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Victorian Energy Efficiency Target Bill: problems must be fixed

Hansard: 20 November 2007 ASSEMBLY

VICTORIAN ENERGY EFFICIENCY TARGET BILL

Second reading
Debate resumed from 1 November; motion of Mr BATCHELOR (Minister for Energy and Resources).

The Nationals amendment circulated by Mr CRISP (Mildura) pursuant to standing orders.

Mr CLARK (Box Hill) — The Victorian Energy Efficiency Target Bill 2007 is a bill to put in place a regime which in effect is to subsidise the purchase of energy-efficient appliances and other energy-efficient improvements using funds raised from the prices that are paid by consumers of gas and electricity. The provisions of the bill and the mechanism created by the bill are quite detailed.

The bill will enable accredited persons to create energy efficiency certificates for what are referred to as prescribed activities. Accredited persons who are consumers will be able to create their own certificates. Non-accredited consumers will be able to assign to an accredited person the right to create certificates based on the consumer’s prescribed activities.

As we understand from the very helpful briefing that was provided to the opposition by the department and from what the minister has said in the second-reading speech, the government intends that initially the scheme will apply only to the residential sector and that prescribed activities will be the purchase of energy-efficient residential appliances, the improvement in the energy efficiency of homes, and the conversion of hot water systems and other home installations to more energy-efficient installations.

The purchase of energy-efficient appliances will entitle the creation of one certificate for every tonne of greenhouse gas that the appliance is expected to save over a specified lifetime compared with appliances of the same type with average energy efficiency. Home improvements and conversions will entitle the creation of one certificate for every tonne of greenhouse gas that the improvement or conversion is expected to save over a specified lifetime compared with the status quo. The installer of the improvement or conversion will be required to certify both the work done and the previous situation so that the relevant saving quantity can be determined.

Any person will be able to apply to become an accredited person subject to the payment of the applicable fee, which is expected to be several hundred dollars. The government expects that appliance retailers and specialist certificate brokers will be among those who become accredited persons, and possibly also energy retailers.

The certificates will need to be registered with the Essential Services Commission, and once registered they will be able to be freely bought or sold. All energy retailers with more than 5000 Victorian customers will be required to purchase and surrender each year a specified number of certificates or else pay a specified penalty for each certificate by which they fall short.

The government intends to specify each year greenhouse gas reduction rates at which energy retailers must purchase certificates for each unit of electricity and gas that they purchase for sale to prescribed customers. Although the bill does not embody the linkage, it appears that the government’s intention is that it will specify the greenhouse gas reduction rate in such a way that the total number of certificates that are required to be surrendered each year will approximate the scheme target number of certificates for that year, which is initially intended to be 2.7 million a year.

That number of certificates for each of the first three years of the scheme commencing on 1 January 2009 will be for that number of tonnes of carbon dioxide equivalent saving over the defined lifetime of the prescribed activity — the lifetime being defined, as with so many other aspects of the scheme, under the regulations.

The government expects that the scheme is going to result in lower costs for prescribed activities for consumers, because the value of the certificates being created as a result of the prescribed activities will lead to appliance retailers or the suppliers of home improvements or conversions offering discounts to consumers for the purchase of the appliances or for undertaking the improvements or conversions on condition that the certificate creation rights in relation to those activities are assigned by the consumers.

Of course the persons who create the certificates will be able to realise a value from those certificates through selling them to energy retailers, and the retailers will be in the market to buy those certificates because they will be obliged to do so under the operation of the scheme.

The energy retailers can be expected to recoup the cost of purchasing the required certificates through the higher-than-otherwise prices of gas and electricity charged to prescribed customers, and it will be logical for them to proceed in that way because the marginal cost to them of the electricity or gas that they buy in order to sell to those prescribed consumers will be increased because the greenhouse gas reduction rates will be applied per unit of the electricity or gas that they buy for sale to prescribed customers.

There are provisions that will enable authorised officers to enter premises, inspect documents, require answers to questions and various other things, either with the consent of the occupiers of premises or with warrants, and there are also mechanisms for various audits and the provision of information and documentation to the Essential Services Commission. There are also extensive regulation-making powers, because it is the government’s intention that much of the mechanics of the legislation will be implemented by regulation.

This bill comes in the context of the challenge posed to humanity by the scientific assessments of the threat of climate change over coming years. Responding to the scientific assessments of the threats of climate change is, in my view, likely to be one of the single biggest public policy and economic issues in Australia over the next few years. The changes required and the costs involved are going to be very high indeed. In dollar terms the prices that are likely to be put on emissions will run into billions of dollars a year, and in economic and social terms we are likely to face massive changes in production and consumption in order to achieve the sorts of emission reductions that are going to be required.

