Regulation Impact Statement for Consultation by mpe18147

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									                         FINAL 





 Regulation Impact Statement: for Consultation

Phasing Out Greenhouse-Intensive Water Heaters
             in Australian Homes 



                    Prepared for the 


   National Framework for Energy Efficiency 


                             by 


       George Wilkenfeld and Associates 


                            with 


   National Institute of Economic and Industry Research 


                     Syneca Consulting 



                     December 2009



      GEOR GE WILKENFELD AND ASSOC IATES Pty Lt d 

      EN ERGY POLICY AND PLANNING CONSULTAN TS 

           PO Box 934 Newtown NSW 2042 Sydney Australia 

                        Tel (+61 2) 9565 2041 

                                                                   Contents 


    EXECUTIVE SUMMARY .............................................................................................................................7

    GLOSSARY ..............................................................................................................................................15

1. THE PROBLEM ..................................................................................................................................16

    DOMESTIC WATER HEATING ..................................................................................................................16

    ENERGY USE AND EMISSIONS.................................................................................................................16

    THE WATER HEATER MARKET ...............................................................................................................19

       Market Overview...............................................................................................................................19

       Market Share by Main Type..............................................................................................................19

       Water Heater Choice ........................................................................................................................22

       Types and Greenhouse intensity of water heaters.............................................................................25

    INFLUENCES ON WATER HEATER DESIGN AND SELECTION ....................................................................30

       Energy Labelling...............................................................................................................................30

       The Renewable Energy Target (RET) Scheme ..................................................................................30

       Rebates and Incentives......................................................................................................................32

    MANDATORY REQUIREMENTS ................................................................................................................37

       New Homes .......................................................................................................................................37

       Existing Homes .................................................................................................................................37

       Government Policy on ‘Greenhouse-intensive’ water heaters..........................................................39

    THE PROBLEM ........................................................................................................................................41

2. OBJECTIVES OF THE REGULATIONS ........................................................................................43


3. POLICY OPTIONS..............................................................................................................................44

    THE PROPOSED REGULATION .................................................................................................................44

      Gas availability and other possible screening criteria .....................................................................46

      Water Heater Industry Proposal (WHIP) .........................................................................................49

      Use of Electric Resistance Water Heaters in Certain Situations ......................................................49

      Proposed Mode of Implementation ...................................................................................................51

    ALTERNATIVES AND COMPLEMENTS TO THE PROPOSED REGULATION ...................................................53

      State regulations ...............................................................................................................................53

      Energy labelling................................................................................................................................53

      Minimum Energy Performance Standards........................................................................................54

      Incentive and rebate schemes ...........................................................................................................56

    OPTIONS MODELLED ...............................................................................................................................59

4. COST-BENEFIT ANALYSIS .............................................................................................................61

    OVERVIEW .............................................................................................................................................61

       Private and societal costs .................................................................................................................62

       Energy price and greenhouse intensity projections ..........................................................................65

    GENERAL METHODOLOGY .....................................................................................................................67

       Modelling individual household water heater selections..................................................................67

       Aggregate modelling outputs ............................................................................................................71

       The significance of natural gas availability......................................................................................72

    INPUT ASSUMPTIONS ..............................................................................................................................75

       Capital Costs.....................................................................................................................................75

       Service Life .......................................................................................................................................77

       Hot Water Demand ...........................................................................................................................78

    FINDINGS ................................................................................................................................................79

       Water heating options for individual households .............................................................................79

       National Impacts...............................................................................................................................83

       Benefit/Cost Ratios ...........................................................................................................................92

       Greenhouse impacts........................................................................................................................101

5. OTHER IMPACTS ............................................................................................................................103

    PRODUCT TYPE AND COST ...................................................................................................................103




                                                                                                                                                         2
    MANUFACTURERS AND IMPORTERS ......................................................................................................105

    EMPLOYMENT ......................................................................................................................................109

      Manufacturing ................................................................................................................................109

      Installation......................................................................................................................................110

      Net Effects .......................................................................................................................................111

    PLUMBERS AND OTHER INSTALLERS ....................................................................................................111

    OWNER-OCCUPIERS ..............................................................................................................................113

    TENANTS AND RENTAL OWNERS ..........................................................................................................115

    ENERGY UTILITIES ................................................................................................................................116

    ANNOUNCEMENTS AND CONSULTATIONS.............................................................................................117

6. CONCLUSIONS AND RECOMMENDATIONS............................................................................119

    SUMMARY ............................................................................................................................................119

      Impacts, Costs and Benefits ............................................................................................................119

      Sensitivities and Risks .....................................................................................................................124

    RECOMMENDATIONS ............................................................................................................................127

7. REVIEW .............................................................................................................................................129

    REFERENCES.........................................................................................................................................130





                                                                                                                                                      3
                                               Figures and Tables 


Figure 1 Energy used in the residential sector, Australia 2008 ..................................... 17 

Figure 2 Greenhouse gas emissions from residential sector energy use, Australia 2008

      ................................................................................................................................ 17 

Figure 3 Emissions by residential energy end uses, Australia 1990-2020 .................... 18 

Figure 4 Water heater market share by type, Australia ................................................. 20 

Figure 5 Share of existing water heater stock by State and Territory, 2008 ................. 21 

Figure 6 Share of water heater sales, 5 States, 2008 ...................................................... 21 

Figure 7 Reported householder engagement in previous water heater purchase .......... 24 

Figure 8 Water heater preferences by class of purchaser .............................................. 24 

Figure 9 Greenhouse intensity factors from a range of sources .................................... 26 

Figure 10 Projected greenhouse intensity factors, CPRS and related scenarios ........... 26 

Figure 11 g CO2-e/MJ of hot water, selected States and Zones .................................... 29 

Figure 12 Set diagram of screening criteria................................................................... 47 

Figure 13 Projected day rate electricity prices, CPRS-5 ($2008, real prices) ............... 66 

Figure 14 Number and type of water heater owned by households by income levels .. 70 

Figure 15 Share of water heater types owned by households........................................ 70 

Figure 16 Replacement water heater sales to pre-2011 houses, Australia .................... 71 

Figure 17 Projected emissions from water heating, pre-2011 houses, Australia .......... 72 

Figure 18 Share of all existing houses by natural gas classification ............................. 74 

Figure 19 Number of electric water heating households by gas classification .............. 74 

Figure 20 Modelled and actual water heater capital costs, 2008................................... 76 

Figure 21 Historical RECs prices and estimated impacts on purchase values ............... 76 

Figure 22 Annualised cost (energy plus capital) of alternative water heater options.... 78 

Figure 23 Annualised cost of water heating options, NSW, Zone 3, Medium delivery 80 

Figure 24 Annualised cost of water heating options, NSW, Zone 3, Low delivery...... 80 

Figure 25 Annualised cost of water heating options, Queensland, Zone 3, Medium

     delivery ................................................................................................................... 81 

Figure 26 Annualised cost of water heating options, Victoria, Zone 4, Medium delivery

      ................................................................................................................................ 81 

Figure 27 Projected water heater stocks, pre-2011 houses, Scenario 0 (Ideal) ............. 84 

Figure 28 Projected water heater stock, pre-2011 houses, Scenario 1 (No Regs)......... 84 

Figure 29 Projected water heater stock, pre-2011 houses, Scenario 2 (Rapid) .............. 85 

Figure 30 Projected water heater stock, pre-2011 houses, Scenario 3 (Extended) ........ 85 

Figure 31 Projected water heater stock, pre-2011 houses, Scenario 4 (WHIP) ............. 86 

Figure 32 Projected change in total sales over period 2011-2020.................................. 87 

Figure 33 Change in average water heater capital costs, 2011-20 ................................. 89 

Figure 34 Change in total annual water heater capital costs, 2011-20 (averaged)........ 89 

Figure 35 Change in total annual water heater capital costs, 2011-20 (averaged), by 

     income category...................................................................................................... 90 

Figure 36 Projected capital cost impacts on low-income groups, renters and owners 

     (Scenario 3) ............................................................................................................ 90 

Figure 37 Projected change from NR scenario: capital, energy and net costs .............. 92 

Figure 38 Variation of Benefit/Cost ratios with discount rate .................................... 100 

Figure 39 Projected reduction in annual emissions from water heating under various 

     scenarios, compared with NR Scenario................................................................ 102 

Figure 40 Projected reduction in annual emissions from water heating by jurisdiction 

     under Scenario 3, compared with NR Scenario.................................................... 102 



                                                                                                                                    4
Figure 41 Projected increase in annual solar installations, S3 (Extended 

    implementation) compared with SI (No Regulations).......................................... 110





Table 1 Estimated number of dwellings and residential water heaters, Australia......... 16 

Table 2 End use share of household energy used and related emissions, Australia 2008

     ................................................................................................................................ 18 

Table 3. Water heater sales, Australia 2007-08.............................................................. 19 

Table 4 Estimated share of water heater stock and sales by main types 2008 .............. 20 

Table 5 Share of water heater replaced with same type ................................................ 22 

Table 6 Indicative range of modelled water heater task efficiencies ............................ 28 

Table 7 Estimated potential and actual RECs from ‘renewable’ water heaters ............ 32 

Table 8 Rebates for purchase of solar, heat pump and gas water heaters, 2009 ........... 33 

Table 9 NSW Rebate Scheme – Takeups Oct 2007 to Dec 2008.................................. 34 

Table 10 Victorian Rebate Scheme – Takeups June 2008 to March 2009..................... 34 

Table 11 Target dates for coverage, New and Existing Buildings ................................ 45 

Table 12 Adoption of the Plumbing Code of Australia by States and Territories......... 52 

Table 13 US Department of Energy: Life Cycle Analysis for Electric Storage Water 

    Heaters, 2009 .......................................................................................................... 55 

Table 14 Replacement water heater options under various scenarios........................... 60 

Table 15 Scenarios modelled by NIEIR ......................................................................... 68 

Table 16 Water heater ownership by income and tenancy group.................................. 68 

Table 17 Number of households with electric storage water heaters, 2006 .................. 73 

Table 18 Market share gains by non-gas water heater types, 2011-2020...................... 87 

Table 19 Change in average water heater capital costs, 2011-20, compared with S1.... 88 

Table 20 Share of total increase in capital costs borne by income categories................ 91 

Table 21 Home ownership and rental status by household income .............................. 91 

Table 22 National costs and benefits of proposals, 2011-2020 (Truncated) ................. 93 

Table 23 National costs and benefits of proposals, 2011-2020 (Cohort) ...................... 93 

Table 24 National costs and benefits of proposals, 2011-2030 (Truncated) ................. 93 

Table 25 National costs and benefits of proposals, 2011-2030 (Cohort) ...................... 93 

Table 26 Per household impacts of proposals, 2011-2020 (Truncated) ........................ 94 

Table 27 Per household impact of proposals, 2011-2020 (Cohort)............................... 94 

Table 28 Per household impacts of proposals, 2011-2030 (Truncated) ........................ 94 

Table 29 Per household impacts of proposals, 2011-2030 (Cohort) ............................. 94 

Table 30 National (less SA) costs and benefits of proposals, 2011-2020 (Truncated) . 95 

Table 31 National (less SA) costs and benefits of proposals, 2011-2020 (Cohort) ...... 95 

Table 32 National (less SA) costs and benefits of proposals, 2011-2030 (Truncated) . 95 

Table 33 National (less SA) costs and benefits of proposals, 2011-2030 (Cohort) ...... 96 

Table 34 Benefit/Cost ratios for Scenario 3: Cohort analyses ...................................... 97 

Table 35 Benefit/Cost ratios for Scenario 3: Truncated analyses ................................. 99 

Table 36 Sensitivity of Scenario 3 B/C ratios to capital and energy price changes ....... 99 

Table 37 Benefit/Cost ratios for Scenario 3 by Household Income Category ............. 100 

Table 38 Aggregate greenhouse emissions and reductions (Mt CO2-e)....................... 101 

Table 39 Registered solar and heat pump water heater models .................................. 104 

Table 40 Existing water heaters by location, Australia 2008 ...................................... 104 

Table 41 Complying product types made by electric water heater suppliers.............. 105 

Table 42 Projected manufacture and sales of water heaters by type, 2011-2020........ 108 



                                                                                                                                   5
Table 43 Comparison of Scenario manufacture and installation impacts .................... 109 

Table 44 Assessment of options against main criteria ................................................. 120 

Table 45 Comparison of greenhouse impacts with E3 Program ................................. 121 


Acknowledgements

This Regulatory Impact Statement was prepared by George Wilkenfeld & Associates
(GWA), who also managed the research for the impact assessment on behalf of the
Department of the Environment, Water Heritage and the Arts. The scenario modelling
of the water heater market was carried out by the National Institute of Economic and
Industry Research (NIEIR). The energy price projections were prepared by Syneca
Consulting. The RIS draws on a range of studies commissioned by DEWHA, including
simulations of thermal performance by Thermal Design, and consumer research on
water heater purchase behaviour by Winton Sustainable Research Strategies.

The DEWHA expert advisory group for the project comprised Peter Dempster (Syneca
Consulting), Lloyd Harrington (Energy Efficient Strategies), Alan Pears (Sustainable
Solutions), Hugh Saddler (Pitt&Sherry) and George Wilkenfeld (GWA).

The preparation of the RIS was overseen by the Hot Water Implementation Group,
comprising officials of DEWHA and all State and Territory governments.




                                                                                                      6
Executive Summary
Background
Water heating is the second largest energy user in households. It accounted for nearly
23% of the energy used in Australian households in 2008, 22% of household sector
greenhouse gas emissions and over 5% of total stationary energy sector emissions.
Natural gas and electricity each account for nearly half of water heating energy, with
some use of LPG as well as direct solar. Electric resistance water heaters accounted for
nearly 80% of water heater emissions.
Hot water system replacements generally occur in a crisis situation where the system
suffers a catastrophic failure. Replacement decisions are usually rushed, because the
high value which occupants place on continuing availability of hot water limits the time
available for research, selection and installation. The cheapest capital option is often
preferred even if it is known to have higher lifetime costs, and the most common pattern
of replacement is like for like. Some of this behaviour is rational given the constraints
of the replacement decision, but there are also market failures in terms of information,
consumer myopia and split incentives. The influence of plumbers and other
intermediaries reinforces these.
Greenhouse gas-intensity and options for reducing it
The aim of the proposed measure is the phase-out of ‘greenhouse-intensive water
heaters’. The greenhouse gas intensity with which a water heater supplies hot water
depends on the greenhouse- intensity of the energy it uses, and the quantity of energy it
consumes to deliver a given level of water heating service.
A water heater that exceeds 100 g CO2-e/MJ of energy delivered as hot water 1 is
proposed as a regulatory definition of ‘greenhouse-intensive’. Adoption of the
greenhouse intensity calculation methodology proposed for the 2010 revision of the
Building Code of Australia (BCA) is also proposed for existing dwellings. This
provides a simple and stable method of calculation so that water heater suppliers and
installers can verify their compliance with it.
Given the nature of the Australian electricity supply system, electric resistance water
heaters will remain by far the most greenhouse-intensive water heaters well into the
2030s, despite the changes in generation fuel mix expected to occur under the Carbon
Pollution Reduction Scheme (CPRS) and the Renewable Energy Target (RET). Higher
energy prices expected under the CPRS should make householders more inclined to
consider running costs in the water heater replacement decision, but market failures are
still likely to persist and lead to higher community costs and greenhouse gas emissions
than otherwise.
Policy and Consultation
The objective of this proposal is to contribute to Australia meeting its obligations under
the Kyoto Protocol and any subsequent international agreements, by:
•	 bringing about reductions in greenhouse gas emissions from water heating below
   what they are otherwise projected to be;
•	 reducing the cost of abatement; and

1
  Greenhouse-intensity for the purposes of this RIS relates to operating energy use only and does not
include greenhouse gas emissions associated with the manufacture or transportation of water heaters.


                                                                                                        7
•	 helping households adjust to the impacts of an emissions trading scheme.
While initially an Australian Government election commitment announced in
September 2007, the proposal has now been absorbed within the National Hot Water
Strategic Framework, agreed by the Ministerial Council on Energy on 12 December
2008. The Council of Australian Governments (COAG) endorsed the proposal in April
2009 through the National Strategy for Energy Efficiency, published in July 2009

The water heater industry has been aware of the proposals since 2007, and an
implementation plan suggested by the major manufacturers is one of the three scenarios
modelled for this RIS.
Modelled impacts, costs and benefits
The most effective and efficient way to phase-out electric water heaters is to regulate
against their installation, except in restricted circumstances. The three options
examined in this RIS are:
•	 exclusion of electric water heaters from the entire replacement market after 2010
   (the ‘S2 Rapid’ scenario),
•	 exclusion of electric water heaters from the replacement market in some areas after
   2010 and in all areas after 2012 (‘S3 Extended’); and
•	 restricting the use of electric water heaters to owner-occupied houses in areas not
   supplied by natural gas, and requiring rental houses to replace with solar, heat pump
   or – where available – natural gas (‘S4 WHIP’, for Water Heater Industry Proposal).
The main aspects of the three scenarios are summarised in Table E1. Scenario S2 has
the highest impact in terms of greenhouse gas reductions, which is the main objective of
the proposal, followed closely by S3 (Figure E1). The greenhouse reductions of S4 are
about 60% lower than S2 or S3.
In S3, emissions from household water heating in 2020 would be 4.8 Mt lower than
otherwise. This was equivalent to 1.6% of the total emissions from stationary energy
combustion in 2007, the latest published National Greenhouse Gas Inventory.
The water heaters that would substitute for the electric resistance types excluded from
the market would either cost about the same to purchase and install (eg LPG), cost
slightly more (natural gas, heat pump) or cost significantly more (solar). They would
cost less to run (solar, heat pump), about the same (natural gas and, if household has
low hot water use, LPG) or significantly more (LPG).
The cost-benefit analyses in this RIS take into account the value of Renewable
Electricity Certificates (RECs) created by solar and heat pump water heaters, but not the
value of Commonwealth or State rebates. This is because the RET under which RECs
are created is legislated until 2030, whereas none of the rebate programs is committed
beyond 2012. The average capital cost increases shown in Table E1 will be offset by
lower energy costs under all scenarios, except that in some scenarios the savings take
somewhat longer to exceed costs.
The proposed measure would be about equally cost-effective for all household income
groups, with slightly greater net benefit for the lowest incomes (less than $20k) and the
highest (more than $100k). However, the initial capital cost will be a more significant
issue for lower income groups.



                                                                                          8
Impacts on the water heater industry
The increase in capital costs means an increase in revenues to water heater
manufacturers, importers and installers. All suppliers of electric storage water heaters
also supply other types, so none would be excluded from the market by the proposed
measure. The largest suppliers both import and manufacture locally, so would gain
irrespective of how the growth in market value were distributed.

The employment implications of all three scenarios are positive. The net impact on local
water heater manufacture is expected to be relatively minor, ranging from a small gain
under S4 to a small loss under S2.

The impact on installation activity, which is more labour-intensive and more evenly
distributed across jurisdictions, would be strongly positive under all scenarios, but
especially S2 and S3, which have a higher solar market share. Of the three scenarios,
S2 and S3 are likely to have the most positive net impact on employment, although
there could be some transfer of employment from manufacturing to installation.

                   Table E1 Assessment of options against main criteria
Criterion                             Year or       Changes compared with ‘No Regulations’ Scenario (e)
                                      Period (a)      S 2 (Rapid)       S 3 (Extended)         S 4 (WHIP)
Cumulative greenhouse reduction 2011-20 T 32.5 Mt CO2-e                 29.4 Mt CO2-e        11.8 Mt CO2-e
compared with S1                      2011-20 C 57.8 Mt CO2-e           53.6 Mt CO2-e        21.9 Mt CO2-e
                                      2011-30 T 77.9 Mt CO2-e           74.4 Mt CO2-e        34.2 Mt CO2-e
                                      2011-30 C 98.6 Mt CO2-e           94.9 Mt CO2-e        46.2 Mt CO2-e
% emissions reduction compared 2011-20 T                 28%                 26%                   10%
with S1                               2011-20 C          35%                 32%                   13%
                                      2011-30 T          37%                 36%                   16%
                                      2011-30 C          39%                 38%                   18%
Greenhouse reduction in 2020          2020           5.0 Mt CO2-e        4.8 Mt CO2-e         2.0 Mt CO2-e
NPV Net benefit (cost) (b)            2011-20 T ($M 220) cost           ($M 140) cost        $M 71 benefit
                                      2011-20 C $M 1,235 benefit $M 1,192 benefit $M 1,111 benefit
                                      2011-30 T $M 1,669 benefit $M 1,621 benefit $M 1,614 benefit
                                      2011-30 C $M 2,512 benefit $M 2,427 benefit $M 2,410 benefit
Benefit/cost ratios (b)               2011-20 T           0.9                 0.9                   1.0
                                      2011-20 C           1.5                 1.6                   1.8
                                      2011-30 T           1.5                 1.6                   1.7
                                      2011-30 C           1.8                 1.9                   2.1
Implied $/tonne CO2-e saved (c) 2011-20 T                +$6.8               +$4.8                −$6.0
                                      2011-20 C         −$21.4              −$22.2               −$50.8
                                      2011-30 T         −$21.4              −$21.8               −$47.8
                                      2011-30 C         −$25.5              −$25.6               −$52.2
Increase in avg. WH capital cost 2011-20              $512 (29%)          $449 (26%)           $292 (17%)
Low-income HH WH cap costs (f) 2011-20                  $M 142              $M 119               $M 108
Impact on local manufacturing                           Neutral       Neutral to negative Small positive
Impact on installation activity                     More positive       More positive            Positive
Net impact on employment                            Most positive       More positive            Positive
Administrative complexity                              Simplest         More complex       Most complex (d)
       (a) T = analysis truncated at end of period. C = all lifetime energy use ‘locked in’ for water heater
          cohorts installed up to 2020 taken into account. (b) Net Present Value at 6% discount rate. (c)
     Negative values indicate that value of energy savings alone cover the abatement costs. (d) Requires
          workable and enforceable means of distinguishing ‘rental’ from ‘owner-occupied’ houses. (e)
     Includes costs and benefits for SA, which results in a slight overestimate of the national net benefits,
       as SA is already implementing regulations which capture most of the impacts of S2, S3 and S4. A
      separate analysis of the national impacts excluding SA are reported in the body of the RIS. (f) Total




                                                                                                         9
increase in capital costs of WH purchases by HH with income less than $40k. Will be exceeded by
                               NPV of energy savings to those HH.




                                                                                          10
                                      Figure E1 Projected greenhouse gas emissions from water heater installed in
                                                                  existing houses

                                                       14000
  Total kt CO2-e from water heatersm pre-2011 houses




                                                       12000



                                                       10000


                                                                                                                                                                                                           S1 (No Regs)
                                                        8000
                                                                                                                                                                                                           S4 (WHIP)
                                                                                                                                                                                                           S0 (Ideal)
                                                                                                                                                                                                           S3 (Extended)
                                                        6000
                                                                                                                                                                                                           S2 (Rapid)


                                                        4000



                                                        2000



                                                           0
                                                               2011

                                                                      2012

                                                                             2013

                                                                                    2014

                                                                                           2015

                                                                                                  2016

                                                                                                         2017

                                                                                                                2018

                                                                                                                       2019

                                                                                                                              2020

                                                                                                                                     2021

                                                                                                                                            2022

                                                                                                                                                   2023

                                                                                                                                                          2024

                                                                                                                                                                 2025

                                                                                                                                                                        2026

                                                                                                                                                                               2027

                                                                                                                                                                                      2028

                                                                                                                                                                                             2029

                                                                                                                                                                                                    2030
Compliance and Administration
The obligation to comply with the proposed plumbing regulations will rest with
plumbers and other installers such as electricians, gas-fitters, builders and carpenters.

S4 appears to be unworkable under current legislation as it depends on a workable legal
definition of a house as ‘rental’ or ‘owner-occupied’, an administrative system for
making this information accessible to plumbers and installers, and an obligation to act
on this information when advising customers and installing water heaters. These factors
are presently beyond the scope of plumbing codes, which deal with products and their
installation.

S3 differs from S2 in that there is a two year period where the measure applies in some
areas but not others. This adds administrative and compliance complexity, however an
extended implementation period allows early impacts to be monitored and
administration to be fine-tuned by the time the measure becomes universally applicable.

Sensitivities and Risks
The projected energy costs used in this RIS correspond with the Treasury projections
under the CPRS-5 scenario, which would aim for national emissions to be 5% lower
than the 2000 levels by 2020. Higher prices would make the proposed measure more
cost-effective.

For solar water heaters the risks are poorly matching product performance to hot water
demand and climate zones and poor installation. The level of plumber and installer
expertise is progressively improving as familiarity with solar installations grows, but the
risks could be reduced with further intensive training programs.



                                                                                                                                                                                                                  11
The primary compliance obligation will fall on plumbers and other installers. There is a
risk that some will be unaware of their requirements, especially in the early stages.
There will also be a continuing risk that some will choose not to comply with the
regulations, either on their own initiative or in response to customer requests or
demands. These risks would be highest in phase one of the Extended scenario (S3) but
can be minimised through clear rules and guidelines, training programs for plumbers
and installers, and monitoring by relevant inspectors. In jurisdictions which rely on
random rather than universal inspection of plumbing work, the rate of inspections may
need to be increased in the early phases of implementation.

There is a risk that some householders will adopt LPG solely because it is the lowest
capital cost option, and not because it is the most cost-effective long term option. Low-
income and rental households could be left with high operating costs which leaves them
especially vulnerable. The extent of this will not become apparent until the electric
water heater phase-out extends to areas without a natural gas supply. If necessary,
monitoring programs and the early development of policy responses would mitigate this
risk.

