SUBMISSION:

Review of the Victorian Energy Efficiency Target Scheme

14 May 2015

Review of the Victorian Energy Efficiency Target schemeEnergy Sector Development DivisionGPO Box 4509MELBOURNE VIC 3001

IntroductionEnvironment Victoria welcomes the opportunity to participate in the consultation process for the Review of the Victorian Energy Efficiency Target (VEET) Scheme. Representing 69,000 Victorians, Environment Victoria is one of Australia’s leading environment groups. We are an independent and non-partisan charity, founded in 1969 with a strong track record of delivering for the environment.

This submission complements and extends the responses provided via the online Stakeholder Consultation webform.

When the Victorian Energy Efficiency Target (VEET) scheme was established in 2009, it was innovative and one of the first of its kind in the world. Environment Victoria has been strongly supportive of the Victorian government’s commitment to retain and strengthen the VEET scheme and its stated intention to be a leader in energy efficiency policy.

The 2015 VEET review provides an opportunity for the Victorian government to demonstrate its commitment to continuing to lead on energy efficiency.

Question 1: What should the new VEET target be?Other. Minimum of 6.9 Mt/yr CO2-e for a period of at least five years.

Question 1a: Please outline why you prefer the target you identified, or why you selected "No response":Modelling data provided in the stakeholder consultation documents show that the highest net benefits are delivered by the highest target modelled – 6.2 Mt/yr CO2-e for 5 years. The modelling has therefore not demonstrated where the peak of the curve lies – the point at which maximum benefits are delivered.

This suggests that higher targets may also achieve positive net benefits, and this is supported by subsequent analysis (extrapolation only), showing that significant net benefits (in fact, maximum benefits) are delivered at a target of 6.9 Mt/yr CO2-e for 5 years.

On this basis, we would urge that additional modelling be undertaken of a range of targets between 6.2 Mt/yr and 10 Mt/yr to establish a sound evidence base for decision-making. We understand that running the model again would take some additional time and financial resources, but believe this is justified by the creation of a rigorous dataset which clearly identifies the 'sweet spot' on the curve.

Furthermore, Environment Victoria is of the view that the cost-benefit analysis has significantly under-estimated the benefits and potentially over-estimated the costs associated with each target (see Questions 2 and 4). Consequently, it is likely that the modelled net benefits represent the lower bound of net benefits which will actually be delivered.

The fact that modelling based on such conservative assumptions has yielded positive net benefits for all targets modelled, should give the government significant confidence that higher targets can be justified.

Hence, a 6.2 Mt/yr CO2-e target should be considered an absolute minimum, with serious consideration given to conducting additional modelling to establish whether a higher target of at least 6.9 Mt/yr CO2 can be justified.

Environment Victoria supports establishing the new VEET target for a minimum of 5 years. Allowing the target to be set over a longer period than 3 years would avoid wasted resources associated with frequent reviews and increase certainty for Victorian-participating businesses.

However, as the VEET review is occurring within the context of a complementary process to set a new Victorian Emissions Reduction Target, it is important that the scheme builds in the flexibility for the target to be revised upwards in light of Victoria’s greenhouse gas abatement responsibilities into the future.

Furthermore, given the conservative assumptions underpinning the modelling it is likely that Victorian Energy Efficiency Certificate (VEEC) prices will not be as high in practice as has been assumed (see Question 2). A low certificate price would signal additional untapped opportunity within the market, justifying an upwards adjustment of the target.

Consequently, and particularly if there is not enough time to conduct further modelling given the deadlines for decision-making, we would urge that any target be framed as a 'floor' target for the 3 or 5 year period. The target should be set at a minimum level of 6.2 Mt/yr CO2 (or 6.9Mt/yr CO2) for the next 3 or 5 years with flexibility for revision upwards if the Climate Change review requires, or if certificate prices are lower than anticipated.

Question 2. Comments are invited on the modelling approach used to determine the costs and benefits of the VEET scheme. Is there any additional data or information that should be considered?Environment Victoria welcomes the improved approach to modelling compared with the 2014 Business Impact Assessment – specifically the inclusion of environmental benefits, exclusion of private participant costs and the assumption of persistence of energy savings.

