The Economics of Energy Efficiency & the Efficient Gap

- the NSW experience

Robert SmithManager – Demand Management Policy & Strategy

EnergyAustralia

14 June 2006

2

The rebirth of interest in Demand Management

Late 70s 1980s 1990s 2000

Energy Crisis

Hig

hL

ow

Greenhouse

Deregulation

3 Late 70s 1980s 1990s 2000

Energy Crisis

Hig

hL

ow

Greenhouse

Deregulation

The rebirth of interest in Demand Management

4 Late 70s 1980s 1990s 2000

Energy Crisis

Hig

hL

ow

Greenhouse

Deregulation

The rebirth of interest in Demand Management

5 Late 70s 1980s 1990s 2000

Energy Crisis

Hig

hL

ow

Greenhouse

Deregulation

The rebirth of interest in Demand Management

6 Late 70s 1980s 1990s 2000

Energy Crisis

Hig

hL

ow

Greenhouse

Deregulation

The rebirth of interest in Demand Management

Energy Crisis

Demand changes

Lifestyle changes & growth

– New appliances and increased uptake

– 7kVA per house from 3.5kVA in 1990’s

– Over a decade of economic growth

– Growth in air conditioning loads

– Peak growth - 3.5% peak cw 2.1% usage

– Shift to summer peaking

Demand Management in NSW

“It is the Tribunal’s strong view that there is significant untapped potential for efficient demand management. To a large extent, one of the major obstacles continues to be a culture which favours traditional “build” engineering solutions and which pays little more than lip service to alternative options” Dr Tom Parry, Chairman, Independent Pricing & Regulatory Tribunal, Inquiry into the role of Demand management and Other Options in the provision of Energy Services, Final Report, October, 2002

9

Environmentally driven reducing greenhouse gas emissions

Wholesale market driven reducing wholesale pool prices

Network driven deferring network investment

Customer driven changing usage, patterns or fuel

The Four Drivers of Demand Management

10

Environmentally driven reducing greenhouse gas emissions

Wholesale market driven reducing wholesale pool prices

Network driven deferring network investment

Customer driven changing usage, patterns or fuel

The Four Drivers of Demand Management

Externality

Lumpy capital

End use efficiency

Missing electricity value

NEM VOLL = $10,000 MWh cw Customers 13¢ kWh

NSW Greenhouse Plan - costs

Source: NSW Greenhouse Plan, NSW Greenhouse Office, 2005

• Energy efficiency in existing homes identified as cost-effective

• Barriers - expectations of short payback periods, lack of information and materiality of electricity costs in household expenses

NSW Greenhouse Plan - Opportunities

Source: NSW Greenhouse Plan, NSW Greenhouse Office, 2005

Observed market costs

0

• Energy efficiency in existing homes identified as cost-effective

• Barriers - expectations of short payback periods, lack of information and materiality of electricity costs in household expenses

NSW Greenhouse Plan - Opportunities

Source: NSW Greenhouse Plan, NSW Greenhouse Office, 2005

Observed market costs

0

• Energy efficiency in existing homes identified as cost-effective

• Barriers - expectations of short payback periods, lack of information and materiality of electricity costs in household expenses

Solar Cities

Productivity Commission Report - 2005

“Examine why measures that appear to be privately cost effective are not being adopted”

Market Failure

– Asymmetric information - Public good information

– Split incentives - Positive externalities

Behavioural & Cultural

– Bounded rationality - Organisational barriers

Other Barriers & Impediments

– Implementation costs - Risk & uncertainty

– Capital constraints - Asset replacement costs

Productivity Commission Report - tone

“Contentious” to argue for mandatory measures or intervention

– “preparedness of governments to force firms to supposedly “help themselves” “opportunities ostensibly in their own interest”

– “override consumer and producer sovereignty”

– “perception that there can be win-win options”

– MEPS used “quite aggressively to remove whole swathes of product”

– ‘Seems counterintuitive that a measure that denies customer choice and can increase purchase prices could be in their interests’

Productivity Commission Report - conclusions

“Scope for government to efficiently intervene to address barriers and impediments ..appears to be modest”

“None of this is to deny that firms and individuals are sometimes not acting as rationally as they might. There is nothing intrinsically different about energy in this regard: nor does failure to take up such opportunities necessarily warrant policy intervention”

“Temptation has been to overstate the private cost-effectiveness aspects of energy efficacy programs when public benefits from greenhouse gas abatement often seems the real policy target”

Productivity Commission Report - observations

– TOR create Hamlet without the greenhouse prince

– Scepticism of zealots shaped the report

– Strict private cost effectives only - no margin

– Simplified rational competitive market model underpins assumptions and conclusions particularly in uncertainty, Office of Regulation Review 1998 repackaged–

Good economics or Galbraith’s “innocent fraud”?

