Business Impact AssessmentVictorian Energy Efficiency Target

February 2014

Executive Summary

The Victorian Energy Efficiency Target (VEET) Scheme, also known as the Energy Saver Incentive (ESI), is a market based scheme designed to promote the uptake of energy efficiency improvements in residential and non-residential premises.

The scheme is established under the Victorian Energy Efficiency Target Act 2007 (the Act) and is legislated to continue in three-year phases. Prior to the beginning of each new phase the Act requires the scheme’s targets to be reset in the VEET regulations.

The second phase of the scheme is due to end on 31 December 2014. On 7 June 2013, the Victorian Government announced that it was undertaking a review of the VEET scheme, which would inform the Government’s decision regarding the continuation of the scheme and, potentially, introduce new regulations setting the scheme’s target for the 2015-2017 period.

This Business Impact Assessment (BIA) has been prepared to determine the continuation of the VEET scheme for a third phase (2015-2017). In accordance with the Victorian Guide to Regulation, this BIA:

Describes and assesses the nature and the extent of the problem being addressed Evaluates the effectiveness of the existing regulations in addressing the original problem States the objectives of the proposed legislation Describes the legislative proposal and its expected effect on key stakeholders Assesses the costs and benefits of the proposal and other practical means of achieving the

objective Describes the distribution of costs and benefits, particularly the impact on small business.

Nature and extent of the problem

In a perfect market consumers are fully informed and have flexibility to respond to price signals, which are reflective of private and public costs, and adjust their energy consumption accordingly. In practise, consumers are unable to respond efficiently to price signals effectively because of:

the existence of market failures and/or barriers that prevent the uptake of energy efficiency measures

non cost-reflective pricing.

There are a number of current and planned policies, including the introduction of flexible pricing in Victoria, aimed at addressing the problems associated with non-cost reflective pricing; however, even once this problem is addressed there may be a range of barriers facing businesses and households which mean that, without further action, there will be less than optimal uptake of energy efficiency opportunities going forward. These barriers include:

Information gaps Split incentives Access to capital Behavioural, organisational and cultural factors.

While these barriers have been identified in policy and academic literature, the extent to which there is clear evidence to suggest that these barriers exist in Victoria and require intervention is less certain.

The evidence contained in this BIA supports the existence of information related market failures. Both households and businesses in Victoria have identified a lack of information as a reason why they do

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not undertake energy efficiency activity. Existing policy measures exist that partially address this market failure; however, there remains a residual problem that may require intervention.

There is limited evidence to suggest that the other market failures analysed represent a material problem in Victoria. While there have been a number of qualitative studies that indicate that, from both a tenant and landlord perspective, split incentives exist, there is limited quantitative evidence for the existence and materiality of them within Victoria and Australia.

There is limited empirical analysis of the existence of credit rationing (a lack of information on the part of a lender about the payoff from energy efficiency investments) and none has been identified in either Victoria or Australia. While the amount of capital available to make investments presents a barrier to firms or individuals from making specific investments, such as those for energy efficiency activity, there is no identifiable failure in the market.

Behavioural factors, such as bounded rationality, have been shown to exist in laboratory settings; however, there is an absence of empirical evidence to demonstrate that they exist in the context of energy efficiency decisions in the market place.

There is broad support for the existence of these barriers among stakeholders. This is evidenced both through recent policy literature, such as the Report of the Prime Minister’s Task Group on Energy Efficiency, and responses to the Department’s Energy Saver Incentive Review: Issues Paper . As such, the Department is of the opinion that these barriers may exist; however, the level of evidence to support them is not sufficient to determine definitively that they do exist or that they are material.

The barriers facing the residential and commercial sectors are broadly similar. There are, however, a different set of incentives for large businesses to adopt energy efficiency activities. Large energy users currently participate in Commonwealth programs, such as the Energy Efficiency Opportunities program, that alone are sufficient to drive energy efficiency improvements for this customer class. As a result, the barriers that prevent the uptake of energy efficiency measures for large business are not a problem that the State believes requires the intervention of the Victorian Government and therefore these barriers are not examined further through this BIA.

The 2011 Regulatory Impact Statement (RIS) for the VEET identified externalities, specifically greenhouse gas (GHG) emissions, as a market failure to be addressed by the VEET scheme. In light of the Commonwealth Government’s commitment to a national policy framework to reduce GHG emissions, it is the Victorian Government’s policy position that emissions reduction should not be a primary objective of State policies. Any additional efforts to reduce GHG emissions by the State Government may:

not lead to additional national abatement have a distortionary effect on the national scheme lead to Victoria effectively cross-subsidising emissions abatement in other states at an additional

cost to Victorians.

As such, GHG emission externalities are not a market failure being examined through this BIA.

Evaluation of the Scheme to date

As part of the BIA process the performance of VEET through its phase one and two was evaluated, including the validation of the energy savings associated with the scheme, as well as its cost and benefits.

The targets set for each of the first four years of the scheme have been met, in terms of certificates surrendered that correspond to the retailers’ liability. In the years 2009 to 2011 this meant that 2.7 million certificates were surrendered every year. For 2012, 5.4 million certificates were surrendered.

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The scheme has been dominated by the installation of two measures since its inception: lighting and standby power controllers (SPCs). Together the installation of these two measures account for 82 per cent of all Victorian Energy Efficiency Certificates (certificates) registered under the scheme prior to the end of 2012. Both of these products are low cost measures that have been ‘free’ to participants – the cost of supplying the appliance has been outweighed by the value of the certificates generated from their installation.

The scheme has been predominantly taken up in the residential sector, with limited activity occurring in the business sector. In total, a little less than 150,000 certificates have been created for businesses implementing VEET activities in 2012. This accounts for approximately 1.9 per cent of all certificates created during 2012.

Relatively disadvantaged areas have received a greater share of certificates than more advantaged areas. This reflects the high proportion of certificates created through the installation of light globes and replacement showerheads during the first phase of the scheme.

An analysis of the energy savings associated with scheme activities found that the impact of the VEET scheme on energy consumption has been significantly less than was previously expected. The analysis found that only 8 million tonnes of GHG abatement is attributed to the 16.7 million certificates created as of 31 December 2012, compared to the 16.7 million tonnes of GHG that was anticipated. This lowers the level of energy consumption saved as a result of the scheme and reduces the ability of the scheme to impact wholesale energy prices.

A cost benefit analysis (CBA) of the VEET scheme to date showed that it had delivered a net cost to the economy of $177.6 million; i.e. the cost of supplying energy to the economy has increased as a result of the scheme. This result suggests that the red tape costs of compliance and administration of the scheme, which are subsequently passed on to energy customers, have outweighed reductions in production costs associated with reduced energy consumption from the scheme.

The scheme has benefited residential consumers who have participated in the scheme through decreasing their energy bills; however, non-participating households and businesses have experienced increases in their energy bills. This result suggests that the benefits accrued by consumers participating in the scheme, while outweighing the costs incurred by non-participating consumers, represent a transfer from energy generators and retailers to these consumers through a loss of profits.

The results are significantly different from previous analysis of the scheme. The 2011 VEET RIS found that the scheme would have a net economic benefit under all scenarios that were analysed. The reasons for this difference are the change in forecast energy consumption and the reduction in energy savings associated with the scheme, which led to a lower impact on energy consumption. In 2011, the forecasts for energy consumption were predicting strong energy demand increases. These forecasts have changed significantly in the intervening period to the extent that forecasts suggest more subdued energy demand growth in the future. This flatter demand profile limits the impact that the reduction in consumption caused by the VEET scheme can have on energy generation investment, particularly the deferral of future generation capacity.

The Government objectives

The objectives of the VEET have remained unchanged since the Scheme’s inception. Section 4 of the Act outlines the following government objectives:

to reduce GHG emissions to encourage the efficient use of electricity and gas

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

While all these objectives continue to be relevant to the scheme, the emphasis placed on each has changed since the commencement of the current phase. Specifically, although previously great weight was placed on the objective of reducing GHG emissions, as mentioned above, in light of a national policy aimed at achieving reductions, emissions abatement is no longer a primary objective of Victorian Government policy. The Government is seeking primarily to encourage the efficient use of electricity and gas by assisting households and businesses to manage rising energy costs through measures which help them reduce energy consumption.

Options to achieve objectives

There are a number of options that could be adopted to meet the Government’s objectives, whilst addressing the barriers to the uptake of energy efficiency measures. The options that this BIA will be subjecting to a detailed CBA, however, relate to a continuation of the VEET scheme.

This BIA considers the following options for a VEET scheme over the next phase of the scheme (2015 to 2017):

Option 1: Target of 2.0 Mt CO2 per annum. This option sets an annual target that will produce certificate prices consistent with average prices observed in phase two of the scheme (2012 to present)

Option 2: Target of 2.7 Mt CO2 per annum. This option is consistent with the target from phase one of the scheme (2009 to 2011)

Option 3: Target of 5.4 Mt CO2 per annum. This option is consistent with the target for the current phase of the scheme (2012 to 2014).

A number of changes to the scheme design have been modelled for the three options. These include:

a downward revision of the energy savings associated with the VEET activities in line with the findings of the evaluation

the inclusion of new VEET activities, particularly within the business and commercial sector the introduction of project based methodologies as a means of generating certificates for business

activities.

The BIA also considers the merits of three alternative interventions which could address information related market failures; information campaigns, household energy audits and voluntary energy efficiency disclosure for residential properties.

Cost-benefit analysis of options

The CBA has been calculated for the period from 1 January 2015 to the end of 2030. The analysis has required the modelling of national energy markets over this period to determine the impact that the scheme will have on wholesale energy prices and the cost of energy generation.

The CBA measures the overall impact of the scheme on the economy. Effectively it measures the impact that the three options have on the cost of providing energy to the economy. The VEET scheme reduces the amount of energy consumed in Victoria. The CBA calculates the reduction in economic costs of reducing energy consumption compared to the costs incurred to reduce that energy through the VEET scheme; i.e. the additional compliance costs of the scheme.

The results of the CBA show that all three options modelled produce an overall net economic cost: i.e. the cost of supplying energy to the economy has increased as a result of the scheme. The results of the CBA for the three options can be seen in the table below.

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Net economic benefits of the VEET – electricity sector total resource perspective ($2015, millions)

NPV@3.5%2015-2030

NPV@7%2015-2030

Option 1: Target of 2.0 Mt CO2

per annum -$174.1 -$184.0

Option 2: Target of 2.7 Mt CO2 per annum -$259.5 -$270.0

Option 3: Target of 5.4 Mt CO2

per annum -$711.5 -$715.4

In line with the Government’s position that GHG emissions reduction is not a primary objective for the Victorian Government, the value of GHG reductions have not been included in this CBA. It should be noted however, that when the value of emissions reductions are included in the analysis, all three options still deliver overall net economic costs.

Under all three options participants benefit from the scheme, as do all large business participants that are not liable for scheme costs. However, the effect on non-participants depends significantly on the option selected:

Under option 1 the bill impact of the scheme is almost cost-neutral on residential non-participants and results in a low increase in bills for non-participating businesses, although almost 90 per cent of businesses have been found to not participate under this option

Under options 2 and 3 both non-participating residents and businesses face increases in their bills as a result of the scheme.

The results suggest that non-participants are likely to be cross-subsidising participants were the scheme to continue into its next phase. While scheme uptake to date has been proportionally greater for low income households, it is anticipated that this will change going forward. Future activities are likely to require financial contributions from participating consumers and, as such, it is possible that the scheme may have a regressive effect on customers under options 2 and 3.

While a qualitative CBA of alternative interventions to VEET was also undertaken, the Department is currently in the process of reviewing a number of potential energy efficiency policies. Therefore this BIA does not make any recommendations regarding the future adoption of alternative policies so as not to pre-empt the findings of this aforementioned work.

Preferred approach

The preferred option is to not set any new targets in the regulations for the third phase of the scheme and to legislate for its closure. The preferred option has been chosen on the basis that the three options analysed all deliver a net economic cost.

In order to ensure the orderly closure of the scheme, the legislation will set a transitional target of 2.0 Mt CO2 for 2015, with the scheme then being legislated to close on 31 December 2015. The legislation is intended to give absolute certainty to the market on the closure of the scheme while providing an appropriate period of time to businesses, particularly Accredited Persons (APs), who are involved in the scheme to adjust their business models. The scheme is estimated to support more than 2,000 jobs and the closure of the scheme at the end of 2014 may not allow sufficient time for APs and manufacturers to adjust their business models to cope with the removal of the scheme. A

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transitional target of 2 million certificates in 2015 will give businesses the opportunity to plan for, and make, an orderly exit from the scheme at the end of 2015.

It is anticipated that the target of 2.0 Mt CO2 will deliver a net economic cost; however, it is the Department’s view that this cost will be countered by the benefit that extending the scheme will give to the market. Further, the results of the CBA indicate that, a target of 2.0 Mt CO2 is unlikely to have a material impact on non-participating customer energy bills. It should be noted however, that many of the changes to the design of the VEET scheme modelled in this BIA, including the introduction of new activities and Project Based Assessment methodologies, will not occur under the proposed transitional phase.

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Glossary

Abbreviations DescriptionABS Australian Bureau of StatisticsAEMC Australian Energy Market CommissionAEMO Australian Energy Market OperatorAMI program Advanced Metering Infrastructure programAPs Accredited PersonsBAU Business-as-usualBIA Business Impact AssessmentBMS Building Management Systems CBA Cost Benefit AnalysisCertificates Victorian Energy Efficiency CertificatesCFL Compact fluorescent lampDAP Direct Action PlanDCCEE Department of Climate Change and Energy

EfficiencyDRM Demand Response MechanismDPI Department of Primary Industries EEA-Business model Energy Efficiency Activities Business modelEEA model Energy Efficiency Activities modelEEA-Residential model Energy Efficiency Activities Residential modelEEC Energy Efficiency CouncilEEO program Energy Efficiency Opportunities programESS Energy Savings SchemeEPA Environmental Protection AgencyEREP Environment and Resource Efficiency PlansERF Emissions Reduction FundESC Essential Services CommissionETS Emissions Trading Scheme GHG Greenhouse gasGWh Gigawatt hoursHE High efficiencyHVAC Heating, Ventilation and CoolingIssues Paper Energy Saver Incentive Review: Issues PaperLED Light-emitting diodeLV Low-voltageMEPS Minimum energy performance standardsMH Metal halideML Million litresMT or Mt Million tonnesmtpa Million tonnes per annumMW MegawattsMWh Megawatt hoursNEFR National Electricity Forecasting ReportNEM National Electricity MarketNPV Net present valuePBA Project based assessment PC Productivity Commission PJ PetajoulesRCM Regulatory Change MeasurementRET Renewable Energy TargetRIS Regulatory impact statement

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SME Small to medium enterpriseSPC Standby power controllerTJ TerrajoulesThe Act The Victorian Energy Efficiency Target Act 2007The Department Department of State Development, Business and

InnovationThe ESI survey Hall Partners|Open Mind survey of 1,000

participants in the VEET schemeThe Regulations The Victorian Energy Efficiency Target

Regulations 2008The Scheme The Victorian Energy Efficiency Target (or Energy

Saver Incentive) SchemeVECCI Victorian Employers’ Chamber of Commerce and

IndustryVEET Victorian Energy Efficiency TargetVSDs Variable speed drives

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Contents

1. Introduction........................................................................................................................................ 1

2. Nature and extent of the problem......................................................................................................3

2.1 The energy efficiency gap............................................................................................................3

2.2 Impediments to the uptake of energy efficiency opportunities.....................................................4

2.3 Cost reflective pricing.................................................................................................................11

2.4 Large business consumers........................................................................................................12

2.5 Externalities............................................................................................................................... 13

3. VEET scheme evaluation................................................................................................................16

3.1 Overview of the scheme............................................................................................................16

3.2 Achievements to date................................................................................................................18

3.3 Cost Benefit Analysis of the scheme to date..............................................................................22

4. The Government’s objectives..........................................................................................................36

4.1 Reduce GHG emissions............................................................................................................36

4.2 Encourage the efficient use of electricity and gas......................................................................36

4.3 Encourage investment, employment and technology development...........................................36

5. Options to achieve objectives..........................................................................................................38

6. Cost-benefit analysis....................................................................................................................... 39

6.1 CBA period................................................................................................................................ 39

6.2 Base Case................................................................................................................................. 40

6.3 VEET activities modelling..........................................................................................................40

6.4 Energy market modelling...........................................................................................................46

6.5 Distributional effects................................................................................................................... 48

6.6 Allocative effects........................................................................................................................ 59

6.7 Alternative policy options...........................................................................................................64

6.8 Summary of preferred option.....................................................................................................69

7. Additional considerations.................................................................................................................75

7.1 Change in the regulatory burden...............................................................................................75

7.2 Small business impacts.............................................................................................................75

7.3 Evaluation of the scheme...........................................................................................................76

8. Appendices...................................................................................................................................... 77

8.1 Stakeholder consultation............................................................................................................77

8.2 Industry round-table discussion.................................................................................................79

8.3 Energy efficiency schemes........................................................................................................80

8.4 VEET activities modelling..........................................................................................................83

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8.5 Energy Market Modelling and CBA report................................................................................114

8.6 Key assumptions analysis........................................................................................................115

8.7 Drafting Instruction amendments to the Victorian Energy Efficiency Act 2007.........................119

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1. Introduction The Victorian Energy Efficiency Target (VEET) scheme, publicly known as the Energy Saver Incentive (ESI) scheme, commenced on 1 January 2009. The scheme encourages households and businesses to adopt energy efficiency measures that can help reduce greenhouse gas (GHG) emissions and lower demand for electricity and gas by participating consumers.

The VEET scheme is a ‘white certificate’ trading scheme, which creates a market mechanism to reduce energy consumption and GHG emissions through the creation of tradable certificates. Scheme certificates may be created when prescribed activities are performed. These activities include the installation of energy efficient heating and cooling products, lighting, and weather sealing products. Energy retailers are required to meet a portion of the scheme target each year by surrendering scheme certificates. Each scheme certificate represents one tonne of carbon dioxide equivalent GHG emissions savings.

The scheme is established under the Victorian Energy Efficiency Target Act 2007 (the Act) and is based on an annual scheme target of GHG emissions savings, which must be set by regulations every 3 years until the end of 2029. The second phase of the scheme is due to end on 31 December 2014, which requires targets to be set for the next phase of the scheme (2015-2017) for the scheme to continue.

On 7 June 2013, the Victorian Government announced that it was undertaking a review of the VEET scheme, which would inform the Government’s decision regarding the continuation of the scheme and, potentially, introduce new regulations setting the scheme’s target for the next phase of the scheme. The outcome of the review has been to prepare this Business Impact Assessment (BIA) to propose amendments to the Act that will provide for the early closure of the VEET scheme.

A BIA is an assessment of how the proposed primary legislative measure impacts business and competition. A BIA must be prepared when the proposed legislative measure has a significant effect on business productivity, competition and growth within Victoria. Through the early closure of the scheme, the proposed amendments to the Act will specifically impact small businesses that create energy efficiency certificates through the installation of energy efficiency activities in households and businesses, which therefore triggers the need for a BIA.

In accordance with the Victorian Guide to Regulation, this BIA:

Describes and assesses the nature and the extent of the problem being addressed Evaluates the effectiveness of the existing regulations in addressing the original problem States the objectives of the proposed legislation Describes the legislative proposal and its expected effect on key stakeholders Assesses the costs and benefits of the proposal and other practical means of achieving the

objective Describes the distribution of costs and benefits, particularly the impact on small business.

In terms of structure of this report:

Section 2 sets out the current nature and extent of the problem which the scheme was originally designed to address

Section 3 evaluates the performance of the scheme to date Section 4 outlines the Government’s objectives in relation to energy efficiency Section 5 describes potential options to achieve the objectives Section 6 considers the costs and benefits of each option and identifies the preferred approach

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Section 7 describes the change in administrative burden associated with the proposal, considers the impact on small business and on competition, and outlines an evaluation strategy.

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2. Nature and extent of the problemThis chapter discusses the nature and extent of the problem that is proposed to be addressed by the VEET scheme.

In summary, in a perfect market consumers are fully informed and have flexibility to respond to price signals, which are reflective of private and public costs, and adjust their energy consumption accordingly. In practise, consumers are unable to respond efficiently to price signals because of:

the existence of market failures and/or barriers that prevent the uptake of energy efficiency measures

non cost-reflective pricing.

There are a number of current and planned policies, including the introduction of flexible pricing in Victoria, aimed at addressing the problems associated with non-cost reflective pricing; however, even once this problem is addressed there may be a range of barriers facing consumers which mean that, without further action, there will be less than optimal uptake of energy efficiency opportunities going forward.

The barriers facing the residential and commercial sectors are broadly similar. There are, however, a different set of incentives for large businesses to adopt energy efficiency activities.

The remainder of this chapter considers:

the impediments faced by households and businesses in taking up energy efficiency opportunities

existing policies to address the problem national policies to address GHG emissions.

2.1 The energy efficiency gapThe existence of an energy efficiency gap , which the Productivity Commission (PC) defines as “the gap between actual energy efficiency and the level of energy efficiency believed to be achievable and affordable,”1 is often cited as evidence that consumers do not respond to price signals in an economically efficient manner. In their information paper on the investigation of a national energy savings initiative, the previous Commonwealth Government stated that:

“The existence of an energy efficiency gap would suggest that some energy users are consuming more energy than they would in the absence of barriers that impede the adoption of energy efficiency improvements. This implies that investment in energy efficiency is less than optimal.”2

Numerous studies, both in Australia and overseas, claim to have identified untapped energy efficiency opportunities that have a ‘negative’ cost, meaning that realising these opportunities would leave customers better off. While there is a large body of evidence that suggests that a gap exists, the size of the energy efficiency gap is subject to debate.

1 Productivity Commission (August 2005), The Private Cost Effectiveness of Improving Energy Efficiency, p.XXIV.2 Department of Resources, Energy and Tourism and the Department of Department of Industry, Innovation, Climate Change, Science, Research & Tertiary Education (July 2013), Information Paper: Investigation of a National Energy Saver Initiative: economic modelling and potential regulatory impacts, p1.

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Australian studies of the energy efficiency gap often take the form of ‘marginal abatement cost curves’ that rank energy efficiency opportunities across sectors of the economy in order of rising costs. The existence of the energy efficiency gap is highlighted by the level of abatement that can be achieved in the residential and commercial sectors at a negative cost (the consumer will save money for every tonne of CO2 that is reduced).

For example, ClimateWorks (2010) project that around 4 million tonnes per annum (mtpa) of C02-e could be abated through energy efficiency measures in the residential building sector by 2020, at an average (negative) cost of (-)$98 per tonne of C02-e3. Alternatively, McKinsey & Co project that a total of 60 mtpa of C02-e could be abated in the combined residential and commercial building sector at a cost of (-)$170 to (-)$50 per tonne of C02-e by 2030, depending on the energy efficiency technology adopted4.

These two examples highlight not only that there appear to be significant, private and profitable opportunities to improve consumer energy efficiency, but also that there is considerable divergence in studies between the perceived size of such an energy efficiency gap. There is also a critical literature (The PC 2005, Palmer et al. 2011, Gillingham Palmer 2013) which asserts that the energy efficiency gap is far smaller than is often claimed due to the fact that a range of factors are not taken into account when calculating the figure. These include;

Rebound - consumers tend to make relatively greater use of an appliance or equipment if it becomes more energy efficient and hence cheaper to use, thereby reducing the perceived gap.

Hidden opportunity costs – factors such as the time to source an energy efficiency appliance or the (lower) quality of product (an energy efficient light globe may produce lower quality lighting) are not accounted for in the costs.

Critics feel that their arguments are borne out by the low uptake of energy efficiency activity and evidence that suggests that many ex ante estimates of energy savings are overestimated (Golove and Eto 1996, Allcott and Greenstone 2012).

The PC argues, however, that it is impossible to identify the size of the energy efficiency gap given the uncertainty relating to calculations. A more productive role for policy makers is to accept that it exists and identify the underlying causes of the energy efficiency gap and how government can address these5. While estimating the size of the energy efficiency gap would give an indication of the materiality of the problem within Victoria, it would not allow the identification of the type of market failure or barrier that is the cause of the gap.

2.2 Impediments to the uptake of energy efficiency opportunitiesA significant body of literature takes as a starting point the view that consumers and businesses are prevented from making cost-effective energy efficiency investments that address the energy efficiency gap because of the existence of a number of market failures and barriers. Broadly speaking, these impediments fall into two classes:

‘Market failures’, which occur when there is a flaw in the way that markets operate, and ‘market barriers’, a more general term that refers to any disincentives to the adoption or use of a good. The most commonly cited market failure in energy efficiency arises from negative unpriced spillover effects (externalities) arising from air pollution. But market failures are posited to arise in a wide range of circumstances, including as a result of misaligned incentives or if there are fundamental impediments that prevent information from being exchanged. Market barriers generally refer to high transactions costs, such as the cost of obtaining information about the

3 ClimateWorks Australia, Low carbon growth plan for Australia, 2010.4 McKinsey & Company, 2008. An Australian Cost Curve for Greenhouse Gas Reduction.5 Productivity Commission (August 2005), The Private Cost Effectiveness of Improving Energy Efficiency, p.XXV.

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energy efficiency characteristics of a product. The point to note is that, unlike in the case of behavioural failures (below), the presence of market failures or barriers, would lead rational agents (consumers or businesses) to make fewer energy efficiency investments than is ‘optimal’.

‘Behavioural failures’, which refer to systematic biases in customer decision making. Behavioural failures are said to take a number of forms, all of which imply some type of ‘irrational’ decision-making, for instance, a failure to take into consideration future cost savings or the use of simplified decision making criteria. The existence of behavioural failures then represents customer behaviour that is inconsistent with energy service cost-minimisation, and also leads to underinvestment in energy efficiency.

The 2011 Regulatory Impact Statement (RIS) for the VEET identified the following barriers that prevent the uptake of energy efficiency activity:

information gaps split incentives access to capital behavioural, organisational and cultural factors externalities.

The remainder of this sub-section revisits the first four barriers identified above to identify evidence of their existence and, specifically, their materiality within Victoria. The extent to which the VEET scheme addresses externalities, specifically GHG emissions, is discussed later in the section.

While this BIA attempts to identify quantitative evidence of the existence of these barriers in Victoria, it acknowledges that much of the evidence to support their existence is qualitative in nature. In part, this is due to the difficulty in isolating these barriers from each other and observing their effect on real world activity beyond the existence of an energy efficiency gap.

As stated previously, there is a significant body of policy literature that cite the existence of these market failures or barriers and that they constitute a rationale for some government intervention. As the issue of climate change action and intervention has gained prominence, so too has the body of literature, particularly in Australia. Notable documents include:

Department of Climate Change and Energy Efficiency (DCCEE), Report of the Prime Minister’s Task Group on Energy Efficiency, 2010

The Allen Consulting Group, The Energy Efficiency Gap: Market Failures and Policy Options, The Allen Consulting Group, Melbourne, 2004

The PC, The Private Cost Effectiveness of Improving Energy Efficiency, 2005.

It should be noted that, although these policy documents include all the aforementioned market barriers and failures, there is no consensus as to whether the existence of these market failures or barriers, individually, warrant government intervention.

2.2.1 Information gaps

Market failures or barriers associated with imperfect or asymmetric information occur when customers lack sufficient information about energy efficient equipment, either because the (opportunity) costs of acquiring this information are very high, or because of other impediments that prevent information from being credibly transmitted.

Information gaps as market failures may exist for energy efficiency where customers do not have sufficient information regarding the future operating costs between more or less energy efficient products. Below are listed three examples of how a lack of sufficient information can impact on consumers’ decision making with regards to their energy consumption.

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Information regarding the energy use of a specific product: The energy consumption regarding a specific appliance may not be readily available or accessible. This would prevent consumers from making an adequate comparison between similar products to determine their running costs. Consumers may overcome this lack of information through undertaking their own research; however, this represents an opportunity cost to both consumers and businesses that may present a rational barrier to prevent the uptake of the energy efficiency activity.

Timing of energy bills: There is a time lag between when the energy is consumed and the bill for that energy being received by the consumer (on average, electricity bills are delivered to households once a quarter and gas bills every two months). This time lag, combined with the time in between receiving bills, may make monitoring and comparing energy consumption difficult for consumers. Receiving information in a timely and regular manner may allow consumers to more effectively adjust their consumption.

Aggregated pricing: It is difficult to ascertain the amount of energy used by a specific appliance from the usage information supplied to households on their energy bills. In general, energy bills show the quantum of energy consumed during that billing period. While, for example, it may be possible to ascertain the impact of using an air conditioner during summer when comparing energy usage across billing periods, this is likely to be inexact and not possible for a range of appliances.

A further information related market failure is that of information asymmetries. Market failures related to asymmetric information occur where one party has more information than another. An example of asymmetric information with respect to energy efficiency would be between consumers and providers or sellers of energy efficiency appliances. The sellers have greater information regarding the energy efficiency or savings potential of their product, but are unable to transfer this information to the consumer. This is partially because energy efficiency may be viewed as intangible by consumers and also because consumers will know that the seller will have a financial incentive to emphasise the benefits of their product and will, therefore, discount it.

The existence of information gaps as a barrier to the uptake of energy efficiency products or measures has been evidenced in both the residential and business sector through recent surveys. In 2011, the Department of Primary Industries (DPI) commissioned Hall Partners|Open Mind to undertake a survey of around 1,000 participants in the VEET scheme (‘the ESI survey’). The key findings in relation to information barriers were:

When asked why they had not pursued energy efficiency activities prior to participation in the VEET scheme, around 20 per cent said that they were unsure of the most energy efficient appliances.

24 per cent of respondents identified ‘lack of information’ as the reason why they do not undertake more energy savings activities.

The responses to both of these questions provide some evidence to suggest that lack of sufficient information provides a barrier to the uptake of energy efficiency; however, it should be noted that other answers to the two questions elicited higher responses. For the first question, the majority of respondents stated that the appliance to be replaced was still operational and for the second, cost was the biggest reason why respondents did not undertake more energy savings activity.

In 2009, Carbon Down6, a survey of around 1,000 Victorian businesses, aimed to identify what carbon-reducing behaviours businesses are undertaking, and to better understand motivations and barriers for implementing carbon-reducing measures. Ten per cent of respondents said that they were not sure of what to do when asked the reasons as to why they were not making further energy efficiency improvements, although cost was the most commonly cited response. Likewise, the

6 VECCI, July 2009, Carbon Down: Victorian businesses’ climate change knowledge, attitudes and behaviours – Market research report.

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Australian Industry Group claimed in 2011 that “smaller businesses still lack access to information…”7, although this appears to be more of a qualitative observation.

There is additional evidence from outside of Australia to suggest that information gaps act as a barrier to consumers undertaking energy efficiency activity. A survey of 479 energy auditing companies in the United States asked respondents what prevented households from undertaking energy audits. 63 per cent of respondents stated that homeowners did not understand the information that such audits provided, with a further 50 per cent citing a lack of awareness of energy audits in general.8 It should again be noted that the cost of energy efficiency improvements was cited as the major barrier (72 per cent).

The majority of submissions to the Department of State Development, Business and Innovation’s (the Department’s) Energy Saver Incentive Review: Issues Paper (Issues Paper) stated that information related market failures remained an issue in Victoria for both households and businesses. In their submission, AGL Energy Ltd stated that:

“In our experience the key barriers are consumer’s lack understanding of how to reduce energy consumption by changing their behaviour, how their consumption compares to efficient households and a lack of understanding of the economics of investing in energy efficient technology.”

While the information contained in these submissions provided a qualitative view by stakeholders of the existence of information gaps or asymmetries as barriers to the uptake of energy efficiency activity, there was limited quantitative evidence provided. However, these qualitative views, aligned with the findings of the ESI Survey and Carbon Down, indicate that information related market failures exist for both households and businesses in Victoria.

2.2.2 Split incentives

Market failures from ‘split incentives’ potentially arise within the confines of the tenant-landlord relationship. Here it is argued that landlords have reduced incentives to improve the energy efficiency of buildings or install energy efficient appliances because tenants cannot observe these effects and do not compensate the landlord in the form of higher rents.