However, a number of other benefits of greenhouse gas emission abatement and energy efficiency have not been taken into account. These include wider economic benefits such as employment growth and direct savings to the government’s energy concessions budget, as well as mitigation of the public health costs and risks of living in low quality housing particularly during extreme weather events such as heatwaves.

Environment Victoria understands the limitations of any modelling exercise and the difficulties in accurately assessing variables. However, exclusion of these benefits means that the modelled results likely represent the lower bound of benefits which will actually be delivered.

Similarly, it is likely that targets higher than 6.9 Mt/yr CO2-e would also deliver net benefits had these additional benefits be taken into account.

Furthermore, there are several reasons to believe that the modelling approach has over-estimated the certificate price and hence the compliance costs associated with higher targets. Firstly, operation of the VEET scheme can be expected to exert downward pressure on the price of the dominant technology in the market, and hence on certificate prices over time. However this effect has not been taken into account.

Secondly, if government adopts recommendations for measures (both internal and external to the scheme) to improve participation by low-income households, this should assist in lowering compliance costs for Accredited Providers associated with reaching 'hard to reach' segments of the population. It is possible that the presence of such measures could deliver additional activity sufficient to achieve a higher target at a lower certificate price.

Question 3. Which greenhouse gas coefficient should be used to quantify the reduction in greenhouse gas emissions achieved by the VEET scheme?Environment Victoria supports the use of the updated greenhouse gas coefficient to reflect energy market changes.

Question 4. Please outline whether you think this approach is appropriate for valuing greenhouse gas emissions reductions over the period 2016 to 2050?Environment Victoria welcomes the inclusion of greenhouse gas (GHG) abatement benefits within the preliminary modelling. However, use of the Climate Change Authority (CCA) carbon valuation (or price) series as a proxy for benefits is likely to have significantly under-valued the benefits of GHG emissions reductions. Any price set within a carbon abatement market by definition represents the lower bound of the value of that abatement – otherwise there would be no economic justification for undertaking abatement at that price.

Even using price as a proxy for value, the 2015 prices in the CCA series are well below the most recent price set in an Australian market – that established by the first round of Emissions Reduction Fund auctions (April 2015)1 This established an average price of $13.95 per tonne – almost double the 2015 values used in the VEET modelling.2

A superior estimate of GHG abatement benefit is given by the social cost of carbon, defined as the costs imposed on the wider economy by greenhouse gas emissions. These economic damages can take various forms including decreased agricultural yields, harm to human health, property damages from increased flood risk and lower worker productivity.

The United States uses a value of $37 per ton of GHG abatement to guide energy policy decision-making, although a recent study has suggested the actual cost could be as high as $220 per ton.3 Closer to home, recent research provided to Environment Victoria calculated the social (combined GHG and air pollution) cost of electricity generation in Victoria to be at least $59 per tonne.4

The fact that modelling based on such low values for GHG abatement benefits has nevertheless produced positive net benefits for all targets, reinforces the conclusion that the cost benefit analysis results are highly conservative and that higher net benefits are likely to be realised in practice.

Question 5. Is there a case to exclude any business sector(s) from participation in the VEET scheme?No.

Environment Victoria welcomes the suggestion in the consultation paper that large energy using sites (industry, hospitals, universities) be considered for inclusion in the VEET scheme.

There is ample evidence that significant opportunities exist for business and industry to improve energy efficiency at low or negative cost, and that such efficiency and productivity improvements would deliver substantial benefits both to individual businesses and to the wider Australian economy.5 Including large users will also be critical to the achievement of higher targets.

Eligibility could be defined on the basis of participation in the Environmental and Resource Efficiency Plans (EREP) program (now closed), and/or those entities defined as emissions-intensive trade-exposed (EITEs).

However, it is important to note that the VEET legislation contains an ‘additionality’ provision, requiring that only those energy efficiency activities which are demonstrably additional to those which would have occurred under business as usual scenarios, should be eligible for the generation of Victorian Energy Efficiency Certificates (VEECs) under the scheme.

The relevant clause Section 19 (2) of the VEET Act states:

“Without limiting the generality of subsection (1), the discount factors are to take into account any uncertainty associated with the reduction of greenhouse gas emissions that would eventuate from a specified prescribed activity or specified class of prescribed activities but for (emphasis added) the existence of the VEET scheme.”

