 $72 $731 $917

Business non- Gas Bill Reduction $0 $0 $0 $0.00 $0.00

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participants

*NOTE: The negative figures indicate that those customers’ bills will increase as a result of participating in the scheme. This is because the VEET scheme leads to residential participants increasing their average consumption. It should be noted that in many cases, these customers will also be electricity participants, and therefore, this bill increase will be offset a reduction in their electricity bill.


Table 42 shows the total benefits accruing to customers that are not categorised as residential or business customers under the 2.7 million certificate scenario.Table 42: Total benefit for other customer classes under the 2.7 million certificate scenario ($2015)

Customer class*

Component

2015 2016 2017NPV@7%


High voltage non participant

Wholesale Reductions $16,554 $13,079 $12,563 $127,240 $159,690

Sub trans-mission non-parti-cipants

Wholesale Reductions $122,433 $96,728 $92,913 $941,065 $1,181,065

Transmis-sion Con-nected non-participants

Wholesale Reductions

$14,430,617 $11,541,621 $11,084,5

30$112,117,40

6$195,903,52

9


The following table shows the per-customer benefits accruing to residential and business customers under the 2.0 million certificate scenario.Table 43: Annual benefit per customer under the 2.0 million certificate scenario ($2015)

Customer class*

Product

Component 2015 2016 2017

NPV@7%2015-2030

[email protected]%

2015-2030


Electricity

Wholesale $5.80 $3.57 $4.41 $50.63 $64.48

Bill Reduction $77.06 $116.50

$128.72 $1,106.42 $1,997.80

Residential participants* Gas Bill Reduction -$3.80 -$5.89 -$6.61 -$428.52 -$876.99


Electricity Wholesale $6.19 $3.95 $4.93 $56.15 $71.35


Business Electrici Wholesale $38.39 $24.4 $30.57 $372.96 $481.27

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participants ty8

Bill Reduction $5,522 $5,525 $5,526 $46,567 $81,414


9 $5,539 $47,151 $90,990


Electricity Wholesale $66 $42 $53 $601 $763

Business non-participants Gas Bill Reduction $0 $0 $0 $0.00 $0.00

*NOTE: See the note accompanying the previous table.


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The following table shows the total benefits accruing to customers that are not categorised as residential or business customers under the 2.0 million certificate scenario.Table 44: Total benefit for other customer classes under the 2.0 million certificate scenario ($2015)

Customer class*

Component 2015 2016 2017NPV@7%


High voltage non parti-cipant


Sub trans-mission non-parti-cipants


Transmis-sion Con-nected non-parti-cipants

Wholesale Reduction $10,049,715 $6,488,443 $8,105,13

8 $92,159,896 $164,333,529


The following table shows the benefits accruing to non-Victorian customers.Table 45: Benefit of the VEET accruing to non-Victorian customers in aggregate under each scenario ($2015)

Scenario Modelled

2015 2016 2017NPV@7%


5.4 million scenario $83,084,163

$102,442,316

$83,405,874 $939,174,026

$1,712,121,406

2.7 million scenario $61,258,288 $66,696,123

$56,983,578 $564,899,668

$1,014,033,370

2.0 million scenario $48,051,574 $50,585,913 $42,309,01

0 $456,994,357 $826,071,655


6.2.3. Net benefits accruing to participants and non-participants in VictoriaTable 46 on the following page demonstrates the net (per customer) benefits accruing to the average residential and business customer in Victoria in the 5.4 million tonne target scenario.

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Table 46: Distributional impacts – net annual and total financial benefit of the VEET per average customer for each customer class in the 5.4 million certificate scenario ($2015)

Customer class

Product 2015 2016 2017

NPV@7%2015-2030

[email protected]%

2015-2030

Residential participants Electricity $33.59 $92.48 $109.31 $1,160.78 $2,250.49


Electricity -$53.60 -$55.21 -$61.72 -$237.81 -$275.61

Residential participants Gas $61.65 $34.31 $29.89 $316.23 $521.84


Gas -$22.15 -$15.52 -$12.52 -$44.53 -$47.25

Business participants Electricity $4,519 $4,405 $4,306 $38,143 $67,404

Business non-participants Electricity -$208.68 -$385.08 -$537.45 -$1,993.60 -

$2,398.60Business participants Gas $0.00 $1,545.5

6$4,446.7

4 $42,763 $84,791

Business non-participants Gas $0.00 -$40.93 -$36.84 -$66.54 -$72.41


The benefits to other non-participants such as high voltage customers, sub transmission customers, transmission connected customers and interstate customers are the same as mentioned in the previous section for the 5.4 million certificate scenario. The following table demonstrates the net (per customer) benefits accruing to each residential and business customer category in Victoria under the 2.7 million certificate scenario.Table 47: Distributional impacts – net annual and total financial benefit of the VEET per average customer for each customer class under the 2.7 million certificate scenario ($2015)

