2016 in review: Energy efficiency powers on despite policy turmoil 16 December 2016

The EEC's Head of Policy, Rob Murray-Leach, cuts through the sound and fury to reflect on an eventful year in energy policy.

The pressure on the media to deliver up-to-the-minute coverage creates sound and fury, but it signifies nothing. To get a real picture of progress it’s important to step back and reflect on the broader arc of events. Which is a flowery way for me to introduce an overview of Australian energy policy in 2016, and the implications for energy efficiency.

The latest policy drama is a useful framework to consider some of these issues. The Australian Government released the terms of reference for its Climate Change Review on 6 December. The terms were suitably broad and left business leaders hoping the Turnbull Government might be able to craft a compromise policy on climate with enough political stability to improve the investment environment for the energy industry.

In particular, Minister Frydenberg stated than an ‘Emissions Intensity Scheme’ (EIS) would be considered as part of the review. A number of independent experts and political operatives have started to coalesce around an EIS for the energy sector. An EIS would set an emissions intensity baseline for electricity generators. Generators that generate electricity with an emissions intensity above this baseline would buy credits created by generators that are below the baseline. 

The general consensus is that an EIS would have a lower impact on electricity prices than a carbon price – in fact, it could actually reduce energy bills compared to the current suite of policies. A recent paper by Danny Price from Frontier Economics estimated that an EIS would reduce energy costs by up to $15 billion compared to business as usual. Another report by Jacobs for the Energy Networks Association and CSIRO estimated than an EIS would reduce household energy bills by $216 a year.

This should have been a pretty easy sell for a Coalition Government, which could have argued that the Coalition will give industry certainty and lower power bills through a sensible, modest scheme that’s been recommended by industry. 

However, the energy industry’s hopes were dashed when the Prime Minister and Minister Frydenberg then explicitly ruled out an EIS. This change of direction is likely due to pressure from some Coalition parliamentarians, who have been emboldened by Trump’s election as US President. If the Australian Government can’t find a way to conduct a broad climate change review it will hobble the process from the start, with a number of consequences.

Policy uncertainty and the electricity revolution

The first consequence of ruling out an EIS is that the energy industry is much less likely to get the policy certainty that it desperately needs anytime soon. It has become increasingly clear to every sensible expert that dramatic change in the energy sector is inevitable, with or without action by governments. However, governments have a critical role in ensuring that the transition is as orderly, equitable and low-cost as possible.

To makes sensible investments, companies need to understand the likely returns from assets, and this means that governments need to give them long-term certainty around both climate and energy policy. Investors will only believe a policy is stable if it has long-term credibility. Unfortunately continuing business-as-usual in the energy sector in Australia is no longer credible. 

This has real consequences for both energy costs and the stability of the grid. Without policy stability, households and businesses will either avoid investment altogether, or focus on investments that make sense in the short-term but may be less cost-effective in the long-term. This is bad news for grid stability, given the need for significant, sensible investment to adapt to the closure of coal-fired generators and increased penetration of intermittent generation.

Following the South Australian blackout in September, the COAG Energy Council appointed Australia’s Chief Scientist, Alan Finkel, to produce a report on reliability and stability in the National Electricity Market. Dr Finkel released his  Preliminary Report last week. While this is an issues paper, rather than a set of recommendations, it makes some very clear observations, including:

There is evidence that investment in the electricity sector has stalled… due to policy instability and uncertainty driven by numerous reviews into the renewable energy target and a lack of clarity about the policies to reduce emissions after 2020.”

In summary, we desperately need credible long-term policy for emissions reduction if we’re going to keep energy reliable and affordable, and there is a real risk that the Australian Government is closing off options that could provide that policy stability.

Strengthening policy framework for energy efficiency 

The second consequence of the Australian Government ruling out an EIS is that they will have to place much more focus on energy efficiency to achieve further reductions in greenhouse gas emissions. The members of the Coalition that are concerned about an EIS are equally agitated about renewable energy and the closure of coal-fired generation, leaving relatively few areas for stronger action on climate change. Energy efficiency is one of the few policy options still on the table. 

It’s clear that the Government is aware of this, as the Terms of Reference for the 2017 Climate Change Review explicitly mention the National Energy Productivity Plan. However, it’s not clear how ambitious the Australian Government will choose to be, particularly given internal debates within the Coalition.

State and Territory leadership

The third consequence of the Government ruling out an EIS is that it puts the onus on states and territories to do the heavy lifting on emission reduction. This is really just locking in a key trend from 2016 – in the absence of clear Federal policy, states have been leading. Action in this area includes the Queensland Government’s renewable energy target, NSW’s recent and substantial Draft Plan to Save NSW Energy and Money and Victoria’s soon-to-be-released Energy Efficiency and Productivity Strategy.

