Submission on Expansion of VEET - Adjunct Professor Alan Pears AM

15 April 2011

Summary of Recommendations

This submission recommends that:

• VEET legislation and regulation be designed to support a transition to an effective national scheme, and that resources be allocated to ensure any national scheme delivers maximum benefits
• Even the strongest of the target options seems to fall well short of the optimum cost-effective level. So legislation should be designed to allow targets to be increased in recognition of additional analysis to identify optimum levels of activity, additional measures, declining costs of measures, increasing energy prices, and more effective program implementation
• Deeming should comprise a significant component of the payments to participants, so that the impact of high discount rates on recognition of benefits by participants is reduced
• The Victorian government should request that the Australian government cancel appropriate numbers of Kyoto permits and, when it is introduced, ETS permits, so that VEET energy efficiency measures not only save energy but also deliver additional greenhouse gas abatement beyond Australia’s Kyoto (and subsequent international scheme) cap and ETS cap
• The Victorian government take a more pro-active role promoting the scheme to potential participants and assisting market intermediaries to efficiently utilise the scheme to benefit their businesses
• Auditing and compliance monitoring should be integrated into a broader data collection scheme to underpin policy development, business innovation and improvement in consumer satisfaction

Introduction

The continuation and expansion of the VEET is an extremely important element of policy that delivers:

• Reductions in energy bills for Victorian households and businesses relative to what would otherwise occur
• Lower cost abatement of greenhouse gas emissions than would otherwise be achieved, through capture of more low cost abatement measures
• Flow-on benefits to the Victorian economy, including green jobs and earlier development of service and physical infrastructure to support development of a low carbon economy

The comments made in this submission should therefore be seen in a context of my strong support for the expansion and enhancement of this scheme.

National Developments

Late in 2010, the Prime Minister’s Energy Efficiency Task Group recommended the development of a national energy efficiency scheme to replace a number of different state level schemes. The Clean Energy Council and a number of businesses have also actively supported such a change.

It is therefore important that changes to VEET move towards aligning the scheme with the best understanding of future national schemes, and that legislative and regulatory frameworks are designed to facilitate transition. Coverage of both electricity and gas, and extension of the scheme to business seem consistent with any likely national scheme.
Victorian government should also allocate resources to contribute to development of a national scheme that maximises its benefits to Victoria, as well as Australia.

Proposed Scale of Target

The RIS evaluates the costs and benefits of a range of abatement targets for the scheme, and proposes that the strongest option be accepted.

However, the economic analysis begs the question of whether even the strongest option is sufficiently strong. As can be seen in Figure 1, the higher the target, the more cost-effective the outcome. The range of options considered shows no evidence of approaching any limit to this trend. Indeed, studies by ClimateWorks and others show very large cost-effective untapped energy efficiency potential that could be captured by additional expansion of VEET beyond the level proposed in the RIS.

It follows that placing an unnecessarily low limit on the VEET target means Victoria will miss out on significant benefits. An additional economic analysis (with sensitivity studies) should be carried out for a range of higher targets, and the legislation and regulations should be designed to allow the target to be increased over the 3-year period, in line with identification of additional cost-effective potential of the scheme.

It should also be noted that introduction of additional measures over time within the coming 3-year period will make it easier to achieve a given target, and provision should be made to adjust the target upwards in response to inclusion of further measures, as well as unexpected increases in energy prices and reductions in delivered costs of VEET measures.

Figure 1 Projection of potential net benefits from VEET as targets are strengthened. Net benefit data is from the RIS. The projected additional benefits depend upon the existence of additional measures with cost-effectiveness comparable to those include in the VEET economic analysis.

Importance of Deeming, even for Business Measures

VEET makes use of deeming (provision of estimated lifetime savings in an up-front payment) for households. This is important in reducing administrative costs and maximising ‘perceived value’ for VEET participants. However, it does remove the incentive to ensure the measure continues to perform.

The RIS proposes an alternative ‘project based’ approach for business measures, where payments would be made based on reported savings. This offers more flexibility in linking VEET benefits to actual abatement, especially for more complex projects. However, it should be noted that ongoing tracking of actual savings is not necessarily straightforward, and can be costly.

More importantly, since businesses typically apply very high discount rates to future savings in their financial analyses, spreading the benefits over time can significantly reduce their effectiveness as an incentive. Figure 2 shows how the application of high discount rates can undermine the business case for an energy efficiency measure.

At the same time, there is value in providing an ongoing incentive for maintaining performance. On this basis, it may be appropriate to develop a flexible approach for larger and more complex projects that may include a mix of deemed and ongoing payments, mandated reporting of performance, or performance bonds.

Figure 2. Present Value of $1 per year revenue for ten years with different real discount rates applied.

‘Rebound Effect’ Claimed by VCEC

VCEC, in its review of the RIS, comments that potential rebound effects need to be considered in evaluation of the cost-effectiveness of VEET.