Customer class

Product 2015 2016 2017

NPV@7%2015-2030

[email protected]%

2015-2030



Electricity -$2.81 -$9.68 -$13.70 -$41.96 -$48.77

Residential participants* Gas -$2.18 -$3.96 -$6.23 -$373.66 -$766.54

Residential non-

Gas -$2.19 -$1.70 -$1.58 -$4.82 -$5.12

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participantsBusiness participants Electricity $5,208 $5,121 $5,075 $43,550 $76,459

Business non-participants Electricity -$9.00 -$153.34 -

$229.37 -$942.60 -$1,162.34

Business participants Gas $0.00 $5,157 $5,122 $46,461 $90,238


*NOTE: Residential gas participants have higher bills after participating in the VEET scheme because they are assumed to consume more gas than they otherwise would have, had the scheme not have been in place. In many cases, this will be due to a switch from electricity to gas consumption; therefore, these customers are likely to benefit from reductions in their electricity bill as a result of participating in the scheme.


The benefits to other non-participants such as high voltage customers, sub transmission customers, transmission connected customers and interstate customers are the same as mentioned in the previous section for the 2.7 million certificate scenario. The following table demonstrates the net (per customer) benefits accruing to each residential and business customer category in Victoria under the 2.0 million certificate scenario.Table 48: Distributional impacts – net annual and total financial benefit of the VEET per average customer for each customer class under the 2.0 million certificate scenario ($2015)

Customer class

Product 2015 2016 2017

NPV@7%2015-2030

[email protected]%

2015-2030



Electricity $0.55 -$5.14 -$6.21 -$7.42 -$6.72

Residential participants* Gas -$4.69 -$6.65 -$7.27 -$430.55 -$879.15


Gas -$0.89 -$0.75 -$0.66 -$2.02 -$2.15

Business participants Electricity $5,523 $5,448 $5,421 $46,115 $80,854

Business non-participants Electricity $1.05 -$131.90 -$181.21 -$751.67 -$926.93

Business participants Gas $0 $5,291 $5,270 $46,699 $90,496

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*NOTE: See the note accompanying the previous table.


The benefits to other non-participants such as high voltage customers, sub transmission customers, transmission connected customers and interstate customers are the same as mentioned in the previous section for the 2.0 million certificate scenario.

6.3. Net economic benefits The previous sections assessed the financial outcomes of the program from the perspective of customers that participated in the VEET and several classes of customers that did not participate. The economic benefits and costs of the program from the total resource perspective of the energy sector – which can be defined as including the total net cost borne by electricity and gas providers and users in meeting electricity and gas needs – are somewhat different:

Economic benefits, which, in our economic model, are represented by41:reductions in production costs, which, include reductions in electricity variable costs: fuel costs, variable operation and maintenance costs; and reductions in capital costs and fixed operation and maintenance costs; and

Economic costs, which in our economic model, are represented by:the economic cost of implementing the VEET program, in particular, the cost to accredited providers of creating the certificates that lead to the energy savings and the administrative costs to retailers of the scheme; and the economic costs incurred by program participants.

The table below presents the economic benefits and costs of the 5.4 million certificate scenario.Table 49: Economic benefits and costs of the 5.4 million certificate scenario ($2015, millions)

Economic benefit/cost

Benefit / Cost

2015 2016 2017

NPV@7%2015-2030

[email protected]%

2015-2030

Total reduction in pro-duction costs Benefit $13.33 $24.57 $38.09 $257.76 $326.18

41 For completeness, it is noted that it was agreed with DSDBI that we would not model the change in wholesale gas production costs resulting from the VEET scheme, due to the immaterial change in gas demand, relative to the market as a whole. Furthermore, we have not modelled the change in network costs for either gas or electricity, again, because the change in demand resulting from the VEET scheme is not considered material in the context of the broader economic costs and benefits.

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Total cost to accred-ited providers* Cost -$257.95

-$224.0

0-$204.14 -$603.36 -$642.45

Total administrative costs to retailers Cost -$4.45 -$4.43 -$4.41 -$11.63 -$12.42

Total cost to parti-cipants Cost -$128.32

-$139.7

4-$142.30 -$358.14 -$382.77

NET BENEFIT/COST OF SCHEME -$715.37 -$711.46

*NOTE: This is effectively the price of certificates multiplied by the quantity of certificates, less the producer surplus that is assumed to accrue to accredited providers. The estimate of producer surplus has been provided by DSDBI.

Source: DSDBI information and OGW analysis

Table 50 on the following page presents the economic benefits and costs of the 2.7 million certificate scenario.