These announcements are coming thick and fast. On 13 December the South Australian Government announced $31 million over two years to support energy audits for businesses that use more than 160MWh of electricity per annum. The ‘Energy Productivity Program’ will include: 

  • $7.5 million to cover 75 per cent of the cost of energy audits for up to 500 businesses. Audits will be completed by June 2017.
  • $8.5 million to implement audit recommendations in at least 110 businesses with $75,000 grants on a one-to-one funding basis
  • $15 million to implement at least six major energy saving opportunities, with grants of up to $2.5 million on a $1 of Government funding for $2 of business contribution basis.

While a national approach to energy and carbon policy would mean less variations across the country and lower compliance costs, there are some advantages to states and territory leadership. Policies can be introduced quickly and tailored to local conditions, and if a policy is jointly set by a group of governments it can be more stable than if its set by a single government. For example, appliance standards were immune from the Abbott Government's windback of climate policies in 2014, largely because they’re set jointly by all Australian governments.

For some of us this feels like we’ve travelled back in time to 2006, when the states and territories ran a National Emissions Trading Taskforce to develop national greenhouse reduction policies. While the South Australian Government is currently pushing for states and territories to collaborate on the introduction of an EIS, it could be challenging to get this up with a diverse mix of Coalition and Labor-led states and territories.

Instead, states and territories are likely to lead through loosely coordinated action on areas like renewables and energy efficiency. This brings us back to the National Energy Productivity Plan, otherwise known as the NEPP. The NEPP is more of a framework for action than a clear set of policies. NSW and Victoria can lead the country by introducing ambitious policies that are subsequently picked up by other states, or turned into national policies through the NEPP.

This would build on the consolidation of energy efficiency policies and that we’ve seen in 2016, including:

  • The expansion of the national Commercial Building Disclosure program
  • Continuing development and harmonisation of energy efficiency certificate schemes in NSW, Victoria, South Australia and the ACT. Another last-minute announcement is that Victoria is consulting to enable the reintroduction of insulation to the Victorian Energy Efficiency Target.
  • Expansion of programs to improve the energy efficiency of government buildings, with NSW rolling out projects, South Australia setting up its systems and Victoria reintroducing the Greener Government Buildings program.
  • State and territory governments trying to get around the intransigence of the Australian Energy Market Commission on demand-response. This includes working directly with networks and considering reverse auctions for demand management.
  • The introduction of State Government support for sensible energy management practices in large energy users in South Australia.

Changing attitudes in business

However, the largest lesson from the media-storm around the Climate Change Review is probably the response of the energy industry and broader businesses. The business community has travelled a long journey to realize that it needs clear credible policy and carbon and clean energy to enable investment. Just this week the Energy Networks Association called for the introduction of a price on carbon to facilitate transition. Separately,  Matthew Warren, Chief Executive of the Australian Energy Council, released an unequivocal statement on this:

Old generators are exiting the market, but political uncertainty means we are unable to build the kinds of assets that can effectively replace them. As a result, the grid is now visibly deteriorating. Reliability is being compromised. The grid will continue to deteriorate until the uncertainty is resolved, which requires effective, efficient, durable, national climate and energy policy.” 

Business has started to realise that energy costs are going to rise substantially, and that they need to adapt. One of the reasons that coal-fired generators are starting to close is that many of them are well beyond their design life. Any form of generation that replaces them, including new coal-fired generators, will be substantially more expensive than the current fleet. This means higher prices.

The cost of energy contracts in South Australia have already risen substantially, and many business organisations are looking to how they can help their members adjust. This means a stronger focus on energy efficiency and, for more enlightened businesses, starting to prepare for a zero-carbon economy.

One of Australia’s largest Real Estate Investment Trusts, Investa, has committed to achieve net zero emissions by 2040, and is putting its money where its mouth is. The Clean Energy Finance Corporation (CEFC) has invested $110 million in equity to help Investa finance a $900 million 33-storey office at 60 Martin Place in Sydney that will achieve at least 5.5 star NABERS.

Large scale investment in energy efficiency, supported by strong energy efficiency policies, could have a dramatic impact on the energy sector. Not only would these investments bring down power bills, they could actually reduce energy costs by competing with generators and reducing their pricing power. A new report by CitiGroup looks into the dramatic impact that this could have on the energy sector in Europe.

Despite the turmoil in the energy sector more broadly, 2016 was a positive year for energy efficiency. While there are many uncertainties for 2017, it could prove to be a defining year for the sector.