Recommendations
It is recommended that:

   1.	 Greenhouse gas-intensive water heaters should be phased-out from Class 1
       buildings (ie houses) through prohibiting the installation of electric resistance
       water heaters, with certain exemptions.

   2.	 The phase-out should be implemented in two stages; the first stage in 2010 and
       the second stage in 2012.

   3.	 Each Australian jurisdiction should implement the first stage under its own
       plumbing regulations, and the second stage through common provisions, such as
       those which may be developed for the Plumbing Code of Australia.

   4.	 Each jurisdiction should determine its own rules for coverage in the first stage of
       implementation, based on criteria such as location and/or gas connection status,
       on the principle that coverage in this stage should be targeted to houses where
       compliance options are wider and compliance costs likely to be lower.

   5.	 The second stage should apply across the entire jurisdiction, subject to certain
       exemptions.

   6.	 The second stage should preferably take effect at the same time in all
       implementing jurisdictions, to minimise confusion among water heater buyers
       and installers, and disruption to the water heater industry.

   7.	 The method of calculating the greenhouse gas intensity of water heaters similar
       to that proposed for the Building Code of Australia should be used if water
       heater suppliers wish to demonstrate that a product or design meets the criterion
       of ‘low emissions-intensity’, but for ease of implementation the basis of
       regulation should be acceptable types of water heaters and simple performance
       criteria.


                                                                                      12
8.	 Provisions for general exemptions should be similar to those adopted for new
    buildings. These include rules under which electric resistance water heaters (up
    to a size or heat loss limit) can be installed in defined situations, or where the
    electricity is supplied directly from renewable sources. GreenPower, however,
    does not meet this criterion.

9.	 Jurisdictions should develop guidelines and administrative procedures for
    assessing and granting special exemptions, in cases where installing any water
    heater other than electric would be unsafe or excessively costly.

10. Where solar or heat pump water heaters are installed, the requirements should be
    similar to those adopted for new buildings.

11. Information and training programs on the proposed phase-out should be
    developed and implemented for plumbers and installers.

12. Information programs on the proposed phase-out should be developed and
    targeted to households with electric water heaters, so they will be more aware of
    the options when it comes time to replace them.

                                      *****




                                                                                  13
                            Submissions on this Consultation RIS

Submissions are invited on any of the material in this document, but particularly the following
questions

  1.	 Do you support the proposal to phase out greenhouse-intensive water heaters? Please give
      reasons.
  2.	 Do you agree with the proposed criteria for greenhouse-intensity? If not, please suggest
      alternative criteria.
  3.	 How significant a role do you think that market failures (eg information failures, 

      consumer myopia and split incentives) play in the replacement water heater market?

  4.	 Do you agree with the estimated capital, installation and running cost estimates for
      different water heater types (keeping in mind that the RIS uses broad averages, and
      specific model prices can vary widely and can change over time )? If not, please provide
      alternative values.
  5.	 If greenhouse-intensive water heaters are to be phased out, should this be done at the 

      same time in all areas (eg whether or not they have natural gas), or should there be a 

      staged process, as proposed?

  6.	 Are the proposed general exemptions appropriate? If not, what other general exemptions
      do you propose?
  7.	 Are the proposed special exemptions appropriate to address the potential problem of
      households that do not meet the general exemption criteria? What criteria should be used
      when considering special exemptions?
  8.	 What implications (positive or negative) would the proposals have for your industry, in
      terms of activity, profitability and employment?
  9.	 What opportunities would the proposal create for the private sector (eg for water heater
      manufacturers, suppliers, installers and ‘green loans’ financiers)?
  10. What can water heater installers and energy utilities do to facilitate rapid replacement of
      water heaters at time of failure (especially of electric with non-electric)?
  11. Do you consider that there are any major technical or functional issues related to less 

      greenhouse-intensive water heater types? If so, how should these be addressed? 

  12. How will the proposal impact on electricity prices and energy network costs and 

      investment requirements? 

  13. Do you agree with the specific recommendations in the RIS? If not, please address 

      comments by the numbered recommendation? 

Submissions to the Consultation RIS can be either emailed to:
hotwater@environment.gov.au or mail

Heating and Cooling Team
Appliance Energy Efficiency Branch
Renewables and Energy Efficiency Division
Department of the Environment, Water, Heritage and the Arts
GPO Box 787
Canberra ACT 2601




                                                                                              14
Glossary
ABCB 	     Australian Building Codes Board
AGA        Australian Gas Association
           	
AS         A
           	 ustralian Standard
AS/NZS 	   Australian and New Zealand Standard
AGA        Australian Gas Association
           	
BCA 	      Building Code of Australia
COAG 	     Council of Australian Governments
CSWH	      Central service water heating installation (may consist of several
           separate water heaters coupled together)
CWH 	      Central water heater serving a Class 2 building (as distinct from a
           separate water heater serving a Class 1 building or an apartment in a
           Class 2 building)
DEWHA 	    Department of the Environment, Water, Heritage and the Arts
DTS 	      Deemed to satisfy
ESWH 	     Electric storage water heater
F&M 	      Factors and Methods Workbook published occasionally by the AGO
GH         Greenhouse
           	
GWA 	      George Wilkenfeld and Associates
GSWH 	     Gas storage water heater
HH         Household
           	
HPWH 	     Heat pump water heater (where water is heated mainly by a vapour
           compression process, although may be boosted by other means)
IWH 	      Instantaneous water heater (where the water is heated on demand by gas
           or electricity rather than stored hot for use)
LPG 	      Liquefied petroleum gas
MCE 	      Ministerial Council on Energy
MEPS 	     Minimum Energy Performance Standards
MRET 	     Mandatory Renewable Energy Target (succeeded by RET)
NCFA 	     Net conditioned floor area (as defined in AccuRate)
NIEIR 	    National Institute for Industry and Economic Research
NPV        N
           	 et present value
NR 	       No Regulations case
OP 	       Off-peak (electricity tariff)
ORER 	     Office of the Renewable Energy Regulator
PR 	       Proposed Regulation case
RECs 	     Renewable Energy Certificates (as determined by ORER)
RET        Renewable Energy Target
           	
S-EWH      Solar water heater with electric boost
           	
S-GWH 	    Solar water heater with gas boosting
SWH 	      Storage water heater (where water heated by electricity, gas, solar
           energy or any combinations is stored hot for later use)
TRNSYS     TRaNsient SYstem Simulation Program (used for simulating the
           	
           performance of water heaters in AS/NZS 4234
WH         W
           	 ater heater
WHIP 	     Water Heater Industry Proposal




                                                                            15
                                     1. The Problem
Domestic Water Heating
Domestic water heating is the supply of hot water in houses, apartments and other
accommodation for personal washing, showering, cooking, dishwashing, clothes
washing and similar uses. It is a different service from the supply of hot water for space
heating, although in some cases the same equipment may heat water for both purposes.

Domestic hot water in houses is supplied by one or more separate water heaters serving
only that house. Apartments may have their own water heaters, or be served from a
central water heater (CWH) system that serves the entire building.

Table 1 indicates that in 2006 there were about 8 million separate domestic water
heaters installed in Australia. All houses and about 61% of apartments had their own
water heater and the other 39% of apartments were served from central systems.

     Table 1 Estimated number of dwellings and residential water heaters, Australia
                                               Number of With own            Served by      Number
                                              Dwellings (a) WHs (b)         Central WH     of CWHs
         Separate houses                         6,262,719 6,262,719                NA           NA
         Attached houses                            783,023       783,023           NA           NA
         Apartments                              1,236,542        750,207       486,335      16,141
         Other private residences                   144,271       144,271           NA           NA
                                                 8,426,555 7,940,220            486,335      16,141
     Source: Appendix 1, based on Census 2006. (a) Includes unoccupied dwellings, which make up 9% of
    houses and 13% of apartments at any given time. (b) National average about 1.02 water heater per house


Energy Use and Emissions
Water heating accounted for nearly 23% of the energy used in Australian households in
2008, and about 22% of the greenhouse gas emissions associated with household energy
use (Table 2). Water heating is the second largest energy user in households after space
heating and cooling, and the second largest source of emissions after electrical
appliances.

Natural gas and electricity each account for about half the delivered energy used in
water heating, with some use of LPG as well as direct solar (Figure 1).2 Because
electricity is the most greenhouse-intensive form of delivered energy, it accounted for
nearly 80% of the emissions from water heating (Figure 2).




2
  Figure 1 includes the active solar contribution to solar water heating, but not passive solar contribution
to space heating or ambient energy contribution to space and water heating via heat pumps.


                                                                                                        16
                                  Figure 1 Energy used in the residential sector, Australia 2008
                      180


                      160


                      140


                      120
PJ energy delivered




                                                                                                                            Solar
                                                                                                                            Other fuels
                      100
                                                                                                                            Wood
                                                                                                                            LPG
                       80
                                                                                                                            Natural gas
                                                                                                                            Electricity
                       60


                       40


                       20


                        0
                                  Space        Water      Cooking    Refrigeration     Lighting    Standby      Other
                                heating &     heating                                                         appliances
                                 cooling

                                                  Source: Derived from EES (2008), GWA (2008)


Figure 2 Greenhouse gas emissions from residential sector energy use, Australia
                                    2008
                      18000


                      16000


                      14000


                      12000
                                                                                                                            Other fuels
kt CO2-e (FC)




                      10000                                                                                                 Wood
                                                                                                                            LPG
                       8000                                                                                                 Natural gas
                                                                                                                            Electricity
                       6000


                       4000


                       2000


                            0
                                    Space        Water     Cooking     Refrigeration    Lighting    Standby      Other
                                  heating &     heating                                                        appliances
                                   cooling

                                                  Source: Derived from EES (2008), GWA (2008)




                                                                                                                                 17
                          Table 2 End use share of household energy used and related emissions, 

                                                     Australia 2008 

                                                                                     Share     Share
                                                                                    energy    CO2-e
                                                       Space heating & cooling         40.4%     19.4%
                                                       Water heating                   23.2%     21.8%
                                                       Cooking                          4.8%      4.8%
                                                       Refrigeration                    6.7%     11.4%
                                                       Lighting                         6.7%     11.5%
                                                       Standby energy use               3.7%      6.3%
                                                       Other electrical appliances     14.6%     24.8%
                                                       Total                          100.0%    100.0%
                                                                Source: EES (2008), GWA (2008)

Emissions from water heating are declining, both as a proportion of residential sector
emissions and in absolute terms, but they are still projected to be over 17% of the
sector’s emissions by 2020 (Figure 3). The reasons for the historical decline in
emissions are:

•                       Increase in the average efficiency of all water heaters;
•                       Falling average hot water use per capita, due to greater water use efficiency; and
•                       A gradual shift from electric resistance water heaters to other types.

These trends are expected to continue. The proposed introduction of the Carbon
Pollution Reduction Scheme (CPRS) from 2011 is expected to reduce the greenhouse
gas-intensity of electricity supply, so adding a further driver for reducing emissions.

                          Figure 3 Emissions by residential energy end uses, Australia 1990-2020

                        80000


                        70000


                        60000


                                                                                                                                                Other electric
    kt CO2-e (CPRS-5)




                        50000
                                                                                                                                                Cooking
                                                                                                                                                Heating & Cooling
                        40000                                                                                                                   Standby
                                                                                                                                                Lighting
                                                                                                                                                Refrigeration
                        30000
                                                                                                                                                Water Heating


                        20000


                        10000


                            0
                                1990

                                       1992

                                              1994

                                                     1996

                                                            1998

                                                                   2000

                                                                          2002

                                                                                 2004

                                                                                        2006

                                                                                               2008

                                                                                                      2010

                                                                                                             2012

                                                                                                                    2014

                                                                                                                           2016

                                                                                                                                  2018

                                                                                                                                         2020




                                                                                                                                                            18

      The Water Heater Market

      Market Overview

      The main factors influencing the annual sales (or ‘market’) for a household appliance
      are:

      •	 Changes in the share of homes owning a given product or in the number of products
         present in each home. As almost every home in Australia already has a water heater
         and the great majority have only have one, these factors no longer affect the water
         heater market;
      •	 The construction of new homes, each of which requires a new water heater;
      •	 Renovations involving significant alterations to plumbing, such that the existing
         water heater cannot be retained; and
      •	 The replacement of existing water heaters at the end of their service lives.

      Unlike products such as televisions, which may be affected by the phase-out of
      analogue broadcasting or the introduction of significant changes in screen technology,
      the rate of water heater replacement largely depends on the rate of failure.

      While the number of replacement sales is fairly steady from year to year, the volume of
      sales to new homes and renovations varies with building activity. It is estimated that in
      2008 about 76% of water heater sales were for the replacement of an existing unit at the
      time of failure, 19% were installed in new houses and 5% installed during renovation of
      an existing house (Table 3).

                               Table 3. Water heater sales, Australia 2007-08
                               House­   Share    WH At time At time At time At time At time At time Share of
                               holds             sales    of      of    of ren­    of      of    of ren­ WH
                               ('000)           ('000) building failure ovation building failure ovation sales
Owner-occupied                  5655 69.2%          520      104     388        27 13.8% 51.3%        3.6%    69%
Private rental+other tenancy    2150 26.3%          190        35    148         7    4.6% 19.5%      0.9%    25%
Public tenancy                   371     4.5%         30        4     26         1    0.5%     3.4%   0.1%     4%
                                8175 100.0%         740      143     562       35 19.4% 75.9%         4.7% 100%
      Source: Author estimate based on BIS (2008), ABS (2008); includes separate water heaters in Class 1 and
         Class 2, but excludes central water heaters for Class 2 <Water Heater data Jan 09.xls\ABS1\T124>



      Market Share by Main Type

      Electric storage water heaters accounted for about 53% of the total national water heater
      stock in 2008 (Figure 5), and for about half of annual sales until as recently as 2006
      (Figure 4). By 2008, however, the market share had fallen to about 37% (Table 4).
      Until 2006, gas accounted for about the same market share as electric storage, although
      there has been a shift from storage to instantaneous within the gas segment.

      After 2006 electricity lost market share to both natural gas and solar, largely in response
      to new regulations for new homes in several States, and rebate and incentive schemes

                                                                                                     19

which are described in the following sections. If the current regulations and incentives
were removed, electricity may recover much of its historical market share.

Both stock shares and market shares vary considerably from State to State (Figure 5,
Figure 6). The State with the highest gas water heater share is Victoria, followed by
WA and SA. The electric water heater is highest in Tasmania, followed by Queensland
and NSW. The NT is unique in that its gas reticulation network is very limited, and
about half of its water heaters are solar.

                          Table 4 Estimated share of water heater stock and sales by main types 2008
                                                                    Stock       Sales      Sales
                                                                  June 2008 2007-08      2007-08
                                      Electric                          53%         37%     274,000
                                      Natural Gas and LPG               40%         50%     370,000
                                      Solar, Heat Pump and Other          7%        13%      96,000
                                      Total                            100%        100%     740,000
                                         Source: Author estimate based on BIS (2008), ABS (2008)



Figure 4 Water heater market share by type, Australia
                          100%


                           90%


                           80%


                           70%
  Share total WH market




                           60%
                                                                                                             Solar
                                                                                                             Gas IWH
                           50%
                                                                                                             Gas SWH
                                                                                                             Electric SWH
                           40%


                           30%


                           20%


                           10%


                           0%
                             1998         2000          2002           2004           2006            2008

                                        Source: BIS (2006, 2008) <WH Modelling Data Oct 20008>




                                                                                                                   20

Figure 5 Share of existing water heater stock by State and Territory, 2008
                            100%


                            90%


                            80%


                            70%
 Shaer of installed stock




                                                                                                            Other
                                                                                                            Solar-other
                            60%
                                                                                                            Solar-gas
                                                                                                            Solar-elec
                            50%
                                                                                                            LPG/bottled gas
                                                                                                            Mains gas
                            40%
                                                                                                            Off-peak electricity
                                                                                                            Peak electricity
                            30%


                            20%


                            10%


                             0%
                                   NSW     Vic.    Qld     SA         WA   Tas.    NT    ACT      Aust.

                                              Source: ABS (2008) <Water Heater Data Jan 09.xls>


Figure 6 Share of water heater sales, 5 States, 2008

                            100%


                            90%


                            80%


                            70%


                            60%
 Share of sales




                                                                                                                     Solar, HP
                                                                                                                     Gas IWH
                            50%
                                                                                                                     Gas SWH
                                                                                                                     Elec SWH
                            40%


                            30%


                            20%


                            10%


                             0%
                                     NSW           Vic          Qld           SA        WA           5 States

                            Source: BIS (2008) – No data for Tasmania, NT or ACT <WH Modelling Data Oct 20008>




                                                                                                                          21

Water Heater Choice

While quantitative factors determine the total number of new water heaters which the
market requires each year, the choice of water heater type depends on individual
purchase decisions. Market research on these decision factors (BIS Shrapnel 2006,
2006a, 2006b, 2008 and Winton 2008) is reviewed in Appendix 2.

Replacement decisions are usually rushed, because the very high value which occupants
place on continuing availability of hot water limits the time available for research,
selection and installation. Decisions also tend to be made under capital constraint:
failures are rarely anticipated or budgeted for, so the cheapest capital cost option is
often preferred even if it is known to have higher lifetime costs.

For example, if natural gas is available in the street but not to the dwelling, there would
be both additional time and cost in connecting to it. If the existing water heater is
located inside the dwelling it would take additional time and cost to install the
replacement outside (as required for heat pump, solar and higher efficiency gas).
Alternatively, the roof configuration may preclude a solar collector. For these reasons,
the most common pattern of replacement is like for like (Table 5).

Thus the market failures which characterise the initial choice of water heater are often
perpetuated over the life of the dwelling. These physical and behavioural constraints on
subsequent replacements slow the rate of adjustment of the water heater stock to
changes in energy price and other factors.

               Table 5 Share of water heater replaced with same type
                        Type of water replaced           2006         2008
                        Electric                          79%         63%
                        Gas (a)                           95%         96%
                        Solar                             76%         87%
                        All types                         86%         78%
             Source: BIS (2008). (a) Includes cases where the type of gas WH changes.

Intermediaries exert a major influence on replacement choice. BIS (2008) reports that
when a water heater fails 46% of home occupants contact a plumber, 15% a hot water
specialist, 15% an energy retailer and 2% a builder: only about 18% go to the types of
retailers or specialised stores that would be normally be the first point of contact for the
purchase of large appliances.

Winton (2008) researched the extent of buyer engagement in the purchase of the
previous water heater and the intended engagement in the purchase of the next water
heater. He found that only 40% of householders (scaled to ABS data) took an active
part in the selection of their current water heater, 20% were passive purchasers and 40%
took no part because the water heater was already there when they moved in (Figure 7).
As the survey only covered occupants, it did not assess the degree of engagement of the
owners of rental homes. However, it would be expected that most owners would want
to minimise their replacement capital cost rather than the lifetime cost, so would be
even less concerned with running costs than owner-occupiers. The less engaged the
purchaser, the more likely that the water heater will be electric (Figure 8).


                                                                                        22
Where home-owners make a water heater selection, they face the likelihood that they
will not be in that house long enough to fully gain the benefits of a water heater with
low energy costs. About one in six households move in each year, and the average
time in the same dwelling is between 6 and 7 years.3 Statistically, the water heater
replacement could occur in any year of tenure. A 10-year service life water heater
(typical of electric storage types) will probably serve the current owner for only 3 to 4
years, and the next owner/s for 6 to 7 years. A 14-year service life water heater (typical
of solar-gas types) will probably serve the current next owner/s for 10 to 11 years.

Homeowners can only be sure of capturing the full energy cost benefit of higher capital
cost water heater if they can be confident of recovering the additional cost in the home
sale price. There is no evidence that this is the case (although there is some evidence
that higher Energy Efficiency Ratings for thermal performance are associated with
higher sale prices, at least in the ACT).4 As long as this is not the case, homeowners
would discount the value of energy savings because they may not be in the dwelling
long enough to recover the costs of a higher capital option (ie they act as the ‘agent’ for
the subsequent occupant, who will capture most of the benefit).




3

http://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbytitle/D2799C9AA38B5E0DCA25741700118E
71?OpenDocument
4
  http://www.nathers.gov.au/about/publications/pubs/eer-house-price-act.pdf


                                                                                         23
          Figure 7 Reported householder engagement in previous water heater purchase

                                          100%


                                          90%


                                          80%
Share of households with this WH type




                                          70%

                                                                                                                                  WH was
                                          60%                                                                                     already there
                                                                                                                                  Passive
                                          50%                                                                                     purchaser
                                                                                                                                  Engaged
                                          40%                                                                                     purchaser


                                          30%


                                          20%


                                          10%


                                           0%
                                                   Elec storage   Gas storage   Gas instant     Solar     Elec HP         All

                                                                                  <WH Choice 2008.xls>


                                                        Figure 8 Water heater preferences by class of purchaser

                                            100%


                                            90%


                                            80%
       Share of water heaters purchased




                                            70%


                                            60%                                                                                   Elec HP
                                                                                                                                  Solar
                                            50%                                                                                   Gas instant
                                                                                                                                  Gas storage
                                            40%                                                                                   Elec storage


                                            30%


                                            20%


                                            10%


                                             0%
                                                         Engaged purchaser            Passive purchaser        WH already there

                                                                                  <WH Choice 2008.xls>




                                                                                                                                         24
Types and Greenhouse intensity of water heaters

There are many type of water heater, distinguished by type of energy used, physical
configuration, capacity and level of energy efficiency and other factors. These are
detailed in Appendix 3, along with the relevant Australian Standards. However, for the
purposes of this RIS the most significant point of difference is the greenhouse gas
emissions associated with the water heater’s operation.

The aim of the proposed measure is the phase-out of ‘greenhouse-intensive water
heaters’. It is therefore necessary to define or adopt an objective measure of
greenhouse-intensity, which covers both the forms of energy used by the water heater
and its own performance and efficiency. Such measures are already in place in some
jurisdictions, and similar criteria have recently been proposed for the 2010 Building
Code of Australia. (GWA 2009).

Greenhouse intensity of energy

The greenhouse gas intensity with which a water heater supplies hot water depends on
the greenhouse-intensity of the types of energy it uses, and the quantity of each energy
type it consumes to deliver a given level of water heating service.

The greenhouse intensity of each energy form can be determined in a number of ways.

The Department of Climate Change (DCC 2008a) publishes a workbook for the
National Greenhouse Accounts (NGA), with a set of electricity and natural gas
intensities for the use of companies reporting greenhouse gas emissions under the
National Greenhouse Energy and Reporting System (NGERS). These historical (ie
backwards-looking) averages for each State are illustrated in Figure 9.




                                                                                     25
                                                  Figure 9 Greenhouse intensity factors from a range of sources

                                   400

                                                                                                                                                                                                 Electricity
                                   350                                                                                                                                                           (Projected CPRS
                                                                                                                                                                                                 emission factors)

                                   300
                                                                                                                                                                                                 Electricity (NGA
                                                                                                                                                                                                 factors)
 g CO2-e/MJ delivered




                                   250

                                                                                                                                                                                                 Natural gas (NGA
                                   200                                                                                                                                                           factors)



                                   150                                                                                                                                                           Electricity (BCA
                                                                                                                                                                                                 default factors)

                                   100

                                                                                                                                                                                                 Natural gas (BCA
                                                                                                                                                                                                 default factors)
                                    50


                                     0
                                            NSW                  Vic              Qld               SA            WA (SWIS)             Tas                  NT          Australia
                                                                                                                                                                        (all States)

                                                                        Source: DCC (2008a), Treasury (2008), GWA (2007)


Figure 10 Projected greenhouse intensity factors, CPRS and related scenarios

                                   1.100

                                   1.000

                                   0.900

                                   0.800
          kg CO2-e/kWh delivered




                                   0.700

                                   0.600
                                                                                                                                                                                                       CPRS-5
                                                                                                                                                                                                       Garnaut-25
                                   0.500

                                   0.400

                                   0.300

                                   0.200

                                   0.100

                                   0.000
                                           2008

                                                   2011

                                                          2014

                                                                 2017

                                                                        2020

                                                                               2023

                                                                                      2026

                                                                                             2029

                                                                                                    2032

                                                                                                           2035

                                                                                                                   2038

                                                                                                                          2041

                                                                                                                                 2044

                                                                                                                                        2047

                                                                                                                                               2050

                                                                                                                                                      2053

                                                                                                                                                              2056

                                                                                                                                                                     2059

                                                                                                                                                                            2062

                                                                                                                                                                                   2065

                                                                                                                                                                                          2068




                                         Source: Extracted from Treasury (2008) <WH Modelling data Oct 2008.xls\GH Profiles>



Forward-looking emissions factors are projections based on the expected fuel mix of
electricity generation. These have been calculated for each State on the basis of the
modelling for the proposed Carbon Pollution Reduction Scheme (CPRS) published by



                                                                                                                                                                                                           26

the Australian Department of the Treasury (2008) (see Appendix 6).5 Figure 10
illustrates the sales-weighted national trend projections under the Treasury’s CPRS-5
and Garnaut-25 scenarios.6 The ‘Projected CPRS’ emission factors for each State in
Figure 9 are the average intensities under the CPRS-5 scenario over the period 2010­
2022, which would cover the service lives of water heaters installed in 2010.

The greenhouse gas intensity of electricity supply changes over time, but a regulatory
definition of ‘greenhouse-intensive’ needs to refer to a simple and stable method of
calculation so that water heater suppliers and installers can verify their compliance with
it. The Building Code of Australia (BCA) is proposing to adopt a set of ‘BCA default
intensity factors’, as shown in Figure 9. Should these factors be adopted, it would be
consistent to use the same factors in other regulations governing the greenhouse
intensity of water heaters.