Despite the challenges that we face in this scenario, humans have shown great inventiveness and resourcefulness to date in our time on Earth in responding to various challenges and threats, so we have good grounds for confidence that humanity can overcome these latest challenges, provided that governments set the right parameters and then give business, community organisations and individuals both the scope and the capacity to rise to the challenge.

The extent of the impact on costs and standards of living from a response to climate change is going to be crucially dependent on the extent to which we can develop new low emission technologies.

There are going to be many different roles for government in relation to emission reductions, including setting the rules; helping businesses, households and the rest of the community make the changes required as effectively and at as low a cost as possible, particularly through the provision of detailed practical and authoritative information; supporting research and development; setting an example in the way they manage their own emissions; regulating products and building standards; and assisting the most vulnerable in the community to cope with the effects of rising energy costs. For its part the Liberal Party supports measures that will achieve these many different aspects of humanity’s response to the scientifically assessed risks of climate change in the most effective ways possible.

The measure that is before the house is claimed by the government to arise out of a promise that was made during the 2006 election campaign, but this measure is a long way from that promise.

Labor’s election policy document entitled Meeting Victoria’s Energy Challenges says at paragraph 17:

Labor will introduce a new Victorian energy efficiency target (VEET) scheme that will require energy retailers to help families cut their power bills through measures such as providing energy-efficient light globes, insulation and efficient shower roses.
Later it says:

Energy retailers will have an incentive to offer to retrofit Victoria households and businesses with improvements such as lower energy lighting and other energy-saving devices for little or no cost. Families will be able to cut their energy bills and save greenhouse gases.

Although there is a reference in the policy to using a market-based scheme, what was set out in the policy seems to be far narrower than the scheme that has arrived in the house. You have to conclude either that the government was not prepared to be frank with the electorate as to how it was intending to fund this scheme through an impost on gas or electricity prices or else that the scheme has been evolving rapidly and the government has been making up its intentions as it goes along.

It is interesting that, as with the previous bill we considered, the government is embracing markets as a way to implement policy. I quote in particular from page 13 of a stakeholder forum presentation that was made by Mr John Krbaleski, the director, energy investment and sustainability, energy and resources policy division, on 31 October 2007: ‘Competitive markets are the most efficient means of directing funding to least-cost solutions’.

That is yet another example of the fact that on the economic front the Liberal Party has won the battle of ideas over the last 20 years and the Labor Party is now espousing the virtues of the free market.

But it is one thing to accept and adopt the theory of free markets and it is another to be an effective and successful practitioner who has practical common sense and experience and gets it right. We have seen the current Premier, who was the former Treasurer, struggle to demonstrate, show and account to the public that PPPs (public-private partnerships), on the terms that he has negotiated them, have achieved value for money for the public. He has fought tooth and nail to stop the public getting access to the public sector comparator documents which would have shown what a bad deal he negotiated for Victorian motorists in relation to EastLink.

In the case of the current bill we have had some think-tank brainstorming and a born-again minister come up with a very elaborate scheme, but there are significant questions about how it is going to work in practice. The opposition does not oppose the bill, but we have many concerns about it both in the way the scheme is going to be initially deployed and in its ongoing operation. We seek the government’s response to those concerns during the course of this debate and, if necessary, beyond.

The first aspect of our concern is that this bill, if passed, will be implemented in a national context. We discussed the desirability of a move to national regulation in relation to the previous bill. My understanding is that this scheme is going to bring the number of separate state-based greenhouse-related regulatory schemes being introduced by various Australian jurisdictions to a total of eight. There is a very important question about how this latest scheme will operate in conjunction with a national emissions trading scheme.

We certainly support, as I indicated in relation to the previous bill, the rights of states to go it alone on reform measures that make good policy sense, as was the case with the Kennett government reforms. If they cannot do that on appropriate occasions, you would have to ask why we bother having states at all.

But in this context we are on the verge of a national emissions trading scheme; we need to know how it is intended that this scheme is going to mesh in with such a national scheme and why we are proceeding with this legislation at this point in time when both sides of federal politics are committed to a national emissions trading scheme in their potential next terms in government.

The Labor Party certainly had its opportunity to introduce its own emissions trading scheme; it huffed and puffed about doing it, but in the end it blew it, when premiers Carpenter and Beattie refused to support the state-based model discussion paper when it was released in August 2006. Then Premier Beattie said:

I refuse to support projects which sound good but deliver bugger all.
Mr Carpenter said he:

… would not commit Western Australia to any form of national greenhouse gas emissions trading until there was more evidence that WA interests would not be adversely affected.
That brought the move by the states and territories to introduce an emissions trading scheme to a complete halt. It has been up to the Howard government to become the first government in Australia to commit to the introduction of an emissions trading scheme. One of the things on which there is agreement between the Prime Minister’s task force and the assessment of the national emissions trading task force of the states and territories is the merits and benefits of having technology-neutral reform measures. The statements on both page 41 of the Prime Minister’s task force report and page 11 of the state and territory governments’ national emissions trading task force discussion paper bear that out.