Many policy makers use this claimed effect to justify scaling back of benefits of energy efficiency. In reality, this should be described as a ‘flow-on’ effect. The principle is that when people save energy, through a cost-effective energy efficiency measure, they have increased disposable income. Second, the effective cost of provision of the service (eg heating or home entertainment) is reduced, so they may choose to indulge in more of the service.

In practice, many VEET measures will take some years to pay back their additional costs, even with the benefit of the VEET incentive. So in fact in the short term the participant will have less available capital or savings. Since future benefits are typically heavily discounted, this may offset any tendency towards other expenditure. Further, if the participant does benefit financially from a VEET measure, the choices they make about how they spend this saving will impact on the extent to which the energy saving is offset (a ‘rebound’) or amplified. For example, if the participant spends the savings on additional energy efficiency measures, the savings will be enhanced.

With regard to the effect of reducing the cost of a given service, the very imperfect feedback on energy use, combined with increasing energy prices, makes it very uncertain that a participant could actually identify the saving. Further, energy is a very small component of the cost of most services, so the savings are likely to be a small proportion of the cost of delivery of additional service, so they could not buy much ‘additional’ service with their energy saving. In any case, most household services are limited by other factors such as achieving adequate comfort or needing to limit shower time in order to go to work.

Further, VEET will deliver a number of indirect benefits that have not necessarily been adequately considered in the RIS. For example, it will encourage reduction in cost of measures through economies of scale and industry development.

On this basis, the rebound effect is likely to be a very minor issue.

Additionality Issues

Under VEET, the Victorian community (through energy retailers and through their additional investments) are bearing costs in order to implement energy efficiency measures that would be unlikely to be fully captured under Business As Usual. One of the major motivators for Victorians to save energy is their belief that it will help to reduce Australia’s and global greenhouse gas emissions.

However, unless the Australian government cancels appropriate numbers of Kyoto permits and, when an emissions trading scheme is introduced, also cancels ETS permits, their actions are simply freeing up more space under the Kyoto cap or ETS cap. So Victorians are effectively subsidising people in other jurisdictions by making more room under the cap for others to emit. Further, to the extent that the Victorian government is investing in VEET, it is subsidising other governments around Australia by doing more than they are to deliver abatement.

These issues are discussed at length in a number of submissions at www.vcma.org.au. The key point is that the Victorian government should engage with the Australian government to ensure that all additional abatement that occurs under VEET is matched by the cancellation of appropriate numbers of Kyoto permits and, under an ETS, ETS permits, so that Victorian energy efficiency action under VEET is truly ‘additional’ abatement.

Need for Pro-active Business Development Model

To date, VEET has been dominated by measures involve low or no costs to participants. So many very worthwhile but more capital intensive measures have not been effectively promoted. This is partly due to the lack of community information on the scheme: the government has done little promotion, so many are simply unaware of it. The ‘hassle factor’ for participants may also be reducing engagement.

But, beyond these issues, there is a need for the government to engage with a range of appliance and equipment manufacturers, importers, retailers and installers to help them to develop efficient business models to utilise VEET. Engagement with these key market intermediaries could also improve understanding of the barriers blocking participation in the present scheme. This will be even more important if SMEs are to be effectively engaged. For example, much of the catering, cooking and refrigeration equipment in the commercial sector is very inefficient, and there is very limited information available regarding its energy performance. Helping small local manufacturers to improve product performance and gain benefits from increased sales seems to be a worthwhile objective.

Auditing and Compliance

There is a clear need for monitoring of a sample of installed systems to confirm savings. This could be done as part of a broader program of performance monitoring to evaluate a range of government programs and regulations, as well as providing an opportunity to identify ways of achieving higher savings and improved consumer satisfaction.

Conclusion

VEET is a very worthwhile program, and its expansion is supported.
This submission recommends that:

• VEET legislation and regulation be designed to support a transition to an effective national scheme, and that resources be allocated to ensure any national scheme delivers maximum benefits
• Even the strongest of the target options seems to fall well short of the optimum cost-effective level. So legislation should be designed to allow targets to be increased in recognition of additional analysis to identify optimum levels of activity, additional measures, declining costs of measures, increasing energy prices, and more effective program implementation
• Deeming should comprise a significant component of the payments to participants, so that the impact of high discount rates on recognition of benefits by participants is reduced
• The Victorian government should request that the Australian government cancel appropriate numbers of Kyoto permits and, when it is introduced, ETS permits, so that VEET energy efficiency measures not only save energy but also deliver additional greenhouse gas abatement beyond Australia’s Kyoto (and subsequent international scheme) cap and ETS cap
• The Victorian government take a more pro-active role promoting the scheme to potential participants and assisting market intermediaries to efficiently utilise the scheme to benefit their businesses
• Auditing and compliance monitoring should be integrated into a broader data collection scheme to underpin policy development, business innovation and improvement in consumer satisfaction

Adjunct Prof Alan Pears AM

RMIT University and Sustainable Solutions Pty Ltd