In this RIS the BCA default intensity factors are used to test whether particular types of
water heaters would qualify as ‘greenhouse-intensive’. However, the costs and benefits
of adopting the requirement are modelled using the projected CPRS-5 greenhouse gas
intensities and electricity prices.

Emissions intensity of water heaters

The definition of a greenhouse gas-intensive water heater proposed for the BCA is one
where the emissions intensity exceeds 100 g CO2-e/MJ of thermal energy, calculated as
detailed in Appendix 5. The emissions-intensity depends on both the greenhouse-
intensity of the energy form and the efficiency of the water heater itself.

The annual energy use and efficiency of a wide range of water heater types has been
calculated by Thermal Design Pty Ltd, using the TRNSYS simulation model. This RIS
draws on four separate studies (TD 2007, 2007a, 2009, 2009a), totalling nearly 1200
discrete simulations. Appendix 4 summarises the combinations of options modelled and
the energy used under a range of drawoffs. Some additional calculations were also
undertaken by GWA.

The end use efficiency of a water heater is often defined as the Useful Energy (UE)
which it transfers into hot water divided by Delivered Energy (DE) – ie electricity, gas,
LPG or other fuel. For conventional gas and electric water heaters, UE/DE is always
less than 1, but for heat pump and solar types it is higher than 1.

The efficiency range for conventional electric and gas water heaters is fairly narrow,
across types and water heater drawoffs (Table 6). The range for heat pumps is
somewhat wider. The efficiency range for solar water heaters is by far the widest, and
is sensitive to many factors including delivery, drawoff, collector efficiency etc. For

5
  These reflect the expectation in Treasury modelling that the marginal intensity in each State will
converge, because the great majority of new generation in all States is likely to be a mix of natural gas
and renewables. If coal fired power stations using carbon capture, sequestration and storage are built, they
would most likely have an intensity between gas and renewables.
6
  At the time of writing the Government had announced the intention to delay the start of the CPRS from
July 2010 to July 2011, and to abandon the CPRS-15 option in favour of a ‘25% reduction target’ to be
adopted in the event of an international commitment to such a target. As a (deferred) CPRS-5 scenario is
now the only one to which there is a commitment, and the probability of adoption of a CPRS-25 scenario
is not known, CPRS-5 is retained as the sole energy and emissions projection scenario.


                                                                                                      27
conventional water heaters and heat pumps, task efficiency increases gradually with
delivery, all else being equal. For solar water heaters on the other hand, task efficiency
increases steeply as delivery declines, and falls as delivery increases.

          Table 6 Indicative range of modelled water heater task efficiencies
Type                                Highest Efficiency       Lowest Efficiency        Range, high to low
Electric (off peak)                        0.90                     0.70                    0.20
Electric (continuous)                      0.90                     0.78                    0.12
Gas IWH                                    0.75                     0.60                    0.15
Gas SWH                                    0.78                     0.55                    0.23
Heat pump                                   3.5                      2.2                     1.3
Solar-electric (evacuated tubes)            6.0                      1.5                     4.5
Solar-gas (flat plate, small)               2.7                      1.1                     1.6
Solar-gas (flat plate, medium)              7.0                      1.5                     5.5
Solar-electric (flat plate)                10.0                      1.7                     8.3
                   Source: Appendix 3. Efficiency varies with delivery and other factors.

Figure 11 illustrates the emissions intensity, for the 40 MJ/peak day task, in the States
and zones which together cover about 85% of houses. The differences in the emissions
for each type of water heater reflect the efficiency of the water heater, the variations in
the energy requirement for the same water heating task from zone to zone, and
differences in the projected CPRS-5 greenhouse intensities (which vary from State to
State) and the default factors proposed for the BCA (which are the same in all States, so
the intensity of water heaters only vary with their solar zone).

Electricity-related emissions are also included for those gas and solar-gas water heaters
which use electricity for standby energy, combustion fans or pumps. It is apparent that
in all the cases shown, conventional electric water heaters give by far the highest
emissions, but the ranking and relative differences between the other options depends
on zone and State.

In summary:

•	 Whether using the method of analysis proposed for the BCA or a similar method
   based on projected emissions, water heaters divide into two discrete groups
   according to greenhouse gas-intensity;
•	 Conventional electric water heaters are in one group and all other water heaters in
   the other;
•	 The differences in greenhouse-intensity between these two groups are greater than
   the differences within them;
•	 On this basis, electric water heaters constitute the ‘greenhouse-intensive’ group, so
   the objective of phasing out greenhouse-intensive water heaters can be achieved by
   phasing out electric resistance water heaters; and
•	 The adoption of the same emissions-intensity metric as proposed in the BCA (100 g
   CO2-e/MJ) is justified for replacement water heaters.




                                                                                                    28
These conclusions are true at both the current levels of greenhouse gas intensity of the
electricity supply, and remain true for the levels of intensity projected until well past
2030 under the CPRS, except possibly in Tasmania.7

                                     Figure 11 g CO2-e/MJ of hot water, selected States and Zones
                    350


                    300


                    250
                                                                                                                                                                                                                                                                                                            NSW Z3 CPRS
    g CO2-e/MJ UE




                                                                                                                                                                                                                                                                                                            VIC Z4 CPRS
                    200
                                                                                                                                                                                                                                                                                                            Qld Z3 CPRS
                                                                                                                                                                                                                                                                                                            WA Z3 CPRS
                    150                                                                                                                                                                                                                                                                                     Z4 Default
                                                                                                                                                                                                                                                                                                            Z3 Default
                    100


                     50


                      0
                                                                                                                                                                                S-G Split, 2 Ind

                                                                                                                                                                                                   S-G Split, 2 Sel
                                                                                                                                                                  G IWH, 5.5*




                                                                                                                                                                                                                                                                  S-LPG Split, 2 Ind

                                                                                                                                                                                                                                                                                       S-LPG Split, 2 Sel
                                                                                                                                                                                                                                                  LPG IWH, 5.5*
                                                                                                                     S-E Split, 30 tube

                                                                                                                                          G SWH, 4*

                                                                                                                                                      G SWH, 5*
                                                                     S-E TS, 2 Dir

                                                                                     S-E TS, 2 Ind




                                                                                                                                                                                                                      LPG SWH, 4*

                                                                                                                                                                                                                                    LPG SWH, 5*
                                                                                                     S-E TS, 2 Sel
                                      Elec, 125

                                                  Elec 315 OP

                                                                HP
                          Elec, 50




Calculated for 40 MJ/day delivery. Z = solar zone. OP = off-peak. HP = heat pump. S-E = solar with
electric boost. S-G = solar with gas boost. S-LPG = solar with LPG boost. TS = thermosyphon. G SWH
= gas storage water heater. G IWH = gas instantaneous water heater. CPRS = emissions calculated using
CPRS-based projections (averaged over period 2011-2020). Default = emissions calculated using default
emission factors proposed for BCA.




7
  Even in hydro-dominated systems such as Tasmania, if future hydro development is constrained,
additional demand for electricity will be met by fossil-fuel based generators located either in Victoria or
in Tasmania itself, so the marginal intensity of adding or avoiding a kWh of future electricity use will be
higher than the historical average.



                                                                                                                                                                                                                                                                                                                   29

Influences on Water Heater Design and Selection
There are several programs and initiatives which try to influence water heater
purchasers towards certain types of water heaters – especially solar – or toward the
more energy-efficient models within types.

Energy Labelling

At present only gas water heaters carry energy labels to indicate their relative efficiency
on a scale of 1 to 6 stars. Electric water heaters do not carry labels, since there is a
reasonably stringent MEPS level and very few models significantly exceed that level.

If more stringent MEPS are implemented for gas water heaters, as is currently proposed,
all models on the market would rate 4 or 5 stars or more, so the effectiveness of labels
in promoting more efficient purchases than the (higher) minimum level may be limited.

For solar water heaters, the physical labelling of products is complicated by the fact that
systems generally consist of several components, and the system performance can only
be determined if the characteristics of each component are known. There would be very
little value to a user in a label attached to a solar collector which said: ‘performance
level X when installed with storage tank A and booster B, performance level Y when
installed with storage tank C and booster D…’ etc, with possibly dozens of
combinations (including options for continuous and off-peak electricity). However, it is
feasible to label the performance of entire systems in product literature or on websites,
and this is in effect the approach taken by the MRET scheme.

The Renewable Energy Target (RET) Scheme

The Mandatory Renewable Energy Target (MRET) scheme was introduced by the
Commonwealth Government in 2001 with the objective of increasing electricity
generation from renewable sources by an additional 9,500 GWh of renewable energy
per year by 2010.

In 2008 COAG agreed to support an extension of the scheme and an increase in the
targe (COAG 2008). In September 2009 the Australian Parliament passed the
Renewable Energy (Electricity) Amendment Act 2009. the purpose of which is:

       ‘… to support implementation of the Commonwealth Government’s
       commitment to expand its Mandatory Renewable Energy Target (MRET)
       scheme, which includes a legislated target of 9 500 gigawatt-hours (GWh) in
       2010 to a national Renewable Energy Target (RET) scheme which includes a
       target of 45 000 GWh in 2020. The expanded scheme will deliver the
       Government’s commitment that the equivalent of at least 20 per cent of
       Australia’s electricity supply is generated from renewable sources by 2020.

       The national RET scheme is being designed in cooperation with the States and
       Territories through the Council of Australian Governments (COAG) and brings



                                                                                       30
         the existing MRET and existing state-based targets into a single national
         scheme.’ (Commentary on the Exposure Draft, DCC 2008).

The Act gives effect to the expanded RET, which progressively increases to 45,000
GWh per annum in 2020 and remains at that level until 2030. The Office of the
Renewable Energy Regulator (ORER), which is a statutory agency within the
Department of Climate Change portfolio, administers the Act and its regulations. The
Act imposes obligations on wholesale purchasers and large users of electricity to
acquire and submit annually a number of Renewable Electricity Certificates (RECs)
corresponding to the ratio of the current annual target to total electricity purchases. For
example, if the ‘Renewable Power Percentage’ is 1.6%, a liable party purchasing 20,000
GWh of electricity would need to acquit 320,000 RECs. Each REC represents 1 MWh
of ‘eligible renewable electricity’.

At present, nearly 8,000 solar-electric, solar-gas and heat pump water heater model
configurations – combinations of tank sizes, collector types and collector numbers – are
registered with ORER as eligible to create RECs.8 ORER allocates each model
configuration a number of RECs in each of the 4 solar zones defined in AS/NZS 4234,
in accordance with published rules (ORER 2008). In general, the number of RECs that
a given model can create are highest for Zone 2, followed by Zones 1 and 3 (which are
equivalent in terms of the number of RECs created) and then Zone 4. The average
number of RECs per solar or heat pump water heater installation is currently around 30.

RECs need to be registered with ORER before they can be validly sold to parties with
liabilities under the Act, who then surrender the RECs to the regulator at the end of each
compliance year. The process of registration requires the seller and the buyer of the
water heater to agree on the assignment of the RECs, and to lodge the registration forms
with ORER or a registered agent (which includes most water heater suppliers). The
agent may offer the owner of the water heater a price reduction on the purchase, an up-
front cash payment or a delayed cash payment after the RECs are registered.

There is no time limit between the installation of the water heater and the registration of
the RECs, and there may be a further period from registration to surrender. The volume
of RECs created from solar and heat pump water heaters can lag the rate of installation
by periods of years, due to both the administrative steps and the incentive for agents and
brokers to withhold RECs from the market until demand increases the price.

This appears to have been the case for some years (see Table 7). Between 2002 and
2007, the number of RECs registered from solar and heat pump water heater sales was
less than 60% of the total that could have been created, if every domestic solar or heat
pump installation had led to the registration of 30 RECs.9 This was partly corrected
during 2008, when it seems that about as many RECs were registered as would have
been created from water heaters installed. At the time of writing about 1.65 million
RECs had already been registered for water heaters installed in 2009, which represent
between 50,000 and 60,000 domestic solar or heat pump water heaters, about the
number that would be expected by this stage of 2009. This suggests that the rate of

8
  Many of the listed configurations will have no sales at all in a given year, but need to be registered so

that RECs can legally be created if there are sales. 

9
  This does not take into account commercial duty heat pump installations operations, many of which can 

each create hundreds of RECs under the ORER guidelines. 



                                                                                                      31
      REC creation from solar water heaters has now caught up with the rate of installation,
      but there is still an ‘overhang’ of over 3.4 million deemed solar RECs from earlier
      years.

      The value of RECs has become an important factor in the pricing and competitive
      position of solar and heat pump water heaters, in both the new building and replacement
      markets. The number of RECs that could be created from water heaters in future, and
      the possible impact on the value of RECs, is discussed in a later section.

      Table 7 Estimated potential and actual RECs from ‘renewable’ water heaters
                            2002      2003      2004      2005       2006      2007      2008           2002-2008
Estimated Sales (a)        31,667    35,000    40,000    45,000    56,667    68,333    86,667
Corresponding RECS(a)     950,000 1,050,000 1,200,000 1,350,000 1,700,000 2,050,000 2,600,000   10,900,000
SWH RECs added to
register (b)                525,137 705,472 812,722 997,641 1,009,626 728,510 2,698,978           7,478,086
          (a) Estimated by GWA from Carbon Market Economics RECS review; assumes 30 RECs per SWH.10
                                    (b) Estimated by GWA from REC registry


      Rebates and Incentives

      In addition to the RECs value, which is available for every solar and heat pump water
      heater installation in Australia (whether in a new or existing home), some jurisdictions
      also offer rebates or other assistance to purchasers. These are usually only available for
      the replacement of existing electric storage water heater (Table 8). Some States also
      offer assistance to purchasers of conventional gas water heaters, if replacing an existing
      electric storage water heater.

      Commonwealth

      In July 2007 the Commonwealth Government began to offer means-tested rebates of
      $1,000 to householders replacing electric hot water systems in existing privately
      owned homes. In February 2009 the Government introduced its Energy Efficient
      Homes package11, which offers either free ceiling insulation up to a value of $1600
      or a rebate of $1600 for a solar water heater or $1,000 for a heat pump water heater,
      if replacing an electric water heater, payable after installation.12 The water heater
      rebate is only available to homeowners who have not already accessed the insulation
      benefit. The Energy Efficient Homes package is due to run to June 2012.

      The 30% of existing houses which lack ceiling insulation and the 52% which have
      electric water heaters (ABS 4602.0) are eligible. It was reported that in the first 6
      months of the program there were over 56,000 applications for water heater rebates, and
      over 107,000 for insulation rebates.13



      10
         http://www.climatechange.gov.au/renewabletarget/consultation/pubs/038greenenergytrading.pdf
      11
         http://www.environment.gov.au/energyefficiency/index.html
      12
         The heat pump rebate was reduced from $1,600 to $1,000 on 4 September 2009.
      13
         Advice from DSE Victoria and
      http://www.economicstimulusplan.gov.au/infocus/pages/if_300709_rheem.aspx



                                                                                                       32

The predominance of insulation takeups may be explained by the fact that the insulation
offer will cover all the costs in the vast majority of cases and will not require any
payment from the householder, while the water heater rebate is only paid afterwards and
may still not cover all out-of-pocket costs. Also, the water heater rebate is generally
only worth accessing when the existing electric water heater has failed or is near failure,
while the insulation option can be taken at any time.

Table 8 Rebates for purchase of solar, heat pump and gas water heaters, 2009
Jurisdiction            Duration               Payment           Conditions (a)
Commonwealth            July 2007– Feb         $1000             Household income <$100k
                        2009
Commonwealth            Feb 2009 –Jun 2012 $1600                 >=20 RECs (b)
NSW – solar             Since Oct 2007         $600-1200 (k) Solar or HP to replacing EWH
NSW – gas               Since Oct 2007         $300              5* Gas to replace EWH
Victoria - metro        Since Oct 2007 (b)     $900-1500         Change from gas also eligible (c)
Victoria - regional     Since June 2008 (b) $400-1600            Restricted to HH not taking CW rebate (d)
Victoria – gas          Since Oct 2007         $400-700 (i)      5* gas to replace EWH (e)
Queensland – solar No solar rebates(f)         NA                NA
Queensland – gas        Current                $300              5* gas to replace EWH
SA – solar              Current                $500              Available to pensioners
SA – gas                Current                $500-700          5* gas to replace EWH (e)
WA – solar              June 2005-June         $500-700          For solar-gas/LPG only; new homes also
                        2009
Tasmania – solar        No solar rebates(g)    NA                NA
NT – solar              No solar rebates(h)    NA                NA
ACT – solar or gas Current                     $500              Must also spend $1,000 on other measures
(a) Solar (any boost) or heat pump to replace existing electric water heater, unless otherwise stated. (b)
HH have choice of taking free insulation (up to value $1600) or WH rebate, but not both. (c) Rebate only
paid for installation of solar-gas. (d) From May 2009, only HH which have taken CW insulation rebate
and so are no longer eligible for CW water heater rebate. (e) Higher payment for concession card
holders. (f) Brisbane City Council offers $400 rebates. State Government has announced program to
package value of CW rebates and RECs and cap additional costs to buyers, commencing July 2009. (g)
Hobart City Council offers rebates. (h) Offers to purchase RECS at fixed price. (i) Plus $300 for
installation in some apartment situations. (k) Payment based on number of RECs.



NSW

The NSW rebate scheme is available to householders who replace an existing electric
water heater. The scheme paid nearly 16,600 rebates over the 15 months to December
2008 (Table 9). It is notable that solar-gas had the least uptake despite the highest
rebate offer. At least 4242 of the claiming households selected a water heater using gas
(ie the sum of gas and solar-gas claimants) and of these over 90% opted for
conventional gas and less than 10% for solar–gas. Only 4% of the solar water heaters
rebated used gas boosting – nearly 96% used electricity.




                                                                                                    33
               Table 9 NSW Rebate Scheme – Takeups Oct 2007 to Dec 2008
             WH type             Number Avg Cap (a) Avg Rebate Avg Net Avg RECs
             Gas - Inst               3282          $1,783        $300      $1,483   NA
             Gas - Storage             538          $1,862        $300      $1,562   NA
             Heat pump                2845          $3,558        $811      $2,746    30
             Solar-elec               9512          $4,017        $852      $3,166    33
             Solar-gas                 422          $5,248        $961      $4,288    38
                                     16599          $3,458        $721      $2,738    32
      GWA analysis of raw data supplied by NSW Department of Environment and Climate Change (a)

                               Includes effect of RECS value, if applicable 


Victoria

The Victorian rebate scheme is available to householders who replace an existing
electric or gas water heater.14 Victoria’s large reticulated natural gas network has
resulted in the majority of homes having a gas water heater rather than electric, and
homes with gas water heaters are not eligible for the Commonwealth solar hot water
rebate, so this limits the scope for takeup. The scheme paid 17,500 rebates from June
2008, when the more generous regional rebate program started, to March 2009. Table
10 analyses the nearly 7,500 rebates paid to March 2009.

In May 2009 the eligibility criteria were changed to prevent ‘double-dipping’ with the
Commonwealth scheme. Rebates for replacement of an electric water heater with solar
or heat pump are now restricted to households that have taken the Commonwealth
insulation rebate, and so are permanently excluded from taking the water heater rebate.
Only a minority of electric water heater replacements in Victoria are likely to meet this
criterion, given the high ratio of insulated homes, so it will mean a significant reduction
in Victorian State rebate payments for solar. However, rebates will continue for gas to
solar-gas and other fuels (eg oil, LPG) to solar, which are not eligible for
Commonwealth rebates.

          Table 10 Victorian Rebate Scheme – Takeups June 2008 to March 2009
 Scheme        WH type      Number Avg Cap $(a) RECs $(b)            Rebate $       Net $ Avg RECS
 Regional    Heat pump          3405         $3,924        $1,044      $2,223        $696           28
 Regional     Solar-elec        1258         $5,289        $1,035      $2,235      $2,039           27
 Regional      Solar-gas        2230         $5,482        $1,111      $2,305      $2,058           28
 Metro         Solar-gas          594        $6,096        $1,081      $1,347      $3,736           35
 Vic Total                      7487         $4,790        $1,065      $2,180      $1,568           29
GWA analysis of raw data supplied by Sustainability Victoria (a) Before RECs value deducted (b) RECS
value passed on the purchaser in the purchase transaction (some values reported, some estimated by SV).

Queensland

On 1 July 2009, the Queensland Government commenced the Queensland Solar Hot
Water Program, a scheme which will ‘accelerate the state-wide installation of up to 200
000 solar and heat pump hot water systems over 3 years’.15


14
     Details are at http://www.resourcesmart.vic.gov.au/for_households/rebates.html
15
     http://www.cleanenergy.qld.gov.au/


                                                                                                  34
        ‘Under the Program, eligible participants will have access to a standard, fully
        installed and warranted, solar or heat pump hot water system for a payment of
        $100 for eligible pensioners and low income earners, and $500 for other eligible
        participants.

        The Queensland Solar Hot Water Program is not a rebate scheme. Successful
        applicants will not be reimbursed for purchasing a system.’16

The Government has called for tenders from companies to supply and install solar and
heat pump water heaters to the scheme. The Government plans to capture the value of
RECs and the Commonwealth $1600 payment, so only those households will be eligible
which meet the Commonwealth criteria, and which have not applied for a home
insulation grant.

As the Queensland government has also legislated to require the replacement of failing
electric water heaters with solar, heat pump or gas water heaters (see later section), the
proposed program in effect limits the compliance cost to $500 if the householder opts
for solar or heat pump, or subsidises the compliance cost by $300, if the householder
opts for gas (assuming the current gas rebate is continued).

Other Jurisdictions

Of the other jurisdictions, WA offers a rebate for solar, and only for solar-gas or solar-
LPG, not solar-electric or heat pump. The ACT offers a $500 rebate for solar or heat
pump, but only if the householder also spends at least $1,000 on other energy efficiency
measures as well. SA offers a rebate of $500 for solar or heat pump but only to low
income pensioners who are owner occupiers.

Other means of support

Solar water heaters also receive indirect support from a number of ‘white certificate’
schemes in which electricity retailers in NSW, Victoria and SA are required to
participate. The Victorian Energy Efficiency Target (VEET) scheme allows the creation
of certificates from replacing working electric water heaters with solar-electric, solar-
gas or solar-LPG, replacing working gas with solar-gas, or installing solar pre-heaters
on any water heater type.17

The South Australian Residential Energy Efficiency Scheme (REES) allows certificates
to be created from the installation of a more efficient water heater than required under
the new water heater standards for South Australia.18 The number of certificates created
from solar water heater installations or the average value of purchase support is not
known. The NSW Energy Saving Scheme (ESS) does not appear to allow certificates to
be created from the installation of solar water heaters.19

16

http://www.cleanenergy.qld.gov.au/zone_files/Demand_side/090424_shwp_consumer_fact_sheet_final.p
df
17
   http://www.esc.vic.gov.au/NR/rdonlyres/E2480219-86C0-4B11-9942­
20C6D63BD184/0/PRCExplanatoryNoteoncreatingVEECSfromprescribedactivitiesv1220090306.pdf
18
   http://www.dtei.sa.gov.au/energy/government_programs/rees
19
   http://www.ess.nsw.gov.au/documents/syn4.asp


                                                                                           35
Nearly 125,000 VEET certificates (VEECS) were created between January 2009 and
October 2009 from replacing water heaters. About 3,800 of these were solar
installations.20 The average value of support per installation was between $320 (at a
VEEC market price of $10) and $480 (at a price of $15), less whatever share of value
was retained by the electricity utility or other intermediaries.

Price and Value of RECs

It is assumed that the full market value of RECs will not be passed on to the purchaser
of a solar or heat pump water heater or the buyer of a home where such a water heater is
installed. In many (probably most) transactions where a water heater is replaced the
buyer assigns the rights to the RECs to the supplier in return for an up-front discount,
rather than going to the trouble of retaining the RECs to sell them to a broker or via the
ORER registry. The water heater supplier will naturally factor in the RECs price risk
and transaction costs into the total package price, even if the purchaser is given a
nominal discount that seems to reflect the full current market value of the RECs, as is
implied by the ‘REC value calculator’ which many suppliers have on their websites.

The Victorian solar water heater rebate scheme collects data on the stated value of
RECs in every transaction which receives a government rebate. The average REC value
in each transaction over the full period of records (to the end of 2008) was $37.40. The
average market price of RECs over the same period was $49.30. This implies that about
three quarters of the nominal RECs value reaches replacement water heater purchasers,
and the rest is retained by water heater suppliers, brokers, dealers and others.




20
     DSE, personal communication October 2009


                                                                                     36
Mandatory Requirements

New Homes

Five States and the ACT have requirements for the types of water heaters that may be
installed in new dwellings (Appendix 5). Queensland, SA and WA have all adopted a
prescriptive approach, which excludes electric water heaters in areas where natural gas
is available and in SA excludes them state wide, while the approaches in Victoria and
NSW are fundamentally different.

A common set of requirements for water heaters in Class 1 house is currently being
considered for inclusion in the BCA (Appendix 5). The following water heaters would
be listed as ‘acceptable construction practices’:

•	 A solar or heat pump water heater which achieves a minimum number of RECs or a
   minimum solar contribution in accordance with AS/NZS 4234, with the number of
   RECs and solar contribution varying with the number of bedrooms;

•	 A gas water heater rated at not less than 5 stars in accordance with AS4553;

An electric resistance water heater is only acceptable practice if (a) the electricity is
generated from a ‘renewable energy source’, or (b) the water heater serves a dwelling of
not more than one bedroom; or (c) the water heater is a supplementary water heater
where a complying water heater is also installed. In cases (b) and (c), the electric
resistance heater must be either of the instantaneous type, or if of the storage type must
have a hot water delivery capacity of not more than 50 litres.