It is reasonable to assume that many large energy-using businesses will have invested in energy efficiency improvements for sound business reasons in recent years, taking advantage of the short pay-back times and high economic returns delivered by improved efficiency.

It is therefore important that appropriate baselines are established for the entry of new business sectors (such as large sites previously registered under EREP) into the VEET scheme, so as to ensure any activity subsequently generated under VEET is genuinely additional to business as usual.

Consequently, Environment Victoria does not support the retrospective generation of VEECs for historical investment in efficiency improvements. Investment decisions made prior to inclusion in the VEET scheme were presumably based on sound economic and business rationales, and hence meet the definition of ‘business as usual’.

Question 6. Should the VEET scheme be amended to better ensure support for low income households?Yes.

Environment Victoria welcomes the review’s emphasis on ensuring all Victorian households, including low-income households enjoy equitable access to the benefits of energy efficiency through participation in the VEET scheme.

As all Victorian energy users share the costs of the scheme, it is important for equity reasons that barriers to participation facing low-income households are minimised. Furthermore, as the market for low-cost efficiency measures becomes saturated, it will be important to increase the take-up of higher value measures if higher targets are to be achieved in future.

While recent analysis has shown that relatively disadvantaged areas have received a greater share of the total benefits of VEET, low-income households have tended to receive fewer high cost measures such as efficient appliances.6 While these measures deliver higher energy efficiency returns (and bill savings), they are also likely to require a financial contribution from the householder that may be unaffordable for low-income home-owners.

There are also 520,000 households in the private rental market in Victoria, of which more than 150,000 households fall within the lowest income bracket.7 Renters in the private market face a ‘split incentive’ whereby landlords have little incentive to invest in improvements because the benefits (of lower bills and improved comfort) are reaped by tenants. Tenants also typically have neither the right to make changes to the dwelling, nor the security of tenure to make such investment in energy efficiency worthwhile.

No policy measure in isolation will be sufficient to overcome the range of financial and ‘split incentive’ barriers to participation facing different low-income groups. A number of complementary measures including targeted financial assistance and regulatory measures such as minimum standards at the point of sale or lease are also needed (see Question 9). These measures should be considered as a coherent package for implementation through amendments to VEET where appropriate, as well as within the wider context of the Victorian government’s Energy Efficiency and Productivity Plan currently under development.

In particular, there is an opportunity for the Victorian government to demonstrate leadership by stepping in to the breach left by the Federal Government’s decision to close the successful Low Income Energy Efficiency Program in May 2016.

A comprehensive Victorian low-income energy efficiency program could build on the successful education and behavior change work done by LIEEP-funded projects targeting ‘hard-to-reach’ groups, by also providing funding for comprehensive household retrofits. It would complement VEET by providing a mechanism for funding the co-contribution of higher value measures which are currently difficult for low-income households to access, as well as by facilitating the delivery of ‘whole of house’ audits and retrofits.

Environment Victoria is not opposed to the introduction of priority sub-targets within VEET, as part of a comprehensive approach to broadening participation by low-income and disadvantaged groups.

We acknowledge that the introduction of sub-targets may increase costs of the scheme overall. However, Environment Victoria is not aware of any rigorous analysis of the magnitude of these costs and hence whether they could be outweighed by the benefits of assisting low-income groups to access the benefits of energy efficiency.

Victoria’s major energy retailers have a large and growing problem with bill payment arrears and customer debt, and have indicated a willingness to explore innovative ways of addressing this financial liability. There should be opportunities for government and

retailers to capitalise on the synergies between their respective policy goals and develop a regime that is to the benefit of all.

Question 7. In addition to expanding the range of energy efficiency activities available in VEET, should any other action be taken to target participation by certain groups?Yes.