There is limited empirical evidence on the existence and materiality of split incentives as a barrier to the uptake of energy efficiency activity in Victoria and Australia, although there is strong support by stakeholders that it exists. In a recent report, the Australian Urban and Housing Research Institute attempted to identify the existence of the split incentive market failure in the private rental market. Their findings showed that:

“The available quantitative data does not support the hypothesis that there is a ‘split incentive’ that results in private rental households paying higher bills than owner-occupiers; indeed owner-occupiers pay more for energy.”9

The study did, however, highlight a number of data limitations that may have impacted on the ability of the analysis to give a positive result. The report also undertook a series of interviews with investors in private rental stock and found that:

“the major barriers to adopting energy and water saving measures were viewed as cost and a lack of financial incentive to act.”

7 Australian Industry Group, February 2011, Energy Shock: confronting higher prices, p.4. 8 Palmer, K., Walls, M., Gordon, H., & Gerarden, T., 2011. Assessing the energy-efficiency information gap: results from a survey of home energy auditors. Energy Efficiency.9 Gabriel, M. et al. (2010) The environmental sustainability of Australia’s private rental housing stock, AHURI Final Report No. 159. Melbourne: Australian Housing and Urban Research Institute.

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The view of private rental landlords that they did not have a financial incentive to adopt energy saving measures provides strong qualitative support for the existence of split incentives in Australia. Responses to the Issues Paper also provided support for this market failure. The submission from the Northern Alliance for Greenhouse Action identified an evaluation of Just Change, a pilot energy retrofit scheme of ten low income households in Metropolitan Melbourne, that:

“found that low-income renters often miss out on funding for rental energy efficiency improvements; there was low awareness of the eligibility of rental properties for energy efficiency programs; and there was reluctance by renters to request energy efficiency improvements.”

One renter who participated in the program identified that incentivising landlords to undertake energy efficiency activity was difficult.

“I can request it, but there’s not much obligation or incentive for the landlord to do it. 10”

Although there is limited quantitative evidence for the existence and materiality of split incentives within Victoria and Australia, there have been a number of qualitative studies that indicate that, from both a tenant and landlord perspective, split incentives exist.

2.2.3 Access to capital

A lack of information on the part of a lender about the payoff from energy efficiency investments may contribute to credit rationing, and thereby give rise to a market failure. Investments with particularly high energy savings payoffs may not be made because lenders cannot distinguish them from investments with low payoffs.

There is limited empirical analysis of the existence of credit rationing and none has been identified in either Victoria or Australia. A recent qualitative study from the United States concluded that, while credit rationing may be an issue, the primary reason why there is limited activity in the market for energy efficiency financing is because of a lack of underlying demand for these products. 11 The report did suggest that, if businesses and individuals were to increase their demand for financing for energy efficiency products, there may be failures in the financing market.

It is important to distinguish between credit rationing and a lack of capital when determining the existence of a market failure in relation to access to capital. Credit rationing suggests a failure in financial markets where, due to a lack of information, lenders are not applying the same criteria to loaning capital for energy efficiency investments compared to other investments. A lack of capital on behalf of the consumer means that they do not have access to the initial finance necessary to make an investment in energy efficiency activity.

The high upfront costs of many energy efficiency products require a significant outlay by the consumer in order for them to realise the benefits of decreased energy consumption. While this is clearly a barrier for many consumers, there is little evidence to suggest that there is a clear market failure in existence. There is a finite amount of capital available for households and businesses to invest and consumers make choices as to where to invest their capital, which may preclude them from undertaking energy efficiency activity or making other investments, such as the purchase of a new car. While the amount of capital available to make investments presents a barrier to firms or individuals from making specific investments, such as those for energy efficiency activity, there is no identifiable failure in the market.

There is strong empirical evidence in Victoria that cost, to both households and businesses, does represent a large barrier to investment in energy efficiency measures. The ESI survey, undertaken in

10 Dillon, R., Learmonth, B., Lang, M., McInnes, D., Thompson, K. and Bowen, K., (2010), Just Change Evaluation report, Just Change Australia.11 Palmer, Karen, Margaret Walls, and Todd Gerarden, 2012. Borrowing to Save Energy.

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2011, identified cost (can’t afford to) to be the most common responses (41 per cent) to the question of why participants in the VEET scheme did not undertake more energy savings activities. Similarly, in the Victorian Employers’ Chamber of Commerce and Industry’s (VECCI’s) Carbon Down survey, 37 per cent of business stated cost as a reason why they did not undertake further energy efficiency activity. While a lack of capital may represent a barrier to firms or individuals in undertaking energy efficiency activity, these responses may also be interpreted as a rational economic decision.

Submissions from stakeholders highlighted capital or cost as a major barrier to the uptake of energy efficiency activity; however, there were no examples of a market failure in the credit market preventing households or businesses gaining access to finance. Although consumers and especially businesses struggled to gain access to credit for undertaking energy efficiency improvements, the reasons for this appear to be based on general economic concerns regarding the credit worthiness of the individual or organisations, rather than a market failure.

2.2.4 Behavioural, organisational and cultural factors

Behavioural and organisational failures refer to systematic biases in customer decision making. In the case of households, in spite of having access to all the available information, consumers will use rules-of-thumb to help them simplify otherwise complex decisions or are overly attached to the status quo. This is commonly known as bounded rationality. In the case of businesses, organisations may be organised in such a way that there are barriers to decision makers getting information about energy efficiency products or how organisations budget for expenditures.

The 2011 RIS cited the fact that the VEET scheme had incentivised the uptake of low cost measures with short payback periods, such as low flow shower roses and energy efficient lighting, was evidence of the existence of a non-price barrier. Despite the fact that these products had short periods of payback, without VEET these products were not being purchased by consumers. This trend has continued since the 2011 RIS was released, with another low cost, short payback measure, the standby power controller (SPC), generating high levels of take up. To date, it is estimated that 56 per cent of all households in Victoria have an SPC.

Although there have not been any Australian studies identified that investigate the existence of behavioural failures, there is a significant body of psychological and sociological literature that identifies these failures in experimental laboratory settings or through surveys. For example, a 1982 survey found that consumers use simplistic rules of thumb to determine their energy consumption and that these rules of thumb lead to an underinvestment in energy efficiency12.

While behavioural failures have been shown to exist in laboratory settings, there is an absence of empirical evidence to demonstrate that it exists in the context of energy efficiency decisions in the market place.

A counter argument to the existence of bounded rationality, as made by the PC, is that it might itself represent a realistic cost-effective outcome for consumers, to the extent that it minimises their information and transaction costs. Consumers will simplify their decision making to reduce the time and opportunity costs associated with the decision making process.

A review of business surveys identifies that a variety of reasons that could be categorised as organisational barriers existed that prevented organisations from making energy efficiency improvements. These included the use of simple payback periods by businesses, the absence of dedicated budgets for energy efficiency improvements and a lack of staff time. However, it is also possible to interpret these barriers as rational economic processes in the way in which businesses make budget decisions.

12 Kempton W, Montgomery L. 1982. Folk Quantification of Energy. Energy 7.

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There is broad support for the existence of these barriers among stakeholders, particularly regarding bounded rationality. This is evidenced both through recent policy literature, such as the Report of the Prime Minister’s Task Group on Energy Efficiency, and responses to the Issues Paper. As such, the Department is of the opinion that bounded rationality may exist; however, there is an absence of empirical evidence to support the existence of this market failure and patterns of behaviour associated with this barrier may be the result of rational economic processes.

2.2.5 Existing policies

The Victorian and Commonwealth Governments currently implement a number of policies aimed at increasing energy efficiency, including:

Energy performance standards – these standards act to impose minimum energy efficiency requirements on new products.

Rebates - the intention of government rebates is to provide a subsidy to energy consumers buying selected energy efficient products.

Education and information campaigns - these initiatives seek to provide energy consumers with a greater understanding of the benefits associated with switching to more efficient products as well as using energy more efficiently.

However, it is the Department’s opinion that the current portfolio of policies only partially addresses the market failures present in the energy efficiency market. In line with the findings outlined above, this suggests that there remains a role for government in addressing residual market failures in this area in order to achieve an optimal amount of energy efficiency take up in Victoria.

A summary of the Department’s view regarding the extent to which the key existing policies address the market failures present in the energy efficiency market is provided in the table below. A more comprehensive list of State and Commonwealth energy efficiency polices can also be found, in the appendices (Section 8.3).

Table 1 Commonwealth and State Government energy efficiency policies

Policy Lack of Information

Split incentives

Bounded rationality

Energy Performance standards

Partially overcomes

Partially overcomes

Partially overcomes

Education and information campaigns

Partially addresses

Do not address Does not address

Rebates Does not address

Partially addresses

Partially addresses

2.2.6 Summary

A range of barriers that prevent consumers undertaking energy efficiency measures have been identified in policy and academic literature; however, the extent to which there is clear evidence to suggest that these barriers represent market failures that require intervention is less certain. The evidence contained in this BIA supports the existence of information related market failures. The level of evidence regarding split incentives, access to capital and behavioural, organisational and cultural factors however, while not ruling out the possibility that these market failures may exist, is not sufficient to determine definitively that they do exist.

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2.3 Cost reflective pricingA further explanation for the energy efficiency gap, in addition to the existence of market failures or barriers, is that the price signals that consumers rely on to adjust their consumption are not reflective of the costs of the energy. The result being that energy consumption is undertaken at sub-optimal levels. The Australian Energy Market Commission’s (AEMC) Power of Choice review states that:

“Currently, most residential and small business consumers do not face cost reflective prices for their consumption” and “consumers generally face flat or inclining block prices which bear little relationship to the actual impacts they impose on network and electricity supply costs.”13

The impact of flat tariffs on consumers is that they face the same electricity prices for consuming electricity at all times of the day and at all times of the year; however, the cost of producing that electricity varies over time. During periods of high electricity demand or peak demand, extra generation capacity is required, which increases both the cost of generating the electricity and the need for enhanced network capacity. There are peak periods during the day and critical peak periods, which generally occur during hot weather periods in the summer. Consumers, however, face an equal incentive in reducing their consumption during these periods, even though reducing demand at these points would deliver greater benefits to both themselves and the broader community.

When energy prices are cost reflective, consumers have greater control over their energy costs as they can respond to increased prices at certain times by reducing their consumption. On a broader level, reducing consumption during these peak demand periods will reduce the cost of generating and delivering energy in the short term. In the long term, consumption reduction during peak demand periods may result in deferring the need for investment in generation and networks.

A move towards more cost reflective pricing as a solution to the sub-optimal use of energy by consumers has received some support from stakeholders through their submissions to the Issues paper. The Energy Supply Association of Australia state that:

“The best incentive for households and businesses to use energy efficiently will be cost-reflective pricing. This will give customers the true signal they need to determine whether using energy at a particular time is efficient or not.”

2.3.1 Existing policies

There are a number of existing policies that seek to make electricity prices more cost reflective. They include:

Flexible pricingFlexible pricing was introduced in Victoria on 17 September 2013. Prior to the introduction of flexible pricing, only flat rate tariffs were available to most residential and small business energy consumers in Victoria. Following its introduction, energy retailers can offer consumers either the flat rate tariff or flexible tariffs, which price electricity differently during different periods of the day. While there is no requirement on retailers to offer specific flexible pricing structures, it is anticipated that the pricing structures will, in general, incorporate three pricing periods; peak, off peak and shoulder (the periods of time between the peak and off-peak periods).

The aim of flexible pricing is to provide an incentive for consumers to use power at times when there is less demand for electricity. The introduction of flexible pricing creates a more cost reflective pricing structure in Victoria, charging more for energy use during peak periods and less during periods of low energy demand.

13 AEMC 2012, Power of choice review - giving consumers options in the way they use electricity, Final Report, 30 November 2012, Sydney, p.149.

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The Power of Choice reviewThe AEMC released their Power of Choice review in November 2012. The report set out a number of reforms aimed to facilitate demand side participation – to enable consumers to manage their energy demand in response to market conditions.

As part of these reforms, the AEMC recommended the introduction of a Demand Response Mechanism (DRM). DRM is a process by which consumers can be rewarded for adjusting their energy consumption during peak demand periods. Essentially, under a DRM, consumers are paid for the energy they do not consume during peak periods at the wholesale spot price. Consumers who participate in the DRM will benefit from both reduced energy consumption during peak periods and through the payment for their deferred energy consumption. More broadly, the DRM will help reduce demand during peak periods and so reduce generation and network costs.

Initially, the DRM will be open to industrial and commercial end users of electricity who consume over 100 megawatt hours a year. In January 2011, the Standing Council on Energy and Resources agreed to implement a DRM. It is anticipated that the DRM will commence in 2015.

SummaryAt present, the energy prices faced by consumers are not reflective of the costs of producing that energy; however, this is not a problem that is intended to be addressed by this BIA. This problem is best addressed through the policies and processes that are currently being implemented by state and federal governments to make energy prices more cost reflective and the mechanisms that can impact against peak demand.

2.4 Large business consumersIn 2012 the VEET scheme was extended from being a residential scheme to including consumers in the non-residential sector. As outlined in the 2011 RIS, the scheme’s eligibility was, however, limited to those businesses that were not subject to existing energy efficiency schemes. This was undertaken to ensure that the abatement achieved by the scheme was additional to what would have occurred if the scheme did not exist. Both the Energy Efficiency Opportunities (EEO) and Environment and Resource Efficiency Plans (EREP) programs were cited as energy efficiency schemes that subjected businesses to statutory reporting requirements and, therefore, organisations subjected to these regulations would be excluded from participation.

2.4.1 Energy Efficiency Opportunities program

The EEO program is a Commonwealth scheme that aims to address the problem of information related market failures pertaining to energy efficiency for large energy users. The program requires large businesses consuming more the 0.5 petajoules (PJ) of energy to conduct an audit of their energy use and identify opportunities for improving their energy efficiency. While large businesses are required to publish opportunities where the financial payback period is less than four years, there is no requirement that these opportunities are taken up.

A full cycle evaluation of the scheme was completed in May 2013 and found that:

The EEO program was effective in addressing information related barriers and improving the identification of energy efficiency opportunities

The EEO is estimated to be responsible for approximately 40 per cent of the energy savings reported by participant businesses over the period of the evaluation (2006 to 2011).14

The report recommended that the second, five-year cycle from July 2011 to June 2016, be completed.

14 ACIL Tasman 2013, Energy Efficiency Opportunities Program Review,

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2.4.2 Environment and Resource Efficiency Plans program

The EREP program requires large Victorian energy and water users (those consuming at least 100 terrajoules (TJ) of energy or 120 million litres (ML) of water per annum) to identify and implement energy and water saving measures. The program required the identified business sites to submit plans to the Environmental Protection Agency (EPA) that would identify all energy saving activities with a payback period of three years or less. These plans were then to be implemented on the basis of an agreed schedule. The existence of the EREP program was identified as a rationale for excluding large businesses from participation and liabilities under VEET for the second phase of the scheme.

In February 2013, following a review of the scheme, the Victorian Government announced that it would be closing the program in December 2013. The review found that the program created an unnecessary burden on businesses as it duplicated activity incentivised under Federal policy, including the EEO program and the impact of carbon pricing.

2.4.3 Stakeholder views

The approach to large businesses undertaken in the 2011 RIS was supported by some of the responses to the Issues Paper. In their response to the paper, Climateworks identified a number of barriers that industrial companies faced including access to capital and organisational barriers, such as operational risk (the difficulty in halting production to undertake energy efficiency upgrades) and long-life decision cycles relating to specific equipment. Regarding information related barriers to large businesses they stated that:

“evidence suggests that organisations with multiple sites and participating in EEO or other State‐based energy efficiency programs generally have the skills and resources to tackle energy efficiency.”

Other submissions argued that energy efficiency schemes in general are not needed for large businesses, as the incentives for these organisations to act as a result of competition and cost pressures. The Energy Users Association of Australia stated that, according to its members:

“schemes are not required to drive energy efficiency improvements when regulated prices are ever increasing.”

and:

“it is now commonplace for aggressive energy efficiency measures to be self-imposed core business objectives.”

2.4.4 Summary

While large business users face barriers to the uptake of energy efficiency activities, their situation is different to those of residential customers and other, smaller business consumers. The conclusion of the review into the Victorian Government’s EREP program has identified that its continuation would duplicate Commonwealth activity in this area, and that these programs are sufficient to drive the energy efficiency improvements for this customer class. Additionally, energy prices faced by all consumers have increased since the introduction of the EREP program, and this incentivises large businesses in particular to undertake energy efficiency activity. As such, barriers that prevent the uptake of energy efficiency measures for large businesses, is not a problem that will be addressed through this BIA.

2.5 ExternalitiesEnvironmental externalities associated with the production and consumption of many sources of energy refer to emissions of GHG and other air pollutants, the costs of which are borne by society rather than the emitter. Without policy intervention, environmental externalities lead to an overuse of energy relative to the social optimum, and underinvestment in energy efficiency and conservation.

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At the time of the VEET scheme’s introduction there was no national mechanism to address the negative externality associated with GHG emissions. As such, one of the main objectives of the Act under which the VEET scheme was established is to reduce GHG emissions. The 2007 VEET RIS stated that the VEET scheme was transitional in nature to prepare households for the changes in energy markets as Australia aims to achieve its emissions reductions objectives over the next two decades. The imposition of national schemes to address emissions reductions requires consideration of whether environmental externalities (in this case GHG emissions) are a market failure that warrants intervention by the Victorian Government.

2.5.1 National Emissions Reduction Target

At a national level, both main political parties have now committed to achieving the same emissions reductions target of a minimum 5 per cent of 2000 levels by 2020, although they plan to achieve this target through alternative mechanisms (a carbon price mechanism and a Direct Action Plan (DAP)).

In July 2012, the Commonwealth Government introduced a national carbon price mechanism to address this externality through imposing a cost on the emission of GHG. The current price mechanism takes the form of a fixed carbon price, which was due to transform into an emissions trading scheme (ETS) in 2014. Following the result of the 2013 Federal election, the Commonwealth Coalition Government have committed to a repeal of the Clean Energy Fund legislation by July 2014 and will introduce their DAP. The DAP is intended to include an Emissions Reduction Fund (ERF) that will purchase the lowest cost GHG abatement through a reverse auction. The ERF may be used to assist energy users to reduce their energy consumption through the adoption of energy efficiency measures. Participating energy users will be rewarded for reductions in their GHG emissions (and associated energy consumption) as measured against a baseline level.

Introducing a national GHG abatement scheme provides an additional incentive for producers and consumers to reduce their emissions independent of those provided by the VEET scheme.

In October 2011, the Victorian Government announced an independent review of the Climate Change Act 2010. The review was tabled in Parliament in March 2012 and found that:

“Broadly, State action in the presence of a national carbon price/emissions trading scheme should be limited to complementary measures that address residual market failures, support research and development, and facilitate adjustment in vulnerable regions and sectors.”

The Victorian Government policy is that, in light of national policy to reduce GHG emissions, State government supports Commonwealth action to tackle climate change and does not have a direct role in reducing GHG emissions. The Government supports actions that minimise the impact that climate change and Commonwealth emissions reductions activity have on households and businesses, but emissions abatement is not a primary objective of Victorian Government Policy.

The specific design of the ERF is yet to be finalised and therefore the extent to which it will contribute to meeting the national five per cent target is unclear. It is recognised that, should the ERF be sufficiently large so as to be able to meet the national target alone, it is possible that the existence of a scheme such as VEET may lead to additional abatement above the national target.

The ERF is intended to be a baseline and credit scheme, which requires determining emissions baselines, monitoring and confirming emissions abatement. This process is suited to activity undertaken by large businesses and industry and would be difficult to implement for households and small businesses, leading to additional abatement being delivered by a scheme such as VEET. It is possible, however, that third parties will act as aggregators under the ERF, delivering emissions reductions from small scale energy efficiency activity that occurs across a number of households and businesses.

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The introduction of the DAP, however, has not altered the State Government’s position on GHG abatement. In its submission to the Commonwealth Government on the design of the ERF, the State Government stated that:

“ as the DAP is a comprehensive emissions reduction policy framework with the same national emissions target as the current Carbon Price Mechanism (CPM), Victoria will maintain its existing role in climate policy of focussing on managing and adapting to climate risks.”

The Victorian Government does not seek to achieve greater emissions reductions than those outlined by the Commonwealth Government and being pursued by activity undertaken on a national level. As such, GHG emissions externalities are not a market failure that is being addressed through this BIA.

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3. VEET scheme evaluationAs part of the BIA process the performance of VEET phase one and two were evaluated in order to validate the energy savings associated with the scheme, as well as the cost and benefits to participating and non-participating energy customers.

3.1 Overview of the schemeDeveloped with the aim of promoting the optimal uptake of energy efficiency improvements in Victoria, the VEET is a market-based white certificate scheme that was launched by the Victorian Government on 1 January 2009.

The scheme is established under the Act and is legislated to continue until 1 January 2030. Due to the fast changing technological environment and the uncertain Commonwealth Government policy context however, the VEET scheme is designed to operate in three-year phases so as to allow a natural point of review to assess the continued need for the scheme, prior to any commitment being made to begin a new phase.

3.1.1 How the scheme operates

The scheme works by providing third parties, known as Accredited Persons (APs), with an incentive to help certain energy consumers overcome the barriers they face in taking up cost-effective energy efficiency improvements. The VEET creates this incentive by providing a legislative framework that allows these APs to firstly create what are known as Victorian Energy Efficiency Certificates (certificates) when they help consumers in this way and then allows them to sell these certificates to energy retailers for a price. The scheme’s Act requires certain energy retailers to acquire and surrender to the Essential Services Commission (ESC) a specific number of certificates each year to satisfy an annual target set by the scheme regulations. In this way, allowing APs to generate revenue through the sale of certificates gives them a monetary incentive to provide energy consumers with products and energy saving information as well as other offers, which may reduce the cost of undertaking improvements, in order to encourage a more optimal uptake of energy efficiency in society.

Scheme certificates and the targetThe scheme’s annual targets are set every three years to align with the beginning of scheme phases. With each certificate under the VEET designed to represent one tonne of lifetime GHG abatement, the scheme’s annual certificate target is also often quoted in million tonnes of GHG abatement. Accordingly the target determines the level of energy efficiency activities that will be undertaken as a result of the scheme.

Scheme activities and certificate creationWhile the scheme allows APs to create certificates when they help certain energy consumers, APs are only allowed to generate certificates with respect to selected energy efficiency activities as prescribed in the scheme regulations.

The number of certificates an AP can create for any particular activity is also prescribed in the scheme’s regulations and is based on deeming algorithms that estimate the average expected energy and GHG savings associated with each activity. These algorithms are built on a number of assumptions and take into account several effects in order to result in the most accurate estimate of energy savings that can be truly attributed to the scheme. Some of these effects include assumptions about business-as-usual (BAU) activity, expected product lifetime and the average use of products by

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consumers. Due to the pace of technological advancement some of these assumptions can be quite time sensitive and therefore require regular review.

Scheme participantsAlmost all Victorian residents, businesses and other organisations can participate in the scheme by undertaking prescribed energy efficiency activities in their residential homes, business premises and other non-residential premises. However companies that qualify for the EREP program are excluded from such participation at their EREP sites.

Liable entitiesEnergy retailers with an obligation to acquire certificates under the scheme are known as liable entities in the Act. However, not all energy retailers constitute liable entities: only retailers that meet a certain customer or energy supply threshold are deemed to be liable entities with respect to the VEET.

As mentioned above, once deemed a liable entity, each liable retailer must then acquire and surrender certificates to satisfy their portion of the scheme’s target. This portion is based on the energy retailer’s share of the energy market during the year. In order to meet their liability, retailers are able to create certificates directly as APs, purchase certificates in a competitive market from other APs, or both. Where liable retailers fail to surrender enough certificates in a year they must pay a shortfall penalty for each certificate they do not surrender to the ESC.

Scheme management and administrationThe scheme’s governing Act and its regulations are maintained by the Department. The ESC is responsible for its administration, which includes such functions as accrediting persons to create certificates, approving energy efficient products, managing the certificate register and ensuring compliance with the Act and regulations.

Amendments to the schemeOver its first five years the VEET scheme has seen a number of key changes. During its first phase the scheme was restricted to the residential sector and had an annual target of reducing lifetime GHG emissions by 2.7 million tonnes. In 2012 however, the VEET was opened to other business and non-residential sectors. The scheme’s target was also doubled to 5.4 million certificates per annum, with a number of extra prescribed activities added to the scheme.

After expanding the scheme in this way a decision was made to exclude, from participation in the VEET, large energy customers with sites taking part in the EPA’s EREP scheme. Accordingly, the formula for calculating an energy retailer’s liability was altered to align with this decision through an amendment to the scheme’s regulations: any energy sold by retailers to these large customers was no longer considered when apportioning the scheme’s overall target based on each retailer’s share of the market.

In June 2013 the threshold used to define a liable entity was also altered. While the scheme’s Act currently takes into account both an energy retailer’s customer numbers as well as the quantity of energy they supply when determining whether a retailer is liable under the scheme, the threshold was previously based solely on customer numbers. This change was made with the aim of reducing any effects the scheme may have on the competition of the energy retail market while also ensuring that any barriers to entry by new businesses were minimised.

3.1.2 How the scheme addresses market failures

The VEET scheme incentivises APs to overcome the market failures and barriers that prevent households and businesses from undertaking energy efficiency activity. The value of the certificate

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allows APs to undertake energy efficiency activity at low or no cost to the consumer, thereby incentivising them to undertake the activity.

The scheme acts in two ways to address information related market failures. Firstly, APs act as intermediaries by effectively undertaking the energy efficiency research and calculations on behalf of the consumer. The value of the certificate provides the AP with the incentive to gather this information, which they then provide to the consumer to aid them in reaching a decision on whether to install a certain product. Secondly, where the appliance is low cost or effectively free to the consumer, it acts as an incentive in itself for the consumer to install the product, without the need of directly addressing the information related market failure. This second reason also provides an explanation as to how the scheme overcomes other potential barriers to the uptake of energy efficiency appliances, such as access to capital and behavioural barriers.

In relation to split incentives, the incentive offered by the certificate may be sufficient to overcome the barriers to property owners of making capital investments that improve the energy efficiency of the property. Under this scenario, the tenants of the property will benefit from the reduced energy costs and the landlords from the capital upgrade to their property.

3.2 Achievements to dateThe targets set for each of the first four years of the scheme have been met, in terms of certificates surrendered that correspond to the retailers’ liability. In the years 2009 to 2011, this meant that 2.7 million certificates were surrendered every year. For 2012, 5.4 million certificates were surrendered.

As of 30 September 2013, the number of certificates that had been registered by the ESC (and therefore available to be acquired by retailers under their liability) was 20.3 million. Assuming that all certificates are acquired by retailers, this means that the target for 2013 has been met, with a further 1.4 million certificates available to meet the 2014 target. Only 4 million further certificates need to be registered by 31 January 2015 to ensure that the target for phase two is met.

In August 2013, the ESC completed its “Performance Report” of the VEET scheme for 2012. The report provides a list of the number of activities undertaken between 1 January 2009 and 31 December 2012 and the corresponding number of certificates created (shown in ).

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Table 2 Prescribed activities undertaken between 1 January 2009 and 31 December 201215

Activity type Installations VEECs registered

Water heating activities 1A - Decommissioning electric and installing gas/LPG storage 2,714 106,8801B - Decommissioning electric and installing gas/LPG instantaneous 8,162 343,9591C - Decommissioning electric and installing electric boosted solar 18,475 783,2841D - Decommissioning electric and installing gas/LPG boosted solar 6,613 372,3012 - Installing solar retrofit on electric 7 1553 - Decommissioning gas/LPG and installing gas/LPG boosted solar 8,368 87,3654 - Installing solar pre-heater on gas/LPG 3 21Space heating and cooling activities 5 - Decommissioning ducted gas and installing high efficiency ducted gas 783 11,0666 - Decommissioning central electric resistance and installing high efficiency ducted gas 1,291 366,801

7 - Decommissioning ducted air to air heat pump and installing high efficiency ducted air heat pump 0 0

8 - Decommissioning central electric resistance installing high efficiency ducted air heat pump 11 1,619

9 - Installing flued gas/LPG space heater 1,044 7,22510 - Installing space air to air heat pump 2 720 – Installing a high efficiency ducted gas heater in a new home 113 69623 – Decommissioning refrigerative air conditioners and installing evaporative coolers 0 0

28 – Replacement of gas heating ducts 0 0Space conditioning activities 11 - Installing insulation in ceiling area not previously insulated 1,168 56,91812 - Installing insulation in floor area not previously insulated 1 1713 - Replacement of external window 1 8114 - Retrofit of external window 0 015 - Weather sealing 43,890 171,056Lighting activities 16 - Installing low energy lamps 541,468 5,107,90721A – Lighting – GLS lamps 98,701 851,14221B – Installing low energy reflector lamp in place of an incandescent reflector lamp 0 0

21C – Installing a low energy lamp in place of an existing 12 volt halogen lamp 96 1,41822D – Installing a low energy downlight fitting in place of an existing 12 volt halogen downlight fitting 1 5

Shower rose activities 17 - Shower rose 173,697 438,626Refrigerator/freezer activities 18 / 22 - Purchase of refrigerator/freezer 12 1319 - Destruction of refrigerator or freezer 29,319 119,557Other activities 24 – Purchase of high efficiency televisions 1,019 1,82425 – Purchase of high efficiency clothes dryers 0 026 – Installing high efficiency pool pumps 172 1,361

15 Essential Services Commission, Victorian Energy Efficiency Target scheme: Performance Report 2012, August 2013. Available at www.esc.vic.gov.au.

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29 – Installing a stand-by power controller 820,948 6,925,492New Activities for 2012 30 – Installing an in-home display 0 031 – Installing a high efficiency motor 0 032 – Installing a high efficiency refrigerated display cabinet 0 033 – Replacing a refrigerator fan 0 034 – Undertaking a lighting upgrade 21 5,217

Totals 1,754,643 15,762,013

The results in the table show that the scheme has been dominated by two measures since its inception: lighting and the installation of SPCs. Together they account for 82 per cent of all certificates registered under the scheme to the end of 2012. Both of these products are low cost measures that have been ‘free’ to participants – the cost of supplying the appliance is outweighed by the value of certificates generated from their installation.

SPCs were not introduced to the scheme until 2011, since then they have been the prevalent activity. During 2012, certificates registered for SPC installation accounted for 79 per cent of all certificates registered. Activity during 2013, however, suggests that SPCs are reaching saturation point. For the period up to 30 September 2013, SPCs had generated 60 per cent of all certificates created during 2013. Over this period the rate at which they have been created has been diminishing.

The RIS for phase one of the scheme estimated a certificate price of $25. The average spot price for certificates over this period of time was lower at $17.04. The RIS for phase two of the scheme estimated a certificate price of $35. The average spot price for 2012, the only year of the second phase to be completed, was lower at $23.12. It should be noted that, during the course of 2013, the spot price for certificates has fallen and, as of 30 September 2013 was $13.90.

The spot price for a certificate is a useful benchmark to identify the cost of certificates; however, only a limited number of certificates are traded in the spot market. The price of the remaining certificates is determined through contracts between APs and retailers or the cost to retailers themselves where they generate their own certificates.

The low certificate prices, in relation to the estimated certificate prices outlined in the 2008 and 2011 RIS documents, have been the result of the saturation of low cost activities that can be supported by low certificate prices over the life of the scheme. As these products reach saturation point, either an alternative low cost activity is required to maintain the current certificate price, or the certificate price will need to rise to bring on higher cost activities.

3.2.1 Distributional impacts

Customer classThe scheme was expanded in 2012 to include small to medium enterprises, with some existing residential activities made available to business. In May 2012, four new activities were added that were specifically focused on businesses; however there has been minimal uptake of these activities over the 2012 calendar year.

In total, a little under 150,000 certificates have been created from businesses implementing VEET activities in 2012. This accounts for approximately 1.9 per cent of all certificates created during 2012. It should be noted that some activities that have been categorised as residential activities will have been used for business purposes. This will primarily be the case for those businesses that operate out of people’s residences.

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As of June 2013, VEET activities had occurred at 1.36 million unique addresses in Victoria. Using the 2011 Census data, this equates to approximately 60 per cent of the 2.27 million households in Victoria having had a VEET activity implemented.

Socio-economic groupThere have been two key studies into the impact the VEET scheme has had on disadvantaged areas or low socio-economic groups during its first phase (2009 to 2011 inclusive). A 2012 report from the Brotherhood of St Lawrence analysed the impact of the first phase of the scheme and found that:

Relatively disadvantaged areas have received a greater share of certificates than more advantaged areas, which reflects the high proportion of certificates created through the installation of light globes and replacement showerheads during the first phase of the scheme.