Existing Homes

South Australia and Queensland have adopted requirements for water heaters replacing
existing water heaters. Requirements for all water heater installations were proposed in
the ACT Legislative Assembly, however the Bill passed with amendments that removed
the provisions for replacement water heaters.

South Australia

In July 2008 South Australia introduced rules for the replacement of existing water
heaters. From 1 July 2009 most replacements need to be low emission types such as
heat pump or solar (meeting minimum RECs requirements) or high efficiency (5* or
better) gas. Conventional electric water heaters can now only be installed for
Metropolitan/near Adelaide homes where the system being replaced is located inside the
dwelling or on the roof space, or if outside is within 3 metres of neighbours’ windows
or doors.

Conventional electric water heaters are allowed as replacements for electric water
heaters in ‘Regional’ and ‘Remote” houses, in multi-storey flats and in dwellings owned
by SA Housing Trust (there is a published list of postcodes classified as ‘Metropolitan’,
‘Regional’ and ‘Remote’).


                                                                                     37
A further element of the regulations is that all showers connected to the replacement
water heater must have a 3-star WELS rated shower head or a flow restrictor (unless the
system is gravity-fed rather than mains pressure).

Queensland

The Queensland Plumbing and Wastewater Code requires provides for ‘hot water
systems with a low greenhouse gas emissions impact’ to be installed ‘at replacement of
existing hot water systems for Class 1 buildings from 1 January 2010’ (QPW 2009).

The application of the Code to replacement water heaters is restricted to buildings
where ‘the distributor advises the hot water system installer that natural reticulated gas
can be supplied to the property’s gas meter at no cost to the building owner.’

If these conditions are satisfied, the ‘acceptable solutions’ for replacement systems,
from 1 January 2010, are solar, heat pump (no minimum RECs requirement) or a gas
hot water system with an energy rating of at least five stars. It is permissible to install a
temporary water heater for up to 60 days, to allow an interim electric water heater or a
gas water heater operating from a compressed natural gas bottle to be used until the gas
connection is completed.

In 2007 the Queensland Government announced that the measure would eventually be
extended to areas without gas reticulation (Qld 2007).

Australian Capital Territory

The ACT Water and Sewerage (Energy Efficient Hot-Water Systems) Legislation
Amendment Bill 2009 was to require persons replacing an existing water heater after
January 2010 to use

•	 a ‘compliant’ gas hot-water system (ie one rated 5 stars or more);
•	 a ‘compliant’ heat pump or solar hot-water system (ie meeting the same
   performance criteria as for new homes in the ACT, as indicated in Appendix 5); or
•	 a hot-water system determined by the Minister.
Water heaters that use solid fuel or which are located ‘in an area of non-urban land’
were to be exempt.

Electric water heaters may be installed in areas ‘without access to the gas distribution
network’, provided the electric water heater:

•	 has a volume of not more than 80 litres; and
•	 is insulated with thermal insulation material that has an R-value of at least R1 (ie
   has an added thermal blanket); and
•	 is the only hot-water system for the building;

As in SA, a further element of the regulations was to be that showers connected to the
water heater must have a flow rate of no greater than 9 litres/min (ie 3-star WELS
rating).


                                                                                         38
Government Policy on ‘Greenhouse-intensive’ water heaters

In December 2008 the Ministerial Council on Energy ‘agreed to a number of important
initiatives under the National Framework for Energy Efficiency including:…a National
Hot Water Strategic Framework’ (MCE 2008).

       ‘The framework provides for the reduction of greenhouse gas emissions
       associated with water heating, through the specification of minimum energy
       performance standards for water heaters and the phasing out of conventional
       electric resistance water heaters (except where the emissions intensity of the
       public electricity supply is low), together with a range of information and
       education measures.

       This initiative will deliver lifetime cost savings to households at times of rising
       energy costs as well as significant CO2 reductions.

       The phase-out of conventional electric resistance water heaters is intended to
       cover all new homes and established homes in gas reticulated areas from 2010,
       and new flats and apartments in gas reticulated areas and established homes in
       gas non-reticulated areas from 2012.

       Both the HVAC and the Hot Water initiatives will be subject to full stakeholder
       consultation and appropriate Regulatory Impact Statements’ (MCE 2008).

In addition, the National Hot Water Strategic Framework allows for the following:

       ‘…individual jurisdictions may opt to bring forward the program including
       introducing more stringent requirements.’ (MCE 2008)

In April 2009 the Council of Australian Governments (COAG) ‘reaffirmed its
commitment to introducing a comprehensive National Strategy for Energy Efficiency
(the Strategy) to help households and businesses reduce their energy costs, improve the
productivity of our economy and reduce the cost of greenhouse gas abatement under the
Carbon Pollution Reduction Scheme (CPRS)’ (COAG 2009). The National Strategy on
Energy Efficiency published in July 2009 states (among other things):

       ‘Inefficient and greenhouse-intensive hot water systems will also be phased-out
       through a mix of regulatory measures, incentives and industry development
       elements. Although the market penetration of electric resistance water heaters is
       falling, roughly half of Australian households still possess this type of hot water
       system. This phase-out will greatly reduce the total electricity used and decrease
       households’ water heating costs’ (COAG 2009a).

The ‘Key Elements’ of this measure are:

   •	 ‘A set of measures (including energy efficiency standards) to phase-out
      conventional electric resistance water heaters (except where the greenhouse
      intensity of the public electricity supply is low) and increase efficiency of other
      types.



                                                                                        39
       •	 Appropriate regulatory mechanisms in each jurisdiction, (for example plumbing
          regulations in conjunction with the National Construction Code when
          developed), will be used to prevent installation of high emission electric
          systems.
       •	 MEPS to regulate remaining technologies.
       •	 Education and industry development measures.
       •	 Jurisdictions to work to better integrate, simplify and reduce red tape associated
          with incentive schemes, such as by offering rebates as point of sale discounts
          and offer one-stop shop approach for rebate applications.
       •	 Mandatory labelling of gas, solar and heat pump water heaters will also be
          introduced.’

The effect of the coverage of the policy framework agreed to by MCE in December
2008 and reinforced by COAG in July 2009 is that the approach adopted in Tasmania
can be designed for particular circumstances applying in that State

The Wilkins Review identified the ‘Phase-out of Electric Hot Water Systems’ as a
program that is complementary to the Emissions Trading Scheme (ie the CPRS) and
should be retained, as part of the National Framework for Energy Efficiency (Wilkins
2008, p58).

The Government response to the Review listed 15 programs that are ‘complementary to
the CPRS and to continue’21 One of these is the ‘Hot Water System Phase-out’ which
is ‘superseded by the National Strategy on Energy Efficiency measures included in the
2009-10 Budget.’




21
     http://www.environment.gov.au/minister/wong/2009/wilkinsresponse.html


                                                                                        40
The Problem
Of all the fixed equipment installed in a house, the water heater usually represents the
largest single user of energy as well as the largest single contributor to greenhouse gas
emissions. Over half the water heaters in use are electric storage water heaters, and
each of these has, on average, about three times the greenhouse gas emissions of the
alternative means of providing hot water (gas, LPG, solar or heat pump).

The present pattern of water heater choice results in outcomes with significantly higher
costs to the community and higher greenhouse gas emissions than if consumers selected
the options with lowest lifetime costs.22 Some of the reason for this behaviour is
rational, in that many consumers place a very high value on the continuing availability
of hot water, and this limits the time available for research, selection and installation,
and would select the current type and/or the cheapest capital option even if they knew it
had higher lifetime costs.

However, market failure also contributes. The market is characterised by:

•	 Information failure: Reliable comparative information on the running costs or
   greenhouse gas emissions (and hence exposure to emissions-related energy prices)
   of alternative water heater types is limited to natural gas water heaters only.
   Determining the relative merits of water heater types is complex. It requires
   comparison of one-off capital and installation costs with energy savings (and
   greenhouse emissions) over time for each type of water heater and comparison with
   alternative investments. (It is worth noting that replacement of an electric storage
   water heater with a more energy efficient technology often compares favourably
   with alternative investments, such as faster repayment of a mortgage. This requires
   some understanding of financial accounting and discount rates. Difficulties may be
   compounded by the rushed conditions under which replacement water heaters are
   often purchased

•	 Principal-agent: When a water heater fails only 40% of householders are actively
   involved in selecting the replacement. About 20% have the decision made by the
   owner of a rental property and in the other 40% of cases they effectively delegate
   the decision to a plumber or other intermediary. Householders also discount the
   value of energy savings because they may not be in the dwelling long enough to
   recover the costs of a higher capital option (ie they act as the ‘agent’ for the
   subsequent occupant, who will capture most of the benefit). This sets water heaters
   apart from plug-in appliances, where the occupants are directly engaged in product
   selection, and will move the appliances with them and so capture the lifetime
   benefits. In addition, tax provisions that encourage like with like replacement may
   contribute to distortions in the market.

Consequently there is a tendency among both engaged buyers and intermediaries to
undervalue future energy costs and to replace the water heater with one of the same
type.

22
  This is indicated by the differences between the ‘Perfect Market’ Scenario 0 and the ‘No Regulations’
Scenario 1 in Table 14.


                                                                                                   41
While it is not possible to be definitive about the cause of what appear to be poor
choices in relation to replacement water heaters, the persistence and size of the
inefficiencies associated with water heater choice leads us to believe that market failure
is pervasive and relatively significant.

The disadvantage to occupants is now likely to rise significantly due to the effects of the
proposed Carbon Pollution Reduction Scheme (CPRS), because the requirements to
acquit permits to emit greenhouse gases will impact most heavily on the price of
electricity. Treasury (2008) projects that the CPRS will add $4 to $5 per week to the
average household electricity bill. Given that water heating accounts for about a quarter
of household electricity use (Table 2) this implies that electric water heating costs could
increase by $520 to $650 over the typical 10 year service life of an electric water heater
– nearly as much as the initial capital cost.

The publicity surrounding the increase in energy (especially electricity) prices from the
introduction of the CPRS should increase consumer awareness of energy prices and so
provide incentives for investment in more efficient technology. However, to the extent
that it remains difficult to obtain information and makes comparison of water heating
technology, consumers may continue to make poor choices.

The quarter of householders that live in rented accommodation are not in a position to
respond to these expected price changes through technological changes. Of the three
quarters that are theoretically in a position to respond, and consider a form of water
heater other than the type already installed, few are likely to be aware of the projected
energy consumption and costs, and so the great majority will make sub-optimal choices.

For new dwellings, these market failures have been addressed by a range of State
regulations which either prohibit or constrain the installation of electric water heaters.
These may be complemented by rules proposed for the Building Code of Australia, if
adopted.

However, replacement sales make up about 80% of the water heater market, so are not
affected by the rules for new construction. The growing reach of the gas reticulation
system and generous incentives for the purchase of solar and heat pump water heaters
have reduced the rate of electric water heater sales, but in the replacement market,
electric storage water heater continue to account for over a third of replacement sales.




                                                                                        42
             2. Objectives of the Regulations 

The overarching objective of the proposal is to contribute to Australia meeting its
obligations under the Kyoto Protocol and any subsequent agreements in the most
efficient way, by:

•	 bringing about reductions in greenhouse gas emissions from water heating in
   existing houses below what they are otherwise projected to be;

•	 reducing the cost of abatement; and

•   helping households adjust to the impacts of an emissions trading scheme.

The specific objectives of the proposed regulation are to:

•	 Provide for a streamlined and consistent national approach for performance
   standards on the greenhouse-intensity of water heaters;

•	 Provide a net benefit to the community; and

•	 Reduce the greenhouse-intensity of water heaters without compromising appliance
   quality and functionality.




                                                                                      43
                             3. Policy Options 

The Proposed Regulation
The proposal is to regulate against the installation of greenhouse-intensive water heaters
in existing Class 1 buildings (ie houses). The regulations may take effect at different
times in different regions or parts of States, but part of the objective is to co-ordinate the
implementation as much as possible to minimise the adjustment costs for industry and
householders.

The types of water heaters permitted in existing houses under the proposed regulations
would be similar to those permitted in new houses under rules already in force in
several jurisdictions.

Options considered for implementation of the proposed regulations include:

•	 A two stage process where:
          o	 Implementation of Stage 1 (2010) occurs on a state by state basis through
             existing State and Territory plumbing regulations; and

           o	 Implementation of Stage 2 (2012) occur through model regulation linked
              to one of the mechanisms outlined below

•	 The Plumbing Code of Australia (PCA) which is in some respects the counterpart of
   the Building Code of Australia BCA. However, the PCA does not have full national
   coverage, as the plumbing regulators in WA and the NT have not adopted it or
   committed to adopting it;

•	 A National Construction Code, if developed in time. In April 2009 COAG
   ‘…endorsed a series of reforms, recommended by the Business Regulation and
   Competition Working Group (BRCWG)…[including]…a further step towards the
   development of a National Construction Code, which will consolidate building,
   plumbing, electrical and telecommunications regulations, through the release of a
   consultation RIS.’

•	 Special State and Territory regulations, with identical or consistent provisions;

•	 Special national regulations; or

•	 Application of the existing energy labelling and MEPS regulations, to prohibit the
   sale of electric resistance storage water heaters (or of water heaters larger than the
   maximum volume that may be permitted in certain situations).

While the form of the regulation is still open to some extent, the intent is to prevent the
installation of electric storage water heaters in existing dwellings, except in situations
where other options are unavailable or prohibitively expensive.




                                                                                         44
There is a wide range of cost-effective low-intensity water heater types on the market,
so it is not necessary to wait for the introduction of new technology. The minimum lead
time for implementation is therefore related to non-technical issues, such as:

•	 The time required for development and implementation of the necessary regulations;

•	 The time required to make stakeholders such as water heater manufacturers,
   importers and suppliers, plumbers and other installers aware of the regulations.

•	 The time required to integrate the proposed measures with other programs with
   similar or related objectives, such as rebates and incentives.

It is considered that the minimum lead time is about one year, so the earliest practical
implementation date is late 2010. This is consistent with Commonwealth Government,
MCE and COAG policy, which envisages a phased implementation in which a portion
of replacement cases would become subject to the regulation in 2010, and all
replacements would be affected from 2012. Table 11 summarises the current policy
positions regarding water heater requirements for various building classes. These are
subject to review and further consideration.

           Table 11 Target dates for coverage, New and Existing Buildings
Category                   Water heaters in new buildings         WH replacements in existing buildings
                           In gas areas        In non-gas areas In gas areas           In non-gas areas
Class 1 – separate WH 2010 (BCA)(a)            2010 (BCA)(a)      2010                 2012
Class 2 – separate WH 2012                     2012-2015          2018-2020 (b)        2018-2020 (b)
Class 2 – central WH       2012                2012-2015          2018-2020 (b)        2018-2020 (b)
(a) Separate consultation RIS (GWA 2009) concluded that there was no benefit in delaying the coverage
to areas without reticulated gas. All other dates from National Hot Water Strategic Framework, 12
December 2008. (b) Indicative dates; feasibility to bring forward to be investigated

There are both costs and benefits in staged implementation. The potential benefits are:

•	 The opportunity to monitor the impact of the measure on the first group/s and refine
   or modify the application to later group/s;
•	 Allowing more time to inform stakeholders and householders;
•	 Where some groups face higher compliance costs, deferring the imposition of those
   costs;
•	 Allowing time for the market to adjust by introducing new products (eg smaller heat
   pumps).

On the other hand the potential costs are, compared with a rapid phase-out, are:

•	 Locking in higher greenhouse gas emissions for the life of the water heaters
   installed during the first phase, and/or in regions where application of the measure is
   deferred;
•	 Locking in higher water heating service costs for some householders who replace a
   water heater during the first phase, and/or in regions where application of the
   measure is deferred;;
•	 The costs of developing, publicising, administering and verifying compliance with a
   screening process to enable householders, plumbers and other stakeholders to


                                                                                                  45
   determine whether the measure applies to them. This administrative infrastructure
   would have a life of only 2 years, after which it would be necessary to remind
   stakeholders that it no longer applied.

The proposal provides a basis for jurisdictions to harmonise their requirements and the
following benefits will be gained:

•	 water heater manufacturers and importers can plan for a nationally co-ordinated
   approach and minimise their transition costs in terms of product types and model
   range;
•	 water heater wholesalers and retailers will be able to rationalise their stock holdings
   and distributions;
•	 plumbers and installers will be faced with the same rules irrespective of their areas
   of operation, so reducing the risk of non-compliance;
•	 supplementary policies (e.g. for financing) can be developed nationally rather than
   by jurisdiction;
•	 jurisdictional administrative arrangements can be streamlined; and
•	 the costs to consumers will be lower to the extent that a share of the benefits of
   lower supplier, distributor and installer costs are passed on to them.


Gas availability and other possible screening criteria

The availability of mains natural gas is proposed as the main criterion for defining the
homes where the measure is to apply from 2010. Queensland has adopted this criterion
(from January 2010), while SA has adopted (from July 2009) a set of criteria based on
both gas availability and other factors, applied geographically by postcode. The ACT
had proposed to adopt this criterion from January 2010 – although the great majority of
ACT homes have access to gas, so would be immediately covered.

The availability of a reticulated natural gas supply means that a household prevented by
the measure from installing an electric resistance water heater would have at least one
low-cost option for compliance. It does not necessarily impose an obligation to use
natural gas. If householders in gas-available areas wished to use heat pump, solar-gas,
or solar-electric or LPG water heaters they would be free to do so. Apart from capital
and energy costs, factors such the availability of rebates would no doubt influence
householder choices.

If ‘gas availability’ becomes a formal criterion, it will be necessary to define the term
with regard to it space, time and possibly cost (as Queensland has done), and there
could be some scope for confusion and requests for exemption.

If the rule were ‘natural gas to be available at the boundary of the site’ there could still
be many cases where the building is a long way from the boundary, or where the site is
rocky or steep and connection would be prohibitively expensive. Gas may not actually
be available at the time a water heater fails, but may be potentially available within a
short period if requested from the gas supplier. For this reason Queensland allows for
use of a temporary water heater for up to 60 days. Each State and Territory would need
to develop rules and procedures to handle these situations.


                                                                                        46
Once the same requirements apply irrespective of whether natural gas is available or
not, it will be up to home owners to select the optimum response from the permitted
options, according to their own investigations and assessments of the energy sources
available. In many cases, the most cost-effective compliance option will be natural gas
– especially if it is already connected to the dwellings – so a home owner or plumber
has every incentive to verify whether gas is available or to negotiate for its connection.

For the period that different compliance obligations apply, the State and Territory
screening criteria could differentiate households as follows (the letters refer to the
overlapping sets in Figure 12):

   a.	 Households living in an area where the cost of compliance is likely to be low,
       because natural gas is available, and/or there is a range of water heater suppliers
       and installers.

       It would be up to each State or territory to designate these areas, based on their
       own criteria, but the areas need to be conveyed to the public in a way that is
       easily accessible and verifiable, such as via postcode or local government area
       (LGA). The only piece of information required to begin an inquiry about
       whether a householder meets the screening criteria is “where do you live?”

   b.	 Households living in a house where the cost of compliance is likely to be low,
       because natural gas is already connected (although the failed water heater may
       not be gas). The only piece of information required to begin an inquiry about
       whether a householder meets the screening criteria is “do you get a bill for
       natural gas?”

   c.	 Both (a) and (b) apply. In most cases households meeting (b) would be
       contained within the group of households meeting (a), but it would be possible
       to envisage circumstances where this is not so. To determine whether a
       householder meets the criteria it would be necessary to ask both “where do you
       live” and “do you get a bill for natural gas?”

                      Figure 12 Set diagram of screening criteria




                                                          c
                              a         b                 All homes




                                                                                         47
48

Water Heater Industry Proposal (WHIP)

The two largest suppliers of water heaters, Rheem and Dux, have proposed a set of
measures covering both new and replacement water heaters.23 These are:

2010
   1.	 Ongoing Inclusion of renewable water heaters in RET scheme
   2.	 Minimum 4 Star MEPS for Gas Water Heaters throughout Australia
   3.	 Ban on Electric water heaters in Class 1 homes in gas reticulated areas

2012
   4.	 Mandatory renewables in all class 1 New Homes
   5.	 Mandatory renewables as replacements in Class 1 rental homes
   6.	 $1000 Means Tested solar conversion incentive for non reticulated area electric
       replacements

Proposals 1, 2 and 4 above are outside the scope of this RIS, because they are not
directly relevant to the proposed measure. (In fact the continuing eligibility of
renewable water heaters to create RECs in the RET scheme has since been confirmed,
and it is understood that MCE is considering a proposal to apply MEPS at the 4 star
level for gas water heaters).

Proposal 3 matches Government policy, and is part of all the scenarios considered in
this RIS. Proposal 5 is also modelled, and the issues related to designating the
additional eligibility criterion – whether a property is a ‘rental home’ – are also
considered.

Proposal 6 bears on the possible supplementary policy mechanisms which may
accompany the proposed measure, which are outside the scope of this RIS.

Use of Electric Resistance Water Heaters in Certain Situations

Government policy envisages the continuing use of electric water heaters ‘where the
greenhouse intensity of the public electricity supply is low’ (COAG 2009a).

General Exemptions

The measure is only intended to apply to water heater replacements in Class 1 buildings
(detached and attached houses). It would not affect replacements in Class 2 buildings
(apartments) or commercial buildings, where electric resistance water heaters could
continue to be installed.

A building, district or region not connected to the main grid may get its electricity
supply from a renewable energy source such as wind or hydro power. In these cases an
electric resistance water heater would meet a 100 g CO2-e/MJ performance requirement
(if adopted). However, this option should only be available where the Class 1 building
has its own electricity supply system, or is connected to a local supply grid that has a

23
     An Australian Water Heater Industry Plan, Interim draft report, October 2008


                                                                                    49
high enough renewable generation component for the proponent to be able to
demonstrate an emissions intensity of less than about 80 g CO2-e/MJ supplied to the
water heater, to allow for storage heat losses in the water heater itself.24

Tasmania is the only State with a greenhouse intensity of electricity supply below 80 g
CO2-e/MJ (at least on a ‘historical average’ basis, if not on a marginal intensity basis).
However, Tasmania is also the only State where average intensity is projected to rise
under the CPRS, and it is expected to exceed 80 g CO2-e/MJ by 2024 (Appendix 6).

Irrespective of the greenhouse gas-intensity of the local electricity supply, it would be
reasonable to permit the use of electric resistance water heaters where hot water needs
are very low, and/or there are isolated points of hot water use a long way from the main
water heater. In some houses there may be a bathroom or laundry that is so remote from
the other points of hot water use that supplying it from the main water heater would
involve long waiting times before the water reaches an acceptable temperature, so
resulting in both energy and water wastage.

Electric resistance water heating is often the most cost-effective solution for very low
hot water demand, and low hot water demand will also limit the greenhouse gas
emissions associated with the actual hot water drawn off.

The most efficient form of electric resistance water heating in these exceptional
situations would be the instantaneous type, because it would not have standing losses.
The heat loss for a 50 litre delivery storage tank is about 1.1 kWh/day, so the annual
loss is about 400 kWh (1.44 GJ). The useful energy in hot water for a daily drawoff of
70 litres is 4.52 GJ (in Zone 3), so about a quarter of the electricity supplied to the water
heater is lost. Using an instantaneous water heater would typically reduce the
greenhouse emissions by at least a quarter, and an even greater ratio where the water
heater is rarely used.

Where electric storage water heaters continue to be used, limiting their size would limit
the standing heat loss, according to the current MEPS scales. Alternatively, there could
be a cap on the heat loss of permitted electric resistance storage water heaters, so if the
market perceived a need for larger capacities, more highly insulated models could be
introduced.25 A limit on the size of electric storage water heaters would also raise
compliance rates for the measure as a whole, because removing larger electric storage
water heaters from the market would directly target the tendency to replace like with
like.

It is not advisable to prohibit the use of electric storage water heaters entirely, because:

•	 at present there is only one supplier of electric instantaneous water heaters in
   Australia; and

•	 some models of instantaneous water heater need a three-phase electricity supply,
   and requiring this additional metering and wiring cost would conflict with the

24
   Whether an electricity consumer elects to pay a premium for ‘GreenPower’ has no bearing on the actual
greenhouse gas energy intensity of the electricity supplied to or at a specific site or building.
25
   The proposed ACT regulations would require even those electric storage water heaters meeting the
'exceptional circumstances’ criteria to be fitted with a post-manufacture ‘blanket.’


                                                                                                  50
   objective of adding this provision, which is to allow a low-cost option in limited
   circumstances.

The rules proposed for new Class 1 buildings in the BCA allow for the use of electric
water heaters of up to 50 litres storage in circumstances where the home is small (one
bedroom or less) or the water heater serves a remote point and there is also a low-
emission water heater installed (see Appendix 5).

It would be reasonable to adopt similar provisions in the proposed measure, except that
where one water heater fails in an existing dwelling with two electric water heaters it
will not be possible to require that a low-emissions water heater also be installed in
order for the failed water heater to be replaced by another electric.

A prohibition on the installation of any electric water heater of greater than 50 litres (or
indeed a prohibition on their manufacture or import via MEPS) would ensure that only
secondary electric water heaters were replaced with electrics. Otherwise homes with
two or more electric water heaters - the most greenhouse gas intensive category of
homes - could continue to replace large electric water heaters with other large electric
water heaters indefinitely.