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Table 50: Economic benefits and costs of the 2.7 million certificate scenario ($2015, millions)


Benefit / Cost

2015 2016 2017

NPV@7%2015-2030

[email protected]%

2015-2030


Total cost to accred-ited providers* Cost -$60.27 -$54.43 -$53.09 -$147.21 -$156.93


Total cost to parti-cipants Cost -$100.04 -$100.52 -$100.62 -$263.43 -$281.25




The table below presents the economic benefits and costs of the 2.0 million certificate scenario.Table 51: Economic benefits and costs of the 2.0 million certificate scenario ($2015, millions)


Benefit / Cost

2015 2016 2017

NPV@7%2015-2030

[email protected]%

2015-2030


Total cost to accred-ited providers* Cost -$33.37 -$31.41 -$29.81 -$82.96 -$88.45


Total cost to parti-cipants Cost -$78.94 -$80.54 -$80.47 -$209.81 -$224.03


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The above figures do not include any monetary value ascribed to either a positive or negative externalities that may accrue from the production or consumption of electricity. In particular, based on advice from the Department, we have not included the estimated monetary value of associated with the reductions in carbon emissions that result from the VEET scheme. If this were to be included, this would lead to additional benefits in NPV terms (assuming a 7% WACC) of $87.34m under the 2.0 million scenario; $112.00m under the 2.7 million scenario; and $198.00m under the 5.4 million scenarios. This increases to $118.46m, $151.40m and $268.50m respectively, if the WACC is changed to 3.5%. We note in all cases, the results of the total resource cost test is still negative, even after the inclusion of the benefits stemming from lower carbon emissions under all of the VEET scenarios.For completeness, we note that the above modelling uses forecasts provided by Thomson Reuters (Point Carbon), converted into Australian dollars using current exchange rates42. We considered using the forecasts produced by the Commonwealth Treasury, as part of its ‘Pre-Election Economic and Fiscal Outlook 2013’ publication that was produced in the lead up to the 2013 Federal Election, however, after due consideration, we concluded that the Thomson Reuters forecasts were likely to represent a more robust forecast of carbon prices over the longer term horizon. The main reason for not adopting the Treasury forecasts was primarily because of their reliance on a linear transition path from current market prices to $38 in 2019-20, with this later price point being based on longer term modelled outcomes that were published back in 2011 in the ‘Strong Growth, Low Pollution’ report. Our primary concern is that the use of long-term modelled prices, derived around 3 years ago, may not adequately to account of the significant change in the market for carbon permits over that period. The Thomson Reuters’ forecasts do not appear to suffer from this same issue.

Finally, in addition to the above, we note that the VEET scheme could also lead to an additional economic benefit, being an improvement in allocative efficiency. In simple terms, allocative efficient outcomes occur if the price for a particular service accurately reflects the costs to society of providing that service. Where prices deviate from costs, the socially optimum level of production and consumption will not occur, and thus, a “deadweight loss” will result. If, in the absence of the VEET scheme, the pricing outcomes within the wholesale market deviated from cost reflective levels (i.e., were higher than cost-reflective levels), this would result in some customers consuming less electricity than they otherwise would have purchased. This is likely to reduce either the productivity or amenity enjoyed by these consumers, and thus their consumer surplus. There will also be a loss in producer surplus, due to the fact that the generators will not sell as many units of electricity as they would have under perfect competition.

42 http://www.commodities-now.com/news/environmental-markets/15325-european-carbon-market-oversupplied-until-2027.html, the exchange rate conversion is based on 1 EUR = 1.4411 AUD.

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If, however, the adoption of the VEET scheme leads to generators adopting more efficient bidding behaviour, so that the wholesale price better reflects the cost of supply, then improvements in allocative efficiency will ensue. Notwithstanding the conceptual merits of including this economic benefit within our analysis, it is our view that, in the case of the VEET, it is not likely to be material when compared with the productive efficiency benefits that have been outlined above. We say this for two reasons:

The results of our market modelling indicate that there are only small changes in bidding behaviour as a result of the VEET scheme; andThis small change in the wholesale price does not directly translate into a loss in allocative efficiency because:

the majority of the revenue that is generated from that change in wholesale price simply represents a transfer from consumer to producer surplus (i.e., producers increase their profits, with this being ‘funded’ directly by consumers), which is not an economic cost; and the loss in allocative efficiency is further reduced as it is a function of, amongst other things, the elasticity of demand (which reflects the slope in the demand curve).

As a result, we do not feel that the omission of the potential for the VEET to increase allocative efficiency makes a material difference in the estimation of the scheme’s net economic benefits.

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7. Conclusions and caveats7.1. Conclusions

This section presents the conclusions that can be drawn regarding the key questions to be addressed in this study based on the analyses undertaken. These conclusions should be considered in light of the assumptions presented in section 3, and the caveats discussed in section 7.2.The material provided by the Department shows that meeting each of the three VEET emission reduction targets will require a non-trivial level of take-up. However, in some scenarios, the take-up rates required, given the number and savings impacts of the measures included for the purpose of the analysis, are high enough to raise some questions regarding their achievability.