Disadvantaged areas have received fewer of the measures which cost more to install and result in higher energy efficiency returns, such as hot water services, space heating and insulation. These items offer greater savings potential to households, but are likely to require financial co-contribution by the participant.16

These findings were similar to those found in an Australian Bureau of Statistics (ABS) study in 2011 commissioned by the DPI that analysed the socio economic distributional impact of VEET activities. The analysis was undertaken for the first two and a half years of the scheme’s existence (1 January 2009 to 30 June 2011) and found that, for replacement lamps and shower roses, certificate creation was skewed in favour of lower socio-economic groups.17 The report also found that for water and space heating, the distribution of certificate creation was more prevalent in higher socio-economic households.

The majority of appliances that have been incentivised by the VEET scheme have been those, such as light globes, showerheads and SPCs, which have not required participants to make a financial contribution. These items have been taken up across all socio-economic groups; however, have been particularly prevalent in the most disadvantaged areas. This indicates that these areas have received more of the benefits accrued by the scheme to date. The Brotherhood of St Lawrence notes, however, that:

“as the scope for light globe and showerhead replacements is exhausted, low-income households are likely to receive less benefit from the scheme, relative to other households. This is largely because such households are unable to afford the co-contributions required for measures that are more expensive.”

Future iterations of the scheme may need to consider whether there are potential regressive implications of VEET activity if future activity requires some form of up-front payment by participants.

3.2.2 Employment impacts

As of 31 December 2012, 121 AP businesses had been accredited to participate in the scheme. There are no figures available as to the precise number of individuals employed as a result of the scheme; however, the Energy Efficiency Council (EEC), in their submission to the Issues Paper stated that:

“a number of Council members have engaged staff in Victoria due to the ESI (Energy Save Incentive), with some estimating that the ESI has created around 2,000 jobs in Victoria.”

16 Sullivan, D., Johnson, V. The power to save: an equity assessment of the Victorian Energy Saver Incentive in Metropolitan Melbourne, Brotherhood of St Lawrence 2012.17 Australian Bureau of Statistics, 2011, ABS analysis of Victorian Energy Efficiency Target administrative data set, January 2009 – June 2011.

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In their submission, the Energy Efficiency Certificate Creators group estimated the number of full time jobs associated with the scheme in Victoria, including manufacturing, at 2,500. The submission also stated that, with the scheme expanding into the business sector, an estimated 800 additional jobs could be created over the coming year.

The ESI survey in 2011 undertook a limited survey of 50 APs and found that approximately one quarter of the businesses surveyed had been created explicitly as a result of the scheme. However, for the majority of businesses surveyed, the scheme represented a minority of their overall business activities. On average, an AP employed 14 individuals (only five full time) to undertake VEET related activity, which represented, on average 19 per cent of their workforce. If this analysis were extended to include all the 121 businesses accredited to participate in the scheme, the total employment related to the scheme would amount to almost 1,700 individuals (although only 605 of these would be full time positions).

It should be noted that the small sample size used in this analysis reduces the level of accuracy that can be ascribed to it. Additionally, since this analysis was undertaken, the scheme has doubled the target and expanded to include business activities. This suggests that the level of employment associated with the scheme will be near to those suggested by stakeholders (2,000-2,500), although there is limited quantitative data available to support this.

3.3 Cost Benefit Analysis of the scheme to dateA comprehensive assessment of the costs and benefits of the scheme to date has been undertaken to determine the overall impact of the scheme. The analysis has been undertaken in a similar manner to the cost benefit analysis (CBA) that was undertaken in the 2011 RIS. The CBA has considered both the distributional impacts of the scheme in terms of impacts on participants and non-participants and the allocative impacts of the scheme, which attempts to assess the impact on the overall level of welfare in society.

The analysis calculates the costs and benefits associated with all certificates that have been generated from 1 January 2009 to 31 December 2012. The impact of these activities is calculated in the CBA from 1 January 2009 to 31 December 2020. It should be noted that some activities that have been incentivised under the scheme have a lifetime that extends beyond 2020; however, due to the fact that extending the CBA beyond 2020 would lead to increased uncertainty in the electricity market modelling that was required and the benefits achieved beyond this point would be subject to significant discounts, it was determined that 2020 was an appropriate end period for the analysis. It is acknowledged that the benefits of the scheme will be slightly understated as a result of this decision.

The process was conducted in three phases:

Modelling to understand the energy savings associated with the certificates generated between 2009 and 2012: This involved a review of the deeming algorithms that generated the number of certificates associated with each activity, transforming the certificates to energy savings and multiplying by the number of times the activity had taken place during the analysis period.

Energy market modelling: Input the outcomes from the energy savings review into a model of the National Electricity Market to determine the impact on electricity costs.

Cost Benefit Analysis: Using the outputs from the energy market modelling, together with information on certificate prices and the administrative costs of the scheme, undertake a CBA to determine both the distributive and allocative impacts of the scheme.

3.3.1 Review of energy savings

The review was based on data available in May 2013 and included all certificates accepted and registered between 1 January 2009 and 31 December 2012. This amounted to 16.7 million certificates. The finalisation and validation of figures for the 2012 period had not been confirmed at

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this point and, therefore, the figures will differ from the official performance report of activity, released by the ESC in August 2013. The review focussed on all activity that had taken place up until 31 December 2012, which generated a greater number of certificates than the retailer liabilities for the first four years of the scheme, to generate an accurate picture of the impact that the scheme had had on energy consumption over this period.

The methodology used to model the energy savings associated with the VEET activities undertaken to 31 December 2012 involved four steps:

A review of the energy savings achieved by the scheme: The energy savings achieved by the scheme were reviewed in light of the latest data available. Data on the lifetime of the measure was used to convert certificates (lifetime abatement) into annual greenhouse savings for each fuel (electricity and gas).

VEET greenhouse coefficients were used to convert annual greenhouse savings into annual energy savings for each fuel. The coefficients are those that are currently specified in the regulations.

It should be noted that, whilst the assumptions on which the deeming algorithms are based were used as the starting point of this analysis, the analysis was not a specific review of the deeming algorithms that are used to generate certificates. The purpose of the review is to ascertain the quantity of energy savings that could reasonably be attributed to the VEET scheme over the analysis period.

The review calculated the energy savings achieved by the scheme by analysing the actual installations under the scheme over the period and modelling the estimated energy savings. These were calculated using an updated version of the Energy Efficiency Activities (EEA) model that underpinned the 2011 RIS analysis and the current regulated algorithms used to calculate the level of certificates allocated for each activity. The EEA model was updated with new data on the energy use of appliances, changes in the regulatory environment, including new minimum standards and changes to government subsidies such as rebates, and other sources such as two participant surveys that were commissioned by the ESC in 2011 and 2013 on how SPCs are being used in households. The review of the model and the estimated energy savings were conducted by Sustainability Victoria, who had significant responsibility for the formation of the original model and regulated algorithms. The revised energy saving calculations were reviewed by an independent expert who is specialised in energy efficiency.

The review found that the scheme delivered substantially less GHG abatement and associated energy savings than was expected, delivering only 56 per cent of the anticipated GHG abatement suggested by the certificates created.

A further discount of 8 percentage points was applied (in addition to the initial revision to 56 per cent) to account for factors that could not be known when the 2011 RIS and modelling forecast was conducted. The further discount accounted for new data that became available concerning compliance, rebound and additionality factors, they are described below:

Compliance: the ESC has a compliance regime in place for registering certificates that have been created by APs. Reflecting the fact that the enforcement of compliance regimes is a complicated matter, a conservative adjustment was added to the estimate. The degree to which compliance impacts on an activity is dependent on the type of activity. Non-compliance is liable to be greater for products that can be easily removed, such as light globes and SPCs. Where compliance data existed, as was the case for chimney balloons and SPCs, the actual figures were applied. Most other measures received a three per cent compliance discount.

Additionality: this relates to the financial additionality that occurs when activities under the VEET scheme receive other financial incentives, such as rebates, during the period of analysis. Financial subsidies offered by Government can change dramatically over time and for this reason

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the benefit of retrospectivity was used to calculate further financial additionality discounts for measures that received complimentary subsidies from Victorian or Commonwealth Governments over the period. This facilitated a more realistic estimate of VEET’s role in encouraging energy efficiency activities.

Rebound: an additional discount factor of five per cent was applied to the replacement of simple incandescent lighting with compact fluorescent lamps (CFLs) to account for possible increased use by some people who believe there is less incentive to turn efficient lights off.

The revised modelling indicates that the lifetime GHG abatement and related energy savings delivered by the activities installed in VEET between 2009 to 2012 is significantly less than anticipated, delivering only 48 per cent of the forecast GHG abatement.

The reductions in the lifetime GHG abatement and the associated energy savings are accounted for by the following five specific activities:

Water heating: recent data suggests that hot water use by households is less than was originally assumed. For the solar water heater measures, the savings which have been attributed to VEET have also been reduced to account for the multiple incentives which were available during 2009 to 2012.

Lighting: recent data suggests that the BAU uptake of low energy lamps is higher than was originally assumed.

Appliances: - a reduction in the energy savings attributed to the removal and destruction of older fridges

as many are not removed permanently from service- a rapid increase in the base line efficiency of the average television sold compared to the

benchmark used to calculate the original savings in the VEET algorithms- compliance issues relating to the replacement of central electric heating systems with

more efficient heating systems. Shower roses: recent data suggests that the water savings achieved when installing low flow

shower roses is somewhat less than was originally expected due to people becoming more water conscious and self-limiting the flow rates of standard (higher flow) shower roses.

SPCs: recent surveys commissioned by the ESC suggest several factors that reduced the estimated savings associated with SPCs. The factors include the removal of devices and more devices being installed per household than originally anticipated.

outlines the estimated GHG abatement for categories of activities compared to the anticipated GHG abatement, noting that a significant proportion of the downgrade was related to SPCs.

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Table 3 Estimated GHG abatement for VEET activities (2009 to 2012)

Category

Anticipated GHG Abatement

(Million tonnes (MT) of CO2-e)

Revised estimate(MT of CO2-e) % change

Water heating 1.74 0.88 -49%

Space heating 0.42 0.32 -25%

Weatherisation 0.29 0.21 -28%

Lighting 6.09 4.18 -31%

Hot water saving (shower) 0.48 0.17 -64%

Appliances 0.15 0.03 -83%

Energy saving devices (including SPCs)

7.50 2.23 -70%

Business only 0.01 0.01 -3%

Total 16.68 8.02 -52%

The results of the analysis estimate that eight million tonnes of GHG abatement is attributed to the 16.7 million certificates. The results of the review indicate that the impact of the VEET scheme on energy consumption is significantly less than anticipated. For the purpose of the energy market modelling, the review estimates that VEET activity undertaken between 2009 and 2012 will reduce electricity consumption by 5.4 million megawatt hours (MWh) by the end of 2020.

It should be noted that the energy savings calculated through the review are estimates and not measured results. While every effort has been made to identify all factors that may impact on the energy savings associated with VEET activities they are, nonetheless derived from engineering estimates. To date, there has been no direct measurement of the energy saving impacts of the activities. As such, the estimates that are being used to measure the impact of the VEET scheme to date may over or under estimate the actual savings that the scheme has delivered.

3.3.2 Energy market modelling

The department commissioned Oakley Greenwood to conduct the economic modelling and CBA of the scheme to date (Section ) and the impact of future target options (Section 6). Oakley Greenwood’s model simulates the National Electricity Market (NEM) and optimises electricity market investment and operation over time, taking into account the physical realities of the electrical power system. It estimates how VEET has (or is likely to) impact on the timing, amount and type of new energy generation capacity in the market and the type (and cost) of electricity generation needed to meet demand. This allows for wholesale and retail energy price forecasts, which are a primary factor in understanding the potential economic impacts of the scheme.

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The estimated energy savings calculated during the course of the evaluation were used to assess the impact that the scheme has had on energy markets, particularly the impacts on wholesale prices, network costs and retail prices. The full set of assumptions that underpin the modelling and the associated CBA can be found in appendix 8.5.

Energy market modelling was undertaken for the period 2009 to 2020. While certain activities had useful lives that extended beyond this period, the impacts were subject to greater levels of uncertainty and would be subject to a significant discount. However, it is acknowledged that this approach may lead to a slight underestimation of the benefits of the scheme.

The gas consumption impacts of the VEET scheme between 2009 and 2012 accounted for approximately 0.1 per cent of residential consumption; therefore, it was not considered significant enough to warrant modelling of gas prices in the wholesale or retail markets. The low level of impact would not have a material effect on gas prices.

The modelling utilised the Australian Energy Market Operator’s (AEMO) 2012 Electricity Statement of Opportunities as the starting point for the forecast period years of 2013 through 2020. The forecast assumed the policy stipulations in place at the time of modelling; namely a carbon price to July 2015, when it would transfer to an ETS.

The analysis only utilised nine measures to calculate the level of energy savings inputted into the energy market modelling. These nine activities accounted for 99.3 per cent of all the energy savings associated with the VEET scheme.

Impacts on electricity marketsThe electricity savings generated by VEET activity from 2009 to 2012 equate to just over 5,400 gigawatt hours (GWh) of energy saved for the period 2009 to 2020. To put this into context, the almost 450,000 MWh saved in 2012 is equivalent to approximately 2.3 per cent of Victoria’s residential and small to medium enterprise (SME) consumption in that year. Across the NEM, the results show that the VEET scheme reduced energy consumption by a 0.1 per cent in the first year of the scheme, rising to approximately 1 per cent in 2013-14 and continuing at that level for the duration of the analysis period. Table 4 shows the impact the VEET scheme has had on energy consumption, peak demand and wholesale prices for the review period.

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Table 4: Impacts of the VEET on the wholesale electricity market (financial year)

Financial Year

Without VEET With VEET Change

Total electricity sent out

– Victoria (GWh)

Victoria peak

demand (MW)

Average (time

weighted) price – Victoria ($/MWh)

Total electricity sent out

– Victoria (GWh)

Victoria peak

demand (MW)

Average (time

weighted) price – Victoria ($/MWh)

Total electricity sent out

– Victoria (GWh)

Victoria peak

demand (MW)

Average (time

weighted) price – Victoria ($/MWh)

2009-10 48,085 9,504 $30.08 48,033 9,498 $29.94 -52 -6 -$0.14

2010-11 47,946 9,365 $29.88 47,754 9,343 $29.36 -192 -22 -$0.52

2011-12 47,143 8,630 $19.64 46,871 8,605 $19.35 -272 -25 -$0.29

2012-13 47,936 9,108 $47.26 47,510 9,073 $46.80 -426 -35 -$0.46

2013-14 49,572 9,451 $50.84 49,003 9,410 $50.43 -569 -41 -$0.41

2014-15 50,790 9,677 $52.66 50,202 9,638 $52.35 -588 -40 -$0.31

2015-16 51,994 9,861 $33.85 51,417 9,823 $33.76 -577 -38 -$0.09

2016-17 53,002 10,033 $33.23 52,429 9,995 $33.15 -573 -38 -$0.08

2017-18 53,992 10,199 $42.43 53,421 10,161 $41.47 -571 -38 -$0.96

2018-19 55,112 10,395 $36.82 54,542 10,357 $36.75 -570 -38 -$0.07

2019-20 56,137 10,567 $36.28 55,568 10,529 $36.14 -569 -38 -$0.14

2020-21 56,996 10,717 $37.03 56,430 10,678 $36.92 -566 -38 -$0.11

The scheme’s impact on electricity peak demand, which tends to occur in the afternoon or early evening during the summer, has been calculated to be relatively small. The impact on peak demand has ranged between a 0.1 per cent reduction and a 0.4 per cent reduction, reaching a peak of 41 megawatts (MW) during 2013.

It should be noted that a number of assumptions have been made concerning the impact of VEET activity on peak demand, given the absence of direct data on the time distribution of the VEET activities. For water heating and shower rose activities (accounting for approximately 17 per cent of all energy savings) it has been assumed that these have been installed on only off peak water heating and would have no impact on peak demand. Were this assumption to be altered it is liable that the impact of the scheme on peak demand would be greater and, therefore, the scheme would have greater ability to impact on wholesale electricity prices.

The reduction in energy consumption has led to downward pressure on electricity system production costs and, therefore, downward pressure on wholesale electricity prices. The reductions in the average wholesale electricity price over the analysis period ranged from between 0.2 per cent to 2.4 per cent, averaging at 0.7 per cent. This equates to $0.27 per MWh.

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3.3.3 CBA results

The CBA provides two sets of results. Firstly, the CBA analysed the distributional impacts of the VEET scheme to date. This process calculates the bill impacts of the scheme on five separate customer groups. These are:

Residential participants, defined as residential customers that had measures installed under the VEET scheme between 2009 and 2012

Residential non-participants, defined as residential customers who were eligible to participate under the scheme, but did not do so

Small commercial customers, defined as all commercial customers whose energy is delivered through the low-voltage (LV) distribution network

Medium commercial and small industrial customers, defined as all other commercial customers, excluding those large energy customers who had participated in the EREP program

Large commercial and industrial customers, defined as those large energy customers who had participated in the EREP program and were not liable under the scheme.

Secondly, the CBA analysed the allocative impact of the scheme that outlines the overall impact that the scheme has had on the Victorian economy.

A net present value (NPV) has been applied to the results of the CBA. The NPV is calculated from 1 January 2009 to 2020 (in 2012 dollars) to discount future impacts (mainly benefits in the later years). The NPV has used a risk-adjusted seven per cent discount rate, which is the same as the conservative NPV used in the 2011 RIS. It is acknowledged that using a less conservative discount rate would increase the value of benefits attributed to the scheme in later years.

Distributional impacts - costsAs outlined in section 3.1, retailers are required to generate or purchase a number of certificates to meet their liability under the scheme for any given year. The cost of generating or purchasing certificates by retailers is then passed onto consumers through their retail energy bills. The reduction in energy consumption caused by the scheme will also impact on the network fees that are imposed on consumers. Although the total revenue of distribution companies responsible for network fees will remain the same, the cost per unit of electricity will increase to reflect the lower level of energy consumption across the network.

The distributional costs of the scheme are:

Network costs including;- Transmission costs – unit prices will automatically increase or decrease to compensate for

changes in revenue that stem from changes to energy consumption. A decrease in energy consumption will lead to an increase in the transmission costs incurred per unit of electricity.

- Distribution costs – the distribution component is dependent on the extent to which the fall in energy consumption is forecast by distribution businesses. Any forecast reduction in consumption and, therefore, sales, will result in higher unit prices. It is assumed that, for the 2006 to 2010 regulatory period, the drop in energy consumption associated with VEET was not included in the consumption forecasts by distribution businesses; however, for the following period (2011 to 2015) it is assumed that the fall in energy consumption was forecast for residential customers by distribution business and, therefore, unit prices increased.

It is assumed that, given that the majority of VEET activity occurred within the residential sector and that there was no energy reduction forecast for business customer classes, only residential customers will be impacted by network costs.

Retail costs including;

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- certificate costs – it is assumed that the price of certificates include the administration costs of the scheme borne by the ESC and any costs incurred by APs.

- scheme compliance costs – the administrative costs incurred by electricity retailers to comply with the scheme.

It is assumed that retailers pass all costs incurred, through both the purchase of certificates and any compliance costs, through to the customer. It is assumed that costs are passed through to all liable customers in proportion to the amount of energy they consume. This means that, for the first three years of the scheme (2009 to 2011 inclusive) only residential consumers are liable to the costs of the scheme. Following their introduction to the scheme in January 2012, all business customers, with the exception of large commercial and industrial consumers, are liable to have costs passed through to them. Large commercial and industrial consumers are excluded from the scheme liabilities due to their participation in the EREP program.

It is assumed, for ease of analysis, that all costs incurred by retailers have been recovered through electricity bills. In reality, retailers are liable under the scheme for both gas and electricity consumption. This means that some program costs may have been recovered through gas prices and, as such, the costs attributed to electricity bills will be overestimated. However, this will not have an overall impact on the net effect of the scheme. It should be noted that there is no information currently available as to how retailers choose to recover the costs of the VEET scheme and an alternative means of recovering costs may actually be in place. shows the average bill impacts of these costs by the various customer classes.

Table 5: Annual and total cost of the VEET scheme per average customer for each customer class ($2012)

Customer class Component 2009 2010 2011 2012 NPV2009-2020

Residential participantsNetwork costs -$0.29 -$1.17 -$7.22 -$13.60 -$79.50

Retail costs -$26.80 -$10.59 -$32.14 -$33.69 -$86.23

Residential non-participants

Network costs -$0.30 -$1.29 -$7.90 -$14.61 -$89.17

Retail costs -$27.85 -$11.65 -$35.15 -$36.19 -$92.50

Small commercial customers

Network costs $0.00 $0.00 $0.00 $0.00 $0.00

Retail costs $0.00 $0.00 $0.00-

$169.77-$129.52

Medium commercial and small industrial customers

Network costs $0.00 $0.00 $0.00 $0.00 $0.00

Retail costs $0.00 $0.00 $0.00-

$847.65-$646.67

EREP customersNetwork costs $0.00 $0.00 $0.00 $0.00 $0.00

Retail costs $0.00 $0.00 $0.00 $0.00 $0.00

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Two features stand out from the results of the costs of the scheme. Firstly, there is a significant increase in the network cost to residential customers from 2011. This is accounted for by the increase in unit costs from distribution businesses as a result of including consumption reduction associated with VEET in their price determinations for the regulatory period from 2011 to 2015. It should be noted that the increase in costs associated with transmission and distribution are due to an overall reduction in demand caused by the VEET scheme. Distribution businesses are reallocating their charges per unit of electricity to maintain a certain level of revenue and, therefore, in net terms the scheme has neither a positive or negative impact on their business. The increase in revenue that they receive from the increased charges are equalised by the drop in revenue they realise from the decreased electricity consumption.

Secondly, businesses liable under the scheme only begin to be subject to the costs of the scheme from 2012, the year when they were eligible to participate.

Distributional impacts - benefitsThe VEET scheme is intended to deliver benefits to consumers in two ways. Firstly consumers who choose to participate in the scheme can expect to reduce their energy consumption, which in turn leads to a reduction in their energy bills. Secondly, the overall reduction in demand for electricity will place downward pressure on the costs of generating that electricity, which will lead to lower wholesale electricity prices. All electricity consumers can expect to experience reductions in their electricity bills if the lower wholesale costs are passed through to the consumer.

The distributional benefits of the scheme relate to:

wholesale price reductions: The wholesale price reductions were calculated through the energy market modelling. It is assumed that the full wholesale price reduction is passed through by retailers to the consumer.

reduction in consumption: The reduction only applies to those customers who participated in the scheme. This component is calculated by multiplying the reduction in energy consumption attributed to the VEET scheme by an average retail price. The average retail price is calculated by weighting the average standing offer and market offer prices by the estimated customer numbers on those offers.

For the purposes of the analysis it is assumed that only residential customers participated in the scheme during the analysis period. A small proportion of certificates were created within the non-residential sector and, therefore, it is acknowledged that the benefits for these groups will be understated. Table 6 shows the average bill impacts of these benefits by the various customer classes.

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Table 6: Annual and total benefit of the VEET per average customer for each customer class ($2012)

Customer class Component 2009 2010 2011 2012 NPV 2009-2020

Residential participants

Wholesale price $0.45 $1.72 $2.04 $1.90 $12.06

Reduction in consumption

$13.20 $48.39 $58.09 $114.74 $824.66

Residential non-participants

Wholesale price $0.47 $1.89 $2.23 $2.04 $13.13

Small commercial customers

Wholesale price $2.11 $8.79 $10.49 $9.58 $61.19

Medium commercial and small industrial customers

Wholesale price $13.18 $49.71 $53.47 $47.83 $313.99

EREP customers Wholesale price $5,067 $21,174 $25,955 $23,796 $151,185

All customers benefit from the downward pressure exerted by the VEET scheme on wholesale electricity prices, with significant additional benefits being experienced by consumers that participated in the scheme, due to a reduction in the level of their energy consumption.

Table 7 shows the net benefit of the scheme for the different customer classes.

Table 7: Distributional impacts – net annual and total financial benefit of the VEET per average customer for each customer class ($2012)

Customer class 2009 2010 2011 2012 NPV2009-2020

Residential participants -$13.44 $38.35 $20.77 $69.36 $670.99

Residential non-participants -$27.68 -$11.05 -$40.82 -$48.75 -$168.63

Small commercial customers $2.11 $8.79 $10.49 -$160.19 -$68.32

Medium commercial and small industrial customers

$13.18 $49.71 $53.47 -$799.82 -$332.68

EREP customers $5,067 $21,174 $25,955 $23,796 $151,185

The results show that, for residential customers who have participated in the scheme, the benefits from participation, namely the decrease in their personal electricity consumption, significantly outweigh the network and retail costs incurred as a result of the scheme.

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For all non-participants who share the costs of the scheme, however, the reduction in wholesale prices is not enough to outweigh the costs of the scheme. This means that their electricity bills will have increased as a result of the scheme.

For large commercial and industrial customers, who participated in the EREP program, as they have not been liable to the costs of the scheme, they have benefited purely from the decrease in wholesale prices.

Looking purely at the financial impacts of the scheme on customers’ bills, it shows that non participants in the scheme, with the exception of those large businesses who are excluded, are, in part, cross-subsidising those who have participated. It should be noted that the benefits that are accrued by participants outweigh the costs incurred by non-participants, as indicated in Table 7. This analysis, however, only looks at the impacts on customer bills and does not consider the broader economic impacts of the scheme.

Drawing on the analysis undertaken by the ABS on the distributional impacts of the scheme, it is reasonable to assume that households from lower socio-economic groups have not been proportionately disadvantaged by this cross subsidisation. This is consistent with the finding that, particularly for low cost measures that have formed the majority of activities undertaken under the scheme, households from lower socio-economic backgrounds have received, proportionately higher numbers of VEET activities.

Allocative impactsThe distributional impacts of the VEET scheme that have been outlined for various customer groups include a significant amount of transfers. Some of the benefits that have been achieved by participants in the scheme will have been subsidised by businesses and other residential customers who did not participate in the scheme. Others will have been achieved through the transfer of revenue previously realised by shareholders in the electricity supply chain to electricity customers.

This BIA has tested the allocative impacts of the VEET by assessing the economic costs and benefits of the scheme through the electricity demand and supply chain. The key economic costs and benefits that have been evaluated are outlined below.

Economic CostsThe economic costs that are imposed on the energy supply chain through VEET relate to the requirements that are faced by the energy retailers in complying with the scheme. This will relate to the cost of purchasing or generating certificates, along with any other administrative costs to the retailer in complying with the scheme. It is assumed that these costs are then fully passed on to all electricity consumers through their electricity bills. These costs are included as they would not have otherwise occurred without the existence of the VEET scheme.

There are no further costs imposed on the energy supply chain from the existence of VEET. The lower level of energy consumption decreases the costs of energy generation, and does not impose additional burden on network infrastructure, so there are no costs imposed on these components. Some participants in the scheme will have incurred costs through financially contributing to the installation of an energy efficiency appliance. These costs have not been considered in the analysis as the majority of appliances installed under the VEET scheme between 2009 and 2012 were low cost items that were effectively free to the participant.

The allocative costs of the scheme relate to:

The costs incurred by retailers in either creating or purchasing certificates: The price at which the certificates have been traded on the spot market has been used to determine the costs relating to certificates. As has been noted previously, this price represents the marginal price at which

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certificates clear the market and is unlikely to represent the actual cost of purchasing those certificates. This is liable to lead to an overestimation of these costs.

Retailers’ compliance costs: The costs incurred in developing the infrastructure to administer the program by retailers and any ongoing costs. These costs have been estimated from a set of interviews undertaken with energy retailers on behalf of the DCCEE18.

The total economic costs associated with the scheme are outlined below in Table 8.

Table 8: Economic costs of the VEET – electricity sector total resource perspective ($2012, millions)

Economic costs 2009 2010 2011 2012 NPV2009-2020

VEET certificate costs -$57.16 -$23.48 -$75.53 -$173.88 -$268.23

Compliance costs -$3.85 -$2.17 -$2.34 -$6.73 -$12.54

Total costs -$61.01 -$25.66 -$77.87 -$180.60 -$280.77

Economic BenefitsThe economic benefits of the VEET scheme relate to the reduction in the costs of supplying the electricity through the supply chain through reducing the level of energy consumption. For electricity generators, this mainly relates to a reduction in the amount of fuel used to generate the electricity. The reduction in consumption can also impact on other ongoing costs of running an energy generator, such as maintenance. If the reduction in energy consumption is large enough, the VEET scheme may also be able to impact on generator capital costs, including the deferment of new energy generation capacity.

An additional benefit that may accrue from reducing energy consumption by an initiative such as the VEET scheme is to defer network upgrades; however, the limited impact that the scheme has had on peak demand, in addition to the fact that these impacts are not localised to specific geographies, means that it is unlikely that it has had a material impact on capital requirements for networks.

A reduction in energy consumption caused by the VEET scheme will also reduce the level of GHG emissions, lowering the costs associated with these. These benefits have not, however, been included in this analysis. The fact that, from July 2012, the analysis included a carbon price means that some proportion of the environmental impacts is included in the cost benefit results. However, it is acknowledged that, for the period prior to 1 July 2012, the scheme will have delivered a benefit in relation to GHG emissions which is not included in the wholesale price and, therefore, is not included in this analysis.

The allocative benefits of the scheme relate to:

Reductions in variable electricity production costs, including fuel costs, variable operation and maintenance costs and carbon costs: The reduction calculated is almost entirely due to the reducing need for coal for electricity generation, reducing the fuel costs of energy generation.

Reductions in capital costs: While there is a limited impact on fixed operation and maintenance costs by the VEET scheme, the analysis has ascertained that there has been no impact on capital costs of electricity generation. The analysis concludes that reduction in energy consumption

18 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.

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caused by the scheme did not have any impact on the amount or type of energy generation capacity needed, indicating that the VEET scheme will not defer planned electricity generation expansion.

The total economic benefits associated with VEET are outlined in Table 9 below.

Table 9: Economic benefits of the VEET – electricity sector total resource perspective ($2012, millions)

Economic benefit 2009 2010 2011 2012 NPV2009-2020

Reduced variable production costs

$0.86 $3.40 $4.11 $15.32 $103.13

Reduced fixed production costs $0.00 $0.00 $0.00 $0.00 $0.01

Total reduction in production costs

$0.86 $3.40 $4.11 $15.32 $103.14

The results of the CBA show that the costs of the scheme have outweighed the benefits from a total resource perspective (as shown in Table 10 below). The impact of the VEET scheme on the economy for the period 2009 to 2020 shows that the scheme delivered a net cost of $177.6 million.

Table 10: Net economic benefits of the VEET – electricity sector total resource perspective ($2012, millions)

2009 2010 2011 2012 NPV2009-2020

Net economic benefit -$60.15 -$22.26 -$73.76 -$165.28 -$177.63

There is a significant difference in the results from the distributional impact and the allocative impact of the VEET scheme. In the previous section outlining the distributional impacts, it was identified that the benefits accrued by participants in the scheme outweighed the costs incurred by non-participants. The outcome from the allocative analysis, suggests that these benefits represent a transfer from the energy supply chain through a loss in profits, particularly by electricity generators.

3.3.4 Difference from previous modelling

The CBA undertaken as part of the 2011 RIS estimated a different set of results to those identified above.. Specifically, in terms of the allocative impacts, the scheme delivered a net benefit. There are, however, three significant reasons why the current analysis has delivered a different result:

The time periods are different. The 2011 RIS CBA modelled the impacts of activity taking place between 2012 to 2014 inclusive. The three years had an annual target of 5.4 million certificates. The analysis outlined above modelled the time period 2009 to 2012 inclusive.

The level of energy savings is different. The analysis outlined above has attempted to quantify the actual energy savings that have been experienced as a result of activity undertaken between 2009 and 2012. The quantum of energy savings used in the 2011 RIS was based on the deeming algorithms, which were produced using the best available information at the time, to estimate the

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energy that would be saved following implementation in 2012 to 2014. As such, the level of energy savings used in this analysis is lower.

Changing forecasts of energy consumption. In 2011, the forecasts for energy consumption were predicting increasing energy demand going forward. These forecasts have changed significantly in the intervening period to the extent that they now forecast a far flatter energy demand profile. This limits the impact that the reduction in consumption caused by the VEET scheme will have on energy generation, particularly the deferral of future generation capacity. Under current forecasts there is limited new generation capacity needed, beyond that which is required by the Renewable Energy Target (RET).

