February 2016 Efficiency policy update - Rob Murray-Leach (EEC) 15 February 2016
Efficiency policy update - February 2016
The EEC's Head of Policy, Rob Murray-Leach, provides provides an overview of energy policy in Australia and the role of energy management. This article is taken from Efficiency Insight, the Energy Efficiency Council's quarterly e-zine. Click here to subscribe.
Energy markets and energy efficiency policy
In this first edition of Efficiency Insight, I’m going to take a step back and look at why the design of our East and West coast energy markets increase the need for energy efficiency policies. While the reasons for policies like minimum appliance standards are well established, the problems with our energy markets are less well known.
Starting with basics, people don’t directly consume electricity and gas – they use it for ‘energy services’ such as warm showers, cool homes and computing. The cheapest way for a home or business to meet its need for energy services is through a combination of supply-side and demand-side investment.
For example, the cheapest way to keep an off-grid home cool in summer is through some supply measures (a generator) and some demand-side measures (e.g. insulation and an efficient air conditioner). If you design a house poorly and have an inefficient air conditioner, you’d have to spend a huge amount on energy supply. You could also over-invest in energy efficiency – it’s all about finding the right balance.
Trying to achieve the right balance of supply-side and demand-side investment is much more complex for the houses and generators connected to a grid. Ideally we want the most cost-effective mix of investment in supply (generation and networks) and demand-side measures (e.g. efficient fridges and peak response programs).
However, Australia’s energy markets have failed to deliver the right mix of investments because of a number of choices that were made when setting up the market. Electricity markets are not ‘natural’ markets, as they are based around monopoly networks – poles and wires.
The question is not whether governments intervene in the structure of energy markets, but the choices that they make when they do. As a result, government decisions have had a major impact on investment patterns in both energy and energy management.
Governments gave network companies monopoly powers to make decisions on behalf of consumers to invest in supply-side infrastructure. This infrastructure allows generators to sell energy cheaply to aggregated consumers. However, very little effort was made to encourage networks to invest in demand-side measures when it was cheaper than network expansion, and governments didn’t set up a competitive market to aggregate demand-side investment and deliver balanced investment.
In other words, we set up a system that meant consumers could access supply with virtually no effort and very little upfront cost, as the costs are smeared among consumers and over time. Worse still, even if consumers don’t want more supply, networks can still invest in more supply on their behalf.
However, if consumers want to access energy management measures they have to take the initiative themselves, pay the costs upfront and get them installed. In short, we've set up a system that makes it much, much easier for consumers to access additional supply than manage their energy use.
The result is billions of dollars wasted on electricity infrastructure that we don’t need, much higher greenhouse gas emissions and homes and workplaces that perform poorly by developed country standards.
These distortions exist to a greater or lesser degree around the world. Most countries have had programs in place to address them, and these programs are currently ramping up. For example, California has long required its utilities to invest in energy efficiency when it’s cheaper than investing in supply, and they’ve just introduced one of the most sophisticated markets in the world for energy efficiency (a ‘negawatt’ market - for more on this, check out this article from Renew Economy).
Australian networks actually used to do a lot more to try to balance investment in supply and demand. However, when we created the National Electricity Market, energy efficiency largely dropped off the agenda. As a result, electricity bills are much higher than they should be.
Reforming the energy market is a long, slow process. This has meant politicians have tried to address these issues outside the energy market, with programs like the NSW Energy Savings Scheme, which puts an obligation on retailers to invest in energy efficiency. In the absence of serious energy market reform, these kinds of programs are essential.
Of course there are also issues that will always be best addressed outside the energy market, because energy efficiency is about the interactions between markets for energy and markets for products that use energy. For example, minimum standards for buildings and appliances are about protecting consumers from shoddy products that use much more energy than they should.
The case for action on energy efficiency is strong and urgent. On economic grounds alone, Australia needs to get its act together fast, as developments in technology, consumer preferences and global politics drive a new wave of investment in energy supply and demand. If we get the balance of investment wrong again, it will waste hundreds of billions of dollars and reduce Australia’s productivity.