Special Exemptions

Apart from the general exemptions that would allow the use of electric water heaters in
defined circumstances, there may be special cases which do not meet the general criteria
but where the installation or use of any form of water heating apart from electric
resistance may be impractical, unsafe or prohibitively expensive.

The SA and Queensland requirements for water heater replacements in existing homes
already contain provisions for special cases to be referred for Ministerial or
administrative decision. All jurisdictions would need to adopt provisions of this kind.

Proposed Mode of Implementation

The COAG National Strategy on Energy Efficiency states that:

       Appropriate regulatory mechanisms in each jurisdiction (for example plumbing
       regulations in conjunction with the National Construction Code when
       developed), will be used to prevent installation of high emission electric systems
       (COAG 2009a).

As water heaters are connected to the domestic water supply they come within the scope
of State and Territory plumbing regulations. It proposed that the objectives of the
proposed measure will be achieved by inserting provisions in the appropriate plumbing
regulations. In case of a phased implementation, each individual jurisdiction would
amend its plumbing codes and regulations to prohibit plumbers from installing water
heaters other than in accordance with the proposed rules. The second phase would most
likely be implemented via uniform provisions in the Plumbing Code of Australia (PCA).

The PCA is in some respects the counterpart of the BCA. However, it does not yet have
full national coverage, as the plumbing regulators in WA or the NT have not yet


                                                                                        51
adopted the PCA (NSW has recently announced its intention to do so). Furthermore,
the State and Territory plumbing regulations do not reference the main plumbing
performance standard (AS/NZS 3500 Plumbing and Draining Parts 1-4 2003, and Part 5
2000) in a consistent way (Table 12).

AS 3500 does have some degree of coverage in all jurisdictions, which reference it – at
least in part – via their own plumbing regulations. Once the Standards Australia
committee/s responsible for AS3500 agrees to insert the proposed rules for water heater
installation into the Standard, the States can reference the relevant sections, either via
the PCA or directly.

  Table 12 Adoption of the Plumbing Code of Australia by States and Territories
State/Territory   Adoption of the Plumbing Code of Australia
NSW               Intending. (a) The NSW Code of Practice for Plumbing and Drainage adopts
                  ‘AS3500:2003 and amendments and Part 5 2000’
Victoria          Yes. Parts A, B, C, D (with restrictions), E and G
Queensland        Yes. Parts A, B, C and G
SA                Yes. Parts A, B, C, F2 and G
WA                No. The regulations call up AS3500:2003 Parts 1,2, and 4
Tasmania          Yes. The Tasmanian Plumbing Code references and varies the BCA.
NT                No. The NT Building Regulations call up AS 3500
ACT               Yes. Parts A, B, C and G
                    Source: ACG (2009) (a) NSW DECC, personal communication



It is intended that the BCA and the PCA will eventually converge into a unified
National Construction Code (NCC). In April 2009 COAG ‘…endorsed a series of
reforms, recommended by the Business Regulation and Competition Working Group
(BRCWG)…[including]…a further step towards the development of a National
Construction Code, which will consolidate building, plumbing, electrical and
telecommunications regulations, through the release of a consultation RIS.’

If and when the NCC is developed, it would be expected that all provisions of the PCA
would migrate over to it, including those covering water heaters.




                                                                                             52
Alternatives and Complements to the Proposed
Regulation

State regulations

It would be expected that the jurisdictions with current requirements for replacement
water heaters (SA and Queensland) would retain them if the proposed national measures
are not implemented. They may choose to do so even if they are. The level of market
transformation which the State provisions will deliver has yet to be ascertained.

If the national measures on which States have now agreed in principle do not proceed, it
is likely that the other States with water heater requirements for new buildings (NSW,
Victoria, WA and the ACT) would in due course also adopt provisions for replacement
water heaters. As with new buildings, these are likely to differ from each other, so
increasing the scope for confusion and higher compliance costs to all parties.

While there is no guarantee that all jurisdictions will adopt them, implementing the
proposed regulations would offer the possibility of national consistency, and if adopted
by some or all States would reduce the costs of complying with differing State
provisions.

Energy labelling

Buyers of whitegoods such as refrigerators usually inspect and compare models in
showrooms, where they are exposed to energy labels, and they usually buy the products
for their own use, so if they choose they can weigh capital cost against energy efficiency
and other features.

Water heaters are generally purchased by or on the advice of plumbers or other
intermediaries who have little or no incentive to take the information on energy labels
into account. Where users order water heaters directly, they would rarely visit a
showroom to inspect a physical sample.

These market conditions have led to the rejection of energy labelling as a workable
energy efficiency measure for electric water heaters, in favour of minimum energy
performance standards (MEPS) (GWA et al 1993). The fact that gas water heaters carry
energy labels is a carryover from the time when the gas utilities and then the Australian
Gas Association managed the program in the 1980s (MEA et al 2002). One of the
reasons for now considering MEPS for gas water heaters is the limitations of the
labelling program (E3 2008/07).

Even if energy labelling (either physical or on brochures or websites) were effective, it
would only influence choice within the same technology and energy type. The
achievement of the objectives of the proposal rely on influencing choice towards less
greenhouse-intensive forms of water heating, whether of different technology (eg solar
vs conventional, electric heat pump vs electric resistance) or different energy form (eg
gas vs electric). Therefore energy labelling alone would not achieve the objectives of
the proposal.


                                                                                      53
Minimum Energy Performance Standards

Minimum energy performance standards have been shown to be effective in increasing
the level of efficiency of products of specific types and energy forms. In water heating
alone, mandatory MEPS have been used to reduce heat losses in electric resistance
water heaters. Higher MEPS are also being proposed as a means of raising the average
energy efficiency of gas water heaters (the MEPS levels currently in place are so low
they have no effect on the market).

MEPS have the advantage that, unlike energy labelling, they also impact on products
purchased by intermediaries and other ‘label-indifferent’ buyers. However, MEPS have
traditionally operated only within technology and energy types, not across them. The
achievement of the objectives of the proposal rely on influencing choice towards low
greenhouse forms of water heating, whether of different technology types or different
energy forms.

Therefore traditional MEPS alone would not achieve the objectives of the measure. In
fact, the proposal represents a means of overcoming the limitations of conventional
MEPS, by applying a performance standard expressed in environmental impact terms –
in this case g CO2-e/MJ – rather than technical efficiency (Useful Energy/Delivered
Energy).

However, it may be possible to use the MEPS regime to support the implementation of
the proposed measure, by setting MEPS levels for electric water heaters that could not
be met by conventional electric storage types.

The US Department of Energy sets MEPS for a range of products, and is currently
revising the MEPS levels for water heaters. In January 2009 the USDOE published an
important milestone in the MEPS review process for water heaters, which is projected
to conclude by March 2010.

The Preliminary Technical Support Document (USDOE 2009) covers four types of
water heater: electric storage (76 to 454 litre capacity), gas-fired storage, gas-fired
instantaneous and oil-fired storage (which the USDOE is obliged to cover, although the
market share is now negligible). Table 13 summarises the results of the analysis for
electric storage water heaters. Only two means of raising energy efficiency were
analysed: progressively thicker insulation and switching from electric resistance heating
to heat pump. A solar-electric option was not analysed because under the USDOE rules
a solar water heater is not classified as an electric resistance water heater, whereas a
heat pump is (in the same way that heat pumps are directly comparable to electric
resistance heaters for space heating).

According to the USDOE analysis the heat pump option has the lowest life cycle cost,
even though it has the highest capital cost, so under the USDOE rules is likely to be the
recommended MEPS option, unless parties making submissions find fault with the
analysis or raise some other compelling objection.




                                                                                     54
       Table 13 US Department of Energy: Life Cycle Analysis for Electric Storage 

                                Water Heaters, 2009 

Efficiency      Energy    Average life-cycle costs        Life cycle cost savings           Payback
level           factor            (2007$)                                                 period (yrs)
(insulation              Instal­   Oper­     LCC    Avg           % of households        Med­     Avg
thickness in               led      ating          saving     Net        No       Net     ian
mm)                       price     cost                     cost      impact benefit
Baseline (38)     0.90      662      2836     3498    NA        NA         NA      NA      NA       NA
1 (50)            0.91      674      2787     3461     20         0         46      54     2.5      2.6
2 (57)            0.92      682      2740     3422     50         0         23      77     2.1      2.1
3 (64)            0.93      709      2694     3403     65         9         18      73     2.3      3.9
4 (76)            0.94      759      2648     3407     61        18          7      75     2.8      6.9
5 (102)           0.95      786      2604     3390     78        18          6      76     3.8      6.7
6 – Heat pump     2.20     1475      1759     3233    229        45          5      50     8.3     22.1
                               Source: USDOE (2009). All values 2007 US$

   It would be possible to set Australian MEPS levels for electric storage water heaters
   using the same principles, although it would be necessary to express the MEPS levels in
   terms of a minimum seasonal efficiency or ‘energy factor’ rather than as a maximum
   heat loss, as is the case at present. Any MEPS level higher than 1.0 would preclude
   conventional resistance water heaters.

   A minimum energy factor (or Coefficient of Performance) could serve the dual purpose
   of excluding resistance water heaters and also setting minimum efficiency levels for
   both heat pumps and solar-electric water heaters, although it may be necessary to
   modify the existing test standards for those products to get values that could be rated on
   a common scale.

   The use of ‘high-level’ MEPS in this way would be a feasible regulatory option for
   achieving the objectives of the proposed measure. An ‘energy factor’ MEPS level of
   less than 1.0 could still be applied to water heaters of 50 litres delivery or less, which
   would need to remain on the market for use in special situations (see preceding section).

   However, MEPS generally take effect by prohibiting the import, manufacture or sale of
   non-complying products from a given date. This would be consistent with a phase-out
   of electric resistance water heaters that takes place at the same time in all areas, but it
   would be difficult to exclude regions temporarily (eg those without a gas supply, during
   the period 2010-2012) or permanently (eg Tasmania). Permanently exempting one
   State from a national MEPS would be difficult, because of mutual recognition
   provisions, which mean that a product that may be supplied legally in one jurisdiction
   may also be supplied legally in all others. This would also apply to electric water
   heaters imported from New Zealand, so a permanent exemption would be required
   under the Trans-Tasman Mutual Recognition Act (TTMRA).

   However, MEPS regulations generally allow products that were lawfully imported or
   manufactured before the date the MEPS take effect can continue to be sold. If high-level
   MEPS were implemented for electric water heaters in 2010, it may be possible for
   suppliers to stockpile enough electric resistance water heaters to cover non-gas areas for
   two years, and perhaps to cover all of Tasmania for longer. Alternatively, the high-level
   MEPS could come into effect in 2012.




                                                                                                 55

Incentive and rebate schemes

The main purpose of rebates is to influence choice rather than to mandate it or constrain
it through regulation. The current Commonwealth and State incentive schemes for
purchase of solar, heat pump and in some cases gas water heaters were analysed in a
previous section. The schemes vary significantly with respect to:

•	 The type of water heater which must be replaced (most are available only to
   purchasers who replace an electric water heater);

•	 Whether available throughout the State, only in gas-connected areas or only in non-
   connected areas;

•	 Whether available for entire systems only, or for panels added to conventional
   systems;

•	 The performance requirements for models eligible to attract incentives, which may
   be expressed in terms of the number of RECs for which the product is eligible, the
   minimum solar contribution, the number of panels or other criteria;

•	 The amount available and how the amount varies with performance or other
   conditions;

•	 The point and timing of payments: whether paid to the supplier to defray the cost of
   purchase, or claimable by the purchaser after the installation, in which case the
   purchaser must meet the full capital cost;

•	 The rules for combining the value of incentives with other incentive schemes or
   with RECs values;

•	 The administrative arrangements and verification rules.

These differences, and the various lists of complying models which they generate, have
been found to be the source of considerable confusion among water heater suppliers,
builders and buyers (GWA 2007a).

While the magnitude and conditions for water heater rebates can vary by jurisdiction
and over time, the price support from the creation of RECS is available for all eligible
solar and heat pump water heaters, wherever in Australia they are installed and whether
on a new house (or indeed on any class of building) and as a replacement for an existing
system.

RECs appears to have been effective in increasing the takeup of solar and heat pump
water heaters, according to the industry itself. In its submission on the RET legislation,
Rheem stated:

       ‘The current MRET scheme has been a triumph in encouraging the adoption of
       solar water heater by Australian households, with Rheem’s internal estimates




                                                                                      56
           suggesting the annual sales of solar water heaters nationally have increased from
           20,000 to 100,0000… during the life of the scheme.’26

However, this has obviously come at a cost to electricity users, who bear the cost of
RECs. Because solar and heat pump water heaters supply a large proportion of the
demand for RECs (between 20% and 30% annually - Table 7) they may be crowding
out investment in other renewable generation technologies such as wind, photovoltaics,
geothermal, biomass and biogas.

The additional solar and heat pump takeup from the NSW and Victorian rebate schemes
implemented in 2007, and the Commonwealth rebates implemented since, compared
with the support from RET alone, has not been estimated. Total takeups are reported
(Table 9, Table 10), but it is not known what proportion of recipients are ‘free riders’,
who would have purchased solar without any subsidy, or for whom the RECs subsidy
would have been sufficient, but who will naturally accept the additional rebates.

If the phase-out of greenhouse-intensive water heaters were implemented through
rebates alone, ever-increasing levels of rebate would be required to secure each
additional takeup, leading to higher costs per marginal tonne of greenhouse abatement.

Thus rebates and incentives alone will not fully achieve the objective of the measure –
the phase-out of greenhouse-intensive water heater – and while they will partially
realise it, the cost are likely to be high:

•	 Very high incentives would need to be offered to completely overcome the initial
   capital cost advantage of electric resistance water heaters:

•	 If rebates were only offered for solar/HP and were high enough to be effective, then
   gas (the most cost-effective low greenhouse option) could be squeezed out in favour
   of the less cost–effective options;

•	 There could be no prevention of ‘free-riding’ – ie the takeup of rebates by those who
   would have taken the desired action anyway;

•	 The administrative costs per transaction (receiving, verifying and processing claims,
   making payments) are high;

•	 A share of the rebates will be absorbed by manufacturers, suppliers and installers.

Even though rebates are not an alternative to the proposed regulation, the measure may
be implemented without rebates or in combination with rebates. Rebates may be
general, or targeted according to income or other household factors.

If electric resistance water heaters are excluded from the market, householders in gas-
supplied areas will have the choice of gas, solar-electric, solar-gas or heat pump (LPG
would rarely be competitive in a natural gas area). If electric resistance water heaters
are excluded from the market, householders in non-gas areas will have the option of
solar-electric, heat pump, LPG or solar-LPG. As conventional LPG has the lowest

26
     http://www.climatechange.gov.au/renewabletarget/consultation/sub_ret/31RheemAustraliaPtyLtd.pdf


                                                                                                 57
capital costs, it would be preferred in many cases, even though the lifetime costs are
high, unless the capital cost of solar or heat pump were reduced with rebates. There is a
risk that households in non gas reticulated areas will shift to LPG under the greenhouse
performance benchmark. This will need to be closely monitored.




                                                                                    58
Options modelled
The variants on the policy options and implementation dates are summarised in Table
14. 	These are organised into a number of distinct scenarios for modelling purposes.

•	 S0 is a theoretical model constructed to simulate a ‘perfect’ market in which all
   households are engaged purchasers who are aware of the relative capital costs and
   energy costs of all water heaters. Capital cost is not a barrier and the only restriction
   on choice is the unavailability of natural gas in some regions. In this scenario there
   are no split incentives: if a more expensive water heater is the best option for a
   tenant the owner purchases it and recovers the higher capital cost via rental. S0 has
   been modelled to test the hypothesis that water heater purchase behaviour is subject
   to market failure. It is not used as the basis for estimating the costs and benefits of
   the proposed measure.

•	 S1 models actual market behaviour given the observed tendencies to replace like
   with like, resist high capital purchases and under-value investment in more efficient
   water heaters. S1 simulates a ‘No Regulations’ (NR) case in which no jurisdiction
   has requirements for replacement water heaters, and there are no rebates for solar or
   any other water heater type (the rationale for exclusion of rebates is discussed later).

•	 S2 models a rapid implementation in which the measure takes effect in all regions in
   2010 (nominally in the middle of 2010, but possibly at the end of 2010. The
   modelling is not precise enough to capture timing differences of 6 months).

•	 S3 models a phased implementation over the two year period 2010 to 2012. In
   Phase 1 the measure only applies to households which are connected to natural gas
   or located in areas with natural gas available. Phase 2 takes effect 2 year later.

•	 S4 models the Water Heater Industry Proposal (WHIP).

The modelling has been carried out on a State by State basis, so the application of
different scenarios to different States can be tested.

SA has implemented measures which will affect a higher share of households than
would be impacted under Phase 1 of S3 or under S4, but a somewhat lower share than
would be impacted in Phase 2 of S3 or under S2. The analysis in this RIS has not
extended to estimating the differences in impact resulting from the different rules and
selection criteria that apply, and the rate of application of those criteria, eg with regard
to share of households exempted.

Queensland has implemented measures which will, from January 2010, give the
outcomes expected in Phase 1 of S3, but has not committed to the rules proposed for
Phase 2.27

27
  The modelling period begins at the point when all jurisdictions implement S2, the first phase of S3 or
the first phase of S4. This is assumed to occur simultaneously for all jurisdictions either at the end of
June 2010 or the end of December 2010. The reduction in impact that would come about from the fact
that Queensland will have implemented the first phase of S3 either 6 or 12 months earlier than other
jurisdictions are not considered sufficient to warrant separate modelling.


                                                                                                      59
To clarify the impacts of the proposed measure beyond the impact of current
regulations, some of the results of the analysis are presented in two ways:
   •	 a national total including all jurisdictions; and
   •	 a separate total which excludes SA, because that State is already committed to
        measures which capture most of the impacts of S2, S3 or S4.

       Table 14 Replacement water heater options under various scenarios
     Scenario   Description              Regions/classes     2010, 2011          2012 onward
     S0 Ideal   Perfect market – no      Gas-available       Unrestricted        Unrestricted
                restrictions             No gas              Unrestricted        Unrestricted
     S1 NR      No regulations or        Gas-available       Unrestricted        Unrestricted
                purchase restrictions    No gas              Unrestricted        Unrestricted
     S2 Rapid   Rapid implementation     Gas-available       No electric         No electric
                2010                     No gas              No electric         No electric
     S3         Phased implementation    Gas-available       No electric         No electric
     Extended   2010-12                  No gas              Unrestricted        No electric
     S4         Water Heater Industry    Gas own-occ         No electric         No electric
     WHIP       Proposal                 No-gas own/occ      Unrestricted        Unrestricted
                                         Gas rental (a)      No electric         No electric
                                         No-gas rental       Unrestricted        Renewable
                                                                                 only
                   (a) GWA interpretation of this element of Industry Proposal




                                                                                                60
                     4. Cost-Benefit Analysis 

Overview 

The likely responses of homeowners to the proposed exclusion of electric water heaters
from the market can be modelled in various ways. There is a finite range of water heater
types, and although there is a range of sizes and models within each type, their
performance is fairly standardised. This lends itself to conventional cost-benefit
analysis, in which the net present value (NPV) of the No Regulations (NR) case can be
directly compared with the NPV of the ‘with-measures’ cases.

Costs and benefits have been calculated for all water heater replacements expected to
occur in Australia from mid 2010 (the earliest the proposed measure could take effect).
The first year of impact is therefore indicated as 2011 – either financial year 2011 (in
the event that the measure takes effect in July 2010) or calendar 2011 (in the event that
the measure takes effect at the end of calendar 2010). The modelling is not precise
enough to distinguish periods of 6 months, so the benefits and costs can be assumed to
be the same irrespective of a mid year or end-year start date. For the extended
implementation scenario (S3) it is assumed that the second phase takes effect 24 months
after the first.

Four time periods have been modelled:

•   10 years (Truncated);
•   10 years (Cohort run-out);
•   20 years (Truncated); and
•   20 years (Cohort run-out).

The 20 year period reaches to 2030, the end point of the Renewable Energy Target
Scheme. This is significant because the scheme creates Renewable Energy Certificates,
a key element in the cost/benefit analysis – although the value of RECs over the period
is subject to some uncertainty. The 10 year period reaches to 2020, the year in which
the emission targets adopted in the CPRS legislation are to be achieved.

A time period is ‘truncated’ if only the monetary cost and benefits actually incurred up
to the cut-off date are taken into account. An alternative way to treat the cut-off date is
to take into account benefits locked in up to the cut-off date. For example, even if the
proposed measure were abandoned in 2021, every water heater installed up to 2020
would return energy and greenhouse savings (compared to the NR case) for the
remainder of its service life. This could be a further 10 to 14 years for the cohort of
water heaters installed in 2020, and a proportionally shorter period for cohorts installed
in each preceding year. In this approach the modelling captures the capital cost of each
annual cohort of water heaters up to the cutoff date, and allows their operating costs to
‘run out’ beyond the cutoff date.

Truncated analysis is the most severe test because it cuts off (‘truncates’) the stream of
benefits in 2020, just when energy prices are projected to have reached a high plateau
due to the CPRS (Figure 13).


                                                                                       61
The stock of houses covered by the modelling is that existing in 2010. This stock
diminishes each year with demolitions (estimated at about 0.5-0.8% of the stock each
year). Of course, more new dwellings are built each year than the number demolished,
which is why the total number of dwellings in Australia is projected to increase at over
1.5% per annum between 2010 and 2020.28 This implies a construction rate of about 2%
of the stock, or about 160,000 homes per year. The selection of water heaters for new
homes is not covered by the measures proposed in this RIS but by the requirements
proposed for incorporation in the Building Code of Australia from May 2010.

Therefore to project the total emissions from household water heating in Australia, from
both the shrinking stock of houses that was in existence in 2010 and the growing stock
of houses added after 2010 it would be necessary to sum the modelling from the two
RISs. The two sets of measures can be implemented independently of one another,
although there may be reasons for co-ordination, which are discussed in this RIS, so it is
not necessary to quantitatively combine their projected impacts.

Private and societal costs

Private cost of hot water

The private cost of hot water service for an individual household is generally defined as
the sum of the dollar amounts that the user pays. It comprises:

       (a) the capital cost of the water heater;
       (b) the cost of installing the water heater;
       (c) the cost of connecting the building to services (other than water and electricity
           which are always connected in any case) if such additional services (eg gas) are
           required by the water heater;
       (d) payments for water, electricity, natural gas, LPG or other fuels; and
       (e) the cost of repairing and maintaining the water heater.

The prices paid by users may be affected by government interventions in markets for
water heaters and energy, for example, the additional cost of energy under the CPRS or
the value of RECs for water heaters that are certified under the RET scheme. The
financial impact of such interventions on households is included in the assessment of
private costs and benefits.

A more complete definition of private costs would include allowances for the quality of
the hot water service as measured by waiting times, the incidence of interruptions,
capacity to simultaneously supply multiple users, the ease of temperature control and
the risk of exposure to accidental scalding. These can be ignored because the options
under consideration have broadly similar quality characteristics.

Societal cost of hot water

The societal cost of hot water service to an individual household is the sum of costs
incurred by all members of the community to supply hot water to that household.

28
     http://naeeec.energyrating.com.au/reports/household-greenhouse.xls


                                                                                        62
Societal costs could be significantly different from the private costs if there are external
costs and benefits or imperfect competition in the supply of relevant goods and services.
Aggregate private costs are not the same as societal costs.

External costs and benefits

Up to now the main external cost associated with the selection of a water heater has
been its contribution to greenhouse emissions. One important external benefit has been
the potential to positively influence the direction and pace of technological change and
thereby reduce future costs, including the benefits of ‘scaling up’ and producing on a
larger scale. However, these effects are no longer entirely external now that government
has implemented measures designed to internalise them and so bring private costs more
into alignment with societal costs.

The greenhouse externality is internalised in this RIS by assuming that the CPRS will
impose an appropriate CO2-e emissions price on energy users.29 In scenarios where the
monetary value of energy cost savings (including the value of CPRS-induced cost
increments) exceeds the value of capital cost increases, and there is a net benefit, there
are no additional costs of emissions savings beyond those internalised by the CPRS. In
scenarios where the monetary value of energy cost savings is less than value of capital
cost increases, and there is a net cost, it is possible to calculate an implied cost of CO2-e
emissions avoided by dividing the emissions reduction by the net cost

The full economic value of individual greenhouse-reducing measures such as the one
proposed in this RIS cannot be fully captured in this analysis, because the aggregate
impacts on the demand for electricity – and hence for emission permits - can only be
properly modelled by considering all such measures together. This would mean
modelling the full impacts of the National Strategy on Energy Efficiency (COAG 2009),
which is beyond the scope of this RIS. The proxy for the contribution of each
individual electricity-reducing measure to alleviating demand for emissions permits
(and hence economy-wide carbon price pressures) is indicated by the measure’s CO2-e
reduction impact, which is quantified.

The technological externality is internalised in this RIS by assuming that the market
value of RECs reflects the beneficial effects to the whole of society of expanding the
market for solar and heat pump water heaters.

Supply of energy network services

Electricity and gas tariffs include charges to recover not just energy production and
generation costs (including emissions permits) but also networks costs, ie the costs of
the poles, wires, transformers, pipes and pumps that transmit and distribute energy from
generators and other producers to end users. These charges are regulated and network
regulators may seek to vary network charges in response to measures that change the
amount of energy that the networks expect to carry or in the peak loads facing the
network.