As shown in Table 52, increased participation from both residential and business customers is projected as the target of the scenarios increase. The participation rates in the 5.4 million tonne scenario are very ambitious, and would, if achieved, represent one of the largest energy efficiency program deployments ever undertaken. Table 52: Projected participation rates by target scenario

Sector% of segment projected to participate


Electricity

Gas Electricity

Gas Electricity

Gas

Segment sizeResidential 2,334,999 1,806,839 2,334,999 1,806,839 2,334,999 1,806,839

Business 316,377 55,024 316,377 55,024 316,377 55,024% segment participation

Residential 12.1% 0.8% 18.5% 1.6% 35.8% 12.8%Business 6.5% 0.6% 8.1% 0.7% 13.7% 0.9%


It should also be remembered that:a non-trivial number of residential consumers have already participated in the scheme – additional participation of these consumers will require that they adopt additional measures to those already installed, and the participation rates shown above represent the number of consumers required to meet the target assuming that each participant undertakes the average bundle of measures. In practice, more participation may be required, particularly if the applicability of some of the measures with larger lifetime savings is not as large as that of the measures with smaller lifetime savings.

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On the other hand, additional measures may, in practice, be introduced within one or more of the scenarios. By introducing more measures, some of which may have lifetime savings larger than the average analysed here, required penetration rates may be reduced.

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Customers that participate in the VEET save money, but the bills of non-participating customers generally increase in all three target scenarios

Table 53 through Table 55 provide a summary of the bill impacts of the three target scenarios on the bills of participating and non-participating residential and business electricity and gas consumers. Tick marks indicate that the consumer’s bill either goes down or does not change. Crosses indicate that the consumer’s bill increases. It should also be noted that gas measures for business customers do not begin to be implemented until 2016.Table 53: Impact of the VEET on customers’ bills, 2.0 million tonne target scenario

Customer class


Electricity or gas


1 2 3 7.0% 3.5%

Residential Participant E G X X X X X

Non-participant E X X X X

G X X X X X

Business Participant E G NA

Non-participant E X X X X

G NA X X X X



Customer class


Electricity or gas


1 2 3 7.0% 3.5%

Residential Participant E G X X X X X

Non-participant E X X X X X

G X X X X X


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G NA X X X X



Customer class


Electricity or gas


1 2 3 7.0% 3.5%

Residential Participant E G


G X X X X X



G NA X X X X


The tables show mixed outcomes. Specifically,In the 5.4 million tonne scenario:

The average residential and the average business customer43 participating in the VEET experience savings on both their electricity and gas bills in the three years in which the program is implemented, and also on a net basis over the 2015 to 2030 period. This is due to the relatively large savings per participant in this scenario as compared to the other scenarios.However, non-participants – whether residential or business – experience higher electricity and gas bills in the first three years of the program and on a net basis over the 2015 through 2030 timeframe. This is because the costs of the VEET in this scenario are significantly higher than those incurred in the other scenarios.

43 The analysis of bill savings had to be undertaken on an average-participant basis. This was the case because the information provided by the Department only projected the number of each eligible measure expected to be taken up, and the total number of residential and business customers taking up one or more eligible electricity or one or more eligible gas measures. No information was provided on the specific combination of measures taken up by different customers or how many customers could be expected to take up electricity and gas measures. As a result, the analysis assesses the average impact of the VEET on the electricity and gas bills of program participants and non-participants.

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By contrast, in the 2.0 million tonne target scenario:The electricity bills of residential non-participants are almost unchanged. They experience a very slight reduction in 2015 (though it is really essentially break-even) and a slight overall increase over the study timeframe as a whole (that is, the average non-participant would pay a total of about $7 more for all the electricity they use over the 2015 – 2030 period). This is because the reduction in wholesale price in this scenario is not quite large enough to outweigh the increases in retail and network costs that result from the program in this scenario. In addition, the gas bills of residential non-participants and both the electricity and gas bills of business non-participants increase in this scenario due to the fact that the cost of the program that is allocated to these customers exceeds the reductions the program causes in wholesale energy prices.The VEET results in lower electricity bills for both the average residential and average business customer that participates in the VEET and lower gas bills for the average business customer that participates in the VEET. By contrast, the gas bill of the average residential customer that participates in the VEET increases. This is because a significant number of the measures that are eligible under the residential program involve a switch from electricity to gas. As a result, the gas consumption of the average participating customer increases, as does their gas bill. The customer will still save money overall, however, as the electricity cost savings achieved by the average residential VEET participant more than offsets the increases they experience in their gas costs44.