It is worth noting that the 2011 RIS predicted a much higher certificate cost (at a marginal certificate price of $35) than was observed in the actual market for phase two. On this basis, while the review of energy savings undertaken during this BIA process reduced the estimated savings encouraged by VEET, it does not suggest that the cost of delivering energy efficiency savings is higher than was anticipated in the 2011 RIS. Rather, the lower certificate prices observed in the market during the latter part of phase two may be consistent with activities that delivered less energy savings than was anticipated.

It is not possible to conclude that the 2011 EEA model was poorly calibrated; rather the data that underpinned the underlying assumptions for some key activities did not have the benefit of performance and monitoring in actual households. This is to be expected when modelling new activities in a new scheme for which limited data is available. In the case of SPCs, much of the data that underpinned the creation of certificates was based on field trials rather than actual performance within homes. A fact that magnified the current findings since SPCs dominated the scheme in 2012 and 2013.

The evaluation of the VEET scheme’s performance to date highlights the challenge of modelling a scheme such as VEET which is one of the first of its kind in Australia. Many of the key variables are unknown and untested. Very little verified data exists on certain aspects of a typical household's energy use and how it may be affected by the installation of activities in VEET. Inherent to technological development, many of the energy efficiency activities also evolve over time in terms of performance, cost and accessibility. Regulatory environments also change, as does the energy use profile of households.

Coupled with the uncertainty associated with modelling energy markets, which are significantly affected by the general performance of the local and global economy, modelling the future costs and benefits of energy efficiency activities which ‘are anticipated’ to be adopted several years in the future, in conjunction with how it will affect the wholesale energy markets, is uncertain.

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4. The Government’s objectivesSection 4 of the Act outlines the following Government objectives:

to reduce GHG emissions to encourage the efficient use of electricity and gas to encourage investment, employment and technology development in industries that supply

goods and services which reduce the use of electricity and gas by consumers.

4.1 Reduce GHG emissionsOne of the key objectives of the Act is to reduce GHG emissions. The policy environment regarding the reduction of GHG emissions has altered significantly since the Act was legislated in 2007. As outlined in section 2.5.1, a commitment has been made by both major parties at a Commonwealth level to a five per cent emissions reduction target by 2020 and that, given the existence of a national emissions reduction policy framework, emissions mitigation is not a major objective of State policies. As such, this is no longer a core objective of the Victorian Government.

4.2 Encourage the efficient use of electricity and gasEncouraging the efficient use of electricity and gas remains a broad Victorian Government objective. More specifically, regarding energy efficiency, the Government’s objective is to promote programs which assist households and businesses manage rising energy costs through measures which help them reduce energy consumption.

The VEET scheme incentivises parties to install products that help reduce their consumption of electricity and gas. APs under the scheme help consumers overcome the barriers that prevent them from installing energy efficiency appliances. A financial incentive is provided that allows the consumer to install the energy efficiency product at a lower cost, which in some cases means that the appliance is effectively free. Through participating in the scheme (installing appliances), consumers are able to reduce the level of energy consumption and, therefore, reduce the quantum of energy for which they are charged.

The VEET scheme can assist in participants reducing their energy bills in two ways. Firstly, through the reduction in the electricity and gas that they personally consume. Secondly, the overall drop in consumption by all participants reduces demand for energy generation. This reduction in demand can lead to a fall in the cost of generating energy and, if the reduction is large enough, the deferral of capital spend on energy generation and networks. This means that, if these cost reductions are passed through to end consumers, everyone benefits from lower energy bills than would otherwise have been the case.

It is important to note that the VEET scheme also imposes additional costs on energy retailers that are passed through to consumers. For the VEET scheme to meet the Government’s objective of being a program that assists households and businesses to manage rising energy costs, the benefits outlined in the paragraph above would need to outweigh the costs of the scheme.

4.3 Encourage investment, employment and technology developmentAnecdotal evidence suggests that the VEET scheme supports approximately 2,000 jobs in Victoria. By providing a financial incentive to implement energy saving activity in households and businesses, the VEET scheme has increased the level of demand for energy efficiency products. This has bought forward the development and dispersion of new products, such as in-home displays, that may not

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have occurred without the scheme. The scheme also provides energy efficiency product manufacturers and suppliers access to markets they would not necessarily have reached.

The continuing existence of the VEET scheme will create certainty for energy efficiency businesses that there will be a specific market for their products over a three year period (2015 to 2017). If the scheme were to expand further into the business sector, this may require new sets of skills and expertise that may lead to further employment. It should be noted, however, that if the scheme’s target is reduced, there may be a fall in employment associated with the scheme as fewer certificates will need to be created.

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5. Options to achieve objectivesThere are a number of options that could be adopted to meet the Government objectives, whilst addressing the barriers to the uptake of energy efficiency measures outlined in section 2. The options that this BIA will be subjecting to a detailed CBA, however, relate to a continuation of the VEET scheme.

This BIA considers the following options for a VEET scheme over the next phase of the scheme (2015 to 2017):

Option 1: Target of 2.0 Mt CO2 per annum Option 2: Target of 2.7 Mt CO2 per annum Option 3: Target of 5.4 Mt CO2 per annum.

The purpose of this BIA is to determine the continuation of the VEET scheme and potentially set the target for the third phase of the scheme. The results of the CBA determine the preferred option for the continuation of the scheme. If none of the above options are preferred, the legislation for the VEET scheme will be those that ensure the orderly closure of the scheme, rather than a new Government initiative.

The BIA also considers alternative interventions that could address the problem outlined in section 2, specifically information gaps. It should be noted that many of the alternatives, such as minimum standards and education, that would have been considered in a future options analysis have already been implemented and form part of the base case. Section 2 identified that, even with these initiatives in existence, there remain barriers to overcome that require intervention. The BIA undertakes a qualitative CBA of the following three options:

Information campaigns Household energy audits Voluntary energy efficiency disclosure for residential properties.

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6. Cost-benefit analysisThe purpose of this BIA is to provide evidence that the intervention chosen to meet the Government’s objectives is the most appropriate mechanism to solve the problem. To this end, this BIA analyses the costs and benefits of the proposed regulations to identify if they deliver a net benefit or cost to society. The CBA provides a mechanism through which this analysis can be undertaken.

The CBA undertaken for the future VEET scheme options has been conducted using similar methodologies to the analysis undertaken in the evaluation of the scheme (section 3 of this BIA). It distinguishes between the distributional effects of the scheme and the allocative effects. The 2011 RIS outlined the difference between distributional and allocative effects:

Allocative (or economic) effects impact on the overall level of welfare in society. They change what, and how much, society can produce which, in turn, determines what is available for the community to consume. Since total resources are limited, the decision to use resources to undertake a particular initiative will mean that the resources cannot be used for other purposes. This represents an allocative cost in terms of production and consumption opportunities foregone – a concept commonly referred to as opportunity costs.

Distributional (or financial) effects represent transfers in welfare between different groups in society, but do not alter the total level of welfare on society (unless a judgement is made that one group derives more value from the resources than another group). In other words, some groups may be made better off as the result of undertaking a course of action at the expense of other groups who become correspondingly worse off. 19

In the case of this BIA, the allocative effects will be economic cost and benefits associated with the reduction in energy consumption caused by the scheme. The distributional effects will be the impact that the scheme has on different consumer groups’ energy bills.

The section that follows estimates the costs and benefits of the VEET options in relation to the base case.

6.1 CBA periodThe CBA has been calculated for the period from 1 January 2015 to the end of 2030. The analysis has required the modelling of national energy markets over this period to determine the impact that the scheme will have on wholesale energy prices and the cost of energy generation.

As outlined in section 3, there have been significant revisions to energy forecasts over the past three years, which, combined with changes in policy settings regarding GHG emissions, leads to a degree of uncertainty around the accuracy of forecasts. Modelling behaviour in such a complex market relies on a range of assumptions, such as forecast energy demand and carbon pricing, which become less certain over time. It has been decided, therefore, to limit the analysis to the end of 2030 to limit the impact of this uncertainty, whilst allowing a sufficient period of time for the impacts of the scheme on energy markets to be modelled.

Some activities under the scheme will deliver lifetime energy savings beyond the end of the analysis in 2030. For example, forms of insulation (ceiling insulation or double glazing) are assumed to have a lifetime of 25 years. In comparison, an SPC has a lifetime of 10 years. This means that the benefits of some measures will continue beyond the end of the analysis, although the majority of benefits will

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

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have been realised. It is acknowledged that this approach may underestimate the benefits of the scheme; however, this period of analysis was deemed appropriate given the uncertainty associated with modelling activity after 2030, coupled with the fact that any costs or benefits accrued after this point would be heavily discounted.

The analysis shows results for the period 2015 to 2030, expressed in 2015 Australian dollars. Results are also shown over the 15 year period using a risk free NPV of 3.5 per cent and a risk adjusted NPV of 7 per cent.

6.2 Base CaseIn order to assess the impact of the options a base case needs to be determined to enable comparison. The base case chosen is the one which would occur if new regulations setting targets for the scheme are not adopted.

The basis for this analysis presumes that if no target is set in the regulations by 31 May 2013, the Department would take action to remove the legislation. Therefore, the analysis assumes that the base case is a scenario where no VEET scheme exists from 1 January 2015.

There is a high degree of uncertainty over the policy settings regarding the treatment of carbon emissions for the CBA period. The base case has adopted the policy settings ascertained from the Commonwealth Government’s policy announcements as of 30 September 2013. This means that under the base case:

there is no pricing of carbon the full RET will be delivered by 2020 a national energy saver incentive is not introduced.

6.3 VEET activities modellingConsistent with the previous 2011 RIS and the CBA of the scheme to date, a two stage process was used to evaluate the costs and benefits of the future of the scheme. Three annual targets were modelled for the period 2015-2017:

Option 1: Target of 2.0 Mt CO2 per annum. This option sets an annual target that will produce certificate prices consistent with average prices observed in phase two of the scheme (2012 to present).

Option 2: Target of 2.7 Mt CO2 per annum. This option is consistent with the target from phase one of the scheme (2009 to 2011).

Option 3: Target of 5.4 Mt CO2 per annum. This option is consistent with the target for the current phase of the scheme (2012 to 2014).

The three targets modelled for phase three are lower than in the 2011 RIS, with the highest target option being equivalent to the current phase two targets. The lower target options are due to the fact that phase three activities are assessed to be delivered at a higher cost. The modelling indicates that there are fewer low or no cost VEET activities available, which require a higher certificate price to incentivise uptake. The higher certificate prices required to reach each of the three options is displayed in Table 11.

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Table 11: Certificate prices under the three options

Option 1 Option 2 Option 3

2015 2016 2017 2015 2016 2017 2015 2016 2017

Certificate price ($)

17.75 17.00 16.50 23.75 22.25 22.00 57.00 49.75 46.00

Two models have been utilised to determine the uptake of activities under the three options. The first model is an updated EEA model that was used in the evaluation of the VEET scheme to date and the 2011 RIS on the VEET scheme. A second model has been used to estimate the type of commercial and SME activities that might be incentivised in phase three with the introduction of Project Based Assessments (PBAs) and potential new activities. Energetics was commissioned to model the take up of activities in the business sector for each of the target options and to integrate its associated cost curves with the EEA model which covers mostly residential activities.

Given that the original EEA Model included mostly residential activities, it will be denoted herein as the Energy Efficiency Activities Residential (EEA-Residential) Model and the Energetics’ business model will be denoted as the Energy Efficiency Activities Business (EEA-Business) Model.

6.3.1 Process for selecting activities

The following section provides a simplified overview of how the EEA-Residential model and EEA-Business model determine uptake rates. Each model was run for each of the options and the results combined to provide an integrated cost curve.

The following general assumptions have been adopted to model the uptake of activities:

Modelling results are based on the best available evidence at the time of modelling; however, the results should be considered indicative rather than predictive.

All measures undertaken are additional to current and anticipated mandatory requirements. A rebound factor is included for relevant measures where this may occur. The incentive generated for a given activity equates to the value of the certificate multiplied by the

number of certificates allocated to that activity minus the Government administration costs ($1 per certificate) and AP costs.

All measures have an assumed life of savings which relates to the lifetime of the product with the exception of project based methodologies (discussed later in this section).

The methodology used to estimate the take up of VEET activities in both the residential and business sectors involved the following three steps. Please note that Step 2 differs for some activities for the EEA-Business model.

Step 1: determine the level of consumer incentive available through VEET by calculating the number of certificates created for each activity. Certificate creation depends on the estimated average annual energy saving per measure, multiplied by the life of the measure, multiplied by the VEET GHG coefficient. Where appropriate, the certificate values are also adjusted for regional factors.

Step 2A – EEA – Residential Model: in the residential model, the uptake rate is determined as a function of the level of incentive provided to the consumer expressed as a percentage of the activity’s total additional cost. Householders do not as a general rule undertake a financial analysis when deciding to implement an energy saving measure but rather put heavy weight on the upfront cash component of any incentive compared to the total outlay required. Therefore, for

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the EEA – Residential model, the annual uptake rate is determined by calculating the level of consumer incentive (net of any administrative costs to the ESC and APs) as a percentage of the measure’s additional cost. This figure is then used as the input to the uptake rate function which is a non-linear function that starts at a low level and then ramps up once the incentive exceeds 50 per cent of the additional cost.

Step 2B – EEA – Business Model: unlike the residential model, we assume that businesses are more likely to undertake the calculations required to determine paybacks for specific activities, particularly for large budgetary measures such as variable speed drives (VSDs) for Heating, Ventilation and Cooling (HVAC) and pumps. Note however that some of the lower cost activities such as lighting use the methodology described in Step 2A (the uptake rate function is based on the proportion of incentive provided).

Step 3: To determine the measures adopted in both models, the annual uptake rate is capped at the annual maximum uptake limit. Where available, the maximum uptake rate is based on historical data from the VEET scheme and/or large scale incentive schemes. The annual uptake rate for a particular measure at a particular certificate price is given by the maximum uptake rate multiplied by the output of the uptake rate function. A measure will continue to see uptake in the model until the “pool of opportunity” for that measure has been exhausted.

In recognition of the fact that phase three is using the EEA-Business model for the first time, a stakeholder consultation workshop was conducted on 20 September 2013 to give relevant business stakeholders the opportunity to comment on the modelling approach, key assumptions and key activities forecast by the model. A workshop was not held for the EEA-Residential Model given that most of the activities modelled are already regulated under the scheme for which detailed consultations for each activity have previously been conducted. An independent expert was commissioned to review the revised EEA-Residential model.

6.3.2 Energy efficiency activities

The balance between residential and commercial activities changes dependent on the level of target as set out in the three options. For options 1 and 2, more certificates are forecast to be created from the commercial sector than the residential sector. For target option 3, the increasing certificate prices are enough to encourage the installation of more expensive residential activities such as underfloor insulation and the purchase of high efficiency (HE) fridges and televisions. Table 12 outlines the proportion of certificates created in the residential and business sector for each of the three target options.

Table 12: Proportion of certificates created by sector

Option 1 Option 2 Option 3

Residential 39% 46% 59%

Business 61% 54% 41%

As a general observation, the modelling suggests a high uptake of activity by the business sector. The VEET scheme to date has seen the vast majority of installations in the residential sector; however, the modelling suggests that, in phase three, there will be a transition to a more business orientated scheme.

To date the scheme has been dominated by low cost residential measures that have been effectively free to households. As these free measures reach saturation levels, new types of activities will need to be incentivised and it is reasonable to expect that businesses will capture a greater share of these

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opportunities, particularly since many low cost opportunities, such as commercial lighting, exist in the business sector. The modelling has also assumed that PBA will be introduced that will help businesses to capture more energy efficiency opportunities. The introduction of PBA methodologies is discussed further in this section.

Activities incentivised in the residential sectorThe EEA-Residential model was updated during the evaluation of the VEET scheme and two further activities were included that are currently not eligible in the scheme. These activities were added on the basis that they are potentially viable, measurable and verifiable. Some further adjustments were made to the average energy savings assumed for the existing activities in light of new data, and some energy baselines needed to be adjusted to account for regulatory changes or improvements to energy efficiency under BAU. These changes to the design of the scheme which have been modelled are summarised below:

HE building shell for new dwellings introduced - From 1 May 2011, the Building Code of Australia required that all new houses, townhouses and apartments meet a minimum 6 Star standard based on their House Energy Rating. Recognising the fact that some new dwellings may be built with an energy efficiency rating that is higher than 6 stars, i.e. 7 and 8 stars, the phase three modelling includes a potential new activity that rewards dwellings built with an efficiency rating that is above 6 stars, achieving savings on their heating and cooling energy use.

Low energy lighting for housing introduced - New dwellings which install lighting systems that are significantly more energy efficient than the minimum standard allowed in the building regulations, can apply to create certificates.

Ceiling insulation reintroduced - The Department has been reviewing this activity, although the actual reintroduction of ceiling insulation is yet to be determined. The modelling assumes the suspension on ceiling insulation is lifted with installation costs increasing by an average of $200 per house to cover new training and compliance requirements.

Adjustment to the GHG abatement associated with SPCs - The EEA-Residential model discounted the savings which are allocated to both audio visual and Information Technology SPCs, based on the discounts that were applied by the ESC in September 2013.

It should be noted that while new activities have been included in the phase three modelling, the actual process for including new activities in the scheme is much more involved and generally requires an amendment to regulations. Eligible activities are prescribed in the Victorian Energy Efficiency Target Regulations 2008 (the Regulations). The process of adding new activities to the list of Prescribed Activities is currently managed by the Department and is informed by the New Activity Guidelines which are available on the Department website. In general terms, the process allows people or businesses to nominate potential new activities for consideration. The potential activities are reviewed by the ESI Activities Review Panel chaired by the Department and any proposed changes, including the draft Regulations, are made available for public consultation.

Table 13shows the forecast residential activities that could be incentivised over the three year period of phase three for each target option. The table includes estimated numbers of certificates created for each activity over the period. Note that as the target level increases (and the marginal certificate price gets higher), new activities are expected to be incentivised.

For each option, lighting, water and space heating are expected to create the bulk of certificates in the residential sector. The replacement of incandescent light globes continues to be one of the cheaper retrofits, reaching its limit of installation capacity over the three years. SPCs are expected to continue to play a significant role, but not at the levels observed during phase two.

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Table 13: Forecast certificate creation in the residential sector by activity (2015 to 2017)

Option 1 Option 2 Option 3

CFL/LED lamp replaces incandescent globe (21A) 450,164 450,164 450,164

Standby Power Controller (AV SPC) (29A) 420,874 601,073 601,073

HE gas heater replaces electric water heater (1 A/B) 327,480 593,706 1,517,574

Replace 12V halogen downlamp (21C) 230,385 417,345 1,480,750

HE gas ducted heater replaces central electric heater (6) 224,605 398,816 422,374

In-home display (IHD) (30) 105,734 191,593 612,954

General air sealing (15a) 101,139 183,344 489,375

Ceiling insulation (11) 97,492 176,157 938,631

Solar-electric replaces electric water heater (1 C/E) 81,984 147,892 786,877

Convert halogen down light to 240V low energy (21D) 69,472 125,291 666,470

PERCENTAGE OF TOTAL RESIDENTIAL CERTIFICATES 91% 88% 83%

Activities incentivised in the business sectorThe modelling suggests that for the lower target options, more than half all certificates would come from the commercial sector in phase three. For phase three to deliver a significant volume of certificates from the business sector, significant administrative and regulatory changes would be required to be implemented by the Department. The Department would consider the need and process for regulating for new activities and approaches after a decision is made by Government regarding the future of the scheme in 2014.

For modelling purposes, we assume that new deemed activities and PBAs are included in phase three for the business sector. A detailed list of all the activities available in the business sector is contained within Section 8.4. The majority of new measures modelled to be introduced into the scheme relate to those that will require a PBA.

A total of five new deemed measures have been added to the EEA-Business model for the third phase on the basis that they have the potential to be viable, these are:

The replacement of an air conditioning system based on a mechanical chiller with an air conditioning system based on an evaporative cooler.

A HE motor is installed instead of a Minimum Energy Performance Standards (MEPS) compliant motor at the time of replacement.

The replacements of computer equipment or upgrading the energy efficiency of existing stock The replacement or upgrading of the existing water circulation pumps with HE pumps. The

replacement will generally be at the end of the life of the existing pumps. The installation of a HE refrigerator rather than a MEPS compliant system, or the replacement of

an aging system with a HE refrigerator when the former is nearing the end of its economic life.

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The introduction of PBAs provides the potential for business sites to undertake energy efficiency improvements that are unlikely to be captured by the specific measures provided by deeming. PBAs may allow for more general site or process upgrades which incorporate a wide range of measures. Examples of PBA activities might include:

custom upgrade opportunities that are suited to a unique environment retrofits that have inter-dependent processes which could be harmonised and the net gains

realised upgrades of industrial processes such as pump upgrades, VSDs, compressors and large electric

motors.

The PBAs seek to provide greater flexibility to the business sector. They recognise that energy efficiency opportunities for business vary across different sectors. For example, the opportunities of an abattoir will vary significantly from a car manufacturer.

Table 14 indicates how many certificates are forecast to be produced using a PBA methodology in phase three. The majority of certificates are forecast to be produced using deeming methodologies. The forecast is broadly consistent with the experience of the NSW Energy Savings scheme (ESS) which has had PBAs in place for some time, yet the majority of their certificates have been created using a deeming method (particularly commercial lighting upgrades).

Table 14 Proportion of business sector certificates created using PBA methodologies (2015-2017)

Option 1 Option 2 Option 3

19.0% 18% 17.5%

To reflect the additional effort and cost involved in creating certificates using a PBA methodology, a number of adjustments were made to the modelling.

an administration charge of 20% a precautionary discount was applied to the forecast energy savings (and associated certificates

created).20

, below, shows the certificate creation by activity in the business sector for each target option. The main business activity that is forecast to be incentivised in phase three is commercial lighting. The main measures within lighting include upgrades to HE lights, installing reflectors and the use of lighting control systems.

Table 15: Forecast certificate creation in the business sector by activity (2015 to 2017)

20 These discounts are currently applied in the NSW EES scheme to PBAs. For more information, visit the Energy Savings scheme, Application: Project Guidance – Project Impact Assessment Method, p. 13. http://www.ess.nsw.gov.au/

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Option 1 Option 2 Option 3

Appliances and equipment 133,635 217,636 819,828

Boilers, furnaces and ovens 115,854 137,233 185,300

HVAC 477,978 502,452 607,485

Lighting 1,573,834 1,896,598 2,437,617

Pumps 713,572 779,274 957,779

Refrigeration 293,280 293,996 307,636

Standalone heating and cooling 225,212 350,610 681,119

Ventilation and fans 14,086 14,086 14,086

Water heating 105,545 186,254 591,029

Total 3,652,997 4,378,140 6,601,885

The outputs from the activities modelling form the basis for the inputs into the energy market modelling and the CBA. These outputs include:

gas and electricity energy savings certificate costs participant costs producer surplus.

These outputs are discussed in the following two sections regarding the distributional and allocative effects of the three options.

6.4 Energy market modellingThe impact of the VEET scheme on energy markets has been modelled to determine the costs and benefits associated with changes in wholesale and network costs. The energy market modelling was undertaken by Oakley Greenwood and analysed through the use of the CEMOS market simulation model. The assumptions underpinning the energy market modelling can be found in appendix 8.5.

To assess the VEET scheme’s impact, a base case has been identified that forecasts energy demand for the period from 2015 to 2030.The base case for future electricity consumption has been based on the medium case forecast from AEMO’s 2013 National Electricity Forecasting Report (NEFR). The NEFR takes into account energy efficiency programs that occur at a Commonwealth level, but does not include the state based schemes such as VEET.21 Therefore, the forecasts represent the electricity and peak demand forecasts that would be expected to occur in Victoria in the absence of the VEET scheme.

It should be noted that there is a high degree of uncertainty in energy demand forecasts and that they have altered significantly downward over the past three years. The Department acknowledges this uncertainty, but is satisfied that the forecasts used are the best available at this time.

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

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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 target option from 2015 through 2017, and the number of each measure that was expected to be installed in year in each target option.

For the electricity market, the electricity consumption impacts were passed through the energy market model to identify the reductions in the quantity of energy generated, peak demand and wholesale prices. These impacts for the three options are shown in Table 16.

Table 16: Impacts on the electricity market in each of the three VEET target options 22

Financial Year

Reductions in sent-out electricity (MWh)

Reductions in peak demand (MW) Wholesale market price changes ($/MWh)

Option 1: Option 2: Option 3: Option 1: Option 2: Option 3: Option 1: Option 2: Option 3:

2015-16 312,069 395,477 649,886 93 114 192 -1.15 -2.13 -3.47

2016-17 559,976 720,961 1,242,855 145 180 318 -0.29 -0.43 -1.14

2017-18 699,885 910,498 1,609,054 149 186 336 -1.50 -2.03 -2.25

2018-19 714,426 937,842 1,670,744 148 186 336 -2.20 -2.25 -3.34

2019-20 709,886 933,458 1,658,134 146 183 327 -0.80 -0.87 -2.13

2020-21 703,099 921,117 1,620,954 143 178 310 -0.52 -0.59 -0.97

2021-22 685,061 895,182 1,558,965 136 168 285 -2.16 -2.20 -2.47

2022-23 653,448 855,482 1,485,851 128 157 262 -0.83 -1.12 -1.49

2023-24 619,759 815,964 1,427,660 122 150 249 -0.61 -0.72 -1.22

2024-25 590,024 779,180 1,375,303 117 144 238 -0.77 -1.18 -1.39

2025-26 561,650 738,237 1,304,346 114 139 225 -1.24 -1.56 -2.27

2026-27 524,086 681,806 1,196,109 108 130 208 -0.89 -0.93 -1.70

2027-28 467,412 596,575 1,033,622 97 114 178 -1.24 -1.48 -1.73

2028-29 373,472 472,968 830,702 69 82 137 -0.27 -0.30 -0.47

2029-30 260,443 327,946 603,482 45 52 90 -1.58 -1.61 -1.35

2030-31 208,403 256,631 485,730 45 52 90 -0.82 -0.48 -0.20

The reductions in the quantity of electricity generated exceed the amount of energy saved through each of the target options by 7.5 per cent to account for losses that would have occurred through transmission and distribution.

22Outputs are presented in terms of financial years, which is how the AEMO data that is used as input to market simulation modelling is provided. The outputs are re-organised to a calendar year basis for the analysis of distributional impacts and net economic benefits of the VEET scheme, which runs on a calendar year basis .

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For all three options, the impact on peak demand is greater than those that occurred in the evaluation of the VEET scheme to date, which is outlined in section 3. In that analysis, the maximum reduction in peak demand in any given year was 35 MW. This compares to maximums of 149 MW under option 1, 186 MW under option 2 and 336 MW under option 3. These reductions to peak demand have helped drive greater reductions in wholesale prices under each of the three options when compared to the evaluation of the scheme to date. It is assumed that these reductions are fully passed on to all consumers through their electricity bills.

Although there are reductions in peak demand under each of the three options, these are insufficient to reduce the energy generation capacity, thereby reducing the capital costs of energy generation. Oakley Greenwood state that the reasons for this are:

the large amount of generation capacity already in place in 2015 the relatively low level of growth in electricity consumption forecast for the period the set amount of generation capacity required from renewable sources by 2020 as set out by the

RET, which impacts on the amount of capacity required by fossil fuel energy generation.

Under each of the three options, therefore, there is no benefit from the deferral of new energy generation, unlike the 2011 RIS.

The impact of the VEET scheme on gas consumption under the three options modelled is small. During the year of its highest impact (under the 5.4 million target option) it only reduces gas consumption by 0.46 per cent of Victoria’s current state-wide gas consumption. The fundamental difference in the gas market when compared to the electricity market is that gas can be stored and, therefore, results in a less volatile supply and demand balance leading to stable prices. As such, it has been determined that the small impact that the VEET scheme has on gas consumption is not sufficient to drive changes in the wholesale price of gas and has not been modelled. 23

6.5 Distributional effectsThe distributional effects of the scheme outline the impact on the energy bills of different consumers, including participants and non-participants under the scheme. Benefits to consumers will be caused through reduced electricity wholesale prices and reductions in energy consumption for those consumers who participate in the scheme. The costs of the scheme experienced by consumers are the costs borne by retailers, which they pass through to consumers and changes in the network charges per unit of electricity.

This process calculates the bill impacts of the scheme on five separate customer groups:

residential participants – being residential energy customers within Victoria who are assumed to participate in the scheme over the 2015 – 2017 period.

residential non-participants – being residential energy customers within Victoria that were eligible to participate in the scheme but who are assumed not to do so at any time over the 2015 - 2017 period.

commercial energy participants – being participants in the scheme that were not residential customers, who were connected to a distribution business’ LV network for electricity and, for gas, consume less than 10,000 GJ per annum.

commercial energy non-participants – being non-residential customers who are connected to the LV network of a Victorian distribution network and, for gas, consume less than 10,000 GJ per annum. These consumers are eligible to participate in the scheme but are assumed not to do so at any time over the 2015 - 2017 period.

23 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 later in the document.

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large energy consumers – energy consumers who are assumed not to be eligible for the scheme and fit into one of the following categories;- all non-residential customers connected to the high voltage component of a Victorian

electricity distribution business’ network- all non-residential customers connected to the sub transmission networks of Victoria’s

electricity distribution businesses- gas customers connected to a gas distribution network who consume above 10,000 GJ per

annum- large electricity customers who are connected to the electricity transmission network.

It should be noted that, while the distributional effects forecast the impact that the VEET scheme will have on energy bills, they do not reach any conclusions regarding whether consumers’ energy bills will increase or decrease in the future. Energy bills can be affected by a range of factors outside of the VEET scheme. The modelling isolates the effects of VEET on energy bills for the purpose of policy analysis.

The following section outlines the components that determine the distributional effects of the scheme.

6.5.1 Costs

There following costs are included in determining the effects of the scheme on energy bills.

Retailer costs

Each option imposes costs on energy retailers through their liabilities under the scheme. These costs are assumed to be fully passed on to consumers through their energy bills. Retailer costs include the following:

Certificate costsEnergy retailers, as liable entities under the scheme, are required to surrender a certain number of certificates dependent on the level of their liability. In order to do this they will either generate certificates themselves, or purchase certificates from APs. For the purposes of the analysis it is assumed that the total cost of certificates each year equates to the number of certificates required to be surrendered in that year multiplied by the estimated certificate price. For the purpose of the CBA we have assumed that retailers will only purchase the certificates required for the target in each individual year and pass the costs of these certificates on to the consumers (where the target relates to 2 million certificates, only 2 million certificates will be purchased or generated by retailers). In reality, retailers may choose to purchase more certificates at the beginning of the phase to bank them for surrender in 2016 and 2017. This may skew the cost of certificates towards 2015.

The cost of certificates also includes administrative costs that are imposed on Government and those that are incurred by APs to implement the activity.

Government

The ESC as the administrator of the scheme is responsible for managing the relevant legislation and its enforcement. The ESC currently charges APs one dollar per certificate to administer the scheme. It is assumed that for the analysis period, that the administrative costs remain the same and that the ESC charges a fee to APs.

Certificate creators

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The value of the certificate provides an incentive for the installation of an energy saving appliance, including the whole or part of the cost of the appliance. APs will, however, incur further costs associated with marketing, advertising, research and business administration.

For the purposes of this BIA, it has been assumed that the administration costs incurred by the AP equates to 10 per cent of the certificate value minus the ESC’s administrative charge. For example, where the value of the certificate is $20, the ESC administrative charge is $1 and the APs administrative cost is $1.90 (or ten per cent of $19). The only exception to this rule is for certificates generated through project based methodologies, where the costs incurred by the AP relate to 20 per cent of the certificate value.

Retailer administration costsRetailers are assumed to have incurred administrative and infrastructure costs in order to comply with the scheme. It is assumed that any fixed costs to retailers from instigating new administrative infrastructure to comply with the scheme, were incurred at when retailers became liable under the scheme. For the most part this will have occurred during the initial phase of the scheme (2009 to 2011) or at the start of the second phase (2012) when the scheme was expanded to include business activity. Therefore, it is assumed that these costs will not be incurred during the third phase of the scheme (2015 to 2017). It is assumed that the retailer will, however, incur a small administrative cost for ongoing compliance with the scheme.

