Energy efficiency faces a political check in 2014

Energy efficiency schemes in NSW and Victoria are hitting targets and saving households and businesses, but both are up for review. NSW seems keen to expand their scheme but Victoria's Minister appears cold.

The NSW government has just released an issues paper for its review of the Energy Savings Scheme, which provides financial incentives for energy efficiency improvements.

To date the NSW O’Farrell government has generally been supportive about enhancing energy efficiency (with the notable exception of refusing to phase out energy guzzling electric resistance water heaters). It has announced a target of seeking to achieve 16,000GWh of energy savings below business as usual in the year 2020 through a combination of programs – with the continuation of the Energy Savings Scheme a critical element. Even with the scheme in its current form the NSW government needs to find an additional 3760 gigawatt-hours savings per annum by 2020, on top of existing programs. This is a pretty decent chunk out of demand, equivalent to 5 per cent of 2020 NSW electricity consumption, or the power consumption of more than half a million homes.

In terms of addressing this gap to its target, the issues paper subtly suggests that expanding the ESS is probably its most favourable option:

An option for filling this savings gap is to increase the ESS targets. Any increase to the ESS targets would need to be justified by rigorous analysis of the costs and benefits of doing so. Other options would require increased spending from the NSW budget, or complex negotiation with other states to enhance minimum standards or national programs.

The thing is that a rigorous cost-benefit analysis is likely to give an expansion of the ESS the tick of approval. The issues paper outlines that three cost-benefit analyses have been undertaken, one of which was only just completed mid last year and another the prior year. All of them find that such a scheme’s economic benefits outweigh its extra costs. 

Another alternative would be for the NSW government to actually follow through on a previously agreed phase-out of electric-resistance storage water heaters. This could be implemented via NSW amending plumbing code regulations. About 50 per cent of homes in NSW have electric-resistance water heaters which equates to about 5000GWh of annual electricity consumption. This could be cut to around 1000GWh if replaced by solar hot water systems or heat pumps, saving 4000GWh, although it would take around 10 years for all the electric-resistance systems to wear out and be replaced.

A cost-benefit analysis completed in 2010 indicated that such a phase-out would deliver $2 of economic savings (through saved energy costs) for every $1 of extra cost (due to higher purchase cost of more efficient water heaters).

Yet such a phase out has, to date, been politically unpalatable because the two primary manufacturers of electric resistance storage heaters (DUX and Rheem) are both located in NSW. 

So that leaves us with an expansion of the ESS as the most likely option.

However, to ensure such an expansion could be accommodated while keeping costs low a number of reforms would be helpful. The fact that Victoria runs a similar model of scheme means participants have been able to see how differences in approach can lead to material differences in administrative burden, the integrity of energy savings and breadth of options for saving energy.

Neither scheme has been perfect and both have had some problems.

Victoria’s scheme has had a question mark hanging over the integrity of energy savings flowing from extensive use of stand-by power controllers (which switch-off TVs when inactive). With NSW there was very little supply of energy saving certificates being produced in the early period as the regulator struggled to accredit companies to participate. Yet over time we’ve seen improvements as both governments have responded to emerging issues. Stand-by power controllers no longer dominate Victoria’s scheme as the regulator adjusted downward the amount of credits such products could generate. In NSW, the word is that pricing tribunal IPART has upped its game and is responding faster. 

Most notably, in spite of doubts from energy retailers, both schemes have had no difficulty hitting savings targets.

Also, late last year, the NSW government proposed a range of changes to the operation of the ESS that should hopefully see a major expansion in the scope of energy saving activities that would qualify. Expansion to energy savings in gas, for example, would seem an obvious reform given all the concern around rising gas prices and available supply in that state.

Another important reform would be to better harmonise and integrate the Victorian and NSW schemes. Unfortunately, the Victorian government has been virtually silent on whether its scheme will continue beyond the current three-year phase, and is also undergoing a review. This seems bizarre given the scheme has had little difficulty hitting targets, it delivers a net saving on household energy bills and low income households have been a major beneficiary.

The prior Coalition energy minister, Michael O’Brien, had been supportive of the scheme and even expanded its scope and ambition. But with his appointment as treasurer, support has waned under the new energy minister, Nicholas Kotsiras. 

In addition, energy companies – who have been taken by surprise by the drop in electricity demand over the last three years – are pushing for these schemes to be scaled back. A further 5 per cent drop in electricity demand in NSW by 2020 would be the last thing they need.

So this year shapes up as an interesting one to see whether both the Victorian and NSW government’s make policy on the basis of cost-benefit analysis, or the lobbying of energy companies concerned about dropping demand for their product.