Large electricity consumers within Victoria and electricity users in other states benefit from the VEET

The outcome for large electricity users within Victoria and all electricity users in other states is different. These electricity users benefit from the lower wholesale electricity prices that result from the VEET, and do not incur any additional costs due to the VEET. In the case of large business customers within Victoria it can be assumed that (a) distributors will not seek to make up from these customers revenue reductions that result from consumption reductions among the smaller customers who are eligible and choose to participate in the VEET, and (b) retailers will not seek to recover from these customers the costs they incur to administer a program targeted at small customers. Similarly, because electricity distributors and retailers in other states do not lose revenue or incur additional costs due to the VEET, they will not pass on any costs associated with the VEET to their customers, meaning that those customers will experience only the impact of the VEET on wholesale electricity prices.In the case of gas, no wholesale price benefits are assumed in the modelling due to the very small reduction in gas consumption and the nature of gas contracting, so large gas users and interstate gas users do not accrue any benefits or incur any additional costs due to the VEET.

44 It is important to recognise that the nature of the eligible measures ensures that where a residential customer’s gas consumption (and therefore gas bill) has increased due to their participation in the scheme, they must benefit from a lower electricity bill. Our analysis indicates that the reduction in the average residential participant’s electricity bill significantly exceeds the increase in their gas bill.

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None of the three VEET target scenarios are cost-effective from the total resource cost (TRC) perspective.

The total resource cost perspective is an economic test that assesses the cost of the VEET as a means for meeting consumers’ needs for energy. It takes as its benefits the reductions that the program induces in the cost of producing and delivering energy to consumers; its costs include all costs incurred in administering and delivering the program, plus any costs borne by customers in order to participate in the program.More specifically:

TRC benefits include reductions in fuel and other variable operating and maintenance expenses, and any reductions in capital or fixed operating and maintenance expensesTRC costs include:

The costs incurred by certificate providers in creating certificates (note that this is not the same as the cost of the certificates themselves)The costs incurred by end-use customers participating in the VEET for measures installed (in those cases where there is a net cost to the customer participating in the program)The costs incurred by the retailers in complying with the administrative and other requirements of the program.

As can be seen in Table 56, the costs of the VEET exceed the reductions it engenders in energy production and delivery costs in all three target scenarios and under both discount rates tested.Table 56: Economic net benefit of the three target scenarios (total resource cost perspective), $2015 millions

Target scenario (millions of tonnes reduced)

7.0% discount rate 3.5% discount rate

2.0 2.7 5.4 2.0 2.7 5.4

Benefits (i.e., reductions in fixed and variable electricity production costs) 113.07 146.4 257.76 143.01 184.91 326.18

Costs, which are comprised of297.05 416.44 973.13 317.05 444.37

1037.64

Certificate creation costs 82.96 147.21 603.36 88.45 156.93 642.45 Administrative costs borne by retailers 4.28 5.80 11.63 4.57 6.19 12.42 Costs of measured borne by participants 209.81 263.43 358.14 224.03 281.25 382.77

Net benefit -183.98 -270.04 -715.37 -174.05 -259.46 -711.46

Benefit/cost ratio 0.38 0.35 0.26 0.45 0.42 0.31


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Put simply, this indicates that it costs more to save energy through the VEET than it does to produce and deliver that same amount of energy.Interestingly, the table also shows that the smallest of the three target scenarios provides the best economic performance. This is due, at least in part, to the fact that the larger programs require higher certificate prices to drive the take-up needed to meet the higher target. However, a large portion of the measures taken up in the larger programs would also have been taken up in the smaller program – but at a lower certificate cost. In essence, the incremental certificate price in the larger program times the number of certificates taken up in the smaller program represents an additional cost of the larger target, but one that does not produce any incremental savings from those measures.

The addition of a value for carbon improves the performance of the scheme, but it still fails to be cost-beneficial from a total resource cost perspective even using a 3.5% discount rate.

The results of the total resource cost test discussed above do not include any consideration of the positive or negative externalities that may result from the changes in energy consumption resulting from the VEET. The decision to not include a monetary value for the carbon emission reductions that result from the VEET was based on the stated policy of the Coalition government that was elected in September 2013 to repeal the carbon price.A test of the impact of including a carbon price was undertaken using the most recent projections of the European carbon price. With this price, the present value of VEET benefits would increase by the following amounts:

$83.75m in the 2.0 million tonne scenario; $112.00m in the 2.7 million tonne scenario; and $198 million in the 5.4 million tonne scenario, if a 7.0% discount rate is used and $113.6m, $151.40m and $268.5m in the 2.0, 2.7 and 5.4 million tonne scenarios respectively, if a 3.5% discount rate is used.

Comparison of these figures to the net benefit figures shown in Table 56 above shows that the addition of a carbon externality value at the level currently projected in the European market would still result in the VEET failing to provide a positive cost/benefit outcome.