The administrative costs to retailers that are associated with the VEET scheme are not publicly available; however, it is possible to estimate a figure from a series of interviews undertaken with a subset of energy retailers on behalf of the Department of Climate Change and Energy Efficiency (DCCEE)24. From the information gathered from this report, it is estimated that an administrative burden of approximately 70c is incurred by the energy retailer for every certificate they are required to surrender. It is assumed that these costs are fully passed on to consumers through their retail energy bills.

The retailer costs differ for each of the three VEET options being analysed. Table 17, and Table 19 show the retailer costs for the three options.

Table 17: Retailer costs under option 1 ($million 2015)

Product Cost Component 2015 2016 2017

ElectricityVEET Certificate costs $33.56 $31.29 $29.72

Compliance costs $1.55 $1.54 $1.55

GasVEET Certificate costs $1.62 $1.83 $1.71

Compliance costs $0.07 $0.09 $0.09

24 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.

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Table 18: Retailer costs under option 2 ($million 2015)

Product Cost Component 2015 2016 2017

ElectricityVEET Certificate costs $60.47 $54.23 $52.91

Compliance costs $2.08 $2.04 $2.07

GasVEET Certificate costs $4.03 $3.88 $3.75

Compliance costs $0.14 $0.15 $0.15

Table 19: Retailer costs under option 3 ($million 2015)

Product Cost Component 2015 2016 2017

ElectricityVEET Certificate costs $268.35 $230.94 $209.89

Compliance costs $3.85 $3.89 $3.92

GasVEET Certificate costs $41.53 $31.77 $26.22

Compliance costs $ 0.60 $0.54 $0.49

For each of the three options, the estimated certificate price falls in both 2016 and 2017. This fall is accounted for by the introduction of project based assessments (PBAs) into the scheme. Given the administrative processes that will need to occur to bring PBAs into the scheme it is assumed that, for complex PBAs, there will be no take up in 2015 and will be gradually start being taken up under the scheme during 2016.

To consider the distributional impacts of the scheme, assumptions are required to determine the allocation of certificate costs to consumers. It is assumed, for ease of analysis, that the costs incurred by retailers have been recovered through electricity and gas bills, proportionate to the percentage of certificates created that impact on that fuel type (for example, where ten certificates are created and one of those certificates impacts on gas consumption, ten per cent of the total certificate costs will be allocated to gas bill). Certificate costs have then been allocated to the different customer classes, proportionate to the level of energy consumed by that customer class.

In reality, retailers liable for gas consumption under the scheme are also liable for electricity consumption, meaning that proportionately higher certificate costs may be recovered through gas prices than is assumed in the current analysis. However, this will not have an overall impact on the allocative effect of the scheme. It should be noted that there is no information currently available as to how retailers choose to recover the costs of the VEET scheme and an alternative means of recovering costs may actually be in place.

6.5.2 Network costs

Network costs applying to consumers are set out in the same manner as outlined in section 3.3.2. For both transmission and distribution costs, where there is a fall in electricity consumption, distribution

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businesses will adjust the unit prices of energy to ensure that their revenue remains the same. Under a VEET scheme, the level of energy consumption is lower than under BAU, meaning that distribution businesses will increase the charges per unit of electricity; however, the net impact of this behaviour is neutral on both their revenue and the economy. Under the analysis in section 3.3.2, it was assumed that there were no changes to non-residential network charges as the scheme had negligible impact on energy consumption within the business sector. Under option 1 and option 2, activity in the non-residential sector creates the majority of certificates, while under option 3, it still accounts for 40 per cent of all certificates created. It is therefore assumed that, for each option, the VEET scheme will impact on electricity delivered through non-residential networks and that distribution businesses will adjust charges to non-residential consumers accordingly.

6.5.3 Benefits

The following two key benefits are included in determining the effects of the scheme on energy bills.

Benefits to participating consumers

Energy consumers who participate in the VEET scheme under each of the three options experience reductions in their energy consumption, which then leads to reductions in their energy bills. This benefit is calculated by multiplying the reduction in energy consumption attributed to the VEET scheme by an average time-adjusted retail price. The average retail price is calculated by weighting the average standing offer and market offer prices by the estimated customer numbers on those offers. For each customer class (residential and business) the total level of energy consumption saved each year through each of the options is multiplied by the weighted retail price and divided by the number of participants in the scheme. This then calculates the average energy bill saving per participant for each year of the scheme.

Reduced wholesale prices

The reductions in wholesale prices from the three VEET options have been outlined in section 6.4. It is assumed that reductions in wholesale prices are fully passed on to all consumers through their energy bills.

6.5.3 Modelling results - impact on consumers’ electricity bills

The following tables outline impacts of each of the options on customers’ energy bills for each customer class.

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Option 1: Target of 2.0 Mt CO2 per annum

Table 20: Net annual and total financial benefit for the average residential participant ($2015)

Component 2015 2016 2017 NPV@3.5%2015-2030

NPV@7%2015-2030

Network costs $0.00 -$3.81 -$6.05 -$57.38 -$45.08

Retail costs -$5.28 -$4.41 -$3.92 -$12.75 -$11.98

Wholesale benefit $5.80 $3.57 $4.41 $64.48 $50.63

Bill Reduction $77.06 $116.50 $128.72 $1,997.80 $1,106.42

Net impact $77.57 $111.85 $123.17 $1,992.15 $1,099.99

Table 21: Net annual and total financial benefit for the average residential non-participant ($2015)

Component 2015 2016 2017 NPV@3.5%2015-2030

NPV@7%2015-2030

Network costs $0.00 -$4.21 -$6.76 -$64.12 -$50.47

Retail costs -$5.64 -$4.87 -$4.38 -$13.94 -$13.10

Wholesale benefit $6.19 $3.95 $4.93 $56.15 $71.35

Net impact $0.55 -$5.14 -$6.21 -$6.72 -$7.42

Table 22: Net annual and total financial benefit for the average business participant ($2015)

Component 2015 2016 2017 NPV@3.5%2015-2030

NPV@7%2015-2030

Network costs $0.00 -$64.42 -$100.01 -$939.04 -$728.60

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

Wholesale benefit $38.39 $24.48 $30.57 $481.27 $372.96

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

Net impact $5,523 $5,448 $5,421 $80,854 $46,115

Table 23: Net annual and total financial benefit for the average business non-participant ($2015)

Component 2015 2016 2017 NPV@3.5%2015-2030

NPV@7%2015-2030

Network costs $0.00 -$111.15 -$172.58 -$1,512.95 -$1,186.23

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

Wholesale benefit $66 $42 $53 $763 $601

Net impact $1.05 -$131.90 -$181.21 -$926.93 -$751.67

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Option 2: Target of 2.7 Mt CO2 per annum

Table 24: Net annual and total financial benefit for the average residential participant ($2015)

Component 2015 2016 2017 NPV@3.5%2015-2030

NPV@7%2015-2030

Network costs $0.00 -$6.20 -$9.91 -$93.80 -$73.70

Retail costs -$10.91 -$8.79 -$8.23 -$26.17 -$24.60

Wholesale benefit $8.29 $6.30 $5.98 $76.91 $61.17

Bill Reduction $82.56 $125.17 $137.85 $2,137.16 $1,183.95

Net impact $79.94 $116.48 $125.69 $2,094.10 $1,146.83

Table 25: Net annual and total financial benefit for the average residential non-participant ($2015)

Component 2015 2016 2017 NPV@3.5%2015-2030

NPV@7%2015-2030

Network costs $0.00 -$6.91 -$11.17 -$105.70 -$83.22

Retail costs -$11.70 -$9.80 -$9.28 -$28.82 -$27.07

Wholesale benefit $8.89 $7.02 $6.75 $85.75 $68.32

Net impact -$2.81 -$9.68 -$13.70 -$48.77 -$41.96

Table 26: Net annual and total financial benefit for the average business participant ($2015)

Component 2015 2016 2017 NPV@3.5%2015-2030

NPV@7%2015-2030

Network costs $0.00 -$78.82 -$123.33 -$1,151.34 -$894.35

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

Wholesale benefit $57.36 $45.32 $43.53 $591.57 $465.35

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

Net impact $5,208 $5,121 $5,075 $76,459 $43,550

Table 27: Net annual and total financial benefit for the average business non-participant ($2015)

Component 2015 2016 2017 NPV@3.5%2015-2030

NPV@7%2015-2030

Network costs $0.00 -$130.65 -$204.44 -$1,800.09 -$1,411.45

Retail costs -$104.08 -$97.81 -$97.09 -$279.43 -$261.95

Wholesale benefit $95 $75 $72 $917 $731

Net impact -$9.00 -$153.34 -$229.37 -$1,162.34 -$942.60

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Option 3: Target of 5.4 Mt CO2 per annum

Table 28: Net annual and total financial benefit for the average residential participant ($2015)

Component 2015 2016 2017 NPV@3.5%2015-2030

NPV@7%2015-2030

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

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

Wholesale benefit $11.71 $11.20 $8.08 $106.19 $85.62

Bill Reduction $83.52 $141.30 $162.80 $2,493.76 $1,370.86

Net impact $33.59 $92.48 $109.31 $2,250.49 $1,160.78

Table 29: Net annual and total financial benefit for the average residential non-participant ($2015)

Component 2015 2016 2017 NPV@3.5%2015-2030

NPV@7%2015-2030

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

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

Wholesale benefit $12.57 $12.66 $9.32 $120.98 $97.65

Net impact -$53.60 -$55.21 -$61.72 -$275.61 -$237.81

Table 30: Net annual and total financial benefit for the average business participant ($2015)

Component 2015 2016 2017 NPV@3.5%2015-2030

NPV@7%2015-2030

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

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

Wholesale benefit $86.85 $87.48 $64.41 $873.98 $699.25

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

Net impact $4,519 $4,405 $4,306 $67,404 $38,143

Table 31: Net annual and total financial benefit for the average business non-participant ($2015)

Component 2015 2016 2017 NPV@3.5%2015-2030

NPV@7%2015-2030

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

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

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

Net impact -$208.68 -$385.08 -$537.45 -$2,398.60 -$1,993.60

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Under all three of the options participants in the scheme benefit. In considering the outcomes of the analysis of the three options, however, it is important to note the proportion of the consumers that participate in the scheme. Table 32, estimates the proportion of consumers who participate in the scheme under each of the three options. The estimates are based on the historic performance of the scheme where, on average, 1.7 activities have occurred in each household. It is not possible to accurately predict the level of participation in the scheme as future participation may not follow the historic trends. In all three options, there is estimated to be more households and businesses that do not participate in the scheme than those that do.

Table 32: Participation as a proportion of all residential and business electricity consumers

Option 1 Option 2 Option 3

Residential 12.1% 18.5% 35.8%

Business 6.5% 8.1% 13.7%

For residential participants, the average benefits in terms of reductions to their electricity bill, increases as the target increases. Participation also increases under each of the options. For all options, non-participating households see electricity bill increases over the analysis period. Under these options there is effectively a financial transfer from non-participating households to participants in the scheme. It should be noted, however, that for option 1, the increase to the electricity bill for non-participating households is very small (less than $10 over the 15 year analysis period). The small nature of this increase means that the scheme is effectively cost neutral to residential non-participants under option 1.

For business participants, the average benefits in terms of reductions to their electricity bills decreases as the target increases, although business participation increases as the target gets higher. Under all options, the average electricity bill of non-participating businesses (excluding large businesses) increases. Although, for option 1, the increase amounts to under $1,000 over the 15 year period of the scheme, this increase would apply to over 90 per cent of the businesses in Victoria. Effectively, for each of the options, there is a financial transfer from non-participating businesses to participants in the scheme.

For some of the activities incentivised under the VEET scheme, the participant will be required to contribute to the up-front capital costs of purchasing the appliance or activity as the incentive offered by the certificate value does not meet the cost of purchase and installation. A full description of the participant costs is outlined in the section below on the allocative effects of the scheme. They have, however, been included in the below table to allow a comparison between the bill benefits that are achieved by participants to the scheme with the costs that they incur.

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Table 33: Costs and benefits to the average participating consumer ($2015)

Option 1:

2.0 million tonnes

2015-2030

Option 2:

2.7 million tonnes

NPV 2015-2030

Option 3:

5.4 million tonnes

NPV 2015-2030

NPV 3.5% NPV 7% NPV 3.5% NPV 7% NPV 3.5% NPV 7%

Residential participant benefits

$1,992 $1,100 $2,094 $1,147 $2,250 $1,161

Residential participant capital costs

-$109 -$102 -$101 -$95 -$79 -$74

Commercial participant benefits

$80,854 $46,115 $76,459 $43,550 $67,404 $38,143

Commercial participant capital costs

-$9,224 -$8,638 -$9,035 -$8,462 -$6,800 -$6,362

Under each of the three options, the benefits to participants through reductions in their energy bills outweigh their financial contribution to installing the energy efficiency measure.

6.5.4 Impact on consumers’ gas bills

Similar to the analysis undertaken as part of the evaluation of the scheme between 2009 and 2012, the impact that the scheme has had on the quantity of gas consumed under each of the three VEET options has not been deemed sufficient to impact on gas market prices.

While it has been determined that wholesale gas prices will not be impacted by the scheme under the three options put forward, the scheme still has the ability to impact on consumers’ gas bills. As outlined previously, some of the retailers’ costs in relation to the cost of administration and certificates will be recovered through gas bills in addition to changes in network charges. Those consumers who have participated in the scheme and accessed gas related activities will experience changes to their gas consumption that will, in turn impact on their gas bills.

The majority of activities incentivised under the three VEET target options reduce the levels of electricity consumed by households and businesses rather than impacting on gas consumption. While reductions to gas consumption do occur, for some activities in the residential sector where GHG emissions are reduced through fuel switching from electricity to gas, the level of gas consumption will increase. For the business sector, there is only one measure, the replacement of a boiler in large commercial buildings, where the scheme reduces the level of gas consumption.

The benefits of reduced or increased gas demand have been calculated by multiplying the reduction or increase in demand under each option by the retail gas price. The impact of the options on consumers gas bills are outlined inTable 34.

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Table 34: Average gas bill impacts of the VEET options ($2015)

Customer class

Option 1:

2.0 million tonnes

NPV 2015-2030

Option 2:

2.7 million tonnes

NPV 2015-2030

Option 3:

5.4 million tonnes

NPV 2015-2030

Residential participants

-$879.15 -$766.54 $521.84

Residential non-participants

-$2.15 -$5.12 -$47.25

Commercial participants

$90,496 $90,238 $84,791

Commercial non-participants

-$16.69 -$25.59 -$72.41

It should be noted when considering these impacts that a relatively small proportion of consumers that participate in the scheme are impacted on their gas bills. For option 1, the scheme impacts the gas consumption of 0.8 per cent of residential consumers and 0.6 per cent of business consumers. Under option 2, this increases to 1.6 per cent for households and 0.7 per cent for businesses and under option 3, this increases again to 12.8 per cent for households and 0.9 per cent for businesses.

For options 1 and 2, the gas bills for residential participants actually increase due to the increase in gas consumption from participating in the scheme. When considering these results for gas related VEET activity, this is because, at the relatively low certificate prices that are experienced in options 1 and 2, the scheme mainly incentivises those activities where an electrical appliance is replaced by a gas appliance. It is only at the higher certificate prices of option 3 where those activities that reduce gas consumption begin to outweigh those that encourage fuel switching.

For commercial customers under all three options, the benefits accrued through reductions to their gas bills are of a greater magnitude; however it should be noted that these benefits are only experienced by relatively few companies (less than 300) under the modelling for all three options and that the majority of commercial customers do not experience benefits to their gas bills.

6.5.5 Impact on large businesses

The modelling assumes that large businesses continue to be excluded from the scheme and are not liable to the costs of the scheme. In terms of impacts on their bills, this means that they do not face any costs associated with the generation of certificates or retailers’ administration costs. As they will not reduce their levels of consumption under the scheme, it is assumed that they will not face increased network charges. The only impact on their bills under each of the three options will be through reductions in the wholesale price of electricity. It is assumed that the full wholesale price reduction will be passed through to large energy consumers.

For the purposes of the modelling, large energy consumers have been determined as all non-residential customers connected to either the high voltage component of a Victorian electricity distribution business’ network, the sub transmission networks of Victoria’s electricity distribution businesses and the electricity transmission network. This equates to approximately 500 businesses across Victoria. As the modelling assumes that there are no impacts on the wholesale price of gas, there are no impacts to large businesses’ gas bills.

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Large businesses experience significant decreases in their electricity bills over the period of the analysis. The results are shown below in Table 35.

Table 35: Total average benefit to large businesses under the three customer classes ($2015)

Option 1 Option 2 Option 3

NPV@3.5%2015-2030

NPV@7%2015-2030

NPV@3.5%2015-2030

NPV@7%2015-2030

NPV@3.5%2015-2030

NPV@7%2015-2030

High voltage non participant

$132,871 $104,567 $159,690 $127,240 $225,308 $181,849

Sub transmission non-participants

$982,710 $773,375 $1,181,065 $941,065 $1,666,377 $1,344,955

Transmission Connected non-participants

$164,333,529

$92,159,896

$195,903,529

$112,117,406

$277,533,985

$160,237,777

6.6 Allocative effectsThe allocative effects measure the overall impact of the scheme on the economy. Effectively it measures the impact that the three options have on the cost of providing energy to the economy. The VEET scheme reduces the amount of energy consumed in Victoria. The CBA calculates the reduction in economic costs of reducing energy consumption compared to the costs incurred to reduce that energy through the VEET scheme. The approach is similar to that undertaken in section 3.3 of this BIA.

The following section outlines the components that determine the net economic impact of the three options.

6.6.1 Production cost reductions

Production cost reductions can take the form of both variable cost reductions, which are generally the fuel costs associated with generating the energy, and capital cost reductions, which relate to the deferral of the need to expand energy generation capacity. As less energy is generated with a VEET scheme than under BAU, society benefits from not allocating resources to both the fuel costs required to generate the extra energy, and to building new generation capacity that may have been required under the base case scenario. These are costs that would have been incurred under the BAU case, but are not under the three options.

The evaluation of the VEET scheme between 2009 and 2012 detailed in section 3 outlined that there had been no impact on the amount or type of energy generation capacity required. The analysis of the three options for the future of the VEET scheme has also identified that there has been no impact on the amount of energy generation capacity required. Therefore, all the production cost reduction relates to variable cost reductions.

The total production cost reductions for the three options are shown in Table 36.

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Table 36: Production cost reductions ($2015 millions)

NPV@3.5%2015-2030

NPV@7%2015-2030

Option 1 $143.01. $113.07

Option 2 $184.91 $146.40

Option 3 $326.18 $257.76

The results show that, as the target increases (and, therefore, less energy is consumed), the production cost savings increase. Option 3 has the greatest benefit in terms of reduced production costs.

An additional benefit that may accrue from the three options is to defer network upgrades; however, the impact that the scheme has had on peak demand under each of the three options, in addition to the fact that these impacts are not localised to specific geographies, means that it is unlikely that it has had a material impact on capital requirements for networks.

6.6.2 Retailer costs

In order to deliver VEET, retailers are liable to purchase or generate certificates, the costs of which are then assumed to be passed directly on to consumers. These include both the certificate costs plus any administration costs incurred by the retailer. Other administrative costs incurred by Government and APs are incorporated into the cost of the certificates. The calculations for these costs are outlined previously in this section. The retailer costs for the three options are outlined in Table 37.

Table 37: Retailer costs ($2015 millions)

Certificate costs Administrative cost to retailers

NPV@3.5%2015-2030

NPV@7%2015-2030

NPV@3.5%2015-2030

NPV@7%2015-2030

Option 1 -$93.3 -$87.5 -$4.6 -$4.3

Option 2 -$167.7 -$157.3 -$6.2 -$5.8

Option 3 -$757.6 -$711.8 -$12.4 -$11.6

6.6.3 Producer surplus

Associated with the cost of certificates are producer or capital surpluses. A producer surplus exists where the incentive offered by the VEET scheme outweighs the capital and administrative costs of the VEET activity. The impact of producer or capital surpluses on the market is unknown and may help drive certificate prices downwards. It may also represent a level of profit that is generated by APs.

Producer surpluses are effectively financial transfers between the participant and the AP and do not contribute to the overall cost of reducing the level of energy consumption; they are a portion of the

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certificate cost that is transferred to the AP, rather than being utilised to reduce the level of consumption.

As the certificate prices (and hence the incentive) rise, low cost activities produce surpluses. Under option 1 where the certificate price remains below $20, in the residential sector only the replacement of an incandescent lamp with a CFL creates a producer surplus. Under option 2, where the certificate price increases to above $20, in the residential sector, the installation of both audio-visual and information technology SPCs generate a producer surplus. The values for producer surpluses under the three options are shown in table 38, below.

6.6.4 Participant costs

In order to deliver the energy consumption reduction associated with the VEET scheme, some participants in the scheme are required to make a financial contribution in order for the energy savings to be realised. This constitutes an overall cost of the scheme to deliver the benefit of the reduced energy consumption.

The total capital costs associated with the activity is dependent upon whether the consumer would have been in the market for the appliance. Where the appliance currently owned by the consumer has reached the end of its life, the capital cost associated with the activity is based on the marginal cost of replacing the item with an energy efficiency appliance as opposed to a standard appliance.

The assumptions relating to this are dependent on the type of activity. For example, where a water heater is being replaced, it is assumed that this would not occur unless the existing appliance had reached the end of its life. For measures where the activity relates to making an existing appliance or fixture more energy efficient (for example, the installation of double glazing or a timer installed on a water heater), it is assumed that the full cost of the appliance equates to the capital costs.

The costs to the participants relate to the capital cost of the activity minus the incentive (which is the certificate value minus the administration costs). As certificate values rise, the costs to participants of undertaking certain measures will reduce and they will effectively be free to the participant. At the same time, the increased certificate values will incentivise new activities that may incur a higher participant cost. The values for participant costs are contained in Table 38.

Table 38: Total participant costs and producer surpluses ($2015 million)

Participant costs Producer surplus

3.5% NPV ($m) 7% NPV ($m) 3.5% NPV ($m) 7% NPV ($m)

Option 1 -$224.03 -$209.81 $4.82 $4.52

Option 2 -$281.25 -$263.43 $10.74 $10.08

Option 3 -$382.77 -$358.14 $115.16 $108.45

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6.6.5 Modelling results – economic cost benefit analysis

The tables below outline the net economic impact of the three options. The net economic impact outlines how the cost of providing energy to the Victorian economy changes as a result of the three options.

Option 1: Target of 2.0 Mt CO2 per annum

Table 39: Economic benefits and costs ($2015 million)

NPV@3.5%2015-2030

NPV@7%2015-2030

Production cost reductions $143.0 $113.1

Producer surplus $4.8 $4.5

Certificate costs -$93.3 -$87.5

Administrative costs to retailers -$4.6 -$4.3

Participant costs -$224.0 -$209.8

Net benefit / cost of option -$174.1 -$184.0

Option 2: Target of 2.7 Mt CO2 per annum

Table 40: Economic benefits and costs ($2015 million)

NPV@3.5%2015-2030

NPV@7%2015-2030

Production cost reductions $184.9 $146.4

Producer surplus $10.7 $10.1

Certificate costs -$167.7 -$157.3

Administrative costs to retailers -$6.2 -$5.8

Participant costs -$281.3 -$263.4

Net benefit / cost of option -$259.5 -$270.0

Option 3: Target of 5.4 Mt CO2 per annum

Table 41: Economic benefits and costs ($2015 million)

NPV@3.5%2015-2030

NPV@7%2015-2030

Production cost reductions $326.2 $257.8

Producer surplus $115.2 $108.5

Certificate costs -$757.6 -$711.8

Administrative costs to retailers -$12.4 -$11.6

Participant costs -$382.8 -$358.1

Net benefit / cost of option -$711.5 -$715.4

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All three options modelled deliver an overall net economic cost. The cost of reducing the level of energy consumed under all three options outweighs the benefits from reduced production costs.

Based on the NPV of each of the options, option 1 delivered the lowest net cost. Modelling of further options was not considered warranted due to the size of net costs delivered by each of the three options. It is anticipated that modelling lower targets would continue to deliver net costs.

6.6.6 Carbon emissions reductions

The reduction in energy consumption also reduces the level of GHG emissions. Under BAU, it is assumed that there is no price on carbon and, therefore, the benefits of reduced emissions are not captured by the reduction in production costs. (The analysis in Section 3.3 assumed a price on carbon from July 2012 onwards).

The value of emissions reductions have not been included in the CBA in line with the Government’s position that emissions reduction is not a primary objective for the Victorian Government in the presence of a national emissions reduction policy framework.

The value of emissions reductions are contained in Table 42.The figures have been modelled using forecasts provided by Thomson Reuters (Point Carbon), converted into Australian dollars using current exchange rates. Advice from Oakley Greenwood is that the Thomson Reuters forecast represented a more robust forecast of carbon prices over the longer term horizon.

Table 42: Total emissions reductions ($2015 millions)

3.5% NPV ($m) 7% NPV ($m)

Option 1 $118.5 $87.3

Option 2 $151.4 $112.0

Option 3 $268.5 $198.0

It should be noted that, were the emissions reductions to be included in the CBA, all three of the options would still deliver overall net costs.

Caveats/limitations to the energy market modelling results

It is acknowledged that, while the modelling is based on the best information available, the results may not accurately reflect the impact of the VEET scheme under the three options. In the 2011 RIS, the certificate price for the second phase of the scheme was estimated at $35, with a broad range of activities taken up in both the residential and business sectors. The certificate prices realised during this phase of the scheme have been far lower, with the majority of activities, predominantly the uptake of SPCs, taking place in the residential sector.

A range of assumptions have been used to model the future impacts of the VEET scheme under the three options. There is uncertainty surrounding many of these assumptions. The following four assumptions are key to the results of the analysis:

the energy savings associated with VEET – many of the activities included in the modelling are deemed and are, therefore, estimates of the energy savings to be achieved through the scheme. As such the energy savings that drive the outcomes of the energy market modelling may be either under or over estimated.

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the upfront cost of VEET activities – the take up of various VEET activities will be dependent on the upfront cost of an activity and the proportion of that upfront cost that can be covered by the value of the certificate. Lower upfront costs have the potential to deliver lower participation costs and lower certificate costs.

the impact of VEET activities on peak demand – the impact of the VEET scheme on production costs and wholesale prices will be determined, in part, by the extent to which the scheme reduces peak demand. Large reductions in peak demand can also help defer capital spend on energy generation. The impact of the scheme on peak demand has been estimated and may, in reality, be either smaller or larger than outlined in this BIA.

the demand for electricity – changes to the electricity demand forecasts will affect the ability of the VEET scheme to impact on wholesale prices. Were there to be a significant increase in the level of electricity demand forecast, it would increase the potential of a scheme such as VEET to defer future energy generation investment.

While there is uncertainty surrounding these assumptions, it is the view of the Department that any changes to these assumptions would not impact the outcome of the analysis that all three options deliver a net cost to the economy. Under the 2.0 Mt CO2 option, which delivers the smallest net cost, there is a net cost of $174.1 million. In order to deliver a cost neutral outcome, for example, the reductions in production costs would need to increase by 120% to counter the costs of the scheme. Any change in the assumptions would have to be of a size that it is unlikely that they would occur.

Analysis of the four assumptions and a qualitative assessment of how changes in these assumptions would impact the CBA is contained in appendix 8.6.

6.7 Alternative policy optionsWhile the costs and benefits associated with the future VEET option suggest it is not the best form of policy intervention to address the identified energy market failures in section 2, there may be a number of other alternative policies which may be more appropriate. These policies could include but are not limited to information campaigns, subsidised household energy audits and residential voluntary disclosure.

The table below provides a summary of how these policies may be seen to address the imperfect information market failure present in the energy efficiency market. Further detail on these policies is provided in the subsequent sections. It should be noted however, that while these sections provide some analysis into the applicability of the policies they provide only a high level view of the options and further work would be required to develop and assess the validity of these alternative policies before any implementation could occur.

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Policy Lack of Information

Residential voluntary disclosure Partially addresses – While voluntary disclosure will provide consumers with information regarding the energy performance of homes it will not specifically identify cost-effective methods for improving this performance nor will it target households that do not intend on selling or renting their properties.

Information campaigns Partially address –due to the inability of these campaigns to provide bespoke information that meets the specific needs of households and businesses, information campaigns can only be seen to partially address imperfect information in the energy efficiency market.

Subsidised household energy audits

Address – by providing households with customised information regarding cost-effective measures they can take-up to increase their energy efficiency, this form of intervention addresses the imperfect information market failure.

By addressing imperfect information market failures even to a limited extent, the three policy options given above have the ability to increase the uptake of energy efficiency measures across various sectors of society. In this way they support the Government’s objective of helping energy consumers manage their energy bills by assisting these consumers to lower their energy consumption. The policies also indirectly help to encourage investment, employment and technology development in the energy efficiency industry through their influence on demand for energy efficiency products. However, further analysis would need to be undertaken to determine whether these options would be the most appropriate interventions to address the imperfect information market failure.

6.7.1 Residential voluntary disclosure

Residential voluntary disclosure requires sellers and landlords of houses to provide information to prospective buyers and tenants regarding the energy performance of their properties. This information disclosure is usually in the form of a performance rating based on the findings of an energy assessment. Due to the voluntary nature of this form of intervention however, sellers and landlords are able to ‘opt-out’ of the assessment process by applying a default performance rating of zero to their properties.

In facilitating the provision of energy performance ratings, residential voluntary disclosure allows prospective buyers and tenants to more effectively identify differences in the relative efficiency of properties. Once identified, buyers and tenants are able to reflect the value of these differences in their willingness to pay higher prices and rents, thereby providing an incentive for homeowners to

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invest in a more optimal level of energy efficiency improvements. In this way residential voluntary disclosure can be seen to address the imperfect information energy market failure. The degree to which this form of intervention is able to address the market failure is limited however, due to the flexibility in the requirement to undertake an assessment which may result in a less than complete provision of energy performance information. Further limiting this ability is the fact that residential disclosure does not provide sellers and landlords of houses with specific information on cost-effective methods for improving their energy performance. Nor does it target the imperfect information issues faced by those households that do not intend to sell or rent their properties.

A variation to this form of intervention requires mandatory disclosure. While this more stringent approach may be seen to more completely address the imperfect information market failure, it is not necessarily the most cost-effective approach. There may be cases where requiring homeowners to undertake an energy assessment would involve imposing a cost on these owners with little benefit to the market. These instances may include situations where home owners are already aware that their properties have poor energy performance or that the house they are selling is likely to be demolished by prospective buyers. In these instances it is more cost-effective to allow these home owners to ‘opt-out’ of the assessment process and disclose a default rating of zero for their properties, saving them the regulatory compliance burden. An option that is possible under the voluntary framework.

Were the split incentives market failure to be found to exist, voluntary residential disclosure may be able to at least partially address this market failure also.

Cost effectivenessThe costs and benefits associated with residential voluntary disclosure will be dependent on the degree of information disclosure required under the legislative framework governing the policy. The more comprehensive the disclosure, and therefore the energy assessments, are required to be, the greater the associated costs for complying sellers and landlords carrying out the assessments and the greater the potential that more cost-effective energy efficiency measures are invested in. The costs and benefits will be further dependent on the ‘opt-out’ rate and therefore the number of people who choose not to undertake the energy assessments.

While the degree of information disclosure required under the legislation would need to be specifically defined to allow for a comprehensive CBA of this option, an indicative list of costs and benefits for this policy is included below. These costs and benefits are based on the work of a July 2011 Consultation RIS, commissioned through the National Framework for Energy Efficiency Building Implementation Committee on behalf of the Commonwealth, States and Territories.

Costs attributable to residential voluntary disclosure25:

Assessments – the costs of paying licenced assessors to perform home energy assessments as well as paying to register the energy performance ratings with the appropriate jurisdictional authority.

Energy performance investments – the costs of implementing any energy efficiency measures that result from the policy, deducting any rebates or subsidies provided by Government to assist with these costs.

Householder time – the opportunity cost of householders’ time as they will be required to be home while the assessments are being undertaken.

Real-estate agents’ time – the costs of real-estate agents’ time to organise assessments for properties that they manage.

Rebates – the cost of any increased take-up of available rebates and subsidies offered by Government that has been incentivised by the residential voluntary disclosure policy.

25 The Allen Consulting Group, Mandatory disclosure of residential building energy, greenhouse and water performance: Consultation regulation impact statement, Report to the National Framework for Energy Efficiency Building Implementation Committee, July 2011, p. xi-xii.