It is important to note that households beyond the ‘low-income’ group may also be at risk of fuel poverty and similarly face financial barriers to participation in efficiency schemes such as VEET. Less than half of the customers participating in a retailer hardship program in Victoria are eligible for a concession card or fall within the lowest income brackets.8 Many of the remainder are large families on modest incomes who are not eligible for concession cards, but who live in relatively inefficient homes and use large amounts of energy.9

Consideration should be given to ensuring that current requirements for energy retailers to provide assistance to hardship customers extends beyond addressing payment arrears. Energy retailers should also be required to provide practical assistance with improving efficiency and lowering energy usage. This could be achieved by including this group within the definition of households eligible for inclusion in a priority sub-target group, should they be established within VEET (See Question. 6 above).

Measures outlined in Question 9 such as minimum energy efficiency performance standards at the point of sale or lease will also act to lower housing running costs for this group whether they are homeowners or renters.

Question 8. Please suggest up to five activities that should be prioritised for revision or introduction to the VEET scheme. Please outline why you believe these activities should be prioritised.Ceiling insulation

Ceiling insulation is one of the most effective ways to increase the thermal efficiency of a dwelling and hence reduce energy use and household bills, particularly in Victorian climate zones. Increasing the uptake of this higher value measure will also be important to the achievement of higher targets into the future.

Insulation was effectively removed from VEET to avoid duplication with the Federal Home Insulation Program, which is now no longer in place. As insulation was removed by the administratively simple measure of reducing its abatement factor to zero, it could be just as easily re-instated by assigning it an abatement factor sufficient to drive uptake.

Consideration should also be given to including an activity addressing under-insulation, given the relatively higher proportion of homes which fall into this category.

Any real or perceived risks of insulation installation can be addressed by establishing a best-practice suite of measures including accreditation, training, auditing and minimum product standards.

Commercial lighting

VEET has a narrower range of allowable activities than comparable schemes such as the Energy Saver Scheme in NSW. In particular, there are significant opportunities for expanding activity in the commercial lighting sector which currently represents a fraction of total activity in Victoria.

As commercial lighting installations are relatively more labour-intensive than other activities, an expansion in this area would create an estimated 400 jobs in addition to the 2000 jobs already created under the current target and activity mix.10

Commercial lighting activity in Victoria could be boosted by adopting the relevant methodologies from the NSW Energy Saver Scheme.

Split system air-conditioning units for heating

Electric split system air-conditioning units used for heating are currently ineligible for the generation of VEECs in gas-reticulated areas, based on the historical assumption that gas is a more affordable and less emissions-intensive heating fuel relative to electricity.

However, in the current context of rapidly rising retail gas prices and the emergence of highly efficient electric appliances, those assumptions no longer hold. Recent research has concluded that highly efficient reverse cycle air-conditioners and heat pumps offer lower-cost space heating solutions for householders than gas appliances.11

The replacement of inefficient gas heaters with efficient reverse cycle air-conditioning units should therefore be eligible for the generation of VEECs.

9. Please suggest up to three changes which should be made to improve the VEET scheme. Please outline why you believe these changes should be a priority. As discussed previously, equitable access to VEET by disadvantaged groups would be improved by the implementation of a range of complementary measures both internal and external to VEET which address the specific barriers faced by these groups.

These measures should be considered as a coherent package for implementation through amendments to VEET where appropriate, as well as within the wider context of the Victorian government’s Energy Efficiency and Productivity Plan currently under development.

Incentives for ‘whole of house’ upgrades

A ‘whole of house’ approach beginning with a comprehensive audit saves time and money by identifying the best mix of efficiency measures for each house. An audit also allows for the delivery of complementary behaviour change education, which is key to installed measures actually delivering promised savings.

Providers should be encouraged to deliver ‘deeper’ comprehensive household retrofits, for example by allowing for the bundling of complementary measures (eg. ceiling insulation and down-light covers). Appropriately targeted incentives could encourage significant business and employment growth in the energy services sector, the creation of which has been one of the notable successes of the VEET scheme. A more integrated approach will also become more important as the market for low-cost measures commonly marketed through door-to-door sales becomes saturated.

Financial assistance to address capital barriers

Financial assistance to address the capital barriers to energy efficiency upgrades can take a variety of forms including grants, rebates, low-interest loans, on-bill financing arrangements (such as Environmental Upgrade Agreements) and tax incentives.