7.2. CaveatsOther benefits that may be provided by the scheme have not been considered in this analysis.

Only those benefits that could be readily quantified as part of consumers’ bills and energy sector production costs have been assessed in this analysis. Other potential impacts – which could include its ability to (a) address non-financial barriers to the deployment of energy efficiency measures, (b) build the capabilities of the energy services industry, and/or (c) create jobs – have not been assessed.

The energy savings of the VEET are not measured results – they have been have been derived from engineering estimates augmented by post-installation surveys to revise persistence assumptions.

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The Department and Sustainability Victoria have made a thorough review and refinement of the algorithms originally used to estimate the energy consumption impacts of the VEET measures. The algorithms themselves are quite sophisticated and take into account all of the factors that could reasonably be thought to affect scheme savings. The decision to commission fieldwork on the persistence of several measures – particularly standby power controllers – has also served to significantly refine and revise the estimated energy savings of the scheme.However, there has been no attempt to measure the actual, real-world impacts of the measures. As a result, these estimates may still over- or under- estimate actual, real-world energy savings and other impacts of the scheme.

There is significant uncertainty regarding the time distribution of VEET measure savings

There is no direct data on the time distribution of the energy impacts of the measures installed under the VEET. As a result, for the purpose of this study, these impacts have been estimated based on the professional experience of OGW.In addition, it has been assumed, based on the data provided by the Department and Sustainability Victoria, that the all of the water heating measures installed on residential electric water heaters and 72% of the shower roses installed in residences with electric water heaters will affect off-peak water heaters. This means that they will have no impact at times of generation system peak demand. These measures represent a sizable proportion of all residential electricity VEET savings (26.7%, 39.4% and 30.8% in the 2.0, 2.7 and 5.4 million tonne scenarios respectively). To the extent that a different proportion of these measures were installed on non-controlled electric water heaters, their impacts on peak demand would be larger.

Benefits accruing from the deferral of network augmentation have not been considered

While we believe that this is unlikely to effect the overall assessment of the costs and benefits of the VEET measures installed from 2015 through 2017, due to their likely impacts on peak demand and geographic spread, it is an issue that may warrant consideration in future evaluations to the extent that (a) the measures to be assessed as part of such evaluations are likely to have larger impacts on peak demand, and (b) underlying growth in peak demand creates a situation in which capital expenditure for network augmentation can be expected to constitute a more important component of overall network costs than it is likely to be in the near- to mid-term.

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Appendix A: Scope of ServicesThe Department will require modelling to be undertaken using a minimum of four target scenarios. Each scenario will be determined by the annual emissions abatement target for the scheme. These targets will identify the energy savings and certificate costs that are to be inputted into the energy market modelling. Under these four target scenarios the modelling will need to be undertaken for the period 2015-2030. The precise scenarios will be determined prior to project inception and provided to the supplier. Cost curve modelling of energy efficiency measures is not required to be undertaken as part of this work and will be provided to the supplier by the Department. The project scope will model the impact of the VEET scheme on: the electricity market

the gas market.

The project will consider a range of costs and benefits relating to, but not limited to: changes in retail electricity and gas prices

changes in wholesale electricity and gas prices

changes in generation expenditure

changes to generator profits (including changes to carbon tax liabilities)

changes to retailer profits

changes in gas and electricity bills for participants and non-participants in the scheme

scheme administration

transaction costs for retailers

transaction costs for accredited providers

up front purchase costs to participants.

The Department and the supplier will identify the appropriate inputs into the cost benefit analyses during inception and the Department will provide inputs where appropriate.The project will consider the distributional effects of the scheme according to: Participants and non-participants in the scheme

Residential and business (SMEs and large businesses) energy consumers.

Project deliverables

The supplier must develop a set of cost benefit analyses that identify the impact of the VEET scheme on energy markets from 2015. The successful supplier will be required to undertake the following tasks: undertake modelling, using energy consumption inputs provided by the Department, that

identifies the costs and benefits of the VEET scheme activities through its impact on the electricity and gas markets, particularly regarding wholesale costs and retail prices

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calculate the average change in household energy bills for participants and non-participants in the scheme

calculate the average change in energy bills for residential and business consumers

undertake financial and economic cost benefit analysis of the scheme

prepare supporting commentary addressing key issues and findings.

The successful supplier will be required to provide the following deliverables: a list of assumptions

modelling results and commentary as necessary to support the results

financial and economic cost/benefit analyses.

The results should be accompanied by commentary of the impact of the VEET scheme on: wholesale costs

retail prices

participants and non-participants

residential customers and businesses.