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Administration – the costs of administering the policy, including costs associated with policy enforcement, compliance, communication, licencing and registration.

Training and insurance – the costs of raising the supply of licenced assessors and making sure that they are adequately trained and insured.

Benefits attributable to residential voluntary disclosure26:

Energy bill savings – this includes the financial benefits derived by consumers from incurring lower energy bills as a result of implementing energy efficiency measures attributable to the policy.

GHG savings – the societal value of reduced GHG emissions associated with the above measures.

6.7.2 Information campaigns

Information campaigns aim to provide households and or businesses at a State level with generic energy efficiency information that may help these consumers reduce the amount of energy they use. These campaigns tend to be offered through a variety of mediums and for a fixed period of time. A recent example of such a campaign was the Victorian Government’s Black Balloons campaign, which provided households with simple and relatively low cost ways of reducing their home’s energy use.

As a form of information provision these campaigns can be effective in offering consumers a greater understanding of the costs and benefits of undertaking energy efficiency measures and in so doing may elicit greater uptake of these measures. In this way information campaigns can be seen to address imperfect information market failures. As was the case in the previous policy however, the extent to which these campaigns address the imperfect information market failure is limited. By striving to reach consumers at a State rather than individual level, information campaigns invariably target consumer groups with significantly differing consumption profiles. This variability in the campaign’s audience necessitates providing information and advice based on average consumer profiles in order to increase the applicability of the campaign to the greatest number of targeted consumers. As such, information provided through this form of Government intervention is unlikely to be sufficiently tailored so as to completely address the imperfect information issues facing individual energy consumers.

Cost effectivenessInformation campaigns generally require significant Government funding, with the costs and benefits of the campaigns dependent on the range and type of mediums used to communicate the initiative as well as the length of time the campaigns operate. Broadly speaking these costs and benefits will include:

Costs attributable to an information campaign:

Advertising – the costs associated with dispersing the campaign on television, the internet, newspapers and or other communication mediums.

Energy efficiency investments – the costs of implementing energy efficiency measures, made as a result of the campaign, in households and businesses, deducting any rebates or subsidies provided by Government to assist with these costs.

Rebates – the cost of any increased take-up of available rebates offered by Government that are used to subsidise investments made as a result of the campaign.

Administration – the costs of managing and co-ordinating the campaign.

Benefits attributable to an information campaign:

26 ibid.

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Energy bill savings –the financial benefits derived by consumers from incurring lower energy bills as a result of implementing energy efficiency measures attributable to the campaign.

GHG savings – the societal value of reduced GHG emissions resulting from the above measures.

An evaluation of the Black Balloons campaign found the campaign to have affected household energy consumption patterns, with forty-two per cent of households claiming awareness of the campaign suggesting it had motivated them to introduce additional energy conservation behaviours. The 2011 RIS, however, noted that other studies have found that information campaigns, as a single policy, do not translate into significant changes in consumer behaviour and the durability of any changes made is uncertain given the relatively short timeframes that previous campaigns have operated over.27

6.7.3 Subsidised household energy audits

Conversely to the type of information provided through information campaigns, household energy audits seek to give homeowners and tenants highly customised advice regarding energy efficiency opportunities that are likely to be cost-effective given their specific consumption profiles. The Victorian Government has had experience providing household energy audits in the past. Through its Energy and Water Task Force, the Government previously provided free home energy audits to concession card households living in disadvantaged communities.

By providing bespoke information in the above way, audits address the imperfect information energy market failure and allow consumers to make more informed decisions based on a greater understanding of energy efficiency costs and benefits. Their ability to address this market failure is limited only by their capacity to reach consumers.

Cost effectivenessAs a Government funded initiative, the costs and benefits of household energy audits will be heavily reliant upon the funding dedicated to the policy. The decision regarding the type and subsidised portion of the energy audits will also impact the distribution of the policy’s benefits, based upon its ability to reach a limited number of households. In much a similar way as was provided for the residential disclosure policy, a list of indicative costs and benefits for this policy is given below:

Costs attributable to subsidised household energy audits:

Audits – the costs of paying qualified assessors to undertake home energy audits. Householder time – the opportunity cost of householders’ time as they will be required to be

home while assessments are being undertaken. Energy efficiency investments – the costs of implementing any energy efficiency measures

that result from the audits, deducting any rebates or subsidies provided by Government to assist with these costs.

Rebates – the cost of any increased take-up of available rebates offered by Government that are used to subsidise investments made as a result of the home energy audits.

Training – the costs of ensuring there is an adequate number of home energy auditors and that they are appropriately qualified.

Policy administration – this includes the costs of building public awareness of the policy, co-ordinating the policy and ensuring its effectiveness.

Benefits attributable to subsidised household energy audits:

Energy bill savings – the financial benefits derived by consumers from incurring lower energy bills as a result of implementing energy efficiency measures attributable to the audits.

27 Regulatory Impact Statements, Victorian Energy Efficiency Regulations, March 2011, p. 24.

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GHG savings – the societal value of reduced GHG emissions resulting from the above measures.

A recent report released by the University of Ballarat Central Victorian Solar City Evaluation Team suggests that participants of their research project that undertook home energy audits were able to lower their energy consumption by nine per cent more than a matched control group.28 While this result was found to be statistically significant,29 the purpose of the report was to compare changes in energy consumption attributable to various energy efficiency measures, rather than compare the perceived benefits with the associated costs of undertaking each measure. As such, the cost-effectiveness of the home energy audits undertaken was not directly discussed. Nor was it made clear how many of the households participating in the study were likely to have been willing to undertake the home energy audits without the financial aid of the research project, preventing an assessment of the audits’ additionality.

6.7.4 Conclusion

The Department is currently in the process of reviewing a number of potential energy efficiency policies. It is expected that this work will require significant further analysis before any decision may be made to implement a new policy.

With this in mind, this BIA aims to provide a high level analysis of only a select number of potential policy alternatives, without making any recommendations for future adoption so as not to pre-empt the findings of the aforementioned work.

6.8 Summary of preferred optionThe outcome of the CBA is that all of the three options analysed produced net economic costs. This indicates that all three options would add to the cost of providing energy to the economy. The distributional effects under all three options highlight that some consumers will experience increases in their bills as a result of the continuation of the VEET scheme, although for option 1, the impact will be largely neutral.

Low income households have, in particular, benefited from the scheme during its first two phases, mainly due to the fact that the majority of activities incentivised by the scheme have been effectively free to the consumer. Analysis for a potential third phase of the scheme indicates that more activities will require participants to financially contribute to the installation of the activity in their household or business. While it is not possible to model the participation rates of specific socio-economic groups in the future, it is anticipated that the requirement of households to make a financial contribution will deter low income households from participating. As non-participants, however, under options 2 and 3, they would face increases in their energy bills.

The preferred option is to not set any new targets in the regulations for the third phase of the scheme and to legislate for its closure. In order to ensure the orderly closure of the scheme, the legislation will set a transitional target of 2.0 Mt CO2 for 2015. The scheme will be legislated to close on 31 December 2015. The legislation is intended to give absolute certainty to the market on the closure of the scheme, while providing an appropriate period of time to businesses, particularly APs, who are involved in the scheme to adjust their business arrangements.

The following section explains the rationale for and implications of implementing the preferred option of closing the VEET scheme on 31 December 2015, with a transitional target of 2.0 Mt CO2 for 2015.

28 University of Ballarat Central Victoria Solar City Evaluation Team, Central Victoria Solar City: Impact Evaluation, Final Report, University of Ballarat, June 2013, p. iii.29 ibid.

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6.8.1 Base case

As outlined in section 6.2, were the Government not to take action through amendments to the relevant regulations or legislation, no VEET scheme would exist from 1 January 2015.

Since 2011, the VEET scheme has operated with a target of 5.4 million certificates and the market has developed to meet this target, including the expansion of some APs and the emergence of new APs. If the base case scenario were to occur (the VEET scheme were to close at the end of its current phase) it is unlikely that the market will be made aware of its closure until around the second quarter of 2014. By this stage the number of certificates required to be created to meet the 2014 target is anticipated to be less than 2.55 million, based on current certificate registration levels. The announcement of such a closure may impact the validity of AP business models and the value of certificate investments:

AP business impactsShould the scheme close at the end of 2014, there may be an insufficient number of certificates remaining to be created to support the current business plans of APs. To date there has been no indication from Government as to the future of the VEET scheme. Although there has been no commitment to extend the VEET scheme beyond its current second phase, APs may still be operating on the presumption that there will be some target going forward. APs may have made investments in staff and appliances that would enable them to continue to meet ongoing targets for the scheme, given that the scheme is legislated to continue to 31 December 2029. This is particularly relevant given that APs have been operating under a 5.4 million certificate annual target for the past two years.

While an announcement in the first half of 2014 would still leave at least six months for APs to adjust to the closure of the scheme, there may be fewer than 2 million certificates that will need to be created to meet the target. The sudden adjustment from an annual target of 5.4 Mt CO2 to no target may mean that APs will immediately be required to reduce staffing levels and leave investments in appliances stranded. This is partially due to the fact that there will only be a limited VEET market for these products and also that it is anticipated that the price of certificates will fall following a scheme closure announcement. Lower demand for these products, coupled with a potential oversupply (acknowledging that the market currently supports an annual target of 5.4 Mt CO2) would serve to drive the price of certificates downward, leading to either a limited return on investments by APs or potential losses.

As outlined in section 3.2.2, there is estimated to be over 2,000 jobs, which the VEET scheme helps to support. The Department commissioned a survey in 2011 which surveyed 50 APs. The survey found that approximately one quarter of jobs within an AP had been created explicitly as a result of the scheme. On average, APs had 14 employees that worked specifically on VEET with 5 full-time and 9 part-time positions, representing 19 per cent of an AP’s total workforce.

Of those working on VEET, 60 per cent of the positions were recruited specifically to work on the scheme and the roles are in a range of positions including semi-skilled vocationally trained installers, skilled trades positions, managerial and administrative staff.

For the majority of businesses surveyed, the VEET scheme represented an average of about 20 per cent of their turnover. Even for businesses that started as a result of the scheme, only 40-45 per cent of their turnover could be attributed to VEET. A minority of businesses (13 per cent) reported that they relied almost entirely on the scheme for income.

If this analysis were extended to include all the 121 businesses accredited to participate in the scheme currently, the total employment related to the scheme would amount to almost 1,700 individuals with around 600 of these positions being full time. Around 16 businesses could be assumed to rely solely on the income from VEET.

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It should be noted that the small sample size used in this analysis reduces the level of accuracy that can be ascribed to it and to the extension of the analysis. Additionally, since this analysis was undertaken, the scheme has doubled the target and has been expanded to include business activities.

Certificate investment values The value of certificates held by APs or investors is liable to be substantially reduced. As alluded to above, approximately 2.85 million certificates have already been created to meet the target of 5.4 Mt CO2 in 2014. Many of these certificates will be held by either APs or third parties who have bought the certificates as investments to be sold to energy retailers at a later date. The announcement of closure, leading to an over supply of certificates, is liable to reduce the value of these certificates meaning that any party holding them will be subject to a loss on their investment. Additionally, energy retailers may choose to wait until the last possible moment (up to 31 January 2015) to purchase certificates in an effort to reduce the price of certificates further.

6.8.2 Preferred option

Under a transitional target of 2.0 Mt CO2 the scheme will continue to operate as it currently does during 2015. It should be noted that many of the changes to the design of the VEET scheme modelled in this BIA, including the introduction of new activities and PBA methodologies, will not occur under a transitional phase. It is anticipated, however, that the Department will review and amend the deeming methodologies underpinning the certificate creation of key activities in light of the findings in section 3.

Large businesses that are on the EREP register are currently exempt from participating in the VEET scheme. The EREP scheme will be repealed in 2014; however, following its repeal, the VEET regulations will be amended to provide that any business that was on the EREP register immediately before it was repealed continues to be exempt from the VEET scheme until the scheme closes on 31 December 2015.

The roles of the departments and agencies involved in the administration and enforcement of the transitional year include:

The Department:

engage relevant stakeholders on an ongoing basis, particularly scheme participants (energy retailers and APs)

facilitate reviews of eligible scheme activities (including their deeming methodologies).

The ESC:

general administration of the scheme accredit persons who may create certificates monitor and administer the creation, registration, transfer and surrender of certificates enforce the imposition of the energy efficiency shortfall penalties undertake audits and monitor compliance with the Act and the preferred option assist with reviews of eligible scheme activities report to the relevant Minister.

Sustainability Victoria:

assist with reviews of eligible scheme activities offer technical advice to the Department as necessary.

The scheme will end on 1 January 2016 rather than 1 January 2030. Retailers will be required to contribute to the 5.4 Mt CO2 target for 2014 and the 2.0 Mt CO2 target for 2015. From 1 January 2016, there will be no scheme target and retailers will not have to acquire and surrender scheme

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certificates. The Act will remain in place to ensure that the ESC’s powers regarding enforcement can remain in place after 1 January 2016. This will ensure that the retailers and APs meet their obligations for activity that has occurred up until 31 December 2015. The Act may be repealed once the ESC is satisfied that no further action needs to be undertaken on outstanding issues.

6.8.3 Rationale for the transition

By implementing the transitional target, AP businesses will have the opportunity to plan for, and make, an orderly exit from the scheme at the end of 2015.

The transitional target for 2015 of 2.0 Mt CO2 would mean that, following an announcement on the closure of the VEET scheme in the first half of 2014, there would still be a requirement for approximately 4 million certificates to be created before the scheme ended on 31 December 2015. While the amount of certificates remaining is less than the requirement under the current annual target of 5.4 million certificates per annum, it would represent only a small reduction on the current level of activity.

The transitional target is intended to allow the scheme to operate as normal for a period of time after the closure announcement, giving businesses the opportunity to transition away from the scheme. The addition of a one year transitional phase would effectively give APs at least 18 months to adjust and a further 4 million certificates to be created from the time of the closure announcement. The addition of a further 2 million certificates to be created under the scheme will also increase the demand for products, stalling a drop in the price of certificates. The market will be given the certainty that there will be no further requirement on retailers to generate or purchase certificates after 31 December 2015, giving the scheme a clear end date and total number of certificates to be generated.

Given that, on average, VEET has been found to represent a minority of an AP’s business activity, the additional time and number of certificates left to be created under the transitional phase is expected to allow APs to slowly transition staff away from VEET activity to their other business ventures. Although APs may be required to reduce their staffing numbers by the time the scheme closes, it is anticipated that the transitional phase will mean that they will be able to do this in an orderly manner, avoiding the need for immediate, enforced job losses, which may have occurred if there were no transitional phase.

6.8.4 Impacts of transition

The implementation of the transitional target is likely to result in certain societal costs and implications for competition:

Costs of the transitionIt is expected that the target of 2.0 Mt CO2 will deliver a net economic cost in 2015; however, it is the Department’s view that this cost will be countered by the benefit that extending the scheme will give to the market. The results of the CBA indicate that, a target of 2.0 Mt CO2 is unlikely to have a material impact on non-participating customers.

The net economic cost of implementing an annual target of 2.0 Mt CO2 for the entire third phase of the scheme is estimated to be $174.1 million (NPV 3.5 per cent). Implementing the target for the transitional year in 2015 will, therefore, give a net economic cost of approximately $60 million. This cost will be countered by the benefit that extending the scheme for an additional year will give to APs and investors in certificates.

The impact on employment of closing the scheme without a transitional year in 2015 is uncertain. Some APs may be able to immediately transition their staff away from the VEET scheme onto other business activities leading to no immediate impact on employment. Those APs that are more reliant

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on the VEET scheme to support their business model, may be more immediately impacted, leading to employees leaving these organisations who may, or may not find alternative employment.

The high end estimate of employment sustained by the VEET scheme has been estimated by industry to be 2,500 people. Given that APs are, generally, diverse businesses and not all employment would be impacted by an immediate closure, a low end estimate of employees impacted by closure at the end of 2014 would be 1,000 Full Time Employees (FTE). Assuming that the net cost of the transitional year is approximately $60 million, this suggests maintaining the scheme and these 1000 FTEs in employment for an additional year will be delivered at a cost to society of between $24,000 and $60,000 per FTE that retains employment.

The analysis of the 2.0 Mt CO2 option for phase three, indicated that the scheme would be either beneficial or cost neutral to residential consumers. Only business non-participants experienced costs as a result of the scheme and these were minimal. It is anticipated that under the transitional period of 2.0 Mt CO2 for 2015 these outcomes will remain (although the level of costs and benefits realised are liable to be smaller).

Competition implicationsIn assessing the impact of the preferred option on competition, this BIA identifies all restrictions to competition that may result from the preferred option. Namely, the competitive effects on the energy retail and energy efficiency measures markets:

Impact on competition in the energy retail market

The VEET scheme requires energy retailers to acquire and surrender certificates in proportion to their share of the retail market. The Act places a mandatory obligation, for the surrender of certificates, on energy retailers with more than 5,000 customers or whose energy supply exceeds a certain limit. This threshold ensures entry into the market by new, small energy retailers is not inhibited.

Were the threshold not in place, the scheme may represent a barrier to new entrants, further intensified by the fact that these new, small entrants would have less access to low cost certificates as larger incumbent retailers would have greater market power to attain these certificates. This would then likely lead to a reduction in the competition of the energy retail market. As such, this threshold will remain in place during the transitional phase in 2015.

Following the closure announcement, potential new entrants that anticipate meeting the energy retailer threshold before 31 December 2015 may decide not to enter the market prior to the scheme closing. Similarly, retailers currently in the market that are yet to meet the threshold may delay plans for business expansion. While any party that reaches or is above the threshold will be required to meet their liability, the liability is imposed in such a way as to be proportional to the organisation’s capacity to meet that liability. The liability is a function of the amount of electricity and/or gas acquired in that year, multiplied by the GHG rate for that fuel. This methodology of calculating liabilities under VEET mitigates the potential risk of inhibiting new market entrants.

The closure of the scheme at the end of 2015 will remove the regulatory burden resulting from the scheme for all retailers. As the scheme is currently designed it provides a competitive advantage to small retailers (those that fall below the threshold), given that they are not required to purchase or generate certificates, thereby reducing their costs. Therefore, by removing a regulatory burden on the retail energy sector, the preferred option acts to alleviate a restriction on competition. No single energy retailer will be required to acquire certificates and the preferred option will, therefore, not competitively advantage or disadvantage one set of retailers over another.

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Impact on competition in the energy efficiency measures market

There are only a certain number of energy efficiency activities that are eligible to generate VEET certificates. There are clear eligibility criteria for activities to be included in the VEET scheme and a number of activities have been introduced to the scheme since its inception, including commercial lighting upgrades and SPCs. A number have been excluded due to the ability to verify and measure the level of abatement associated with such products. The structure of the VEET scheme allows new activities to be added to the scheme based on a stakeholder proposal. However, given the scheme will close at the end of 2015, it is unlikely that many, if any, new activities will be added to the scheme prior to its closure. As such, it is possible that during the one year transitional phase, the scheme may have a distortionary effect on the market for energy efficiency measures, with excluded measures likely to see less uptake than would have otherwise occurred.

The closure of the VEET scheme at the end of 2015 will mean that from 1 January 2016, this potential market distortion will no longer exist as no individual activity will have the advantage of being able to generate and sell certificates.

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7. Additional considerations

7.1 Change in the regulatory burdenFrom 1 January 2010 it is mandatory for a Regulatory Change Measurement (RCM) to be completed for each relevant regulatory change. The threshold for completion of an RCM has been raised from $0.5 million per annum in estimated red tape savings to $2 million per annum.

The implementation of the preferred option will significantly reduce red tape imposed on electricity retailers. This will flow through to lower prices for electricity consumers. If the preferred option is implemented, the Department will complete an RCM report to verify the red tape savings subsequent to this BIA within 12 months (by 2015). This report would be independently assessed by the Victorian Competition and Efficiency Commission.

7.2 Small business impactsThis section considers two key categories of small business. The first is the impact that a phase 3 of the VEET scheme is forecast to have on businesses in Victoria. The second is the impact of closing the scheme on APs who service energy efficiency installations in Victorian households and businesses.

7.2.1 Forecast impacts of VEET phase 3

Table 43 and show that if the VEET scheme were to continue into phase 3, business participants would benefit at the expense of business non-participants. Perversely, the average benefit to business participants decreases as the scheme target increases, while the average cost imposed on non-participants increases. While the benefits to participants are large relative to the cost to non-participants, there are far fewer businesses that participate in VEET which means that the vast majority of businesses in Victoria would be adversely impacted if the VEET scheme were to continue.

Table 43: Net annual and total financial benefit for the average business participant ($2015)

2015 2016 2017 NPV@3.5%2015-2030

NPV@7%2015-2030

Target option 1 (2.0 Mt CO2)

$5,523 $5,448 $5,421 $80,854 $46,115

Target option 2 (2.7 Mt CO2)

$5,208 $5,121 $5,075 $76,459 $43,550

Target option 3 (5.4 Mt CO2)

$4,519 $4,405 $4,306 $67,404 $38,143

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Table 44: Net annual and total financial benefit for the average business non participant ($2015)

2015 2016 2017 NPV@3.5%2015-2030

NPV@7%2015-2030

Target option 1 (2.0 Mt CO2)

$1 -$132 -$181 -$926 -$752

Target option 2 (2.7 Mt CO2)

-$9 -$153 -$229 -$1,162 -$943

Target option 3 (5.4 Mt CO2)

-$209 -$385 -$537 -$2,399 -$1,994

7.3 Evaluation of the schemeAn extensive strategy to evaluate the extent to which the VEET scheme meets the government’s objectives was established at the start of the scheme. The key points of the strategy include verifying GHG savings which was undertaken in 2013 during the VEET Evaluation (see Section ). The ESC also has a comprehensive compliance regime in place.

Under the Act, the ESC is responsible for monitoring compliance with the Act and the Regulations. This includes undertaking periodic audits of the VEET-related operations of scheme participants. Relevant Entities that make energy acquisitions under the Act are required to report their acquisitions for each calendar year in an audited annual energy acquisition statement, to be provided to the ESC by 30 April of the following year.

Relevant Entities must ensure that their statement or return is audited in accordance with the Victorian Energy Efficiency Target Guidelines before being submitted to the ESC. For further information on the VEET scheme's audit process and requirements, please refer to Explanatory Note - Relevant Entities: Audit process for annual energy acquisition statements available from the bottom of this page.

The ESC has established a panel of approved VEET auditors. Relevant Entities may (but are not required to) nominate auditors from the panel list to conduct audits of their annual statement.

Where a Relevant Entity surrenders insufficient certificates for a given year, the ESC will issue a shortfall statement setting out the energy efficiency certificate shortfall penalty for which the entity is liable. Further information is available at https://www.veet.vic.gov.au/Public/Public.aspx?id=AuditandCompliance

Given that it is recommended that the scheme end in 2015, the compliance results have not been reported here and no further changes to the existing compliance regime is required.

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8. Appendices

8.1 Stakeholder consultation A key element of the BIA process has involved the Department consulting extensively with the public. This consultation has been undertaken through the release of the Issues Paper, a series of targeted stakeholder workshops and a round-table discussion with industry.

8.1.1 ESI Review Issues paper and targeted stakeholder workshops

On 7 June 2013 the Department released the Issues Paper seeking stakeholder views on a number of key issues:

Barriers to the uptake of energy efficiency measures The performance of VEET to date Looking forward: the future of the scheme from 1 January 2015.

This Issues Paper was distributed widely amongst stakeholders, with its release being announced by the Minister for Energy and Resources at the ESC’s quarterly VEET forum as well as by email to over 450 stakeholders that had previously registered to receive scheme updates.

Following the release, the Department held a series of round-table workshops with customer groups, energy retailers, APs and product manufactures. The purpose of these workshops was to support the release of the issues paper with the aim of eliciting more informed and substantiated submissions from stakeholders. With this aim in mind, stakeholders were provided with a forum to raise initial feedback directly with the Department and given a greater understanding of the Department’s specific needs in relation to the collection of evidence to support the analysis of the scheme.

The call for submissions was open from 7 June to 8 July 2013 with the Department pleased to receive 44 responses to the paper. A list of all non-confidential submissions made is provided in Table 45.

A copy of the issues paper can also be found at: http://www.energyandresources.vic.gov.au/energy/about/legislation-and-regulation/energy-saver-incentive-scheme-management/ris

Table 45: Non-confidential submissions made to the VEET Review Issues Paper

Stakeholder name DescriptionAGL Energy retailer and Accredited person Amcor Multinational packaging companyCarbonetix Climate change solutions companyClean Energy Council Industry associationClimate Works Australia Not-for-profit organisation Consumer Action Law centre Consumer advocacy organisationCosydome Limited Energy efficiency product manufacturerCSR Limited Major building materials manufacturerEastern Alliance for Greenhouse Action Local government Ecovantage Accredited personEnergy Efficiency Certificate Creators Industry association Emerald Planet Energy efficiency product supplier Embertec Energy efficiency product manufacturerEnergy Australia Energy retailer EEC Industry association

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Energy Mad Accredited personEnergy Makeovers Accredited personEnergy Retailers Association of Australia Industry association Energy Supply Association of Australia Industry association Energy Users Association of Australia Industry association Enlighten Australia Pty Ltd Energy efficiency product manufacturer and

supplierEnvestra Gas transmission and distribution businessEnvironment Victoria Not-for-profit organisation Fan Manufacturers Association of Australia and New Zealand

Industry association

Green Energy Trading Accredited personHeaterMate  Controllers Pty Ltd Energy efficiency product manufacturer and

supplierInsulation Council of Australia and New Zealand

Industry association

Ironbark Sustainability ConsultancyLighting Council Australia Industry association Low energy supplies and services Accredited person Momentum Energy Energy retailerMoreland Energy Foundation Limited Not-for-profit organisation National Electrical and communications association

Industry association

Northern Alliance for Greenhouse Action Local government Opower Energy efficiency consultantsOrigin Energy Energy retailer Shine On Accredited personSimply Energy Energy retailer VECCI Industry association Victorian Farmers Federation Industry associationWattly Accredited person Wyndham City Local government

Main themes arising throughout stakeholder submissions

The submissions made to the Department were received from a diverse range of interest groups including energy retailers, APs, environmental groups and energy users. While there tended to be broad consensus across the issues within interest groups there was also significant disagreement between the groups regarding certain issues. This disagreement was particularly evident in relation to stakeholder views regarding support for the scheme. Strong views were also displayed by stakeholders in relation to the existence of barriers to the uptake of energy efficiency measures, the scheme’s performance to date and its future.

Support for the scheme

While most APs and environmental groups provided support for the scheme’s continuance, the majority of energy retailers and some energy users displayed support for its closure. In the case of the APs and environmental groups, they argued that the scheme had had great success in encouraging energy efficiency that would not otherwise have occurred. Several APs further suggested that closure of the scheme would lead to a loss of jobs and investment. The retailers however advocated that the scheme was administratively burdensome and not the best policy to address the market failures that exist in the Victorian energy market.

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Barriers to the uptake of energy efficiency measures

Although little evidence was provided to support their claims, most stakeholders acknowledged the existence of the imperfect information, split-incentives and bounded rationality market failures. There was however disagreement between stakeholders as to whether the scheme effectively addressed these failures.

A number of retailers further argued that one of the biggest reasons for sub-optimal energy use was non-cost reflective pricing rather than the existence of these energy market failures.

Performance of the scheme to date

Many APs noted in their submissions that the scheme had met its third objective by creating jobs, investment and innovation in the energy efficiency industry over its lifetime.

Others contended that the scheme had had an unfair impact on the business sector. These stakeholders advocated that businesses had been subject to the scheme’s costs, in the form of increased retail prices, despite not being able to participate effectively in the scheme due to a lack of suitable prescribed business activities.

There was also frequent mention of the need to reform the process to add new activities to the scheme. This process was claimed to take such a long time that concerns were raised as to the distortionary impact it may be having on the energy efficiency product market.

Future of the scheme

Going forward many submissions, spanning across the various interests groups, provided strong support for the introduction of PBA methodologies. Broad consensus was also provided around the need to harmonise the scheme with other State schemes or introduce a national energy saver incentive to reduce regulatory and compliance burden. Many stakeholders further agreed that emissions intensive trade exposed corporations should not be included in VEET.

A select number of stakeholders also noted however that the scheme should target low-income households.

Department response to submissions

As noted in the Issues Paper, the intention of the call for submissions was to provide stakeholders with an opportunity to influence the future direction of the scheme. Accordingly, feedback provided in the stakeholder responses has been utilised in the development of this BIA. Specifically, evidence provided in submissions was used in conjunction with other research to ascertain the materiality of the problem being addressed by the current VEET scheme. The feedback provided on the scheme’s performance to date was also relied upon heavily in the development of future potential policy options, particularly the future VEET policy options that were compared against other policy alternatives in section 6.

8.2 Industry round-table discussionDuring the analysis of the potential future policy options, the Department recognised the need to ensure any future VEET option was as accurately defined as possible to allow for a sound comparison of the policy alternatives. As a result, on 20 September 2013 the Department invited a number of key industry representatives to a round-table discussion of the Department’s future VEET policy options. These options involved incorporating more business activities into the scheme and the introduction of PBA methodologies. The purpose of the round-table was to test the assumptions being used to model

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the impact of the scheme should it be extended in this way. Industry participants were asked to discuss the suitability of proposed potential new activities in broad terms as well as their likely take-up rates in Victoria.

While possible future activities for the scheme were discussed during this session, the intention of the meeting was not to call for new activity submissions but rather to establish a likely set of activities that may be taken up in the future for modelling purposes only.

8.3 Energy efficiency schemesThere are a range of Commonwealth and Victorian schemes that have some impact on energy efficiency. These are described in sections 8.3.1 and 8.3.2.

8.3.1 Federal energy efficiency schemes

Measure Target group / technology

Targeted market failure Status

Greenhouse and Energy Minimum Standards (GEMS)

Equipment and appliances

Split incentives / bounded rationality

Ongoing

Low Income Energy Efficiency Program

Residential housing Split incentives / bounded rationality

Under review

Energy Efficiency Opportunities

Large industrial operations

Imperfect information / organisational barriers

Ongoing

LivingGreener website Residential housing Imperfect information Ongoing

Clean Energy Finance Corporation

Industrial and commercial Access to capital and other finance barriers

Uncertain

Clean Technology Investment Program

Industrial operations Access to capital and other finance barriers

Uncertain

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8.3.2 Victorian energy efficiency schemes

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Measure Target group / technology

Targeted market failure Status

Various Government websites providing information on energy efficiency benefits

Residential & SME Imperfect information Ongoing

Building Code of Australia provisions

New residential and commercial buildings

Split incentives / bounded rationality

Ongoing

"Smarter Choice" Retail program

Consumers of appliances Imperfect information Ongoing

Sustainability - It’s just good business

Small Business Imperfect information Ongoing

Green skills for trade Building practitioners Imperfect information Closed from July 2013

Next wave program (commercial buildings)

Select commercial buildings

Imperfect information Ongoing

AMI program Residential, Commercial & Industrial

Imperfect information/ Non-cost reflective pricing

Ongoing

Flexible Pricing Residential & small business

Non-cost reflective pricing Ongoing

Environment and Resource Efficiency Plan

Industrial & Commercial Imperfect information/ bounded rationality

Closed

Greener Government Buildings program

Public & commercial buildings

Imperfect information/ bounded rationality

Ongoing

Whitegoods for concession card holders

Eligible concession card holders purchasing certain appliances

Bounded rationality/access to capital

Ongoing

Victorian Government Warmer Winter discount

Certain residential concession card holders

Bounded rationality/ access to capital

Ongoing

Smarter Resources, Smarter Business Program

Small to Medium-sized business

Imperfect information/ bounded rationality/ access to capital

Ongoing

Energy and Water Task Force

Low income households Imperfect information/ bounded rationality/ access to capital

Closing end of 2013

ResourceSmart schools (energy and water efficient schools)

Schools Imperfect information/ access to capital

Ongoing

Various rebates for energy efficient

Residential Bounded rationality/ access to Closed May 2013

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systems capital / split incentives

Energy and water efficiency in rooming houses

Registered rooming houses

Bounded rationality/ access to capital / split incentives/ imperfect information

Closed

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8.4 VEET activities modelling

8.4.1 Update of the EEA-Residential Model

The EEA-Residential model was updated during the evaluation of the VEET scheme and two further activities were included that are currently not eligible in the scheme. These activities were added on the basis that they are potentially viable, measurable and verifiable. Some further adjustments were made to the average energy savings assumed for the existing activities in light of new data, and some energy baselines needed to be adjusted to account for regulatory changes or improvements to energy efficiency under BAU. These changes to the design of the scheme which have been modelled are summarised below.