29
  It may be argued that the proposed CPRS will not signal the full potential risk or cost of the damages of
global climate change. However the only indication of a government position on these costs is the one
implicit in design of the CPRS.


                                                                                                     63
Network investment requirements are based partly on asset replacement needs and
partly on augmentation to meet projected energy throughput and peak demand., both of
which are growing. Electric water heaters have a major impact on both energy and
demand so will impact on network costs.

A considerable amount of information would be needed to calculate any upward
pressures on network charges paid by the broader community that may result from
falling energy throughput, and offset them against estimated value of energy savings. It
would be necessary to take into account projections of demand for network services and
the projected impacts on that demand of the entire portfolio of energy efficiency and
greenhouse gas abatement policies, not just those covered in this RIS.

It would also be important to allow for the load profile (ie daily and seasonal variation)
of the energy savings. Positive feedback effects are greater where the energy savings do
little to reduce peak loads on energy networks, so leaving their costs relatively
unchanged, but still reducing their revenue. Conversely, there could be a network
benefit that exceeds the revenue loss if the energy savings are concentrated in peak
periods.

To quantify these effects in detail is clearly beyond the scope of this RIS. The effect of
projected increases in electricity network charges embodied in the Treasury’s CPRS
modelling have been included in the retail price projections. Possible impacts of the
proposed measures on time of use, network operators and retailers are discussed
qualitatively in Chapter 5.

Gas network charges in each State have been held constant, on the assumption that the
increase in gas demand from a higher rate of electric to gas water heater replacement in
areas already reticulated would be largely offset by rises in the efficiency of all gas use.
In areas not yet reticulated, new networks will be over-sized to cover all projected use,
not just hot water, so the measure on its own will not increase network costs or charges.

Gas Connection Costs

One likely effect of the proposed measure is a higher rate of connection of existing
houses to natural gas networks than would otherwise be the case. This will mostly be in
areas that are or would have been supplied with natural gas anyway, so the marginal
costs are the labour and materials associated with linking the building to the mains in
the street (including the meter costs). These are estimated at about $1,000 per dwellings
(ABCB 2007).

Network price regulators generally allow gas network operators to subsidise the costs of
connection and recover them in the network charges to all other gas users, because as
long as there is spare capacity the higher the total throughput the lower the average
network charge per MJ. This is analogous to the government’s policy to require all
electricity users to subsidise individual purchasers of solar water and heat pump water
heaters (via RECs) on the rationale that the higher the volume of production, the lower
the average price. Therefore, just as the value of RECs to individual water heater
buyers is taken into account in the calculation of private costs and benefits, so is the
value of the gas connection subsidy.



                                                                                        64
Energy price and greenhouse intensity projections

When the cost-benefit modelling was carried out, it was assumed that the Carbon
Pollution Reduction Scheme (CPRS) would be implemented in mid-2010, and that
energy prices and the greenhouse intensity of electricity supply would follow the
profiles projected by Treasury in Australia’s low pollution future: the economics of
climate change mitigation (Treasury, 2008).

Treasury includes projections of the greenhouse gas intensity of electricity generation,
developed by McLennan Magasanik Associates (MMA 2008). These were used to
develop emissions intensity trends for electricity delivered in each State, which are
detailed in Appendix 6. The greenhouse-intensity of electricity delivered is higher than
the intensity of electricity generated, to allow for energy lost in generation site use,
transmission and distribution.

Figure 10 illustrates the projected average emissions intensity of electricity supplied to
household electricity users nationally, up to 2050. It was projected that the emissions
intensity of electricity supply would decline by about 22% by 2020 under CPRS-5, and
up to 33% under Garnaut-25, which approximates the effects of a CPRS-25 strategy,
should that be adopted.

Just before the completion of this RIS, the Government announced that the start of the
CPRS would be delayed until mid-2011 and that ‘permits will cost $10 per tonne of
carbon in 2011-12, with the transition to full market trading from 1 July 2012.’30 The
Government also announced ‘a commitment to reduce carbon pollution by 25 per cent
of 2000 levels by 2020 if the world agrees to an ambitious global deal to stabilise levels
of CO2 equivalent in the atmosphere at 450 parts per million or less by 2050.’


This means that the energy price increase and greenhouse gas reduction trends projected
in Appendix 6, which form the basis of the modelling could be delayed by up to two
years, and the benefit/cost ratios based on these trends would be on the high side.
However, the potential impact will be small compared with that of variables affecting
capital cost. The impacts of uncertainty in both capital and energy costs have been
explicitly modelled via sensitivity testing.

The recent Government announcement raises the possibility of a ‘CPRS-25’ policy
setting that would result in much higher upward pressure on energy prices than the
‘CPRS-15’ scenario, which was the previous upper extreme of potential official
reduction targets.31

Given that the impact of the policy change is within the range of uncertainties modelled
in this RIS, and that there is now a potential for a more stringent policy setting that
would drive energy prices higher, modelling based on the CPRS-5 scenario as it stood
prior to the policy revision is still considered a robust basis for assessing the costs and
benefits of the proposed policy measure.

30
   http://www.environment.gov.au/minister/wong/2009/pubs/mr20090504.pdf. It is assumed that the
stated price cap is intended to be $10/tonne CO2 ($10/tonne C is equivalent to $3.64/ tonne CO2).
31
   Treasury (2008) modelled a ‘Garnaut-25’ scenario but this was not endorsed by the Commonwealth.


                                                                                                65
                      Figure 13 Projected day rate electricity prices, CPRS-5 ($2008, real prices)


                      40.0


                      35.0


                      30.0

                                                                                                                                                                                 NSW
                      25.0                                                                                                                                                       VIC
     c/kWh day rate




                                                                                                                                                                                 QLD
                                                                                                                                                                                 SA
                      20.0
                                                                                                                                                                                 WA
                                                                                                                                                                                 TAS
                      15.0                                                                                                                                                       NT
                                                                                                                                                                                 ACT

                      10.0


                       5.0


                       0.0
                             2009

                                    2011

                                           2013

                                                  2015

                                                         2017

                                                                2019

                                                                       2021

                                                                               2023

                                                                                      2025

                                                                                             2027

                                                                                                    2029

                                                                                                           2031

                                                                                                                  2033

                                                                                                                         2035

                                                                                                                                2037

                                                                                                                                       2039

                                                                                                                                              2041

                                                                                                                                                     2043

                                                                                                                                                            2045

                                                                                                                                                                   2047

                                                                                                                                                                          2049
                                                                              <WH Modelling Data Oct 2008>



The general residential household electricity energy prices for each State in Figure 13
were developed by Syneca Consulting from the ‘CPRS-5’ projections in Treasury
(2008).32 Off-peak electricity prices consistent with Treasury projections were also
developed for the States which offer OP tariffs (both restricted hours and extended
hours tariff were projected). Syneca Consulting also developed natural gas and LPG
price projections consistent with Treasury modelling. These are in Appendix 6.

The energy price (and capital cost) projections in this RIS are real prices in 2008
dollars, as in the Treasury modelling. Prices have risen with inflation since then. The
projections were checked against CPI-adjusted tariffs for a number of States in
September 2009 and found to be consistent. If the energy price projections were re-
based (to 2010 dollars, say), it would also be necessary to rebase the capital costs and
the B/C ratios would be essentially unchanged from those reported in this RIS.

However, the sensitivity of the modelling to higher/lower real energy prices and
higher/lower real capital costs has been tested.




32
     Syneca contacted Treasury and MMA to clarify treatment of both energy costs and network charges.


                                                                                                                                                                                 66
General Methodology

Modelling individual household water heater selections

When a water heater fails, the process of replacement follows one of three pathways.
The decision-maker may:

   1.	 Not consider any alternative options, but simply replace the water heater with
       another of the same type;
   2.	 Consider alternatives and decide on a different type of water heater, possibly
       because it has a lower lifetime cost (taking into capital costs, rebates if available,
       expected energy costs, ease of access to capital, the value the decision-maker
       places on environmental impacts and other factors);
   3.	 Consider alternatives, but still replace the water heater with another of the same
       type because it takes less time, has a lower capital cost, lifetime cost or both.

The first pathway is typical of (but not exclusive to) the replacement of one electric
water heater with another, the second pathway is typical of changes from electric to
solar or heat pump, and the third pathway is typical of gas to gas replacement. The
proportion of decision-makers taking each pathway varies with the type of water heater
failing and the replacement options available - eg if gas is unavailable and/or the roof is
not suitable for solar, those options cannot be considered. The tendency to follow one
pathway rather than another also depends on whether the decision-maker is the owner of
a rental property or an owner-occupier.

It is necessary to understand these mechanisms in some detail so that the consequences
of removing electric water heaters from the market can be understood and projected
with reasonable confidence. The latest Australian market research on water heater
choice (Winton 2008, BIS 2006, BIS 2008) is summarised in Appendix 2. This
confirms the tendency to stay with the same type of water heater, even if the household
would be financially better off changing to another type.

The National Institute of Industry and Economic Research (NIEIR) was commissioned
to model the characteristics of the decision process. The tendency for households to
follow replacement pathway 1 is simulated by a ‘stickiness’ or ‘inertia factor’, which
can be set at different fixed levels to match the observed data or randomised within
parameters. It is set at 60% under a NR scenario which assumes no solar/HP rebates.
This is lower than the historical ratios (Table 5) due to the effect of rising energy prices
under the CPRS. For households that do consider alternatives, the following factors
come into play:

•	 The capital costs of the available alternatives (taking into account RECs values).

•	 The implicit discount rate for households – the higher this rate, the greater the
   importance of capital cost in the decision and the lower the importance of expected
   energy costs or savings. Household selection patterns under discount rates of 9%,
   6% and 3% have been modelled. The non-changing or ‘sticky’ households can be
   characterised as having very implicit high discount rates. In developing the Decision
   RIS a discount rate of 7% (with sensitivity analysis at 3% and 11%) will be adopted.

                                                                                        67
    This will implement the discount rate the OBPR recommends to ensure consistency
    with other regulatory analysis undertaken for Ministerial Councils and Australian
    Government decisions. It is anticipated that this will not have a major impact on the
    results. In addition, the outcomes of the Copenhagen climate change conference and
    potential changes to energy pricing projections will be considered and where these
    make a material difference, additional modelling will be undertaken.

•	 The cost of connecting to natural gas (if the home is not already connected) and the
   value ascribed to the other uses that can be made of the connection over time (eg
   conversion of the cooking and space heating loads to gas).

•	 The projected energy cost of the alternatives, including the impact of standing
   charges for natural gas or cylinder charges for LPG.

Table 15 summarises the combinations of options modelled by NIEIR, with scenario
numbers corresponding to those in Table 14. Appendix 4 details how these factors are
estimated and applied. For each scenario, NIEIR disaggregates households by State and
Territory, and then by seven income categories and by owners/renters (Table 16). The
modelling structure did not allow simultaneous disaggregation by both income and
renting/owning households, ie into 3 x 7 = 21 categories), but ABS data on this are
presented in Table 21.

The number of water heaters in Class 1 dwellings by household income category is
shown in Figure 14, and the share of types in each category in 2010 is shown in Figure
15 (with ‘negative income’ households combined into the <$20k class). The differences
in water heater type share across categories are relatively small, although higher income
households and owners have a slightly higher ratio of gas.

                         Table 15 Scenarios modelled by NIEIR
Scenario     Perceived gas     Impact of gas    3% household     6% household     9% household
            connection cost   standing charge    discount rate    discount rate    discount rate
   S0             NA                NA               NA                9               NA
S1 (NR),         $100                0                9                9                9
 S2, S3          $250                0                9                9                9
                 $400                0                9                9                9
                 $100               50%               9                9                9
                 $250               50%               9                9                9
                 $400               50%               9                9                9
                 $100              100%               9                9                9
                 $250              100%               9                9                9
                 $400              100%               9                9                9
   S4            $250               50%              NA                9               NA


           Table 16 Water heater ownership by income and tenancy group
                          Category                    Share of all HH
                          HH with negative income                 0.3%
                          HH <$20k                              18.8%
                          HH $20-40k                             24.0%
                          HH $40-60k                             19.0%
                          HH $60-80k                             15.6%
                          HH $80-100k                             9.9%



                                                                                           68
           HH >$100k                               12.5%
           Total households                       100.0%
           HH Owning                               75.1%
           HH Renting                              24.9%
Source: NIEIR modelling for this RIS. Incomes at 2008, in 2008 dollars




                                                                         69
Figure 14 Number and type of water heater owned by households by income levels

 2000000


 1800000


 1600000


 1400000
                                                                                                        Other
 1200000                                                                                                LPG
                                                                                                        Solar-gas
 1000000                                                                                                Nat gas
                                                                                                        HP
  800000                                                                                                Solar-elec
                                                                                                        Elec HWS
  600000


  400000


  200000


       0
             <$20k             $20-40k       $40-60k            $60-80k    $80-100k          >$100k

                                             <NIEIR Results V3>


             Figure 15 Share of water heater types owned by households

   100%


    90%


    80%


    70%
                                                                                                        Other
    60%                                                                                                 LPG
                                                                                                        Solar-gas
    50%                                                                                                 Nat gas
                                                                                                        HP
    40%                                                                                                 Solar-elec
                                                                                                        Elec HWS
    30%


    20%


    10%


     0%
           <$20k     $20-40k     $40-60k   $60-80k   $80-100k     >$100k   Own        Rent      Total

                                            <NIEIR Results V3.xls>




                                                                                                           70

Aggregate modelling outputs

The water heater replacement market is the aggregate of all the individual household
water heater replacement decisions made each year. The total size of the market varies
slightly under different scenarios, because different water heater types are assumed to
have slightly different service lives. Figure 16 projects annual water heater
replacements in houses in existence in 2010, ie ‘pre-2011’ houses (those built in 2011
and later are outside the scope of this RIS because they are covered by regulations for
new construction). Replacements dip after 2021 because due to the exclusion of electric
water heaters a higher proportion of replacements after 2011 are solar, which are longer
lived and so do not need to be replaced until after 2025.

                                       Figure 16 Replacement water heater sales to pre-2011 houses, Australia

                                     900,000


                                     800,000


                                     700,000
  Annual water heater replacements




                                     600,000

                                                                                                                                                                                            S0 - smoothed
                                     500,000                                                                                                                                                S1 - smoothed
                                                                                                                                                                                            S3 - smoothed
                                     400,000                                                                                                                                                S2 - smoothed
                                                                                                                                                                                            S4 -smoothed

                                     300,000


                                     200,000


                                     100,000


                                          0
                                               2011

                                                      2012

                                                             2013

                                                                    2014

                                                                           2015

                                                                                   2016

                                                                                          2017

                                                                                                 2018

                                                                                                        2019

                                                                                                               2020

                                                                                                                      2021

                                                                                                                             2022

                                                                                                                                    2023

                                                                                                                                           2024

                                                                                                                                                  2025

                                                                                                                                                         2026

                                                                                                                                                                2027

                                                                                                                                                                       2028

                                                                                                                                                                              2029

                                                                                                                                                                                     2030




                                                                                  Source: NIEIR <NSUM V3\Tot WH Sales>

From the viewpoint of the objectives of the regulatory proposals in this RIS, the most
significant differences between scenarios are:

•	 The number of each type of replacement water heater purchased;

•	 The capital cost of the replacements;

•	 The total stock of water heaters in pre-2011 houses, taking into account the number
   of each type retired and the number of each type purchased;

•	 Total energy consumed by the stock of water heaters;

•	 Total cost of energy consumed by the stock of water heaters;




                                                                                                                                                                                                   71

•                                                        Total greenhouse gas emissions from the energy used by water heaters.

These are calculated for each scenario and compared with S1, the ‘No Regulations’
scenario. The main comparisons are greenhouse gas emissions, capital costs and energy
costs. All of these are discussed in detail later, but Figure 17 shows the projected
emissions under each main scenario.

                         Figure 17 Projected emissions from water heating, pre-2011 houses, Australia


                                                         14000
    Total kt CO2-e from water heatersm pre-2011 houses




                                                         12000



                                                         10000


                                                                                                                                                                                                              S1 (No Regs)
                                                          8000
                                                                                                                                                                                                              S4 (WHIP)
                                                                                                                                                                                                              S0 (Ideal)
                                                                                                                                                                                                              S3 (Extended)
                                                          6000
                                                                                                                                                                                                              S2 (Rapid)


                                                          4000



                                                          2000



                                                             0
                                                                  2011

                                                                         2012

                                                                                2013

                                                                                       2014

                                                                                              2015

                                                                                                     2016

                                                                                                            2017

                                                                                                                   2018

                                                                                                                          2019

                                                                                                                                 2020

                                                                                                                                        2021

                                                                                                                                               2022

                                                                                                                                                      2023

                                                                                                                                                             2024

                                                                                                                                                                    2025

                                                                                                                                                                           2026

                                                                                                                                                                                  2027

                                                                                                                                                                                         2028

                                                                                                                                                                                                2029

                                                                                                                                                                                                       2030




The significance of natural gas availability

The proposal will impact on the water heating options available to householders who
would otherwise have installed an electric storage water heater. This represents about
37% of water heater purchasers (Table 4). Although 53% of Australian houses
currently have an electric water heater, the market was already trending away from
electric even before solar water heater rebates were introduced. About 3 in 10 electric
water heater households would replace with another type in any case, so the measure
only impacts on the 7 in 10 who would replace electric with electric: ie 37% of total
households. Of course, the impact will not be instantaneous, because households only
experience a constraint on their choice when their existing electric water heater fails.
Assuming a 10 year service life for electric water heaters, this means that about one
tenth of the stock fails each year, so about 3.7% of households would be impacted in
any one year.

Whether a house has natural gas available is a major factor in the cost of compliance
with the proposed regulation. About 38% of houses nationally already use natural gas
water heating – nearly half of these are in Victoria (Figure 18). These will mostly be
unaffected because about 95% of gas water heating households replace with gas in any


                                                                                                                                                                                                                     72

    case (see Appendix 2), but if they do want to change they will have the full range of
    options available, including solar-gas, solar-electric and heat pump. LPG would also be
    available, but there would be no point in using LPG if natural gas were available: it
    would be an identical water heater, the capital cost would be about the same but the
    LPG running cost would be far higher.

    About 9% of houses are connected to gas but use some other form of water heating
    (almost always electricity). If the electric water heater could not be replaced, the least
    cost option would usually be natural gas because there is no waiting time or cost for
    connection. In some cases the diameter and capacity of the gas pipes may preclude a
    gas instantaneous water heater, but gas storage water heaters, with their lower MJ/hr
    consumption rates, would be an option, along with solar-gas, solar-electric and heat
    pump. NIEIR estimates that about 1.54 million houses (22%) are potentially
    connectable to gas because they are already on the line of mains, or will be as the gas
    network extends, and about 31% of houses are not connectable to natural gas.

    Table 17 focuses on households with electric water heaters. Those in ‘connectable’
    areas are further disaggregated into ‘probably connectable’ (assumed to be 80% of those
    in metropolitan areas served by gas networks and 50% in non-metropolitan areas served
    by gas networks) and ‘possibly connectable’ (the balance).

    NSW and Queensland have nearly 83% of all the electric water heaters in non-
    connectable households in Australia, so will be the most highly impacted States. By
    contrast, a very high proportion of electric water heating households in Victoria, SA,
    WA and the ACT are in gas-connected or connectable households, which will have the
    lowest cost compliance options.

          Table 17 Number of households with electric storage water heaters, 2006
            Not connectable           Possibly            Probably        In gas-connected          Total
                                    Connectable         connectable           dwellings
NSW            798.1     46.2%       151.6    31.5%      277.2    28.6%      211.6    38.5% 1438.6        38.6%
VIC            110.7       6.4%       71.9    14.9%      105.5    10.9%      201.5    36.6%      489.6    13.1%
QLD            631.1     36.5%       136.6    28.4%      290.3    30.0%       33.5      6.1% 1091.5       29.3%
SA              37.4       2.2%       48.5    10.1%      136.1    14.1%       44.7      8.1%     266.7     7.2%
WA              40.1       2.3%       21.9     4.6%       62.5     6.5%       45.3      8.2%     169.9     4.6%
TAS             75.6       4.4%       41.2     8.6%       59.1     6.1%        0.6      0.1%     176.5     4.7%
NT              36.2       2.1%         0.0    0.0%        0.0     0.0%        0.0      0.0%      36.2     1.0%
ACT               0.0      0.0%         9.3    1.9%       37.2     3.8%       12.8      2.3%      59.3     1.6%
Aust          1729.1 100.0%          481.0 100.0%        968.1 100.0%        550.1 100.0% 3728.3(a) 100.0%
Share         46.4%                 12.9%               26.0%               14.8%              100.0%
    GWA estimates based on NIEIR research., <Water Heater Data Jan 09\CL1\V177> All values thousands
    (a) Projected to increase to about 4m by 2010 with construction of new dwellings after 2006.




                                                                                                     73

                            Figure 18 Share of all existing houses by natural gas classification
            100%


            90%


            80%


            70%                                                                                                                                                                                                                                                                                                  Not Connectable

            60%
                                                                                                                                                                                                                                                                                                                 Connectable - Not
                                                                                                                                                                                                                                                                                                                 connnected
            50%
                                                                                                                                                                                                                                                                                                                 Connected - Non gas
            40%                                                                                                                                                                                                                                                                                                  WH


            30%                                                                                                                                                                                                                                                                                                  Connected - Gas WH


            20%


            10%


             0%
                                   NSW                      VIC Total                                QLD                           SA Total WA Total                                                 TAS                    NT Total                                 ACT                        Aust
                                   Total                                                             Total                                                                                           Total                                                                                      Total


                                                                                                                                          <Water Heater Data Jan 09>


            Figure 19 Number of electric water heating households by gas classification
            1600



            1400



            1200



            1000
                                                                                                                                                                                                                                                                                                                 Gas-connected dwellings
Thousands




                                                                                                                                                                                                                                                                                                                 Probably connectable
             800
                                                                                                                                                                                                                                                                                                                 Possibly Connectable
                                                                                                                                                                                                                                                                                                                 Not connectable
             600



             400



             200



              0
                                                                                                                                                                                                                                                                                                           ACT
                                                                                                                                                                                                                                                                                     NT metro
                                                                                                       QLD non-metro

                                                                                                                       QLD metro




                                                                                                                                                                                                                                                                      NT non-metro
                                                                                                                                     QLD Total



                                                                                                                                                                SA metro
                                                                                                                                                 SA non-metro




                                                                                                                                                                                                                                                                                                NT Total
                                                                                                                                                                                                                             TAS non-metro
                                                                                                                                                                           SA Total




                                                                                                                                                                                                                                             TAS metro
                                                             VIC non-metro

                                                                             VIC metro




                                                                                                                                                                                                                                                         TAS Total
                                                                                         VIC Total




                                                                                                                                                                                                      WA metro
                                                                                                                                                                                      WA non-metro



                                                                                                                                                                                                                 WA Total
                   NSW non-metro

                                    NSW metro

                                                NSW Total




                                                                                                                                          <Water Heater Data Jan 09>




                                                                                                                                                                                                                                                                                                                                   74

Input Assumptions
The following section presents a brief overview of the input assumptions, which are
detailed in Appendix 3.

Capital Costs

The capital costs of conventional electric and gas water heaters can be determined from
general market data, since they are supplied as single complete units and the price is not
influenced by RECs. The capital costs of heat pumps can also be determined with
reasonable accuracy, since they are also supplied as complete units (or, if a ‘split’
design, as a tank matched with a specified compressor unit), and given that there are
only about 20 models on Australian market, the average number of RECs per purchase
can be estimated.

The capital costs of solar-electric and solar-gas water heaters, however, are more
difficult to determine. The ORER website lists over 6,800 distinct solar models, so
even if the capital costs of all of these were available it would still be impossible to
estimate average prices without extensive market share data. Therefore the solar water
heater costs have been built up from market surveys (ES 2007, 2008) with further cost
modelling, and verified from external data from the NSW and Victorian solar hot water
rebate programs.33

The Australia-wide weighted average capital costs (purchase plus installation less value
of RECs to users) for each main type of water heater generated by the costing model are
illustrated in Figure 20. The corresponding values extracted from the databases of the
NSW and Victorian rebate schemes also shown (NSW supplied data on rebates for gas
as well as solar/HP; Victoria supplied data on solar/HP rebates only). The closeness of
the fit gives confidence in the cost-benefit modelling.

For modelling purposes, the value of RECs have been taken into account but not the
value of Commonwealth and State rebates. RECs have a regulatory basis, unlike the
rebate schemes, which can be varied or terminated at any time.34 The Commonwealth
scheme is only committed to June 2012, and the NSW scheme to June 2011. Another
reason for not including the value of rebate schemes in the modelling is so that
requirements for rebate or subsidies, if any, could be estimated. The modelling helps to
identify the following groups of households:

     1.	 Those that would be financially neutral or better off under the proposed 

         measures, and face no increase in water heater capital costs; 

     2.	 Those that would be financially neutral or better off under the proposed 

         measures, but face an increase in water heater capital costs; 

     3.	 Those that would be financially worse off under the proposed measures.
33
   GWA is grateful to the NSW Department of Environment and Climate Change for access to the
database of grants by the NSW Government solar and gas water heater rebate scheme (totalling 16,600
records) and to Sustainability Victoria for access to the database of grants by the Victorian Government
solar water heater rebate scheme (totalling 7,500 records).
34
   For example, the Commonwealth rebate for heat pump water heater was reduced from $1,600 to $1,000
on September 5 2009, without advance notice.