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Appendix B: Allocation of annual VEET measure electricity savings to seasons and times of day to create load shape impacts for use in the market modelling

B.1 Residential measuresTable 57: Residential electricity measures by end use – impacts by season

End Use / Measure

% Saved by season

Summer months(Dec - Feb)

Shoulder months (Mar -

May, Sep - Nov)

Winter months

(Jun- Aug)

Water heating – controlled off peak High efficiency gas water heater replaces electric stor-

age water heater Solar-electric replaces electric storage water heater Solar retrofit for existing electric storage water heater Solar-gas water heater replaces existing electric storage

water heater Fit low-flow shower rose on electric storage water heater

service

20% 50% 30%

Water heating – not controlled Fit low-flow shower rose on electric storage water heater

service 20% 50% 30%

Space heating – controlled off-peak Replace controlled electric central resistance heating

with high efficiency ducted gas heater0% 30% 70%

Space heating – not controlled High efficiency gas room heater replaces existing non-

controlled electric heater0% 30% 70%

Reverse cycle air conditioning to improve space conditioning efficiency High efficiency ducted reverse cycle air conditioner

(RAC) replaces existing ducted RAC High efficiency central RAC replaces existing central air

conditioning High efficiency room RAC replaces existing room RAC

35% 25% 40%

Insulation, glazing and weatherisation measures Insulate an uninsulated ceiling Install underfloor insulation to uninsulated floor Install new double glazing to replace existing double

glazing Install extra pane of glass to existing single glazed win-

dow Install widow film on existing single glazed window to

get double-glazed effect General air sealing measures Air sealing - chimney balloons

60% 30% 10%

Lighting Relace incandescent lamps with CFLs Replace existing halogens with low energy lamps Convert existing halogen downlight fittings to CFL fit-

tings New House with Low Energy Lighting System - Class 1A New House with Low Energy Lighting System - Other

15% 50% 35%

Install standby power controllers on AV and IT equipment 25% 50% 25%Refrigerators Replace conventional refrigerator with high efficiency

refrigerator Remove a refrigerator

30% 45% 25%

TV - Replace a conventional TV with high efficiency TV 25% 50% 25%Heat pump and gas clothes dryers 20% 45% 30%

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Replace an electric clothes dryer with a heat pump clothes dryer

Replace an electric clothes dryer with a heat pump clothes dryer

Replace a standard pool pump with a high efficiency pool pump 85% 15% 0%Improvements in whole house load Install an IHD Build an above 7-star house

40% 30% 30%

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Table 58: Residential electricity measures – impact by time of day in summer months by end use

End Use

% Saved by time of daySummer months (Dec - Feb)

7A - 3P 3P - 7P

7P - 11P

11P - 7A

Water heating – controlled off peakWeekdays 0% 0% 0% 100%Weekends 38% 15% 23% 25%

Water heating –not controlledWeekdays 38% 15% 23% 25%Weekends 38% 15% 23% 25%

Space heating – controlled off-peakWeekdays 0% 0% 0% 0%Weekends 0% 0% 0% 0%

Space heating – not controlledWeekdays 0% 0% 0% 0%Weekends 0% 0% 0% 0%

Reverse cycle air conditioning to improve space conditioning efficiencyWeekdays 25% 30% 25% 20%Weekends 25% 30% 25% 20%

Install insulation, glazing or weatherisation measuresWeekdays 25% 30% 25% 20%Weekends 25% 30% 25% 20%

Improve lighting efficiencyWeekdays 9% 27% 56% 7%Weekends 9% 27% 56% 7%

Install standby power controllers on AV and IT equipmentWeekdays 36% 9% 9% 45%Weekends 32% 8% 8% 53%

Remove a refrigerator or replace a standard refrigerator with a high efficiency refrigeratorWeekdays 35% 25% 25% 15%Weekends 30% 25% 30% 15%

Replace a conventional TV with high efficiency TVWeekdays 5% 20% 70% 5%Weekends 5% 25% 65% 5%

Replace a conventional electric clothes dryer with a heat pump or gas clothes dryersWeekdays 15% 40% 40% 5%Weekends 25% 35% 35% 5%

Replace a standard pool pump with a high efficiency pool pumpWeekdays 10% 60% 20% 10%Weekends 30% 40% 20% 10%

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Improvements in whole house loadWeekdays 30% 30% 30% 10%Weekends 40% 25% 25% 10%

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Table 59: Residential electricity measures – impact by time of day in shoulder months by end use

% Saved by time of day

End UseShoulder months Mar - May & Sep

- Nov)

7A - 3P 3P - 7P

7P - 11P

11P - 7A














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Table 60: Residential electricity measures – impact by time of day in winter months by end use

% Saved by time of dayEnd Use Winter months (Jun- Aug)