HE building shell for new dwellings introduced

From 1 May 2011, the Building Code of Australia required that all new houses, townhouses and apartments meet a minimum 6 Star standard based on their House Energy Rating. Recognising the fact that some new dwellings may be built with an energy efficiency rating that is higher than 6 stars, ie. 7 and 8 stars, the phase three modelling includes a potential new activity that rewards dwellings built with an efficiency rating that is above 6 stars, achieving savings on their heating and cooling energy use.

Low energy lighting for housing introduced

New dwellings which install lighting systems that are significantly more energy efficient than the minimum standard allowed in the building regulations, can apply to create certificates.

Ceiling insulation reintroduced

When the VEET scheme was initiated, it included ceiling insulation as a prescribed activity. To avoid duplication, the incentives were suspended on 28 July 2009 following the introduction of the Commonwealth Government's Home Insulation Program.

Although the Commonwealth scheme closed in February 2010, ceiling insulation continued to be suspended in the VEET scheme in light of residual concerns around safety and compliance.

The Department recognises that ceiling insulation is an effective way for households to save energy but the human health risk to installers and fire risks for occupants must be mitigated.

On 10 July 2012, the responsible Department (then DPI) released an issues paper on the health and safety risks associated with installing ceiling insulation. This issues paper sought to gain feedback on the possible reintroduction of incentives to support ceiling insulation and a range of measures was proposed that would protect installers and consumers. Measures included mandatory installer training requirements, an update to the relevant Australian Standard, the introduction of post-installation inspection requirements, enhancements to the ESC’s audit and compliance powers and establishing a new offence prohibiting building works that make an electrical installation unsafe.

In general, stakeholders supported the proposed measures, however a decision to reintroduce incentives for ceiling insulation has been deferred until industry has finished the review of the relevant training requirements for installers. Departmental discussions with industry indicate that the review may be completed in 2014. At that time, the Department will review the introduction of ceiling insulation with the view to ensuring that sufficient safe-guards are in place.

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For the purposes of the modelling only, it was assumed that ceiling insulation is an eligible activity from 2015. An additional $200 per house was included in the phase three modelling assumptions to account for new training and compliance requirements.

Adjustment to the GHG abatement associated with SPCs

The EEA-Residential model discounted the savings which are allocated to both audio visual and Information Technology SPCs, based on the discounts that were applied by the ESC in September 2013.

It should be noted that while new activities have been included in the phase three modelling, the actual process for including new activities in the scheme is much more involved and generally requires an amendment to regulations. Eligible activities are prescribed in the Regulations. The process of adding new activities to the list of Prescribed Activities is currently managed by the Department and is informed by the New Activity Guidelines which are available on the Department website. In general terms, the process allows people or businesses to nominate potential new activities for consideration. The potential activities are reviewed by the ESI Activities Review Panel chaired by the Department and any proposed changes, including the draft Regulations, are made available for public consultation.

8.4.2 Criteria for selecting residential activities

In addition to identifying potential energy efficiency activities that are likely to be viable and practical for adoption under a scheme such as VEET, the following approach was adopted to guide the development of the EEA- Residential model.

Criteria How this is achieved

Simplicity Energy savings are calculated in reference to a BAU benchmark.

In general (unless a specific review is undertaken), the BAU energy benchmarks used as the basis for estimating savings remain constant during each VEET phase (the exception is when MEPS are introduced or upgraded mid-phase). Certificates are allocated on the basis of the energy savings achieved in reference to this benchmark, multiplied by the expected life of the measure.

In situations where a particular energy service is saved (eg hot water saving, insulation and weather proofing), the weighted average equipment stock is used as the basis for estimating greenhouse abatement, rather than specifying different abatement levels for different fuel/equipment types. (This approach has been taken to reduce the complexity and cost associated with verifying the equipment type in each home, and to reduce potential gaming.) Where appropriate, the calculations also recognise differences in the equipment stock between Melbourne and Regional Victoria.

The weighted average building stock is used as the basis for estimating savings from HE heating and cooling systems.

Data availability and reliability

Published data on the typical life of appliances and equipment is used where available – eg BIS Shrapnel household appliance reports, Energy Efficient Strategies’ residential baseline model,

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RIS’s, etc.

In situations where existing equipment is replaced with more efficient equipment, published data on the sales weighted average of new equipment sold is used as the basis for estimating the savings wherever possible, and not the estimated efficiency of the existing equipment (which is likely to be somewhat less). There is more certainty about the efficiency of new equipment sold compared to the installed stock, and this also helps to reduce additionality. Also, in most cases people are likely to upgrade to more efficient equipment at or near the end of life of the existing equipment.

Certificates allocated for a particular measure provide a good estimate of the abatement achieved for the average household in which the measure is undertaken

In situations where a particular energy service is saved (eg hot water saving, insulation and weather proofing), the weighted average equipment stock is used as the basis for estimating greenhouse abatement, rather than specifying different abatement levels for different fuel/equipment types. Where appropriate (heating, cooling, water heating), the calculations also recognise differences in the equipment stock between Melbourne and Regional Victoria.

The weighted average building stock is used as the basis for estimating savings from HE heating and cooling systems in the residential model. Heating and cooling systems are classified into different capacity ranges (small, medium & large), and the savings are based the typical floor area which can be heated or cooled by each size range. Different locations in Victoria are allocated to three different climate zones – mild (eg Melbourne), cold (eg Ballarat) and hot (eg Mildura) – to take into account the impact of climate on the savings.

Average hot water consumption in existing homes is used as the basis for estimating savings from HE or low greenhouse water heating systems. Where appropriate, a distinction is made between small and large households, to take into account the differences in the daily hot water task.

Sales weighted averages are used as the BAU benchmark when HE equipment is replacing existing equipment.

Minimise additionality and free rider effects

Lifetime savings estimates are based on the average expected life of the energy efficiency measure. Where there is some uncertainty (eg insulation or double glazing) a conservative approach has been taken.

Sales weighted averages of new products are used as the basis for estimating the savings when HE equipment is replacing existing equipment – this means that only equipment which is more efficient than the sales weighted average will generate certificates.

Minimum eligibility criteria have been specified for HE appliances, and these are somewhat higher than the sales weighted average.

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This creates an ‘efficiency gap’ which also helps to reduce free riders.

Where appropriate and possible, certificate values should recognise higher efficiency and greater capacity products

Where an existing water heater is replaced by a solar or heat pump water heater, data from Australian Standards tests is used to estimate the savings for solar water heaters in relation to a reference water heater.

Calculations for energy efficient or low greenhouse water heaters replacing an existing system take into account the differences in hot water task for small and large households.

Calculations for HE heating and cooling systems take into account the output capacity of the heating/cooling system. Heating/cooling equipment is grouped into three size ranges – small, medium and large – and the savings calculations are based on the typical floor area which can be heated or cooled by each size range. This approach was taken as the ESC wanted to link the number of certificates allocated to the particular model of heating/cooling equipment and not the house into which it is installed, as it is more complex and costly to verify the floor area heated/cooled in each house.

Where possible (eg fridges and freezers, televisions, etc), energy rating algorithms are used to estimate the energy saving between the BAU benchmark and the HE product, for products of the same type and capacity. This allows both capacity and efficiency level to be accounted for in the calculation.

The certificate creation methodology can accommodate changes to minimum energy efficiency standards, as well as improvements in BAU levels of energy efficiency

The eligible measures included in the scheme should be reviewed between each three-year VEET phase. The introduction of minimum standards may mean that some measures will become ineligible in subsequent scheme phases, or the number of certificates allocated to the measure will be reduced due to an increase in the BAU benchmark.

The sales weighted energy efficiency averages and stock averages used in the calculations will be updated between each VEET phase. This will ensure that increases in BAU levels of energy efficiency driven by the market or energy efficiency improvements driven by MEPS will be taken into account.

The minimum eligibility criteria used will be updated between each VEET phase, to ensure that free riders are minimised.

The introduction of minimum standards during a VEET phase can be dealt with through the use of Discount Abatement Factors defined in the VEET Act, or removing a measure from the list of eligible activities.

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8.4.3 Activities forecast by the EEA-Business Model – by activity

The forecast business energy efficiency measures by activity and sector are listed in Sections 8.4.3 and.8.4.4 for each target option.

Table 46: Business certificate creation by activity for each target option

Certificate creation between 2015-2017 by residential activity

Target: 2.0 Mt CO2 per annum

21A. CFL/LED lamp replaces incandescent globe 450,164

29A. Standby Power Controller (AV SPC) 420,874

1 A/B. HE Gas Water Heater replaces electric Water Heater 327,480

21C. Replace 12V halogen down light lamp 230,385

6. HE Gas Ducted Heater replaces Cent electric Heater 224,605

30. In-Home Display (IHD) 105,734

15a. General air sealing 101,139

11. Ceiling insulation to uninsulated 97,492

1 C/E. Solar-electric replaces electric Water Heater 81,984

21D. Convert halogen down light fitting to 240V low energy fitting 69,472

29B. Standby Power Controller (IT SPC) 48,148

5. HE Gas Ducted Heater replaces existing GDH 28,336

9b. HE gas room heater replaces existing electrictric 27,002

15b. Chimney balloons 26,941

17. Low flow shower rose 25,572

19. Remove & destroy pre-1996 fridge 21,223

New house with low energy lighting system - Class 1A 10,822

10b. HE room RAC replaces existing electric heater 10,602

26. Purchase HE pool pump 8,184

8. HE ducted RAC replaces Cent electric heater 5,227

New house with HE building shell - 7* 3,241

New house with low energy lighting system - Other 1,787

20. HE Gas Ducted Heater in new home 933

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10a. HE room RAC replaces existing room RAC 590

9a. HE gas room heater replaces existing gas 104

Certificate creation between 2015-2017 by residential activity

Target: 2.7 Mt CO2 per annum

29A. Standby Power Controller (AV SPC) 601,073

1 A/B. HE Gas Water Heater replaces electric Water Heater 593,706

21A. CFL/LED lamp replaces incandescent globe 450,164

21C. Replace 12V halogen down light lamp 417,345

6. HE Gas Ducted Heater replaces Cent electric Heater 398,816

30. In-Home Display (IHD) 191,593

15a. General air sealing 183,344

11. Ceiling insulation to uninsulated 176,157

1 C/E. Solar-electric replaces electric Water Heater 147,892

21D. Convert halogen downlight fitting to 240V low energy fitting 125,291

29B. Standby Power Controller (IT SPC) 85,325

5. HE Gas Ducted Heater replaces existing GDH 50,550

9b. HE gas room heater replaces existing electrictric 48,852

15b. Chimney balloons 48,832

17. Low flow shower rose 46,315

1 D/F. Solar-gas replaces electric Water Heater 39,737

19. Remove & destroy pre-1996 fridge 38,515

New house with low energy lighting system - Class 1A 19,385

10b. HE room RAC replaces existing electric heater 18,991

26. Purchase HE pool pump 14,143

8. HE ducted RAC replaces Cent electric heater 9,456

New house with HE building shell - 7* 5,363

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New house with low energy lighting system - Other 3,200

28. Gas Heating Ductwork Replacement 2,175

20. HE Gas Ducted Heater in new home 1,557

2. Solar-electric Water Heater retrofit 1,096

10a. HE room RAC replaces existing room RAC 1,051

9a. HE gas room heater replaces existing gas 503

Certificate creation between 2015-2017 by residential activity

Target: 2.7 Mt CO2 per annum

1 A/B. HE Gas Water Heater replaces electric Water Heater 1,517,574

21C. Replace 12V halogen down light lamp 1,480,750

11. Ceiling insulation to uninsulated 938,631

1 C/E. Solar-electric replaces electric Water Heater 786,877

21D. Convert halogen down light fitting to 240V low energy fitting 666,470

30. In-Home Display (IHD) 612,954

29A. Standby Power Controller (AV SPC) 601,073

15a. General air sealing 489,375

21A. CFL/LED lamp replaces incandescent globe 450,164

6. HE Gas Ducted Heater replaces Cent electric Heater 422,374

5. HE Gas Ducted Heater replaces existing GDH 266,168

9b. HE gas room heater replaces existing electrictric 234,407

1 D/F. Solar-gas replaces electric Water Heater 209,804

17. Low flow shower rose 175,811

15b. Chimney balloons 137,795

New house with low energy lighting system - Class 1A 102,471

10b. HE room RAC replaces existing electric heater 100,395

Page | 90

29B. Standby Power Controller (IT SPC) 90,041

26. Purchase HE pool pump 72,107

22. Purchase HE fridge 50,958

8. HE ducted RAC replaces Cent electric heater 45,594

19. Remove & destroy pre-1996 fridge 45,533

28. Gas Heating Ductwork Replacement 29,178

New house with HE building shell - 7* 26,047

3. Solar-gas replaces Gas Water Heater 23,262

New house with low energy lighting system - Other 16,907

24. Purchase HE TV 12,637

20. HE Gas Ducted Heater in new home 7,638

New house with HE building shell - 8* 6,487

2. Solar-electric Water Heater retrofit 5,564

10a. HE room RAC replaces existing room RAC 5,519

12. Underfloor insulation 4,315

9a. HE gas room heater replaces existing gas 2,561

25A. Purchase heat pump clothes dryer 1,674

4. Solar pre-heater for gas WH 441

7. HE ducted RAC replaces existing RAC 301

25B. Purchase gas clothes dryer 232

emphasises the importance of lighting upgrades to the forecast level of generation of certificates in the business sector (a result that is consistent with trends seen in recent years in the NSW ESS). While lighting upgrades predominately benefit the commercial building sector, opportunities to upgrade pumping systems span all sectors including the agricultural sector.

Note also that the lower abatement targets provide sufficient incentive for the majority of lighting, pumping, refrigeration and HVAC measures. However, the higher certificate prices are required to drive adoption of upgrades to appliances and opportunities around water heating.

Page | 91

Figure 1: Business certificate creation by activity for each target option

8.4.4 Activities forecast by the EEA-Business Model – by sector

Table 47 summarises certificate creation by sector. A large number of certificates are expected to be created in the SME/industrial sector with VSD adjustments and upgrades to HE pumps being the most dominant activity type, followed closely by lighting.

Table 47: Business certificate creation by sector for each target option

Forecast business certificate creation between 2015-2017 by sector

5.4 Mt CO2

per annum2.7 Mt CO2 per

annum2 Mt CO2 per

annum

CBD Hotel/SA 90,313 78,925 75,085

Hospital 221,018 158,656 144,252

Hospitality 1,009,905 469,490 307,767

Large office 265,420 239,703 224,004

Large retail(NR) 116,942 296,978 99,276

Large retail(R) 359,515 107,936 272,645

School 73,817 73,817 73,817

Shopping Centre 367,349 347,382 341,175

Small office 271,188 149,400 103,939

Page | 92

Small trade 592,474 428,130 350,286

SME Industrial 2,799,987 1,658,292 1,328,433

University/TAFE 326,866 295,249 286,234

Warehouse (NR) 107,089 74,183 46,086

Total 6,601,885 4,378,140 3,652,997

The tables below outline detailed business certificate creation forecasts for each target option.

Option 1: Target of 2.0 Mt CO2 per annum (2015-2017)

Measure Name Sector End use Total certificates issued

Pumps: Upgrade to HE pumps SME Industrial Pumps 492,798

Lighting: Reflectors / delamping SME Industrial Lighting 266,407

Pumps: VSDs for pumps SME Industrial Pumps 202,538

Lighting: New lamps and other upgrades SME Industrial Lighting 189,433

Lighting: Reflectors / delamping Small trade Lighting 128,813

Refrigeration: HE commercial refrigeration Small trade Refrigeration 121,514

HVAC: Evaporative cooling systemShopping

CentreHVAC 107,235

Refrigeration: Replace a low efficiency fan motor with an electronically commutated motor

Large retail (R) Refrigeration 92,584

Heating and cooling: HE stand alone ACSME Industrial

Standalone heating and

cooling78,129

Refrigeration: HE commercial refrigeration Hospitality Refrigeration 78,074

HVAC: Evaporative cooling systemUniversity /

TAFEHVAC 75,865

Lighting: New lamps and other upgrades Small trade Lighting 73,538

Lighting: Upgrade fluorescent lightsShopping

CentreLighting 70,644

Appliances & Equipment: Install HE or upgraded domestic appliances

SME IndustrialAppliances

and equipment69,465

Lighting: Upgrade fluorescent lights Large office Lighting 63,650

Water Heating: Solar or heat pump water heater Hospitality Water heating 61,339

Lighting: Upgrade fluorescent lights Large retail (R) Lighting 50,678

Lighting: Upgrade fluorescent lights University / Lighting 49,979

Page | 93

TAFE

Lighting: Reflectors / delamping Hospitality Lighting 48,061

Lighting: New lamps and other upgrades Hospitality Lighting 46,659

Lighting: Reflectors / delamping Small office Lighting 43,426

Appliances & Equipment: Install HE or upgraded domestic appliances

HospitalityAppliances

and equipment38,004

Lighting: Upgrade halogen lightsUniversity /

TAFELighting 37,018

Standalone heating and cooling: HE stand alone AC

Shopping Centre

Standalone heating and

cooling36,857

Lighting: Upgrade halogen lights CBD Hotel / SA Lighting 36,200

Lighting: Upgrade halogen lights Large office Lighting 36,069

Heating and cooling: HE stand alone ACHospitality

Standalone heating and

cooling35,630

Lighting: Upgrade fluorescent lightsLarge Retail

(NR)Lighting 35,500

HVAC: HVAC controlsUniversity /

TAFEHVAC 30,482

HVAC: VSDs and control for fans Large retail (R) HVAC 30,233

HVAC: VSDs and control for fansUniversity /

TAFEHVAC 29,817

Boilers, furnaces and ovens: Replace boilerHospital

Boilers, furnaces and

ovens29,330

Lighting: Reflectors / delamping Hospital Lighting 28,333

Water Heating: Solar or heat pump water heater SME Industrial Water heating 27,044

HVAC: HVAC controls Hospital HVAC 26,880

Heating and cooling: HE stand alone ACSmall office

Standalone heating and

cooling26,225

Lighting: Upgrade discharge lightsWarehouse

(NR)Lighting 25,982

Lighting: Upgrade fluorescent lights School Lighting 25,770

Heating and cooling: HE stand alone ACSmall trade

Standalone heating and

cooling24,354

Lighting: New lamps and other upgrades Small office Lighting 24,129

Page | 94

Standalone heating and cooling: HE stand alone ACLarge office

Standalone heating and

cooling24,017

Boilers, furnaces and ovens: Replace boilerLarge office

Boilers, furnaces and

ovens23,895

HVAC: Evaporative cooling systemLarge Retail

(NR)HVAC 23,095

HVAC: HVAC controls School HVAC 22,968

Lighting: Upgrade halogen lightsShopping

CentreLighting 22,628

Lighting: Upgrade halogen lights Large retail (R) Lighting 21,719

Lighting: Halogen lights to CFLUniversity /

TAFELighting 20,596

Lighting: Reflectors / delampingShopping

CentreLighting 19,796

HVAC: VSDs and control for fans Large office HVAC 18,986

Lighting: Reflectors / delamping Large retail (R) Lighting 18,935

HVAC: HVAC controlsShopping

CentreHVAC 18,824

Boilers, furnaces and ovens: Replace boiler

University / TAFE

Boilers, furnaces and

ovens18,763

HVAC: VSDs and control for fans Hospital HVAC 18,727

Pumps: VSDs for pumps Hospital Pumps 18,236

Lighting: Upgrade halogen lights School Lighting 17,756

Boilers, furnaces and ovens: Replace boiler

Shopping Centre

Boilers, furnaces and

ovens17,681

Lighting: Lighting control systemsShopping

CentreLighting 17,467

Lighting: Lighting control systems Large retail (R) Lighting 16,707

HVAC: VSDs and control for fansShopping

CentreHVAC 15,804

Lighting: Reflectors / delamping Large office Lighting 15,458

Lighting: Upgrade fluorescent lights Hospital Lighting 15,456

Lighting: Upgrade halogen lights Large Retail Lighting 15,214

Page | 95

(NR)

Appliances and equipment: Replace a MEPS compliant motor with a HE motor

Shopping Centre

Appliances and equipment

14,239

Ventilation / fans: Car park ventilation controlLarge office

Ventilation and fans

14,086

Boilers, furnaces and ovens: Replace boilerCBD Hotel / SA

Boilers, furnaces and

ovens13,501

Lighting: Voltage optimisation Large retail (R) Lighting 12,863

Lighting: Lighting control systemsUniversity /

TAFELighting 12,730

Boilers, furnaces and ovens: Replace boilerLarge retail (R)

Boilers, furnaces and

ovens12,684

HVAC: HVAC controls CBD Hotel / SA HVAC 12,140

HVAC: Replace a MEPS compliant motor with a HE motor

University / TAFE

HVAC 10,984

HVAC: HVAC controls Large office HVAC 10,822

HVAC: VSDs and control for fansLarge Retail

(NR)HVAC 10,589

Lighting: Voltage optimisation Large office Lighting 10,463

Lighting: Voltage optimisationWarehouse

(NR)Lighting 10,228

Appliances and equipment: Replace a MEPS compliant motor with a HE motor

Warehouse (NR)

Appliances and equipment

9,875

Lighting: Voltage optimisationLarge Retail

(NR)Lighting 9,025

Water Heating: Solar or heat pump water heater Small office Water heating 7,336

Lighting: Lighting control systems School Lighting 7,323

Water heating: Solar or heat pump water heater Hospital Water heating 7,291

HVAC: HVAC controls Large retail (R) HVAC 7,285

HVAC: VSDs and control for fans CBD Hotel / SA HVAC 7,241

Lighting: Lighting control systems Large office Lighting 6,557

Lighting: Lighting control systems CBD Hotel / SA Lighting 6,002

Lighting: Lighting control systemsLarge Retail

(NR)Lighting 5,852

Lighting: Upgrade discharge lights Large retail (R) Lighting 5,314

Page | 96

Lighting: Lighting control systems SME Industrial Lighting 2,618

Water heating: Solar or heat pump water heater Large retail (R) Water heating 2,536

Lighting: Lighting control systems Small trade Lighting 2,068

Appliances & Equipment: Replace a MEPS compliant motor with a HE motor

Small officeAppliances

and equipment1,456

Refrigeration: HE commercial refrigeration Large retail (R) Refrigeration 1,107

Lighting: Lighting control systems Small office Lighting 772

Appliances & Equipment: Upgrade computer equipment

Small officeAppliances

and equipment596

Option 2: Target of 2.7 Mt CO2 per annum (2015-2017)

Measure Name Sector End use Total certificates issued

Pumps: Upgrade to HE pumps SME Industrial Pumps 492,798

Lighting: New lamps and other upgrades SME Industrial Lighting 338,748

Lighting: Reflectors / delamping SME Industrial Lighting 266,407

Pumps: VSDs for pumps SME Industrial Pumps 247,036

Heating and cooling: HE stand alone AC SME IndustrialStandalone heating and

cooling137,746

Lighting: New lamps and other upgrades Small trade Lighting 131,503

Lighting: Reflectors / delamping Small trade Lighting 128,813

Appliances & Equipment: Install HE or upgraded domestic appliances

SME IndustrialAppliances

and equipment123,547

Refrigeration: HE commercial refrigeration Small trade Refrigeration 121,514

Water Heating: Solar or heat pump water heater Hospitality Water heating 108,305

HVAC: Evaporative cooling system Shopping

CentreHVAC 107,235

Refrigeration: Replace a low efficiency fan motor with an electronically commutated motor

Large retail (R) Refrigeration 92,584

Lighting: New lamps and other upgrades Hospitality Lighting 83,437

Refrigeration: HE commercial refrigeration Hospitality Refrigeration 78,074

HVAC: Evaporative cooling system University / HVAC 75,865

Page | 97

TAFE

Lighting: Upgrade fluorescent lights Shopping

CentreLighting 70,644

Appliances & Equipment: Install HE or upgraded domestic appliances

HospitalityAppliances

and equipment67,591

Lighting: Upgrade fluorescent lights Large office Lighting 63,650

Heating and cooling: HE stand alone AC HospitalityStandalone heating and

cooling62,818

Lighting: Upgrade fluorescent lights Large retail (R) Lighting 50,678

Lighting: Upgrade fluorescent lights University /

TAFELighting 49,979

Lighting: Reflectors / delamping Hospitality Lighting 48,061

Water Heating: Solar or heat pump water heater SME Industrial Water heating 47,750

Lighting: Upgrade discharge lights Warehouse

(NR)Lighting 46,499

Heating and cooling: HE stand alone AC Small officeStandalone heating and

cooling46,235

Lighting: Reflectors / delamping Small office Lighting 43,426

Lighting: New lamps and other upgrades Small office Lighting 43,148

Heating and cooling: HE stand alone AC Small tradeStandalone heating and

cooling42,937

Lighting: Upgrade halogen lights University /

TAFELighting 37,018

Standalone heating and cooling: HE stand alone AC

Shopping Centre

Standalone heating and

cooling36,857

Lighting: Upgrade halogen lights CBD Hotel / SA Lighting 36,200

Lighting: Upgrade halogen lights Large office Lighting 36,069

HVAC: VSDs and control for fans Large retail (R) HVAC 35,864

Lighting: Upgrade fluorescent lights Large Retail

(NR)Lighting 35,500

HVAC: VSDs and control for fans University /

TAFEHVAC 35,370

Boilers, furnaces and ovens: Replace boiler HospitalBoilers,

furnaces and ovens

34,742

Page | 98

HVAC: HVAC controls University /

TAFEHVAC 30,482

Lighting: Reflectors / delamping Hospital Lighting 28,333

Boilers, furnaces and ovens: Replace boiler Large officeBoilers,

furnaces and ovens

28,305

HVAC: HVAC controls Hospital HVAC 26,880

Lighting: Upgrade fluorescent lights School Lighting 25,770

Standalone heating and cooling: HE stand alone AC

Large officeStandalone heating and

cooling24,017

HVAC: Evaporative cooling system Large Retail

(NR)HVAC 23,095

HVAC: HVAC controls School HVAC 22,968

Lighting: Upgrade halogen lights Shopping

CentreLighting 22,628

HVAC: VSDs and control for fans Large office HVAC 22,522

Lighting: Voltage optimisation Large retail (R) Lighting 22,395

Boilers, furnaces and ovens: Replace boiler University /

TAFE

Boilers, furnaces and

ovens22,226

HVAC: VSDs and control for fans Hospital HVAC 22,215

Lighting: Upgrade halogen lights Large retail (R) Lighting 21,719

Pumps: Upgrade to HE pumps Hospitality Pumps 21,204

Boilers, furnaces and ovens: Replace boiler Shopping

Centre

Boilers, furnaces and

ovens20,944

Lighting: Halogen lights to CFL University /

TAFELighting 20,596

Lighting: Reflectors / delamping Shopping

CentreLighting 19,796

Lighting: Reflectors / delamping Large retail (R) Lighting 18,935

HVAC: HVAC controls Shopping

CentreHVAC 18,824

HVAC: VSDs and control for fans Shopping

CentreHVAC 18,748

Pumps: VSDs for pumps Hospital Pumps 18,236

Lighting: Voltage optimisation Large office Lighting 18,217

Page | 99

Lighting: Voltage optimisation Warehouse

(NR)Lighting 17,808

Lighting: Upgrade halogen lights School Lighting 17,756

Lighting: Lighting control systems Shopping

CentreLighting 17,467

Lighting: Lighting control systems Large retail (R) Lighting 16,707

Boilers, furnaces and ovens: Replace boiler CBD Hotel / SABoilers,

furnaces and ovens

15,993

Lighting: Voltage optimisation Large Retail

(NR)Lighting 15,712

Lighting: Reflectors / delamping Large office Lighting 15,458

Lighting: Upgrade fluorescent lights Hospital Lighting 15,456

Lighting: Upgrade halogen lights Large Retail

(NR)Lighting 15,214

Boilers, furnaces and ovens: Replace boiler Large retail (R)Boilers,

furnaces and ovens

15,024

Appliances and equipment: Replace a MEPS compliant motor with a HE motor

Shopping Centre

Appliances and equipment

14,239

Ventilation / fans: Car park ventilation control Large officeVentilation and

fans14,086

Water Heating: Solar or heat pump water heater Small office Water heating 12,952

Water heating: Solar or heat pump water heater Hospital Water heating 12,794

Lighting: Lighting control systems University /

TAFELighting 12,730

HVAC: VSDs and control for fans Large Retail

(NR)HVAC 12,562

HVAC: HVAC controls CBD Hotel / SA HVAC 12,140

HVAC: Replace a MEPS compliant motor with a HE motor

University / TAFE

HVAC 10,984

HVAC: HVAC controls Large office HVAC 10,822

Appliances and equipment: Replace a MEPS compliant motor with a HE motor

Warehouse (NR)

Appliances and equipment

9,875

Lighting: Upgrade discharge lights Large retail (R) Lighting 9,511

HVAC: VSDs and control for fans CBD Hotel / SA HVAC 8,590

Lighting: Lighting control systems School Lighting 7,323

HVAC: HVAC controls Large retail (R) HVAC 7,285

Page | 100

Lighting: Lighting control systems Large office Lighting 6,557

Lighting: Lighting control systems CBD Hotel / SA Lighting 6,002

Lighting: Lighting control systems Large Retail

(NR)Lighting 5,852

Water heating: Solar or heat pump water heater Large retail (R) Water heating 4,451

Lighting: Lighting control systems SME Industrial Lighting 4,259

Lighting: Lighting control systems Small trade Lighting 3,364

Refrigeration: HE commercial refrigeration Large retail (R) Refrigeration 1,824

Appliances & Equipment: Replace a MEPS compliant motor with a HE motor

Small officeAppliances

and equipment1,456

Lighting: Lighting control systems Small office Lighting 1,255

Appliances & Equipment: Upgrade computer equipment

Small officeAppliances

and equipment928

Option 3: Target of 5.4 Mt CO2 per annum (2015-2017)

Measure Name Sector End use Total certificates issued

Lighting: New lamps and other upgrades SME Industrial Lighting 603,342

Appliances & Equipment: Install HE or upgraded domestic appliances

SME IndustrialAppliances

and equipment562,111

Pumps: Upgrade to HE pumps SME Industrial Pumps 492,798

Pumps: VSDs for pumps SME Industrial Pumps 411,319

Water Heating: Solar or heat pump water heater Hospitality Water heating 337,269

Heating and cooling: HE stand alone AC SME IndustrialStandalone heating and

cooling294,877

Lighting: Reflectors / delamping SME Industrial Lighting 266,407

Lighting: New lamps and other upgrades Small trade Lighting 234,219

Appliances & Equipment: Install HE or upgraded domestic appliances

HospitalityAppliances

and equipment227,981

Water Heating: Solar or heat pump water heater SME Industrial Water heating 148,697

Lighting: New lamps and other upgrades Hospitality Lighting 148,609

Heating and cooling: HE stand alone AC Hospitality Standalone heating and

134,475

Page | 101

cooling

Lighting: Reflectors / delamping Small trade Lighting 128,813

Refrigeration: HE commercial refrigeration Small trade Refrigeration 121,514

HVAC: Evaporative cooling system Shopping

CentreHVAC 107,235

Heating and cooling: HE stand alone AC Small officeStandalone heating and

cooling98,977

Refrigeration: Replace a low efficiency fan motor with an electronically commutated motor