                                                                                                  75
                                                   Figure 20 Modelled and actual water heater capital costs, 2008

                             $6,000




                             $5,000




                             $4,000
     $ Cost to purchasers




                                                                                                                                                                                                                                          Modelled (replacement)
                             $3,000                                                                                                                                                                                                       NSW (replacement)
                                                                                                                                                                                                                                          Vic (replacement)


                             $2,000




                             $1,000




                                     $-
                                                    Electric (day Electric (OP)                                    Heat Pump                      Gas Wtd                    Solar-elec,                      Solar-gas,
                                                        rate)                                                                                                                   Wtd                              Wtd

                                                                                          <BCA Class 1 water heater model 2009 V1.xls>



                            Figure 21 Historical RECs prices and estimated impacts on purchase values
                 $60




                 $50
                                                                                                                                                                                                                                               Spot prices on
                                                                                                                                                                                                                                               RECs market


                 $40
                                                                                                                                                                                                                                               Estimated value
                                                                                                                                                                                                                                               passed through
                                                                                                                                                                                                                                               to purchasers -
 $/REC




                 $30                                                                                                                                                                                                                           historical

                                                                                                                                                                                                                                               Estimated value
                                                                                                                                                                                                                                               passed through
                                                                                                                                                                                                                                               to purchasers -
                 $20                                                                                                                                                                                                                           projected

                                                                                                                                                                                                                                               Poly. (Spot prices
                                                                                                                                                                                                                                               on RECs market)
                 $10




                            $0
                                                    May-06

                                                             Jul-06




                                                                                                          May-07

                                                                                                                    Jul-07




                                                                                                                                                                 May-08

                                                                                                                                                                          Jul-08




                                                                                                                                                                                                                        May-09

                                                                                                                                                                                                                                 Jul-09
                                 Jan-06




                                                                                        Jan-07




                                                                                                                                               Jan-08




                                                                                                                                                                                                     Jan-09
                                                                      Sep-06




                                                                                                                             Sep-07




                                                                                                                                                                                   Sep-08
                                                                               Nov-06




                                                                                                                                      Nov-07




                                                                                                                                                                                            Nov-08
                                          Mar-06




                                                                                                 Mar-07




                                                                                                                                                        Mar-08




                                                                                                                                                                                                               Mar-09




                                                   <BCA Class 1 water heater model 2009 V1.xls> Spot prices from Eco-Generation

RECS values

For modelling purposes, it is projected that the effective value of RECS to householders 

purchasing solar or heat pump water heaters will remain at $40 per REC (in 2008 



                                                                                                                                                                                                                                                          76

dollars). Analysis of the data collected by the existing rebate schemes indicates that
about three quarters of the market value of RECs is passed on to purchasers, and the rest
retained by water heater suppliers, brokers and other intermediaries. Therefore $40
corresponds to a market value of about $53 per REC, which appears to be around the
long-term plateau price, ignoring the price drop in mid 2009 (Figure 21).

Gas Connection Costs and Standing Charges

The capital costs in Figure 20 are for buildings where services (electricity, water and
gas if applicable) are already connected. It is assumed that all houses within reach of
the electricity distribution network will already be connected, so connection costs need
not be separately taken into account for electric or solar-electric water heaters.
However, not all houses within reach of the gas distribution network are connected, so
the impacts of natural gas connection costs (whether subsidised or not) need to be taken
into account. For modelling purposes it is assumed that the actual physical cost of
connection is $1,000, but that the share charged to the householder is only $400.

Service Life

The average service life water heaters is subject to some uncertainty. While there are
some estimates of age at failure for water heater being replaced now, caution is required
in drawing conclusions about future service lives, especially for solar water heaters,
because of changes in product styles and manufacturing. For example, the data on
average age at failure of existing electric water heaters is weighted by the very long
service lives of older low-pressure systems, which are now hardly ever installed new in
areas served by mains water.

Following a review of the literature and discussions with manufacturers of all types of
water heaters the following service lives have been adopted for mains pressure water
heaters installed in 2011 and later:

•   Electric storage, Gas/LPG storage, heat pump storage: 10 yrs
•   Gas/LPG instantaneous, solar-electric storage, solar-gas with in-tank boost: 12 yrs
•   Solar-gas with in-line boost: 14 yrs.

Differences in service life can determine the order of cost-effectiveness of different
water heater options. This can be shown by calculating an ‘annualised cost’ for each
type of water heater, which is the sum of annual energy costs and an annualised
‘contribution to capital cost’, which varies with service life and the internal rate of
return selected. The longer the service life, the lower the annualised capital costs
contribution, all else being equal.

Figure 22 shows the annualised cost of water heater types falls as their service life
increases. The circles on the diagram indicate the average service life for each type
assumed in the modelling. In general, high capital cost options such as solar-electric
only become cost-effective against conventional electric if they achieve a longer service
life. In general, solar-gas water heaters do not become cost-effective for purchasers
against conventional gas water heaters, however long they last, unless hot water use is
exceptionally high or there are adequate rebates in addition to the RECs value.



                                                                                      77
Solar-LPG was not explicitly modelled because it has both higher capital costs and
higher running costs than the alternatives in areas where natural gas is not available (see
Figure 23 to Figure 26), so without rebates the decision algorithms would never select
it. However, solar-LPG use could be encouraged by targeted rebates or other means.

However, the modelling allows for subjective selection criteria which mimic actual
decision-making, so unless choice is constrained (eg by prohibiting electric water
heaters) there is some takeup of all types, including solar-gas, whether or not they are
cost-effective for the household.

Figure 22 Annualised cost (energy plus capital) of alternative water heater options

                                 $1,100


                                 $1,000


                                   $900
  Annualised Cost (IRR = 6.0%)




                                   $800                                                                                LPG-IWH
                                                                                                                       LPG-SWH
                                                                                                                       Electric-OP
                                   $700
                                                                                                                       Solar-elec
                                                                                                                       Heat pump
                                   $600
                                                                                                                       IWH-NG
                                                                                                                       SWH-NG
                                   $500                                                                                Solar-gas


                                   $400


                                   $300


                                   $200
                                            8      9      10     11      12        13       14   15   16      17
                                                                       Service life (yrs)

                                 <New dwelling water heater model 2008 V5.xls> Energy costs projected for Victoria from 2010


Hot Water Demand

The selection of the size or capacity of a water heater for a particular application is
usually based on the highest daily hot water output likely to be required of that water
heater, under the most severe winter operating conditions, when the input water
temperature is lowest, standing heat losses the highest and solar availability lowest.
Building regulations commonly use the number of bedrooms as a proxy for the number
of occupants, which in turn determines the likely peak water heating load.

EES (2008) estimates that the average household energy use for water heating of all
households has been trending down, and is projected to fall further. The modelling for
this RIS internally categorises households into ‘small’ or medium’ users and allocates a
water heater type accordingly. The estimated total electricity and gas consumption for
household water heating in 2010 in S1 (the NR scenario) closely matches the EES
estimate for the same year.



                                                                                                                           78

Findings

Water heating options for individual households

The households facing the lowest cost of complying with the proposed regulations are
those already using natural gas for water heating, where the probability of selecting an
electric replacement water heater is already very low. Households already connected to
gas but using electric water heating face somewhat higher compliance costs, and
connectable house faces higher costs still – they will either have to connect or use a
higher cost non-gas option. Non-connectable houses face the highest compliance costs.

For each State and Solar Zone, the costs of the options to replace a failed electric water
in can be illustrated by a diagram such as Figure 23. This indicates ‘annualised cost’,
which equalizes the differences in service lifetimes of different technologies (ranging
from 10 years for conventional electric to 14 years for solar-gas).

The annualised capital cost of a water heater comprises the following components:

•	 The net purchase price of the water heater: this includes the estimated pre-RECs
   purchase price less the value of RECs. This is the product of number of RECs in
   the Zone where installed by the nominal value to buyers ($40 per REC, at $2008
   prices).

•	 The installation cost of the water heater: for electric water heaters (the basis for
   comparison) this is the cost of replacement in the same position. The installation
   cost of any type replacing an electric is higher. If a new connection to natural gas is
   required, there is an additional connection charge, but the impact of this on the
   annualised installation cost is low, because the connection is assumed to last for 50
   years, and there is a probability that it will also be used for space heating and
   cooking in due course (see Appendix 4).

The annualised capital cost is then calculated based on the expected service life of the
water heater and the expected service life of the gas connection, using an Internal Rate
of Return of 6% (equivalent to a 6% discount rate).

The annualised energy charges are the average projected energy price over the service
life of the water heater, calculated by multiplying the projected energy tariff for that
State (c/MJ) by the MJ/yr which a water heater of that type is estimated to use to deliver
200 litres of water per day in that climate Zone (for Medium delivery) or 110 litres/day
(for Low delivery). Electricity and fuel costs are shown separately.

The annualised standing charge component for natural gas water heaters is only incurred
where the water heater is the first natural gas appliance in the house, and takes account
of the probability that gas will also be used for space heating and cooking in due course
(see Appendix 4). Even so, where water heating gas use is low (eg solar-gas) and
expected gas use for space heating is also low, the standing charge can be a larger share
of the annual fuel cost than the actual energy charge. The same principles apply to
water heaters using LPG, except that the standing charge covers cylinder rentals.



                                                                                      79
                                                   Annualised Cost                                                                                                                                                                                                                                                                     Annualised cost




                                $-
                                                                                                                                                                                                                                                                                                                    $-




                                     $200
                                            $400
                                                       $600
                                                                                                          $800
                                                                                                                                        $1,000
                                                                                                                                                 $1,200
                                                                                                                                                                          $1,400
                                                                                                                                                                                                                                                                                                                         $200
                                                                                                                                                                                                                                                                                                                                $400
                                                                                                                                                                                                                                                                                                                                                $600
                                                                                                                                                                                                                                                                                                                                                                                              $800
                                                                                                                                                                                                                                                                                                                                                                                                                             $1,000
                                                                                                                                                                                                                                                                                                                                                                                                                                      $1,200
                                                                                                                                                                                                                                                                                                                                                                                                                                                               $1,400
                                                                                                                                                                                                                                                                                                                                                                                                                                                                        delivery

             Elec day rate -                                                                                                                                                                                                                                                             Elec day rate - replace
                replace
       Solar-elec (Dir) - day                                                                                                                                                                                                                                                       Elec 315 litre OP 1 - replace
                rate
                                                                                                                                                                                                                                                                                      Solar-elec (Dir) - day rate
      Solar-elec (Ind) - day
               rate                                                                                                                                                                                                                                                                        Solar-elec (Dir) - OP1

      Heat pump - day rate                                                                                                                                                                                                                                                        Solar-elec (Ind/Sel) - day rate

        LPG inst - exg LPG                                                                                                                                                                                                                                                           Solar-elec (Ind/Sel) - OP 1
               user
        LPG inst - new LPG                                                                                                                                                                                                                                                                 Heat pump - day rate
               user
                                                                                                                                                                                                                                                                                               Heat pump - OP 1
          Solar - LPG (Dir) -
            exg LPG user                                                                                                                                                                                                                                                           LPG storage - exg LPG user
          Solar - LPG (Dir) -
           new LPG user                                                                                                                                                                                                                                                            LPG storage - new LPG user

          Solar - LPG (Ind) -                                                                                                                                                                                                                                                  Solar - LPG (Dir) - exg LPG user
            exg LPG user
          Solar - LPG (Ind) -                                                                                                                                                                                                                                                  Solar - LPG (Dir) - new LPG user
           new LPG user
                                                                                                                                                                                                                                                                               Solar - LPG (Ind) - exg LPG user
          Gas inst - exg gas




                                                                                                                                                                                                                                                                   <NSUM V3>
                user                                                                                                                                                                                                                                                           Solar - LPG (Ind) - new LPG user
         Gas inst - new gas
                user                                                                                                                                                                                                                                                                 Gas storage - exg gas user

      Solar - gas (Dir) - exg                                                                                                                                                                                                                                                       Gas storage - new gas user
             gas user
      Solar - gas (Dir) - new                                                                                                                                                                                                                                                    Solar - gas (Dir) - exg gas user
             gas user




                                                                                                                                                          Gas Available
                                                                                                                                                                                                                                                                                Solar - gas (Dir) - new gas user
      Solar - gas (Ind) - exg
             gas user
                                                                                                                                                                                                                                                                                                                                                                                                                                               Gas Available




                                                                                                                                                                                                                                                                                 Solar - gas (Ind) - exg gas user
          Solar - gas (Ind) -
           new gas user                                                                                                                                                                                                                                                         Solar - gas (Ind) - new gas user




                                                    Z3 Capital
                                                                                                                                                                                                                                                                                                                                        Z4 Capital
                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Figure 23 Annualised cost of water heating options, NSW, Zone 3, Medium




                                                                                         Z3 Fuel charge
                                                                                                                                                                                                                                                                                                                                                                             Z4 Fuel charge




                                                                 Z3 Electricity charge
                                                                                                                                                                                                                                                                                                                                                     Z4 Electricity charge




                                                                                                                                                                                   Figure 24 Annualised cost of water heating options, NSW, Zone 3, Low delivery




80

                                                                                                          Z3 Pro rata standing charge
                                                                                                                                                                                                                                                                                                                                                                                               Z4 Pro rata standing charge
                                                              Annualised cost                                                                                                                                                                                                                                                         Annualsied cost




                                           $-
                                                                                                                                                                                                                                                                                                                   $-




                                                $200
                                                       $400
                                                                       $600
                                                                                                                     $800
                                                                                                                                                    $1,000
                                                                                                                                                             $1,200
                                                                                                                                                                                      $1,400
                                                                                                                                                                                                                                                                                                                        $200
                                                                                                                                                                                                                                                                                                                               $400
                                                                                                                                                                                                                                                                                                                                               $600
                                                                                                                                                                                                                                                                                                                                                                                             $800
                                                                                                                                                                                                                                                                                                                                                                                                                            $1,000
                                                                                                                                                                                                                                                                                                                                                                                                                                     $1,200
                                                                                                                                                                                                                                                                                                                                                                                                                                                              $1,400




                                                                                                                                                                                               delivery
                                                                                                                                                                                                                                                                                                                                                                                                                                                                       delivery

                Elec day rate - replace                                                                                                                                                                                                                                                 Elec day rate - replace

           Elec 315 litre OP 1 - replace                                                                                                                                                                                                                                           Elec 315 litre OP 1 - replace

             Solar-elec (Dir) - day rate                                                                                                                                                                                                                                             Solar-elec (Dir) - day rate

                  Solar-elec (Dir) - OP1                                                                                                                                                                                                                                                  Solar-elec (Dir) - OP1

         Solar-elec (Ind/Sel) - day rate                                                                                                                                                                                                                                         Solar-elec (Ind/Sel) - day rate

            Solar-elec (Ind/Sel) - OP 1                                                                                                                                                                                                                                             Solar-elec (Ind/Sel) - OP 1

                  Heat pump - day rate                                                                                                                                                                                                                                                    Heat pump - day rate

                      Heat pump - OP 1                                                                                                                                                                                                                                                        Heat pump - OP 1

          LPG storage - exg LPG user                                                                                                                                                                                                                                              LPG storage - exg LPG user

          LPG storage - new LPG user                                                                                                                                                                                                                                              LPG storage - new LPG user

      Solar - LPG (Dir) - exg LPG user                                                                                                                                                                                                                                        Solar - LPG (Dir) - exg LPG user

      Solar - LPG (Dir) - new LPG user                                                                                                                                                                                                                                        Solar - LPG (Dir) - new LPG user

      Solar - LPG (Ind) - exg LPG user                                                                                                                                                                                                                                        Solar - LPG (Ind) - exg LPG user

      Solar - LPG (Ind) - new LPG user                                                                                                                                                                                                                                        Solar - LPG (Ind) - new LPG user

            Gas storage - exg gas user                                                                                                                                                                                                                                              Gas storage - exg gas user

           Gas storage - new gas user                                                                                                                                                                                                                                              Gas storage - new gas user

        Solar - gas (Dir) - exg gas user                                                                                                                                                                                                                                        Solar - gas (Dir) - exg gas user

       Solar - gas (Dir) - new gas user                                                                                                                                                                                                                                        Solar - gas (Dir) - new gas user
                                                                                                                                                                                                                                                                                                                                                                                                                                              Gas Available




                                                                                                                                                                      Gas Available
        Solar - gas (Ind) - exg gas user                                                                                                                                                                                                                                        Solar - gas (Ind) - exg gas user

       Solar - gas (Ind) - new gas user                                                                                                                                                                                                                                        Solar - gas (Ind) - new gas user




                                                               Z4 Capital
                                                                                                                                                                                                                                                                                                                                       Z3 Capital




                                                                                                    Z4 Fuel charge
                                                                                                                                                                                                                                                                                                                                                                            Z3 Fuel charge




                                                                                                                                                                                               Figure 26 Annualised cost of water heating options, Victoria, Zone 4, Medium




                                                                            Z4 Electricity charge
                                                                                                                                                                                                                                                                                                                                                    Z3 Electricity charge




81

                                                                                                                                                                                                                                                                                                                                                                                                                                                                       Figure 25 Annualised cost of water heating options, Queensland, Zone 3, Medium




                                                                                                                      Z4 Pro rata standing charge
                                                                                                                                                                                                                                                                                                                                                                                              Z3 Pro rata standing charge
The annualised costs of replacement electric water heaters is at the left side of each
diagram. The cost of replacement options where natural gas is not available are to the
left of the vertical red line. All options on the graph (other than electric) would be
available where natural gas is available.

The relative ranking of options by lifetime cost is much the same in each State and in
each Zone, and also similar at low hot water delivery as at medium delivery. Where
natural gas is available, either conventional gas or heat pump is the least cost complying
option in Zone 3, and conventional gas in Zone 4. The relative ranking of gas and heat
pump heat depends on whether the heat pump is connected to the off-peak tariff. In
most cases the replacement options are equal to or lower in cost than the electric water
heater replaced, even where it is connected to the off-peak tariff.

Where gas is not available, heat pump or solar-electric water heaters are the least cost
compliance option. Conventional LPG is always more costly because of the high fuel
cost, although solar-LPG is comparable with excluded day-rate electric water heating in
many cases (but a more costly compliance option than solar-electric or heart pump).

Therefore even in non-gas areas householders are likely to be no worse off through the
exclusion of electric storage water heaters. LPG would also be a permitted option, but
the very high running costs would make it uneconomic except where occupation was
intermittent and/or water use was low. At lower hot water use (Figure 24 and Figure
26) the cost disadvantage of LPG compared with solar-electric is much reduced. LPG
would also offer a fallback option in areas or buildings where for some reason solar or
heat pump water heaters were unacceptable, or the local climate made them ineffective.

The annualised cost profile of the conventional water heating options is dominated by
energy costs, whereas for solar and heat pump models it is capital costs that dominate.
Many householders will prefer (or be advised to adopt) the lowest capital cost
compliance option, even if it is the highest in annualised costs. In some cases they will
do so because they are unaware of the projected annualised cost and in some cases they
will do so because they are capital constrained. Of course, the offer of assistance to
overcome the capital constraint – such as a rebate for the purchase of a solar or heat
pump water heater – will increase the share of households taking those options. The
value of such rebates is not factored into Figure 22 to Figure 25, for reasons previously
discussed.

The selection of a water heater that is not the most cost-effective type for that household
is not confined to low capital cost options. Even without rebates, some householders
will voluntarily adopt higher-cost solar or heat pump water heating options that are not
cost-effective for them compared to the alternatives. Therefore, when modelling the
national impacts – the aggregated responses of all households to the proposed measure –
it cannot be assumed that they will all take the most cost-effective or even the lowest
capital cost compliance option available to them. NIEIR applied the same decision
algorithms as in the NR scenario (S1) to model the choice between complying water
heaters in S2, S3 and S4 scenarios.




                                                                                      82
National Impacts

This section reviews the projected national impacts of the proposed measures, for the
scenarios listed in Table 14. The differences between Scenario 0 (the ‘ideal’ or ‘perfect
market’) and Scenario 1 (‘No Regs') indicate the extent of the influence of split
incentives and poor information on the water heater market. Scenario 1 is used as the
basis for estimating the impact of the proposed measures.

The differences between S2 and S1 indicate the impact of a ‘rapid phase-out’ strategy in
which electric water heater are excluded from all regions from mid 2010. The
differences between S3 and S1 indicate the impact of an ‘extended phase-out’ strategy
in which electric water heater are excluded from gas-available regions after 2010, and
from non-gas regions after 2012. The differences between S4 and S1 indicate the
impact of the Water Heater Industry Proposal (WHIP), in which electric water heaters
are excluded from gas-available regions after 2010, but are never excluded from non-
gas regions; however, rental homes in non-gas regions must replace with a renewable
energy water heater after 2012.

All scenarios price in the value of RECs (at $40/REC) to purchasers of solar and heat
pump water heaters, but do not price in other rebates, for reasons set out earlier.
Therefore they understate, to some extent, the current surge on the market share of
solar, heat pump (and in NSW, of gas) water heaters due to rebates. They simulate the
likely market composition if those rebates were discontinued and RECs remained the
only subsidy on capital costs.

Water Heater Stock

Figure 27 shows that in an ideal market (S0) the electric share of the water heater stock
would rapidly shift to solar-electric and heat pump, and LPG would disappear because
of its high fuel cost. The gas share would decline slightly, and there would be a small
increase in solar-gas. (The total stock declines because this model only covers homes in
existence at 2010. New homes are covered by the separate requirements in the BCA).

Figure 28 illustrates the NR scenario, which builds in the level of inertia, general
resistance to higher capital other behaviours observed in the actual market. In this
scenario electric water heaters continue to be available and continue to make up nearly
half the stock. The market share of LPG grows slightly. The gas share remains about
the same as in S0, but the solar-gas share rises slightly more.

Figure 29 indicates the effect of removing electricity from the option mix in 2010 (S2).
The greatest shift is to solar-electric and heat pump, although LPG also grows, as the
lowest capital option in non-gas areas. The gas share increases slightly, as does solar-
gas. Figure 30 (S3) shows that delaying the phase-out of electric water heaters in non-
gas areas by 2 years make very little difference.

Figure 30 shows that the industry proposal (S4) would restrain the shift to LPG evident
in S2 and S3, because the most likely adopters (owners of rented houses in non-gas
areas) would be forced to use solar or heat pump. However, a large electric share would
remain due to owner-occupied houses in non-gas areas, which would be exempt from
constraints on their water heater choice.


                                                                                     83
Figure 27 Projected water heater stocks, pre-2011 houses, Scenario 0 (Ideal)

 9000000


 8000000


 7000000


 6000000
                                                                                                                                                              Other
                                                                                                                                                              LPG
 5000000                                                                                                                                                      Heat pump
                                                                                                                                                              Solar-gas
 4000000                                                                                                                                                      Solar-ele
                                                                                                                                                              Gas
                                                                                                                                                              Electric
 3000000


 2000000


 1000000


       0
           2010

                  2011

                         2012

                                2013

                                       2014

                                              2015

                                                     2016

                                                            2017

                                                                   2018

                                                                          2019

                                                                                 2020

                                                                                        2021

                                                                                               2022

                                                                                                      2023

                                                                                                             2024

                                                                                                                    2025

                                                                                                                           2026

                                                                                                                                  2027

                                                                                                                                         2028

                                                                                                                                                2029

                                                                                                                                                       2030
                                                                            <NSUM3>


Figure 28 Projected water heater stock, pre-2011 houses, Scenario 1 (No Regs)

 9000000


 8000000


 7000000


 6000000
                                                                                                                                                              Other
                                                                                                                                                              LPG
 5000000                                                                                                                                                      Heat pump
                                                                                                                                                              Solar-gas
 4000000                                                                                                                                                      Solar-ele
                                                                                                                                                              Gas
                                                                                                                                                              Electric
 3000000


 2000000


 1000000


       0
           2010

                  2011

                         2012

                                2013

                                       2014

                                              2015

                                                     2016

                                                            2017

                                                                   2018

                                                                          2019

                                                                                 2020

                                                                                        2021

                                                                                               2022

                                                                                                      2023

                                                                                                             2024

                                                                                                                    2025

                                                                                                                           2026

                                                                                                                                  2027

                                                                                                                                         2028

                                                                                                                                                2029

                                                                                                                                                       2030




                                                                            <NSUM3> 





                                                                                                                                                                  84
Figure 29 Projected water heater stock, pre-2011 houses, Scenario 2 (Rapid)

 9000000


 8000000


 7000000


 6000000
                                                                                                                                                              Other
                                                                                                                                                              LPG
 5000000                                                                                                                                                      Heat pump
                                                                                                                                                              Solar-gas
 4000000                                                                                                                                                      Solar-ele
                                                                                                                                                              Gas
                                                                                                                                                              Electric
 3000000


 2000000


 1000000


       0
           2010

                  2011

                         2012

                                2013

                                       2014

                                              2015

                                                     2016

                                                            2017

                                                                   2018

                                                                          2019

                                                                                 2020

                                                                                        2021

                                                                                               2022

                                                                                                      2023

                                                                                                             2024

                                                                                                                    2025

                                                                                                                           2026

                                                                                                                                  2027

                                                                                                                                         2028

                                                                                                                                                2029

                                                                                                                                                       2030
                                                                            <NSUM3>


Figure 30 Projected water heater stock, pre-2011 houses, Scenario 3 (Extended)

 9000000


 8000000


 7000000


 6000000
                                                                                                                                                              Other
                                                                                                                                                              LPG
 5000000                                                                                                                                                      Heat pump
                                                                                                                                                              Solar-gas
 4000000                                                                                                                                                      Solar-ele
                                                                                                                                                              Gas
                                                                                                                                                              Electric
 3000000


 2000000


 1000000


       0
           2010

                  2011

                         2012

                                2013

                                       2014

                                              2015

                                                     2016

                                                            2017

                                                                   2018

                                                                          2019

                                                                                 2020

                                                                                        2021

                                                                                               2022

                                                                                                      2023

                                                                                                             2024

                                                                                                                    2025

                                                                                                                           2026

                                                                                                                                  2027

                                                                                                                                         2028

                                                                                                                                                2029

                                                                                                                                                       2030




                                                                            <NSUM3> 





                                                                                                                                                                  85
Figure 31 Projected water heater stock, pre-2011 houses, Scenario 4 (WHIP)

 9000000


 8000000


 7000000


 6000000
                                                                                                                                                              Other
                                                                                                                                                              LPG
 5000000                                                                                                                                                      Heat pump
                                                                                                                                                              Solar-gas
 4000000                                                                                                                                                      Solar-ele
                                                                                                                                                              Gas
                                                                                                                                                              Electric
 3000000


 2000000


 1000000


       0
           2010

                  2011

                         2012

                                2013

                                       2014

                                              2015

                                                     2016

                                                            2017

                                                                   2018

                                                                          2019

                                                                                 2020

                                                                                        2021

                                                                                               2022

                                                                                                      2023

                                                                                                             2024

                                                                                                                    2025

                                                                                                                           2026

                                                                                                                                  2027

                                                                                                                                         2028

                                                                                                                                                2029

                                                                                                                                                       2030
                                                                            <NSUM3> 




Water Heater Sales

Figure 16 shows the annual water heater sales to the replacement market under each
Scenario. These sales transform the water heater stock from a composition that is
identical in 2010 under each scenario to the stock compositions in Figure 27 to Figure
31. Sales are shown as three year moving average, because the dynamic nature of the
modelling gives fluctuations from year to year (just as in the real market). The
scenarios with a high share of solar water heater sales in the early years show a dip in
the market size after 2010, because solar water heaters are assumed to last 2 years
longer than their conventional counterparts, so the replacement of the post 2010 cohorts
is pushed out.