7A - 3P 3P - 7P

7P - 11P

11P - 7A














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B.2 Business measures

B.2.1 Overview of data providedThe Department provided information on 20 different electricity measures, and their take-up and savings impacts when applied in 14 different business/building types. To reduce the number of load shapes to be prepared and analysed via the market modelling the 20 electricity measures were grouped into 10 end-use categories (see Table 61) and the 14 business/building types grouped into 4 usage profile groups (see Table 62).Table 61: End-use categories used in the market modelling

Measures provided by the Department End-use categories used in the market modelling

Install high efficiency or upgrade domestic appliances

Appliance and equipment upgrades

Car park ventilation control Car park ventilation control

Install high efficiency commercial refrigeration Commercial refrigerationReplace a low efficiency fan motor with an electronically commutated motor

Replace refrigerated air conditioning with evaporative cooling

Evaporative cooling

Install or improve HVAC controlsInstall variable speed drives (VSD) and/or controls on HVAC fans

HVAC controls and fans

Halogen lights to CFL LightingLighting control systemsNew lamps and other upgradesReflectors / delampingUpgrade discharge lightsUpgrade fluorescent lightsUpgrade halogen lightsVoltage optimisation

Upgrade to HE pumps PumpsVariable speed drives for pumps

Replace boiler Boiler

Install a high efficiency standalone HVAC system

Standalone HVAC

Replace an electric water heating system with a solar energy or heat pump water heater

Solar and heat pump water heating

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Table 62: Usage/profile groupings used in the market modelling

Business/building type provided by the Department

Usage/profile groupings used in the market modelling

CBD Hotel / Serviced apartments Group 1HospitalHospitality

Large retail (NR) Group 2Large retail (R)Shopping centre

Large office Group 3Small officeSmall tradeWarehouse (NR)Warehouse (R)SME industrial

University / TAFE Group 4School

B.2.2 Measures in Group 1 businesses/buildingsTable 63: Allocation of end-use savings by season and times of day in Group 1 businesses/buildingsAppliance and equipment upgrades % Saved by season

Summer months

(Dec - Feb)

Shoulder months

(Mar – May & Sep - Nov)

Winter months (Jun-

Aug)25% 50% 25%

% Saved by time of day – All months7A - 3P 3P - 7P 7P - 11P 11P - 7A

Weekdays 47% 24% 24% 5%Weekends 47% 24% 24% 5%

Car park ventilation controlNot applicable to this Group of businesses/buildings

Commercial refrigeration % Saved by season

Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)40% 45% 15%


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Evaporative coolingNot applicable to this Group of businesses/buildings

HVAC controls % Saved by season

Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)30% 40% 30%



Lighting % Saved by season

Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)25% 50% 25%



Pumps % Saved by season

Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)50% 40% 10%



Boilers % Saved by season

Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)22% 50% 28%



Standalone HVAC % Saved by season

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Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)60% 40% 0%



Solar and heat pump water heating % Saved by season

Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)20% 50% 30%



B.2.3 Measures in Group 2 businesses/buildingsTable 64: Allocation of end-use savings by season and times of day in Group 2 businesses/buildings

Appliance and equipment upgradesNot applicable to this Group of businesses/buildings

Car park ventilation controlNot applicable to this Group of businesses/buildings


Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)40% 45% 15%



Evaporative cooling % Saved by season

Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)60% 40% 0%


Weekdays 57% 28% 10% 5%

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Weekends 57% 28% 10% 5%


Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)30% 40% 30%




Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)25% 50% 25%



PumpsNot applicable to this Group of

businesses/buildings


Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)25% 50% 25%




Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)60% 40% 0%



Solar and heat pump water heating % Saved by seasonSummer months

Shoulder months

Winter months (Jun-

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(Dec - Feb)(Mar – May &

Sep - Nov) Aug)15% 50% 35%



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Appliance and equipment upgrades % Saved by season

Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)25% 50% 25%



Car park ventilation control % Saved by season

Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)25% 50% 25%




Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)40% 45% 15%



Evaporative coolingNot applicable to this Group of businesses/buildings


Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)30% 40% 30%



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Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)25% 50% 25%



Pumps % Saved by season

Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)32% 48% 20%




Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)25% 50% 25%




Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)60% 40% 0%



Solar and heat pump water heating % Saved by season

Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)15% 50% 35%


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Appliance and equipment upgradesNot applicable to this Group of businesses/buildings

Car park ventilation controlNot applicable to this Group of


Commercial refrigerationNot applicable to this Group of


Evaporative cooling % Saved by season

Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)40% 60% 0%




Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)20% 45% 35%




Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)10% 60% 30%



Pumps Not applicable to this Group of

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Summer months

(Dec - Feb)

Shoulder months


Winter months (Jun-

Aug)15% 57% 28%



Standalone HVACNot applicable to this Group of businesses/buildings

Solar and heat pump water heatingNot applicable to this Group of businesses/buildings

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Documents

OGW Report - Energy€¦ · Web viewFinally, in addition to the above, we note that the VEET scheme could also lead to an additional economic benefit, being an improvement in allocative