Moreover, modelling just released by the Commonwealth Department of Industry, Science and Innovation quotes research that shows that more thermally comfortable offices result in much more efficient staff. The modelling shows that the staff productivity benefits of improving the energy efficiency of our workplaces likely exceed the energy benefits!
POLICY DEVELOPMENT INTERNATIONALLY
The global focus on energy efficiency has increased substantially over the last five years, driven by countries’ desire to address competitiveness, energy security (e.g. concerns about Russia’s control of gas markets), air quality (especially in China) and greenhouse gas emissions.
However, while government policy on these issues might influence the speed and nature of the transition to renewable energy and efficient appliances, it appears that this transition is now inevitable. Over the last two years trends in technology costs and consumer preferences have hit a tipping point, and businesses and households are increasingly voting with their wallets.
Once a shift is seen as inevitable, the debate around it transforms – the economic consequences of being left behind means that the question becomes how to adapt, rather than whether to adapt. Many investors have already started to factor this change into their decisions and the price of coal has fallen dramatically over the last four years.
There is now broad consensus that there will be a huge amount of investment in new supply, storage and networks over the coming decades. The key question for many governments and investors will be how long this transition to cleaner energy will take, and how best to manage the cost of this transition. Energy management will be critical to lower the cost of transition and balance the greater variation in both demand and supply.
Recent estimates by the International Energy Agency and HSBC estimated that the global market for energy efficiency products and services is already around $350 billion per annum, but investment is growing rapidly and could more than double in the coming decade. Australia still has the opportunity to tap into this global market, but only if we ensure that our local markets encourage local providers to flourish.
AUSTRALIAN ENERGY EFFICIENCY POLICY
Energy efficiency has recently emerged from a turbulent and challenging time. While the NSW Government remained a beacon of moderate and consistent energy efficiency policy, in 2014 the Commonwealth Government and the previous Victorian Government terminated a number of important energy efficiency programs.
However, we have well and truly turned a corner. The Commonwealth Government became significantly more pro-efficiency in 2015, even before the change in Prime Minister, as the need to improve Australia’s competitiveness and lower greenhouse gas emissions became pressing, and the new Victorian Government is a vocal supporter of energy efficiency.
The former Commonwealth energy minister, Ian Macfarlane, started the development a National Energy Productivity Plan (NEPP), and his successor, Josh Frydenberg, signed off the NEPP in December with his state and territory counterparts.
Rather than outlining a set of policies, the NEPP is more of a work-plan to develop detailed policies in 2016, which means that this year will see major national work on a number of fronts. Key initiatives will include:
- Governments developing plans to save energy in their own operations (e.g. hospitals and schools). NSW already has an effective program in place, South Australia recently announced that it would be running a scheme, Victoria is considering reintroducing a scheme that was effectively closed in 2014 and the Commonwealth has committed to developing a scheme by the end of 2016
- Investigation of fuel-efficiency standards for cars
- Further work on energy market reform, including the Demand Response Mechanism
- Consultation on the expansion of the Commercial Building Disclosure Scheme to smaller buildings and building areas
- Policy development for residential energy efficiency disclosure at the point of sale (and possibly lease). Victoria will lead this with the release of their voluntary scorecard
At a state level, the Victorian Government will release its energy efficiency and productivity strategy in the first half of 2016, the Victorian Energy Efficiency Target (Energy Saver Incentive) is being expanded to support a wider range of projects, and the NSW, ACT, South Australian and Victorian governments are working to harmonise their energy efficiency certificate schemes.
There is still a robust debate around energy efficiency. The Western Australian Government is currently considering reducing incentives for demand-response, which would benefit its state-owned generators, push up electricity prices and draw ire from large energy users. However, this issue shows how far the debate has moved, with consumers firmly pushing for more, not less, action on energy management.
2016 will be a huge year for energy efficiency.
Rob Murray-Leach is Head of Policy at the Energy Efficiency Council. He has an extensive background in climate change, energy, transport and sustainability, as an author of the Garnaut Climate Change Review and senior policy expert in the South Australian Government. Click here to contact Rob.