Large retail (R) Refrigeration 92,584

Heating and cooling: HE stand alone AC Small tradeStandalone heating and

cooling91,917

Lighting: Upgrade discharge lights Warehouse

(NR)Lighting 78,791

Refrigeration: HE commercial refrigeration Hospitality Refrigeration 78,074

Lighting: New lamps and other upgrades Small office Lighting 76,850

HVAC: Evaporative cooling system University /

TAFEHVAC 75,865

Lighting: Upgrade fluorescent lights Shopping

CentreLighting 70,644

Lighting: Upgrade fluorescent lights Large office Lighting 63,650

HVAC: VSDs and control for fans Large retail (R) HVAC 60,032

HVAC: VSDs and control for fans University /

TAFEHVAC 59,204

Lighting: Upgrade fluorescent lights Large retail (R) Lighting 50,678

Lighting: Upgrade fluorescent lights University /

TAFELighting 49,979

Lighting: Reflectors / delamping Hospitality Lighting 48,061

Water heating: Solar or heat pump water heater Hospital Water heating 48,022

Boilers, furnaces and ovens: Replace boiler HospitalBoilers,

furnaces and ovens

46,909

Lighting: Reflectors / delamping Small office Lighting 43,426

Water Heating: Solar or heat pump water heater Small office Water heating 40,335

Boilers, furnaces and ovens: Replace boiler Large officeBoilers,

furnaces and ovens

38,217

Page | 102

HVAC: VSDs and control for fans Large office HVAC 37,699

HVAC: VSDs and control for fans Hospital HVAC 37,184

Lighting: Upgrade halogen lights University /

TAFELighting 37,018

Standalone heating and cooling: HE stand alone AC Shopping

Centre

Standalone heating and

cooling36,857

Lighting: Upgrade halogen lights CBD Hotel / SA Lighting 36,200

Lighting: Upgrade halogen lights Large office Lighting 36,069

Lighting: Upgrade fluorescent lights Large Retail

(NR)Lighting 35,500

Pumps: Upgrade to HE pumps Hospitality Pumps 35,427

HVAC: VSDs and control for fans Shopping

CentreHVAC 31,381

HVAC: HVAC controls University /

TAFEHVAC 30,482

Boilers, furnaces and ovens: Replace boiler University /

TAFE

Boilers, furnaces and

ovens30,009

Lighting: Reflectors / delamping Hospital Lighting 28,333

Boilers, furnaces and ovens: Replace boiler Shopping

Centre

Boilers, furnaces and

ovens28,278

HVAC: HVAC controls Hospital HVAC 26,880

Lighting: Upgrade fluorescent lights School Lighting 25,770

Standalone heating and cooling: HE stand alone AC Large officeStandalone heating and

cooling24,017

Lighting: Voltage optimisation Large retail (R) Lighting 23,167

HVAC: Evaporative cooling system Large Retail

(NR)HVAC 23,095

HVAC: HVAC controls School HVAC 22,968

Lighting: Upgrade halogen lights Shopping

CentreLighting 22,628

Lighting: Upgrade halogen lights Large retail (R) Lighting 21,719

Boilers, furnaces and ovens: Replace boiler CBD Hotel / SABoilers,

furnaces and ovens

21,593

HVAC: VSDs and control for fans Large Retail HVAC 21,026

Page | 103

(NR)

Lighting: Halogen lights to CFL University /

TAFELighting 20,596

Boilers, furnaces and ovens: Replace boiler Large retail (R)Boilers,

furnaces and ovens

20,285

Lighting: Lighting control systems SME Industrial Lighting 20,271

Lighting: Reflectors / delamping Shopping

CentreLighting 19,796

Lighting: Reflectors / delamping Large retail (R) Lighting 18,935

Lighting: Voltage optimisation Large office Lighting 18,846

HVAC: HVAC controls Shopping

CentreHVAC 18,824

Lighting: Voltage optimisation Warehouse

(NR)Lighting 18,422

Pumps: VSDs for pumps Hospital Pumps 18,236

Lighting: Upgrade halogen lights School Lighting 17,756

Lighting: Lighting control systems Shopping

CentreLighting 17,467

Water heating: Solar or heat pump water heater Large retail (R) Water heating 16,707

Lighting: Lighting control systems Large retail (R) Lighting 16,707

Lighting: Voltage optimisation Large Retail

(NR)Lighting 16,254

Lighting: Upgrade discharge lights Large retail (R) Lighting 16,116

Lighting: Lighting control systems Small trade Lighting 16,011

Lighting: Reflectors / delamping Large office Lighting 15,458

Lighting: Upgrade fluorescent lights Hospital Lighting 15,456

Refrigeration: HE commercial refrigeration Large retail (R) Refrigeration 15,300

Lighting: Upgrade halogen lights Large Retail

(NR)Lighting 15,214

HVAC: VSDs and control for fans CBD Hotel / SA HVAC 14,378

Appliances and equipment: Replace a MEPS compliant motor with a HE motor

Shopping Centre

Appliances and equipment

14,239

Ventilation / fans: Car park ventilation control Large officeVentilation and

fans14,086

Lighting: Lighting control systems University / Lighting 12,730

Page | 104

TAFE

HVAC: HVAC controls CBD Hotel / SA HVAC 12,140

HVAC: Replace a MEPS compliant motor with a HE motor

University / TAFE

HVAC 10,984

HVAC: HVAC controls Large office HVAC 10,822

Appliances and equipment: Replace a MEPS compliant motor with a HE motor

Warehouse (NR)

Appliances and equipment

9,875

Lighting: Lighting control systems School Lighting 7,323

HVAC: HVAC controls Large retail (R) HVAC 7,285

Lighting: Lighting control systems Large office Lighting 6,557

Lighting: Lighting control systems CBD Hotel / SA Lighting 6,002

Lighting: Lighting control systems Small office Lighting 5,975

Lighting: Lighting control systems Large Retail

(NR)Lighting 5,852

Appliances & Equipment: Upgrade computer equipment

Small officeAppliances

and equipment4,165

Appliances & Equipment: Replace a MEPS compliant motor with a HE motor

Small officeAppliances

and equipment1,456

Refrigeration: HE commercial refrigeration SME Industrial Refrigeration 164

Boilers, Furnaces & Ovens: Upgrade HospitalityBoilers,

furnaces and ovens

10

Building shell upgrade: Window treatment Small officeBuilding shell

upgrade4

Building shell upgrade: Window treatment HospitalityBuilding shell

upgrade1

Building shell upgrade: Window treatment Small tradeBuilding shell

upgrade1

Page | 105

8.4.5 Description of activities forecast by the EEA-Business Model

Due to the fact that the activities introduced in the EEA-Business model are new to the scheme, the following tables provide a description of each activity. A comparable table for residential activities is not provided since most of the residential measures modelled are accredited activities under the scheme and have previously been consulted on.

Table 48: Description of large commercial measures

End use Measure Comments/Description Interactions Market size30

Air compressors Improved operation of compressed air systems

Any upgrade to a compressed air system. It could include a new or upgraded compressor, new air filters, leak reduction campaigns or changes to the air distribution network.

Predominately based on existing stock

Appliances and equipment

Upgrade computer equipment

Replacements of computer equipment or upgrading the energy efficiency e.g. activating the EnergyStar features.

End of life

Install HE domestic appliances

The measure is a composite of a range of typical appliances found in the commercial sector, including refrigerators, dish washers, televisions. The savings and costs represent the marginal differences between MEPS compliant and HE.

End of life

Replace a MEPS compliant motor with a HE motor

A HE motor is installed instead of a MEPS compliant motor at the time of replacement. Note that this does not include installing a HE motor in the HVAC system as that is covered elsewhere.

End of life

30 This column describes the basis for the size of the opportunity to implement the measure. A measure that is described as ‘end of life’ is one that is best implemented when a piece of equipment reaches the end of its life and is replaced. An example of this is installing a high efficiency electric motor rather than a MEPS compliant motor when the existing motor expires. ‘End of life’ measures are generally not cost effective unless implemented when equipment is being replaced. A measure that is described as ‘existing stock’ is one that can be implemented in a cost effective way at any time. An example is installing a variable speed drive on a motor.

Page | 106

End use Measure Comments/Description Interactions Market size

Timer A timer is installed on a domestic appliance. The most common example is a timer on a water heater.

Reduces savings from other appliance measures. Also, the other appliance measures reduce the savings from this measure.

Existing stock

Boilers, furnaces and ovens

Replace boiler A gas fired boiler used for space heating is replaced by a more efficient unit, or an electric boiler is replaced by a gas boiler. Specific improvements could cover a range of components. The savings and capital cost are a composite of replacement options or upgrade options.

More likely to be end of life

Building shell Ceiling insulation / envelope

Adding internal insulation or external cladding to the building shell. While these two measures are independent of each other, they impact every other measure associated with space heating and cooling.

Existing stock

Window treatment This is a composite measure that could include installation of double glazing, window tinting, blinds or external shading.

Existing stock

HVAC Evaporative cooling system This measure covers the replacement of an air conditioning system based on a mechanical chiller with an air conditioning system based on an evaporative cooler. The latter use much less energy but relies on the wet bulb temperature of the air being significantly lower than the dry bulb temperature.

Existing stock

HVAC controls HVAC controls range from fully featured Building Management Systems (BMS) down to simple timers. The savings and the cost for each building type represent a composite average of measures that are appropriate to the scale of building.

Mixture

HVAC routine maintenance This covers operational activities such as leak detection and repair, repairs to cooling fans and general repairs to damaged components.

Existing stock

Replace a MEPS compliant motor with a HE motor

A HE motor is installed instead of a MEPS compliant motor at the time of replacement.

End of life

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End use Measure Comments/Description Interactions Market size

Replace cooling tower This measure covers upgrading or replacing the cooling tower when appropriate. In most cases, the upgrade or replacement will occur near the end of the life of the existing cooling tower.

More likely at end of life

Upgrade chiller The measure covers a range of activities that are broadly described as ‘upgrading the chiller’. It could cover installing a HE chiller at the end of the life of the current chiller, replacing a poorly performing chiller with a new system or adding new components such as VSDs to a chiller. The savings and the cost are representative of the basket of activities.

Replacing the chiller is more likely at end of life. VSDs and other upgrades can happen at any time.

HVAC economy cycles An economy cycle involves the use of fresh air to minimise the demands on the mechanical chillers. For instance, if the HVAC system is calling for cooling at a time when the exterior temperature is lower than the interior temperature then it is much more efficient to draw in fresh air than to run the chillier. Most HVAC systems have the ability to run economy cycles and so the measure just requires the opening of the external air vents. However, in other cases some capital work is required. The savings and costs are reflective of the balance of projects seen across a range of buildings.

Existing stock

Upgrade to HE pumps (HVAC)

Involves the replacement or upgrading of the existing water circulation pumps with HE pumps. It excludes installation of HE motors or VSDs as these measures are covered elsewhere. The replacement will generally be at the end of the life of the existing pumps. The measure especially applies to facilities that circulate chilled water to remote air handling units.

End of life

VSDs and control for fans The installation of VSDs on the fans is an important energy saving measure. It covers both the fans in the air handling units and fans in the cooling tower or condenser. The VSD needs to be connected to some control signal and the measure may also require installation of measurement devices or controllers. This has been allowed for in the cost of the measure.

Existing stock

Lifts and travelators

Isolation and controls The purpose of this measure is to introduce time controls on lifts and travelators so they don’t run outside of normal operating hours. The cost of the measure is relatively low.

Existing stock

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End use Measure Comments/Description Interactions Market size

Lighting Halogen lights to CFL The measure covers the replacement of a halogen light with a CFL. The savings and costs are the averages of a range of projects at different scales. Note that it will also capture the replacement of any legacy incandescent lights.

Existing stock

Lighting control systems This covers a range of activities ranging from the installation of a single occupancy sensor through to the installation of complex whole-of-facility systems covering photoelectric and motion sensors. The costs and savings reflect a range of projects across a range of facilities.

Installing a control system will reduce savings from delamping and any upgrade to lights.

Existing stock

Reflectors / delamping The removal of single lights from dual fittings, installation of less powerful lights, or upgrades to fittings that allow more efficient lights to be employed.

Delamping will impact any other lighting measure

Effectively an end of life as the measure is implemented during a building refit

Upgrade discharge lights The measure incorporates a range of activities focused on replacing metal halide (MH) lamps. The MH lamps could be replaced with LEDs or CFLs.

Existing stock

Upgrade halogen lights Primarily the replacement of 50W Dichroics with 35W infra red coated Dichroics. Note that the introduction of MEPS for halogen lights will impact this measure.

End of life

Voltage optimisation This generally calls for the installation of fixed dimming of lights in low traffic spaces such as car parks. The average cost is reflective of the range of specific measures seen in the commercial buildings of Australia.

Existing stock

Pumps VSDs for pumps The installation of VSDs on the pumps is an important energy saving measure. It covers all pumps in the building. These will generally be associated with the HVAC systems but there can be others. The VSD needs to be connected to some control signal and the measure may also require installation of measurement devices or controllers. This has been allowed for in the cost of the measure.

Existing stock

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End use Measure Comments/Description Interactions Market size

Refrigeration HE commercial refrigeration

This covers the installation of a HE refrigerator rather than a MEPS compliant system, or the replacement of an aging system with a HE refrigerator when the former is nearing the end of its economic life. The capital costs are high because of the complexity of these systems, especially in large retail outlets.

End of life

Replace a low efficiency fan motor with an electronically commutated motor

This measure calls for the replacement of low efficiency shaded pole or permanent switched capacitor motors with more efficient electronically commutated motors.

Existing stock

Standalone heating and cooling

HE stand alone AC In some cases, even a large commercial building can have small stand-alone HVAC systems. One example is stand alone systems for server rooms. There are limited opportunities however as the measure coverage is low. The cost and savings represent averages of a few instances that have been analysed by Energetics energy audits.

End of life

Ventilation / fans Car park ventilation control Generally this is about installing carbon monoxide sensors in car parks to control the operation of the ventilation fans, or installing VSDs to slow the fans when they are not needed. The scale of the measure is variable, depending upon the configuration of the car park and the design of the system.

Existing stock

Water heating HE gas water heater This measure covers the replacement of an existing gas hot water heater with a HE version. Generally this will happen at the end of the economic life of the existing system.

These two measures are mutually exclusive.

End of life

Solar or heat pump water heater

In some circumstances, it is possible to install a solar hot water heater or a heat pump system. Solar hot water works well in buildings like large retail, hospitals or universities and less well in large offices. The cost is based on the average of a range of instances that are representative of opportunities in the market.

Existing stock

Water heating control systems

Usually a timer on a hot water heater, but can be a more complex controller. Reduces the impact of other HW measures

Existing stock

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End use Measure Comments/Description Interactions Market size

Street lighting Upgrade street lighting Replace an existing street light with a more efficient light. This covers a basket of upgrades. Old lights include MV80 lights and twin T8 fluorescent lights in inefficient fittings. New lights include CFLs, discharge lights (with or without active reactor controls), induction lights and LEDs

Existing stock

Table 49: Description of SME measures

End use Measure Comments/Description Interactions Market size

Air compressors Improved operation of compressed air systems

This covers any upgrade to a compressed air system. It could include a new or upgraded compressor, new air filters, leak reduction campaigns or changes to the air distribution network.

Predominately based on existing stock

Appliances and equipment

Controls, timers and voltage optimisation

Covers measures like timers and standby controllers. Reduces savings from other appliance measures and vice versa

Existing stock

Upgrade computer equipment

This covers replacements of computer equipment or upgrading the energy efficiency e.g. activating the EnergyStar features. A typical action is replacing a desktop computer and monitor with a laptop.

End of life

Replace a MEPS compliant motor with a HE motor

A HE motor is installed instead of a MEPS compliant motor at the time of replacement. Note that this does not include installing a HE motor in the HVAC system as that is covered elsewhere.

End of life

Install HE domestic appliances

The measure is a composite of a range of typical appliances found in the commercial sector, including refrigerators, dish washers, televisions. The savings and the cost represent the marginal differences between MEPS compliant and HE.

End of life

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End use Measure Comments/Description Interactions Market size

VSDs The installation of VSDs on the pumps is an important energy saving measure. It covers all pumps in the building. These will generally be associated with the HVAC systems, but there can be others such as materials handling systems. The VSD needs to be connected to some control signal and the measure may also require installation of measurement devices or controllers. This has been allowed for in the cost of the measure.

Existing stock

Building shell upgrade

Ceiling insulation / envelope

A collection of measures related to the installation of insulation in the building shell. It could include insulation in the ceiling or in the wall cavity.

While these two measures are independent of each other, they impact every other measure associated with space heating and cooling.

Existing stock

Window treatment This is a composite measure that could include installation of double glazing, window tinting, blinds or external shading.

Existing stock

Ventilation / fans Improve fan efficiency Measures aimed at improving the fan performance. The cost represents the basket of measures considered.

Existing stock

Stand alone heating and cooling

Controls Heating and cooling controls range from fully featured BMS down to simple timers. The savings and costs for each building type represent a composite average of measures that are appropriate to the scale of building.

These two measures will impact each other

Existing stock

HE stand alone AC Generally this measure involves upgrading to a high performance (5 star) air conditioner at the time that a new AC system is being installed.

End of life

Water heating Water heating control systems

This generally involves the installation of a timer on a hot water system but also covers other measures like adjusting the hot water temperature.

Reduces the impact of other HW measures

Existing stock

Solar or heat pump water heater

In some circumstances, it is possible to install a solar hot water heater or a heat pump system. Solar hot water works well in buildings that have significant roof area. The cost represents the average of a range of instances that are representative of opportunities in the market.

These two measures are mutually exclusive.

Existing stock

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End use Measure Comments/Description Interactions Market size

HE gas water heater This measure covers the replacement of an existing gas hot water heater with a HE version. Generally this will happen at the end of the economic life of the existing system. It also covers the replacement of an electric hot water system with a gas water heater.

End of life

Lighting Lighting control systems This covers a range of activities ranging from the installation of a single occupancy sensor through to the installation of complex whole of facility systems covering photoelectric and motion sensors. The costs and savings reflect a range of projects across a range of facilities.

Installing a control system will reduce savings from delamping and any upgrade to lights.

Existing stock

New lamps and other upgrades

The measure covers all instances where one lighting technology is replaced with another. The most common will be the replacement of an incandescent/metal halide light with a CFL or LED, or the replacement of T8 fluorescent tubes with T5 tubes. It could also cover upgrades to fittings as well as the lamps.

The majority of the lights likely to be replaced are currently not covered by MEPS. Should MEPS be introduced it will limit the availability of the measure. Currently it is most common for the new lamp to be an LED rather than a CFL, or a T5 tube in the case of the replacement of T8 tubes. There are still savings available from these replacements as the penetration is not high for the SME sector.

End of life

Reflectors / delamping This can cover the removal of single lights from dual fittings, installation of less powerful lights, or upgrades to fittings that allow more efficient lights to be employed.

Delamping will impact any other lighting measure

Existing stock

Boilers, furnaces and ovens

Replace boiler Covers a range of measures associated with upgrades or replacement of boilers and heaters.

End of life

Pumps Upgrade to HE pumps Involves the replacement or upgrading of the existing water circulation pumps with HE pumps. It excludes installation of HEmotors or VSDs as those measures are covered elsewhere. The replacement will generally be at the end of the life of the existing pumps. The measure especially applies to facilities that circulate chilled water to remote air handling units.

These two measures impact each other.

End of life

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End use Measure Comments/Description Interactions Market size

VSDs for pumps The installation of VSDs on pumps is an important energy saving measure. It covers all pumps in the building. These will generally be associated with the HVAC systems, but there can be others. The VSD needs to be connected to some control signal and the measure may also require installation of measurement devices or controllers. This has been allowed for in the cost of the measure.

Existing stock

Refrigeration HE commercial refrigeration

Covers a range of measures to commercial refrigeration systems. Often this will involve the installation of a HE refrigerator rather than a MEPS compliant system, or the replacement of an aging system with a HE refrigerator when the former is nearing the end of its economic life.

End of life

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8.5 Energy Market Modelling and CBA reportTwo reports are attached from Oakley Greenwood, titled:

Analysis of the impact of the Victorian Energy Efficiency Target scheme on energy consumption and Victorian energy markets

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

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8.6 Key assumptions analysisThe CBA of the VEET scheme requires modelling the impact of various VEET activities on energy consumption and modelling the impact that the impact on energy consumption has on energy markets. These pieces of modelling are based on a range of assumptions upon which there is a degree of uncertainty. Changes to these assumptions may impact the outcome of the CBA. The following table outlines the key assumptions used in the analysis and how varying these assumptions may impact on the overall CBA result.

Key assumptions in the CBA

1. Assumptions regarding the level of energy savings attributed to each VEET activity

Description: Each activity incentivised by the VEET scheme is attributed a level of energy saving where that appliance or measure is installed in the average household. The level of energy savings determines the number of certificates associated with undertaking that activity. (If the energy savings attributed to a device were to double, the number of certificates associated with that product would also double).

The energy savings for each appliance are determined by the deeming algorithm, which makes a range of assumptions about BAU activity, expected product lifetime and the average use of products by consumers. Due to the pace of technological advancement some of these assumptions can be quite time sensitive.

Impact: Section 3 outlined the difficulty in deeming the level of energy savings associated with individual appliances leading to a lack of certainty in the level of energy consumption reduced as a result of VEET.

The following analysis considers how changes to the energy savings associated with VEET activities would impact the overall CBA under the 2.0 Mt CO2 option (using an NPV of 3.5%).

Changes in the level of energy savings associated with products will impact on the following variables in the CBA:

Certificate costs – Under the current 2.0Mt CO2 option the price of certificates would deliver a different number of certificates if the level of energy savings were to change. For example, if the energy savings of all appliances were to double, the price of certificates outlined for this option would deliver 4 million certificates per annum as opposed to 2 million. A rough rule of thumb would indicate that only half the number of installations would be required to meet the 2 million target, meaning that the total cost of certificates would be 50 per cent lower to deliver the same level of abatement.

Participant costs – an increase in the level of energy savings will decrease the number of times that appliances need to be installed in order to meet the scheme target. This means that the total cost of installing all appliances would be less. For example, if the level of energy savings were doubled, only half of the appliances would be required to be installed, roughly halving the participant costs (the reduction would not be quite 50% as the level of incentive per appliance would be slightly lower due to the ESC administration charge per certificate, requiring participants to pay slightly more per appliance).

Producer surplus – again, an increase in the level of energy savings would decrease the number of times appliances need to be installed to meet the scheme target, which means the overall ability of APs to gain a surplus on installations is decreased. Similar to the previous examples, a rough rule of thumb would mean that a doubling of the energy savings would deliver roughly half of the producer surplus.

There would be no impact on the administrative cost to retailers, as this is based on a per certificate basis and there would be no change in the number of certificates needed to be produced. Nor would

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there be any impact on the reduction in production costs as the same level of overall energy savings would be delivered.

Under the 2.0 Mt CO2 option, the net economic cost of the VEET scheme is $174.1 million. In order to be cost neutral, the sum of the certificate costs, the participant costs and the producer surplus would be required to reduce by over 55 per cent. Assuming that the link between energy savings and the costs is linear, this would mean that the energy savings attributed with each appliance would have to increase by 122 per cent to be cost neutral.

The evaluation of the VEET scheme estimated that the energy savings associated with the activities were 52 per cent lower than had been anticipated. Even if the level of energy savings associated with the activities were the same as initially anticipated, this would still not be sufficient to deliver an overall cost neutral scheme.

2. Assumptions regarding the upfront cost of VEET activitiesDescription: Each activity incentivised by the VEET scheme has a cost attributed to it. The cost of the appliance or activity affects the level of incentive assumed to be required to drive large uptake for each activity. The upfront cost of purchase and installation varies by each activity and is driven by in particular:

The current retail price for the items, based on available data. Whether the consumer would or would not have been in the market for a product of that nature

anyway – albeit a less energy efficient one (marginal versus full costs). These are based on estimates of normal consumer purchasing cycles for appliances, based on available data.

Impact: The upfront cost affects participant costs (whether or not the item is ‘free’ at the point of installation) and the producer surplus (whether the certificate value exceeds the upfront cost, realising benefits to APs). The upfront costs can also have an effect on certificate prices.

Under the 2.0 Mt CO2 target option, assuming that the certificate price (and therefore total costs of certificates) remain the same, the net cost of participant costs minus producer surplus would need to reduce from $219.2 million to $45.1 million to deliver a cost neutral scheme. If the upfront cost of activities were to be reduced by 50% under the 2.0 Mt CO2 target option, however, the net cost of participant costs and the producer surplus would still be approximately $77.5 million.

If allowing the upfront costs to have an effect on certificate prices, however, reducing the upfront cost of VEET activities may also drive down the certificate price at any given level. The 2011 RIS estimated that the certificate price for an annual target of 5.4 Mt CO2 would be $35. In reality the price has been far lower than this, driven by low cost activities, such as SPCs, that have been effectively free to participants. This is partially due to the fact that the upfront costs of these items have been lower than was anticipated.

Reducing the certificate price will, however, lead to a decrease in the incentive offered to customers, increasing the participant costs. In this way it is difficult to look at any one variable (be it participant costs, certificate costs or producer surplus) in isolation. As outlined for the previous assumption, the net cost of these variables combined would be required to reduce by 55 per cent in order to deliver a cost neutral scheme. It appears unlikely that upfront costs of VEET activities have been overestimated to the extent that this would occur.

3. Assumptions regarding the impact of individual VEET activities on peak demandDescription: In 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 peak demand. The extent to which a measure impacts peak demand will depend on both the time of day and the time of year that the measure helps

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reduce energy consumption.

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

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.

Full details of these assumptions can be found in appendix 8.5.

Impact: Changes to the assumptions that determine the impact that VEET activities have on peak demand will either increase or decrease the impact the scheme has on overall peak demand. These changes will affect the energy market modelling in two ways:

Were the VEET scheme to have a greater impact in reducing peak demand it can defer investment in generation capacity, reducing capital costs. However, current forecasts do not predict the need for new energy generation capacity in the future due to (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 RET, which sets absolute targets for the amount of generation required by renewables, and which therefore requires a corresponding amount of renewable electricity generation capacity. This means that any changes in peak demand will only defer new generation capacity if the current policy settings and energy demand forecasts change.

A greater reduction in peak demand will change the reduction in production costs. While the same amount of energy reduction will be achieved by the VEET scheme, the type of fuel that would be used to generate that ‘lost’ energy will be different. Where the VEET scheme has a greater impact in reducing peak demand, the reduction in production costs will shift from a reduction in coal costs to a reduction in gas costs. The impact on the production costs will depend on the difference between the price of coal and the price of gas.

An increase in the peak demand impact of the VEET scheme is unlikely to deliver a cost neutral outcome for the scheme, given that the benefits from the scheme in terms of reductions in production costs would need to increase by 120% under the 2.0Mt CO2 option to deliver this scenario. As the cost of generating electricity from gas is greater than the cost of generating electricity from coal (particularly Victoria’s brown coal), a switch of fuel from coal to gas will further reduce production costs; however, the difference is likely to be minimal and would not lead to an increase in benefits that would deliver a cost neutral outcome for the VEET scheme.

4. Assumptions regarding future energy demand

Description: The energy and demand forecasts used for the base case scenario were taken from AEMO’s 2013 NEFR. 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 2005-06 through 2011-12. Information for 2012-13 is estimated and information for 2013-14 through 2032-33 is forecast.

For 2015 through 2030, the energy market modelling used the NEFR Medium Case forecasts, which are taken from the Scenario 3, Planning scenario of the National Transmission Network Development

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Plan, 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).

Impact: Changes to the base case energy demand forecast will impact the ability of the VEET scheme to affect production costs and deferred generation. A forecast that predicts growing energy demand will require new energy generation capacity to come on line, in addition to increasing the wholesale price of electricity. Any reduction in that energy demand caused by a scheme such as VEET will lead to greater wholesale price reductions, in addition to potentially deferring capital spend on new energy generation.

The scenario used for the energy market modelling inputs into the CBA, forecast lower future energy demand than had previously been the case. Compared to the previous forecast, there are relatively low levels of growth in electricity consumption and, therefore, no need for new energy generation capacity in the near future. This has meant that wholesale prices remain relatively low under the base case scenario, limiting the impact of the scheme on wholesale prices. Additionally, there is no change in the generation capacity as a result of the VEET scheme under any of the options modelled.

Higher energy demand forecasts have the capacity to result in the deliverance of greater benefits from a future VEET scheme (although the extent to which energy demand would have to rise to reduce the net cost from $174.1 million to zero is unknown); however, recent trends in energy demand indicate that the forecasts may in fact be inflated.

Victoria has experienced decreases in energy demand since 2008. The forecast predicts that energy demand will start to grow again in the immediate future (although at a lower rate than was previously forecast), rather than following recent trends. Future energy demand forecasts will depend, to an extent, on the level of economic activity. With the relatively recent announcements on the future of Ford and Holden manufacturing plants in Victoria, there is limited evidence to suggest that demand will start growing strongly again in the near future. With decisions due to be made in 2014 on the future of Alcoa’s Port Henry aluminium smelter in Geelong and manufacturing at the Toyota in Melbourne, strong growth in energy demand in the State appears less than certain.

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8.7 Drafting Instruction amendments to the Victorian Energy Efficiency Act 2007Background

The Victorian Energy Efficiency Target Act 2007 (the Act) establishes the Victorian Energy Efficiency Target (VEET) scheme - a market based scheme designed to encourage the uptake of energy efficiency measures. The Department has undertaken a review of the scheme in light of the need to set new scheme targets for 2015-2017. The review has found that the scheme has a net cost, and recommends it is closed following a short transitional period. Legislative amendment is required to give effect to this proposal.

The VEET scheme is based on an annual scheme target of greenhouse gas (GHG) emissions savings, which must be set by regulations every 3 years until the end of 2029 (s.30). Energy retailers with more than 5,000 customers are required to meet a portion of the scheme target each year, calculated according to their share of relevant energy acquisitions (s.29). Retailers meet this obligation by surrendering scheme certificates to the Essential Services Commission (ESC). Each scheme certificate represents one tonne of carbon dioxide equivalent GHG emissions savings. If a retailer has a certificate shortfall in any year it must pay a penalty (s.27).

Scheme certificates may be created when prescribed activities are performed by Accredited Persons (APs), who are registered with the ESC. Retailers can meet their target liability by either performing activities themselves or acquiring certificates from third party APs.

It is proposed that the scheme will end on 1 January 2016, rather than 1 January 2030. This means that retailers will need to contribute towards the existing scheme target for 2014 (set in regulations as 5.4 million tonnes of carbon dioxide equivalent of GHG emissions), and a new scheme target for 2015 of 2 million tonnes of carbon dioxide equivalent of GHG emissions. From 1 January 2016, there will be no scheme target and retailers will not have to acquire and surrender scheme certificates. However, the provisions of the Act which relate to enforcement will need to continue. For example, the ESC will need to be able to impose penalties on retailers after 31 December 2015 if they do not meet their obligations for 2015.

It is not proposed to repeal the Act at this time. This will ensure that all of the necessary powers and functions of the ESC are maintained for the transitional period. The Act will not impose costs on retailers after they meet their 2015 obligations. It may be repealed at a later date when the ESC is able to confirm no further action is required.

Instructions

Section 17 provides that a certificate can only be created if the prescribed activity it relates to has been undertaken on or after the commencement of the VEET scheme and before 1 January 2030. As the scheme will close at the end of 2015, this section must be amended to provide that a certificate can only be created if the prescribed activity has been undertaken on or after the commencement of the VEET scheme and before 1 January 2016.

Section 27 provides that a relevant entity (an energy retailer with at least 5,000 customers) must not have an energy efficiency certificate shortfall for a year in which the relevant entity makes a scheme acquisition. The section does not apply in the year commencing 1 January 2030 or any year after that year. An amendment is required to provide that the section does not apply for the year commencing 1 January 2016 or any year after that year.

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The VEET scheme target must be set in regulations made under section 30 for every 3 year target period from 1 January 2009 to 31 December 2029. Parliamentary Counsel is instructed to amend this section to set the VEET scheme target for 2015 at 2 million tonnes of carbon dioxide equivalent of greenhouse gas emissions. There will be no obligation to set a target for any year after 2015. The existing scheme target set for the 2012-2014 period must continue to apply for that period.

Parliamentary Counsel is instructed to consider whether amendments are required to section 32, to provide that greenhouse gas reduction rates do not need to be set for any year after 2015. These rates are set by Order in Council and are used to determine a relevant entity’s certificate liability (see s.27) each year, so that the total liability for all relevant entities meets the scheme target. As there will be no scheme target from 1 January 2016, there should be no requirement to set greenhouse gas reductions rates under section 32 from that date.

As there will be no obligation for retailers to meet their portion of the VEET scheme target under section 27 from 1 January 2016, there should also be no corresponding reporting obligations for 2016 or any following year. The obligation for relevant entities to surrender annual energy acquisition statements under section 33 should apply for 2014 and 2015 but not for any year after that. Retailers will need to lodge the 2015 statement on or before 30 April 2016 (or any later day allowed by the ESC).

Parts 6 to 8 will need to be retained to allow the ESC to carry out its enforcement functions and powers beyond 31 December 2015 for any outstanding issues (such as retailer and AP obligations), including matters not identified at 1 January 2016.

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