– Compare with the Indonesia free market model

Java comparison – proposed lighting program

Peak demand and oil prices

– 70% of fuel cost for electricity generation for 30 % of time

– Electricity cost 600Rph/KWh - oil cost PLN 1,500Rph/KWh

– 6.00pm-10.00pm evening peaks from households lighting

Issues

– No standards or stars for appliances or CFLs

• Counterfeit Phillips 15W incandescent globes on sale

– Increasing CFL imports and sales

• CFLs 60% bad (cheap poor quality), 40% good

– Household electricity bills of $8.00 a quarter

• CFL cost of $2.50 creates real cash flow problems

– No greenhouse gas programs or trading

• CDM - Clean Development Mechanism untested

NSW situation

Favourable regulation

• NGACs – CO2 $15.71 a tonne

• D-factor – Network deferral X 2

• Energy Savings Fund – $61m, 2006-07

• NEM VOLL – $10,000 MWh

• Solar Cities – $75m for 4

• MEPS - Minimum appliance standards

• Stars - Energy appliance ratings

• NEM Rules - DM investigation

• BASIX & ABGR – Building ratings

• RECs - greenhouse incentives

• Audits & Action Plans - NSW & Fed

Low prices

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Environmental Energy Market Network Customer

Incentives

NGACs

Pool Prices and

interuptablity contracts

D- Factor and Deferral value

Retail energy tariffs

Framework/

Benefit

NSW Greenhouse

Gas Abatement Legislation &

ESF

National Electricity

Market

Network Price Determination IPART &ESF

Bill Savings & incentive pass

through

Value $15.71 penalty per tonne CO2

Abatement

$52 per kW per annum (flat

Price Physical cap struck at $300/MWh)

$94 per kVa average firm

deferral at peak in a constrained

area

$2 a week average savings

per 10% reduction in

household use

NSW Incentives for Demand Management

EA developments in managing demand

Network D- factor

– $5.5M in deferrals in 2004-05

– Power Factor success

– 26 investigations underway

Energy efficiency & Greenhouse

– CFL’S 500K in 2004, 2M in 2006

– Spare Fridge retirement of 1,000

– On–Line Shop

– Refit – home installation

– Insulation offers

– On-line education – calculators

– www.energy.com.au

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Residential energy efficiency cost effectiveness

Extra Purchase

costAnnual cost

savings Payback

$ $ Years

Compact Fluorescent Lamp 5 18 0.3

AAA Showerhead 35 135 0.3

R3.5 Ceiling Insulation 1026 280 3.9

Solar hot water - electric boost 2900 340 8.5

Source: Moreland Energy Foundation via Productivity Commission, 2005

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Compact Fluorescent light (CFLs) example

CFL economics - 15,000hr 15W bulb

Calculations

Energy saving 80%

kWh saving per year (4 hr a day) 88

$ saving per year $14

CFL life (years) 10.3

CFL Saving over life $144

Wholesale purchase cost $2.50

Default Factor NGAS (15,000hr) 0.9

NGAC Value at penalty cost $15.71 *0.8 $11.30

CFL economics - responses

Market share

– energy saving lights in 37.2% of households in NSW 2005

Free giveaway programs

– LESS – libraries and newspaper coupons

– ORIGAN – energy sales promotion

– FeildForce – streets and Easter Show

– NECO – streets and on-line shop (postage)

– Easy Being Green – streets

Retail outlets – Still $7.00 and limited shelf space

Barriers to behavioural change

Nous - knowledge of the issue and what to do

Squint - financial myopia to investing in long term savings

Noise - competing messages and priorities

Clout - split incentives and ability to contract for savings

Grunt – low energy cost & low on customers priorities

Nimby – externalities unrecognised

Sloth - inertia even among the willing

Demand Management in NSW – future

“Economists love incentive. They love to dream them up and enact them, study them and tinker with them. The typical economist believes the world has not yet invented a problem he cannot fix given a free hand to design a proper incentive scheme.” Steven Levitt & Stephen Dubner

Demand Management in NSW – future

Questions

Observations

Gripes

Developments in the metering & pricing

Time of Use pricing

– First utility in the world to mandate ToU for all new connections/meters

– Voluntary TOU pool offer

– Strategic pricing trial 1,300

Smart Meters and ToU progress

– 160,000 meters installed

– Mandatory for >40MWh

– 22,000 customers paying ToU

– “Smarter” meters 10,000 trial 2007

ToU Target

– 220,000 customers by 2008

Regulation and energy efficiency initiatives

Regulatory Frameworks Key EA Initiatives

2003 NSW DM Code Tips brochures

IPART DM review REFIT pilot

NGACs introduced Learn-by-Doing pilots

2004 Network D- Factor CFL give-away 500,000

2005 D-Factor Guidelines Home Energy Saver

Energy Savings Fund One line Shop

Solar Cites Competition ToU roll-out

2006 D- Factor pass through Pump -TOU Trial

NGAC review Spare Fridge program

Insulation program

CFL 2,000,000 (six pack)

Local constraints reviewed for DM

Dem

an

d (

kW

)

Time of day

Air conditioning usage

AC, hot workday

AC, avg workday

No AC, avg workday No AC, hot workday

Midnight MidnightMidday6 a.m. 6 p.m.

2.5

1.5

1.0

0.5

0.0

2.0

Each air conditioned customer is subsidised c.$70 p.a. by each non air conditioned customer

Trends in Demand – Air conditioner impacts

• One of the world’s first mandatory greenhouse gas emissions trading schemes in (Jan 2003)

• Aggressive “beyond Kyoto” commitment for NSW creating an imbalance between supply of and demand for abatement certificates

Greenhouse Gas Abatement Scheme Introduction, March 2006

NGAC Forecast Shortfall