The UK Home Improvement Fund addresses information and capital barriers in a coordinated way by basing eligibility for financial assistance for energy efficiency upgrades on the completion of an approved audit (Green Deal Advice report).12

The Victorian government should investigate options for applying Environmental Upgrade Agreements (EUAs) to residential buildings, as is occurring as part of NSW Energy Efficiency Plan. There are also examples of EUAs being successfully applied in a residential context in Victoria such as the City of Darebin’s $olar $avers scheme which has assisted 300 pensioners to install rooftop solar systems at no upfront cost.13

There is an opportunity for the Victorian government to demonstrate leadership by reinstating funding for successful Federal and State low-income energy efficiency programs which have been closed or are due for closure.14 A comprehensive Victorian low-income energy efficiency program would complement VEET by providing a mechanism for funding the co-contribution of higher value measures which are currently difficult for low-income households to access, as well as by facilitating the delivery of ‘whole of house’ audits and retrofits.

Minimum energy efficiency performance standards at the point of sale or lease

Mandatory disclosure of the energy and water efficiency performance of residential buildings at the point of sale or lease has been proposed in recent years as a way of improving transparency for buyers and renters, and to create incentives for homeowners and landlords to invest in improvements so as to capitalise on increased market value. However, progress on policy development has stalled.

Furthermore, mandatory disclosure operates through the mechanism of consumer choice. However, low-income renters and home-buyers typically have few housing options and little market power. Consequently, disclosure in the absence of minimum standards may simply push people with limited housing options into the least efficient properties.

Minimum 5-star energy and water efficiency standards should be introduced at the point of sale or lease within 2 years, combined with a comprehensive range of financial assistance (as outlined above) to assist homeowners and landlords to implement the new standards. This would improve low-income households’ access to the benefits of efficiency and drive the progressive upgrade of Victoria’s housing stock over time.

1 Climate Change Authority (2014) Reducing Australia’s Greenhouse Gas Emissions – Targets and Progress Review, Table 10.1 pp. 130-1312 “First Emissions Reduction Fund auction delivers significant abatement”, Media release, April 23 2015 at http://www.greghunt.com.au/Home/LatestNews/3 “Estimated social cost of climate change not accurate, Stanford scientists say”, Stanford Report, January 12, 2015 at http://news.stanford.edu/news/2015/january/emissions-social-costs-011215.html4 Ward, J. and M. Power (2015). Cleaning up Victoria’s power sector: the full social cost of Hazelwood Power Station, Harvard Kennedy School of Government, February 24th 2015. Derived from Table B7 p. 37: Average electricity generation over 6 years (MWh) x Average GHG and CO2 cost ($/MWh) = Total combined air pollution and GHG cost ($) / Total GHG emissions (tonnes) = Cost ($/tonne)5 ClimateWorks (2015) Australia’s Energy Productivity Potential, Melbourne6 Sullivan, D. and V. Johnson (2012) The Power to Save: An equity assessment of the Victorian Energy Saver Incentive scheme in Metropolitan Melbourne, Brotherhood of St Laurence, Fitzroy 7 Data provided by ABS, derived from Australian Bureau Statistics Survey of Income and Housing, 2011-12 except as noted8 Monthly average number of concession customers in hardship programs is 37% of the annual total number of participants. From ESC (2014), Energy Retailers Comparative Performance Report – Customer Service, 2013–14, December 20149 For example, average annual electricity consumption of AGL’s Victorian customers participating on its Staying Connected hardship program is around 40% higher than the average annual consumption of its Victorian customer base. (Reported to stakeholder workshop on Energy Efficiency & Customers in Hardship, 30 April 2015.)10 Job creation estimate provided by the Energy Efficiency Certificate Creators Association (EECCA), April 201511 ATA (2014) Are we still cooking with gas?, Alternative Technology Association, Melbourne12 United Kingdom Government, Green Deal Energy Saving Plan at https://www.gov.uk/green-deal-energy-saving-measures/overview13 City of Darebin in partnership with Moreland Energy Foundation Positive Charge, http://www.mefl.com.au/news-and-events/item/1146-darebin-solar-aver.html14 Home Energy Saver Scheme (HESS), the Victorian Energy and Water Taskforce, solar hot water rebates and the Low Income Energy Efficiency Program (LIEEP)