There will be difficulties coordinating this state scheme with a national scheme. I am looking forward to government speakers explaining how it is intended that they will fit the two schemes together. In the course of the briefing that was provided to the opposition, a number of statements were made that implied that somehow the dollars-per-tonne price that was going to be set under the VEET (Victorian energy efficiency target) scheme would be set to be competitive with the dollars-per-tonne price which would be set under an emissions trading scheme. But it seems to me that this is like comparing apples with oranges.

The VEET tonnage figures are tonnes of CO2 emissions which are avoided, measured over the lifetime of an appliance or home improvement, whereas the dollars-per-tonne price that is paid under an emissions trading scheme is an annual figure that is being paid for the right to make an emission rather than to save an emission.

Given all of those considerations, the two do not seem to be interchangeable.

Some years ago there was considerable investigation done of the possibility of introducing a national energy efficiency target, called NEET. Research work on that was undertaken by the national framework for energy efficiency which included commonwealth, state and territory agencies. That work was then reviewed along with various other issues by the federal Productivity Commission in report 36 of 31 August 2005 entitled The Private Cost Effectiveness of Improving Energy Efficiency. Chapter 13 of that report assessed and reported on proposed national energy efficiency target options in some detail. It needs to be stressed that the commission was reporting on a model which had not been as fully developed as the Victorian model and a model which was potentially far broader than the Victorian model, which, at least initially, is addressed to households alone.
Nonetheless, the Productivity Commission report made a number of observations that need to be responded to by the government in the course of consideration of what the government is now proposing. At page 301 of the report, in the key points, the Productivity Commission said:

Modelling for the NFEE —
that is, the national framework for energy efficiency —

suggests that a NEET —

that is, a national energy efficiency target —

would have substantial economy-wide benefits. The commission’s view is that it would not be possible to design a NEET scheme that would have the effects assumed by the modelling.
That is a very significant reservation expressed by the Productivity Commission, upon which it elaborates in its report. For example, at page 308 the report states:

While the idea of a NEET seemingly draws on well-established principles for creating tradeable permits, the commission considers that the proposal has significant flaws — including its failure to address the policy-relevant market failures preventing the uptake of privately cost-effective energy efficiency.

Furthermore, as discussed later in this section, difficulties with measuring and verifying efficiency-related energy savings would result in property rights being poorly defined. Consequently, markets in white certificates —
and I interpose that that is the term they have given to energy efficiency certificates —
would not operate efficiently and so would not result in the most cost-effective energy efficiency investments being made.
They comment specifically on the modelling by the Allen Consulting Group that has been cited by government in numerous documents in relation to the VEET (Victorian energy efficiency target) scheme, and they say:

the Commission would be concerned if this modelling was to be used to justify the desirability of introducing a NEET scheme (and indeed no claim of this type is made in Allen Consulting Group … or MMA —
that is, McLennan Magasanik Associates —

… by the consulting firms that undertook the modelling).
Later on they say:

In effect, the modelling assumed that many privately cost-effective energy efficiency investment opportunities exist but have not yet been taken up, and that targets would be successfully met solely through the widespread uptake of these investments. As discussed in the remainder of this chapter, the commission’s assessment is that this would not occur.

Later on the commission confirms what I referred to earlier, namely at page 310:

The retailers would seek to pass the costs of meeting energy efficiency targets to their customers (through increased retail energy prices) and to energy suppliers (through decreased wholesale energy prices). In this situation, a NEET would be equivalent to a tax on energy that is imposed on retailers, the proceeds of which are used to subsidise energy efficiency improvements.
At page 311 the commission says:

For a NEET to work effectively, property rights need to be assigned to parties that undertake energy efficiency measures that result in energy savings that are additional to that which would have occurred without a NEET. This requires:

determining what would have happened without a NEET (by establishing BAU —
that is, business-as-usual —

baselines);

measuring energy savings resulting from energy efficiency measures; and verifying that eligible energy savings have occurred.
Further on, the commission says, at page 315:

The administration costs faced by regulators of, and participants in, a NEET could be significant.

The task of regulating a NEET would involve setting targets, determining eligibility of energy-savings measures, verifying energy savings and administering the issue and surrender of certificates. Verification would likely be the most costly component. The verification task has been distributed earlier — to maintain even a moderate level of system integrity would require considerable resources and expense. The costs associated with performing the other tasks would also be significant.

In addition to the costs of purchasing white certificates, paying penalties, undertaking energy efficiency improvements and the opportunity cost of forgoing more profitable uses of capital, a NEET would impose a range of administrative costs on designated participants.

These costs would be associated with demonstrating compliance with targets, such as the administrative costs involved with obtaining and trading certificates.
Later on, at pages 317-18, the Productivity Commission reported:

As a policy to address greenhouse gas abatement, a NEET would target energy efficiency improvements rather than emissions themselves. It would not be the most directly targeted instrument and is therefore unlikely to be the most efficient or cost-effective option.

They compare a NEET scheme with a cap-and-trade emissions trading scheme, and conclude that the advantages of emissions trading included more comprehensive inclusion of greenhouse gas abatement options, better functioning markets, potentially lower administration costs and greater certainty of meeting a greenhouse gas abatement objective.

They also say at page 318:

There is also doubt as to whether a NEET can be integrated with an emissions trading scheme without threatening the credibility of the latter —

and they elaborate on that at page 319.

So we have a very credible and respected body raising a range of very important issues that need to be addressed in our consideration of this proposal. The model before the house is certainly narrower than the sort of NEET that was addressed by the commission, but many of the concerns expressed by the commission seem to apply to it, and I hope the government will respond to them during the course of this debate.

I want to say a few words about two specific aspects, namely costs and carbon reduction effects, and then something about some of the mechanics and other consequences.

The government has claimed that this bill will not result in higher prices, but it is clear that at least the first-round impact of the measures to be implemented under this bill will be to raise the costs of electricity and gas to families, and that will be on top of the increases that are soon to be imposed by national emissions trading and as a result of rising market prices for electricity due to drought, industrial disputes and other factors.

In the presentation of 31 October that I referred to earlier, the document states that there is expected to be what it refers to as a $210 million investment in certificates among 2.1 million Victorian households, which implies that there will be a $100 per household starting point for increases in household energy bills over the first three years of the scheme. However, at page 28 of the same document the government claims that there will be a 2.2 per cent average reduction per annum in the wholesale market price of electricity compared with business as usual.

Strangely, however, the same document states that the average retail price increase will only be 0.09 per cent compared with business as usual. Of course one has to ask what the difference is between the two, and presumably it is because the difference is due to the retailer making up the cost of the certificates that they are going to have to purchase.

There also needs to be an explanation of the fact sheet from the Department of Primary Industries headed ‘Estimated impacts of Victorian energy efficiency target scheme’, which sets out a claim that the scheme is going to cut average household power bills by $45 per annum. If that $45 equates to 0.09 per cent, that would imply a household power bill of around $50 000 per annum. I think — even with the effects of the introduction of an emissions trading scheme — that is a very high figure.

It would seem either that there is an inconsistency between the two documents or possibly that the claimed $45 reduction is not actually a reduction for the average household but only a reduction for those households that generate certificates. Again, I hope that some explanation of those figures can be provided by government speakers in the debate.

In relation to carbon reduction effects, by definition if the abatement factors that are set by the government cause the scheme to hit the target, we are going to get 2.7 million tonnes per annum — or 8.1 million tonnes in the first three years — measured in terms of abatement over the defined lifetimes of the activities that are undertaken. The expected annual abatement over the first three years is 0.192 tonnes in 2009, 0.468 tonnes in 2010 and 0.675 tonnes in 2011. That would imply around a 10-to-15-year average period to realise the abatement effects. Again I would be interested if the government could confirm that conclusion.

There are going to be some practical difficulties in defining the regime and administering it in order to prevent abuse. Some of those were alluded to by the Productivity Commission report. What is the extent of the powers of inspectors to enter premises? How widely will they need to be exercised? When you are getting installers of insulation or other home improvements certifying, they have to certify both the starting situation and the gains of their product. There is going to be an enormous incentive to make those figures as generous as possible. Verifying that is going to be a lot more complex than the gas or electricity safety audits that are currently undertaken.

This scheme is not targeted to low-income consumers. Wealthy families who have the money to invest in energy efficiency improvements are going to be subsidised by low-income consumers who cannot afford such improvements for themselves. The government’s claim at page 29 of the document I referred to about the benefits for low-income consumers is wrong. They are not going to benefit a great deal through the VEET take-up, because many of them will not be able to afford the necessary improvements, even with the subsidy built into the scheme.
They are the many concerns we have about how the scheme is going to operate in practice. So far these concerns are unresolved. We look forward to the government’s responding to them during the course of the debate. If they cannot be resolved, we urge the government to think very carefully before it proceeds to put this bill into operation.