Figure 32 and Table 18 show the projected increase in sales of non-electric water
heaters over the period 2011-2020 to make up the 3.6 to 3.8 million sales diverted from
electric water heaters (the annual sales trends for each type of water heater are in
Appendix 8). In S2 and S3, the sales that would have gone to electric are diverted
roughly equally to gas, solar-electric, heat pump and LPG, with a small share going to
solar-gas (it should be noted that this is without the effects of rebates for solar/HP
purchases, which if available would reduce the diversion of sales to LPG). In S4, the
share going to LPG is greatly reduced. While the share of diverted sales going to solar
and heat pump water heaters in S4 appears to be higher than in S2 and S3, the number
of gains for those types is lower, because electric water heaters are permitted to remain
on the market in non-gas areas.




                                                                                                                                                                  86
   Figure 32 Projected change in total sales over period 2011-2020

                                        1100000



                                         900000
     Change in sales cf S1, 2011-2020




                                         700000



                                         500000



                                         300000



                                         100000



                                        -100000
                                                                            S4 (WHIP)




                                                                                                                   S4 (WHIP)




                                                                                                                                                            S4 (WHIP)




                                                                                                                                                                                                  S4 (WHIP)




                                                                                                                                                                                                                                         S4 (WHIP)
                                                               S2 (Rapid)




                                                                                                      S2 (Rapid)




                                                                                                                                               S2 (Rapid)




                                                                                                                                                                                     S2 (Rapid)




                                                                                                                                                                                                                           S2 (Rapid)
                                                  (Extended)




                                                                                         (Extended)




                                                                                                                               (Extended)




                                                                                                                                                                        (Extended)




                                                                                                                                                                                                              (Extended)
                                                      S3




                                                                                             S3




                                                                                                                                   S3




                                                                                                                                                                            S3




                                                                                                                                                                                                                  S3
                                                               Gas                             Solar-electric                               Solar-gas                            Heatpump                                  LPG




                                          Table 18 Market share gains by non-gas water heater types, 2011-2020
              % of electric                                                                     % of diverted sales going to other water heater types
              sales diverted                                                            Gas   Solar-elec Solar-gas Heat pump        LPG         Solar   Solar+HP
S3 (Extended)            92%                                                              21%       24%          7%         20%        28%          31%       51%
S2 (Rapid)             100%                                                               18%       25%          8%         22%        27%          32%       55%
S4 (WHIP)                35%                                                              12%       35%         18%         35%          1%         53%       88%



   Water Heater Capital Costs

   The shift in market share from electric to other types of water heaters will increase both
   purchase and installation costs. The estimated increase in average water heater capital
   costs, compared with the NR scenario, is $519 per household (S2), $449 (S3) or $292
   (S4) (Figure 33). This is averaged over the period 2011-2020, by which time almost
   every electric water heater will have been replaced, and across both gas and non-gas
   areas, so households without access to gas could face significantly higher additional
   capital costs.

   Figure 33 and Table 19 indicate the increase in average water heater capital costs
   compared with NR by household income and tenancy categories. For S2 and S3, the
   highest capital cost impacts are on households in the $60-100k bracket. The impacts on
   the lower and higher income brackets are significantly lower, possibly because these
   households have greater access to natural gas. The impacts on owner-occupied
   households are somewhat higher than for rental households.

   Scenario S4 (the Water Heater Industry Proposal) has a lower cost impact overall, but a
   less equitable impact in that it is significantly higher for low-income households than



                                                                                                                                                                                                                                        87

for high-income, and on rental households than on owner-occupied (corresponding to
the higher proportion of low-income households that are renters – see Table 21).

This is because after 2012 owners of rental houses without access to gas would be
forced to replace a failed electric water heater with either a solar-electric or a heat
pump, leading to an average $800 increase in capital cost. This could create a strong
incentive for owners to either circumvent the requirement or to recover the additional
cost in rental, rather than to accept lower rental profits.

If electric water heaters are excluded, the lowest capital cost alternative in non-gas areas
would be LPG. S4 virtually prevents the use of LPG water heaters, unlike S2 or S3,
(Figure 32). Therefore most rental households would still be better off through lower
running costs, even if the full $800 extra capital cost were passed on to them. S4 impose
relatively little additional cost on owner-occupiers, who would be free to install electric
water heater replacements in non-gas areas.

Figure 34 indicates the total increase in water heater capital costs for all households
replacing a water heater in 2012 (ie the average increase in Figure 33 multiplied by the
number of households in each category). The total costs are highest under S2 (rapid
implementation after 2010) and lowest under S4 (WHIP), with S3 in between.

A disproportionate share of the increase in capital costs is borne by the $20-40k income
group (Table 20). This is because this group has a higher share of electric water heaters
and a lower share of gas water heaters, so they face higher replacement costs. Also, this
group has a higher share of rental households, which in the WHIP proposal would be
forced to replace with renewable energy water heaters.

Table 19 Change in average water heater capital costs, 2011-20, compared with S1
                          Category      S2       S3         S4
                         <$20k        $ 508   $ 440     $   372
                         $20-40k      $ 534   $ 450     $   352
                         $40-60k      $ 478   $ 447     $   292
                         $60-80k      $ 524   $ 463     $   218
                         $80-100k     $ 508   $ 469     $   251
                         >$100k       $ 520   $ 429     $   174
                         All HH       $ 512   $ 449     $   292
                         Max          $ 534   $ 469     $   372
                         Min          $ 478   $ 429     $   174
                         Difference   $  55   $    40   $   198
                         Owners       $ 522   $ 451     $   123
                         Renters      $ 482   $ 439     $   800
                         Difference   $  40   $    12 −$     677
                                      <NSUM 4 V3\SUM> 





                                                                                       88
                                                                   $M Increase in total installled cost                                                                                                                                                                            $/WH Increase in average installed cost




                                                       -$50
                                                              $0
                                                                     $50
                                                                            $100
                                                                                        $150
                                                                                                        $200
                                                                                                               $250
                                                                                                                      $300
                                                                                                                             $350
                                                                                                                                                                                                                                                                      -$100
                                                                                                                                                                                                                                                                              $0
                                                                                                                                                                                                                                                                                     $100
                                                                                                                                                                                                                                                                                            $200
                                                                                                                                                                                                                                                                                                   $300
                                                                                                                                                                                                                                                                                                               $400
                                                                                                                                                                                                                                                                                                                               $500
                                                                                                                                                                                                                                                                                                                                      $600
                                                                                                                                                                                                                                                                                                                                             $700
                                                                                                                                                                                                                                                                                                                                                    $800
                                                                                                                                                                                                                                                                                                                                                           $900


                                          S2 (Rapid)                                                                                                                                                                                                     S2 (Rapid)
                                       S3 (Extended)                                                                                                                                                                                                  S3 (Extended)




                    <$20k
                                                                                                                                                                                                                                   <$20k
                                          S4 (WHIP)                                                                                                                                                                                                      S4 (WHIP)
                                          S2 (Rapid)                                                                                                                                                                                                     S2 (Rapid)
                                       S3 (Extended)                                                                                                                                                                                                  S3 (Extended)




                    $20-40k
                                                                                                                                                                                                                                   $20-40k
                                          S4 (WHIP)                                                                                                                                                                                                      S4 (WHIP)
                                          S2 (Rapid)                                                                                                                                                                                                     S2 (Rapid)
                                       S3 (Extended)                                                                                                                                                                                                  S3 (Extended)




                    $40-60k
                                                                                                                                                                                                                                   $40-60k
                                          S4 (WHIP)                                                                                                                                                                                                      S4 (WHIP)
                                          S2 (Rapid)                                                                                                                                                                                                     S2 (Rapid)
                                       S3 (Extended)                                                                                                                                                                                                  S3 (Extended)
                                          S4 (WHIP)                                                                                                                                                                                                      S4 (WHIP)
                                          S2 (Rapid)                                                                                                                                                                                                     S2 (Rapid)
                                       S3 (Extended)                                                                                                                                                                                                  S3 (Extended)




                    $60-80k $80-100k
                                          S4 (WHIP)




                                                                                                                                                                                                                                   $60-80k $80-100k
                                                                                                                                                                                                                                                         S4 (WHIP)
                                          S2 (Rapid)                                                                                                                                                                                                     S2 (Rapid)
                                       S3 (Extended)                                                                                                                                                                                                  S3 (Extended)




                                                                                                                                                                                                                      <NSUM4 V3>




      <NSUM4 V3>

                    >$100k
                                                                                                                                                                                                                                   >$100k
                                          S4 (WHIP)                                                                                                                                                                                                      S4 (WHIP)
                                          S2 (Rapid)                                                                                                                                                                                                     S2 (Rapid)
                                       S3 (Extended)                                                                                                                                                                                                  S3 (Extended)




                    Owners
                                                                                                                                                                                                                                   Owners

                                          S4 (WHIP)                                                                                                                                                                                                      S4 (WHIP)
                                          S2 (Rapid)                                                                                                                                                                                                     S2 (Rapid)
                                       S3 (Extended)                                                                                                                                                                                                  S3 (Extended)
                                                                                                                                                                                                                                   Rental




                    Rental
                                          S4 (WHIP)                                                                                                                                                                                                      S4 (WHIP)
                                          S2 (Rapid)                                                                                                                                                                                                     S2 (Rapid)
                                       S3 (Extended)                                                                                                                                                                                                  S3 (Extended)
                                                                                                                                                                                                                                   All HH




                    All HH
                                          S4 (WHIP)                                                                                                                                                                                                      S4 (WHIP)
                                                                                                                                                                                                                                                                                                                                                                  Figure 33 Change in average water heater capital costs, 2011-20




                                                                                                                                    Figure 34 Change in total annual water heater capital costs, 2011-20 (averaged)




89

                                                                                   Extra purchase
                                                                                                                                                                                                                                                                                                          Extra purchase




                                                                                   Extra installation
                                                                                                                                                                                                                                                                                                          Extra installation
Figure 35 Change in total annual water heater capital costs, 2011-20 (averaged),
                             by income category
                                      $350



                                      $300



                                      $250
              $M Extra capital cost




                                                                                                                                                                                                                                                  >$100k
                                      $200                                                                                                                                                                                                        $80-100k
                                                                                                                                                                                                                                                  $60-80k
                                                                                                                                                                                                                                                  $40-60k
                                      $150                                                                                                                                                                                                        $20-40k
                                                                                                                                                                                                                                                  <$20k


                                      $100



                                       $50



                                        $0
                                                                          S2                                                            S3                                                          S4

                                                                                                                          <NSUM 4 V3> 



                                      Figure 36 Projected capital cost impacts on low-income groups, renters and
                                                                  owners (Scenario 3)

                                      600                                                                                                                                                       1200                                   Extra $M, new WH, All
                                                                                                                                                                                                                                       HH (LHS)


                                      500                                                                                                                                                       1000
                                                                                                                                                                                                                                       Extra $M, new WH,
                                                                                                                                                                                                                                       owning HH (LHS)
$M extra capital cost - All WH




                                                                                                                                                                                                         $ per WH extra capital cost




                                      400                                                                                                                                                       800

                                                                                                                                                                                                                                       Extra $M, new WH,
                                                                                                                                                                                                                                       Total Low Income
                                      300                                                                                                                                                       600                                    (LHS)


                                                                                                                                                                                                                                       Extra $M, new WH,
                                      200                                                                                                                                                       400                                    renting HH (LHS)



                                      100                                                                                                                                                       200                                    Extra $/elec WH
                                                                                                                                                                                                                                       displaced, Low
                                                                                                                                                                                                                                       income HH (RHS)

                                        0                                                                                                                                                       0
                                                                                                                                                                                                                                       Extra $/all new WH,
                                             2010
                                                    2011
                                                           2012
                                                                  2013
                                                                         2014
                                                                                2015
                                                                                       2016
                                                                                              2017
                                                                                                     2018
                                                                                                            2019
                                                                                                                   2020
                                                                                                                          2021
                                                                                                                                 2022
                                                                                                                                        2023
                                                                                                                                               2024
                                                                                                                                                      2025
                                                                                                                                                             2026
                                                                                                                                                                    2027
                                                                                                                                                                           2028
                                                                                                                                                                                  2029
                                                                                                                                                                                         2030




                                                                                                                                                                                                                                       Low income HH
                                                                                                                                                                                                                                       (RHS)


                                                                                                            < Income & Tenancy V3.xls>




                                                                                                                                                                                                                                                     90

    Table 20 Share of total increase in capital costs borne by income categories
                   Income        % of      % of total capital cost increment
                   category    Households S2 (Rapid) S3 (Extend) S4 (WHIP)
                   <$20k              19%       19%           18%        24%
                   $20-40k            24%       25%           25%        29%
                   $40-60k            19%       18%           19%        19%
                   $60-80k            16%       16%           17%        13%
                   $80-100k           10%       10%           10%         8%
                   >$100k             13%       12%           11%         7%
                                     100%      100%         100%        100%
                   Owning             75%       76%           76%        32%
                   Renting            25%       24%           24%        68%

Figure 36 details the capital cost impacts of Scenario 3 on the 43% of households with
an income of less than $40,000 and on rental households. The main points are:

•	 For lower-income households, the increase in average capital cost of replacement
   water heaters is about $200 in the 2011, rising to about $500 by 2015 and remaining
   at that level (the right axis is the reference).

•	 However, the additional capital costs are not distributed across all low-income
   households, but fall on those who would otherwise have replaced an electric with
   another electric water heater, but are unable to do because of the proposed
   regulation. For this group, the average increase in water heater capital cost is about
   $520 in 2011 rising to about $850 in 2016, then to $950 by 2030 (the variations
   about this trend line are due to modelling effects). These capital cost increments are
   significantly lower than the value of the rebates currently available to households
   replacing an electric water heater, which can exceed $2,100.

•	 The total value of the capital cost increment for low-income households is about $M
   45 M in 2011 rising to about $M 135 by 2014, then to $M 160 by 2030 (the left axis
   is the reference). This compares with an estimated value of $M 246 for
   Commonwealth and State rebates to all water heater purchasers in 2009.

•	 The total value of the capital cost increment for rental households is about $30 M in
   2011 rising to about $100 M by 2030 (the left axis is the reference). Of course, not
   all rental household are low-income, but Table 21 indicates that low-income
   households are more likely to be renters than middle or high income households.

         Table 21 Home ownership and rental status by household income
         Income Category                              Low       Middle       High
         Mean equivalised disposable household income $k 21     $k 36        $k 86
         Home owners/buyers                           65.9%     69.8%        75.8%
         Private rental                               23.9%     26.2%        21.5%
         Public rental                                6.5%      1.0%         0.2%
         Other                                        3.7%      3.0%         2.5%
                                                      100%      100$         100$
            ABS 6523.0 - Household Income and Income Distribution, Australia, 2007-08




                                                                                        91
Benefit/Cost Ratios

Energy Savings and Net Costs

The proposed measure is projected to lead to an increase in annual household
expenditure on replacement water heaters compared with the NR scenario, but also a
reduction in energy use and energy costs.

Figure 37 indicates the projected capital cost impacts of S2, S3 and S4 compared with
the NR scenario (S1), the projected energy cost impacts and the change in net costs (ie
capital cost increases less energy cost savings). Impacts are plotted in the year they
occur, in undiscounted 2008 dollars. The effects of time discounting are discussed later.

For the first years after implementation, the measure would lead to higher net costs, but
between the fifth and sixth year the value of annual energy savings would exceed the
value of the higher capital costs, producing net savings.

                                            Figure 37 Projected change from NR scenario: capital, energy and net costs
                                            $600

                                                                                                                          Change in capital
                                                                                                                          costs S2 (Rapid)
                                            $400
                                                                                                                          Change in capital
                                                                                                                          costs S3 (Extended)
 Change in cost from S1 ($M undiscounted)




                                            $200
                                                                                                                          Change in capital
                                                                                                                          costs S4 (WHIP)

                                              $0                                                                          Change in total cost
                                                                                                                          S4 (WHIP)

                                                                                                                          Change in total cost
                                            -$200                                                                         S2 (Rapid)

                                                                                                                          Change in total cost
                                                                                                                          S3 (Extended)
                                            -$400

                                                                                                                          Change in energy
                                                                                                                          costs S4 (WHIP)
                                            -$600
                                                                                                                          Change in energy
                                                                                                                          costs S3 (Extended)

                                            -$800                                                                         Change in energy
                                                    2011



                                                           2012



                                                                  2013



                                                                         2014



                                                                                2015



                                                                                       2016



                                                                                              2017



                                                                                                     2018



                                                                                                            2019



                                                                                                                   2020




                                                                                                                          costs S2 (Rapid)




The net present value of the projected capital and energy costs under each scenario over
10 year (Truncated), 10 year (Cohort), 20 year (Truncated) and 20 year (Cohort) periods
are summarised in Table 22 to Table 25 (for a discount rate of 6%). If the NPV of the
energy saving exceeds the NPV of the additional capital costs the measure has a
benefit/cost (B/C) ratio of 1 or more. All three implementation scenarios meet this
criterion over 10 years (Cohort) and 20 years (Truncated and Cohort), but over a 10 year
(Truncated) period S2 (rapid implementation) and S3 (extended implementation) have
B/C ratios slightly lower than 1, while S4 (the WHIP scenario) slightly exceeds 1.

Where the B/C ratio is less than 1, it is possible to calculate a nominal abatement cost,
beyond the emissions value incorporated in energy prices via the CPRS. For S2, the


                                                                                                                                       92

           implied cost abatement is $6.8 per tonne CO2-avoided, while for S3 it is $4.8 per tonne
           CO2-e avoided. Where a negative abatement cost is shown this means that the value of
           energy savings exceed the value of capital cost increases, so there is no additional
           abatement cost. S2 and S3 are relatively close in costs and abatement. Phasing in the
           implementation (S3) increases the B/C ratio slightly, but reduces the net monetary
           benefit and the greenhouse savings. By contrast S4 has significantly lower costs but
           also lower benefits, with slightly higher B/C ratios. However, the projected emissions
           savings are 55% to 65% lower than the other scenarios.

           Table 22 National costs and benefits of proposals, 2011-2020 (Truncated)
Scenario            $M Net Present Value at 6% discount rate       $M change from NR Scenario B/C           Mt $/tonne
                                                                    Capital Energy Total net       ratios CO2-e saved
                Purchase Install Capital Energy           Total      cost       cost      cost             saved  (a)
S1 (No Regs)      $6,125 $2,910 $9,036 $18,074 $27,109                    $0         $0        $0
S2 (Rapid)        $7,405 $3,979 $11,384 $15,946 $27,330 $2,349 −$2,128                      $220       0.9   32.5    6.8
S3 (Extend)       $7,179 $3,862 $11,041 $16,208 $27,249 $2,006 −$1,865                      $140       0.9   29.4    4.8
S4 (WHIP)         $6,982 $3,474 $10,456 $16,583 $27,039 $1,420 −$1,491                      −$71       1.0   11.8  −6.0
         < State NPVs V6.xls> (a) Negative values indicate that value of energy savings cover the abatement costs


           Table 23 National costs and benefits of proposals, 2011-2020 (Cohort)
Scenario            $M Net Present Value at 6% discount rate      $M change from NR Scenario B/C            Mt $/tonne
                                                                    Capital Energy Total net ratios CO2-e saved
                Purchase Install Capital Energy           Total      cost       cost      cost             saved  (a)
S1 (No Regs)      $6,125 $2,910 $9,036 $24,014 $33,050                    $0         $0        $0
S2 (Rapid)        $7,405 $3,979 $11,384 $20,431 $31,815 $2,349 −$3,584 −$1,235                         1.5   57.8 −21.1
S3 (Extend)       $7,179 $3,862 $11,041 $20,817 $31,858 $2,006 −$3,197 −$1,192                         1.6   53.6  -21.9
S4 (WHIP)         $6,982 $3,474 $10,456 $21,483 $31,939 $1,420 −$2,531 −$1,111                         1.8   21.9 −50.6
         < State NPVs V6.xls> (a) Negative values indicate that value of energy savings cover the abatement costs


           Table 24 National costs and benefits of proposals, 2011-2030 (Truncated)
Scenario            $M Net Present Value at 6% discount rate       $M change from NR Scenario B/C            Mt $/tonne
                                                                    Capital Energy Total net ratios CO2-e saved
                Purchase Install    Capital Energy        Total       cost       cost     cost             saved   (a)
S1 (No Regs)      $9,386 $4,502 $13,888 $28,733 $42,621                    $0         $0       $0
S2 (Rapid)       $11,144 $5,934 $17,079 $23,873 $40,952 $3,191 −$4,860 −$1,669                         1.5    77.9 −21.4
S3 (Extend)      $10,906 $5,814 $16,720 $24,280 $41,000 $2,832 −$4,453 −$1,621                         1.6    74.4 −21.8
S4 (WHIP)        $10,714 $5,355 $16,069 $24,937 $41,006 $2,181 −$3,795 −$1,614                         1.7    34.2 −47.2
         < State NPVs V6.xls> (a) Negative values indicate that value of energy savings cover the abatement costs


           Table 25 National costs and benefits of proposals, 2011-2030 (Cohort)
Scenario            $M Net Present Value at 6% discount rate       $M change from NR Scenario B/C            Mt $/tonne
                                                                    Capital Energy Total net ratios CO2-e saved
                Purchase Install    Capital Energy        Total       cost       cost     cost             saved   (a)
S1 (No Regs)      $9,386 $4,502 $13,888 $31,906 $45,794                    $0         $0       $0
S2 (Rapid)       $11,144 $5,934 $17,079 $26,203 $43,282 $3,191 −$5,702 −$2,512                         1.8    98.6 −25.5
S3 (Extend)      $10,906 $5,814 $16,720 $26,647 $43,367 $2,832 −$5,259 −$2,427                         1.9    94.9 −25.6
S4 (WHIP)        $10,714 $5,355 $16,069 $27,315 $43,384 $2,181 −$4,591 −$2,410                         2.1    46.2 −52.2
         < State NPVs V6.xls> (a) Negative values indicate that value of energy savings cover the abatement costs




                                                                                                         93
By Household

Impacts can be expressed on a per household basis by dividing by the national impacts
by the number of water heaters to be installed over the corresponding period. Table 26
to Table 28 indicate that the net benefit per average water heater purchasing household
under S3 (compared with the No Regs scenario) ranges from a net cost of $20
(calculated over 2011-2020, Truncated) to a net benefit of $171 (2011-2020, Cohort).
S3 results in an average greenhouse saving of 7.8 tonnes CO2-e per household over the
lifetime of the water heater (only the Cohort analysis gives a true value – the Truncated
analyses exclude part of the service lives for some cohorts). The average B/C ratios per
household are of course identical to the national values in the corresponding table.

       Table 26 Per household impacts of proposals, 2011-2020 (Truncated)
                             Change from NR Scenario           B/C ratios     tonnes
                                                                            CO2-e saved
                         Capital cost Energy cost Total cost                 per HH
         S1 (No Regs)             $0          $0          $0
         S2 (Rapid)         $ 341 −$ 309            $     32      0.9           4.7
         S3 (Extended)      $ 291 −$ 271            $     20      0.9           4.3
         S4 (WHIP)          $ 202 −$ 212 −$               10      1.0           1.7
                                           <Aust E.xls>


         Table 27 Per household impact of proposals, 2011-2020 (Cohort)
                             Change from NR Scenario           B/C ratios     tonnes
                                                                            CO2-e saved
                       Capital cost Energy cost Total cost                   per HH
         S1 (No Regs)           $0          $0          $0
         S2 (Rapid)       $ 341 −$ 519 −$ 177                     1.5           8.4
         S3 (Extended)    $ 291 −$ 462 −$ 171                     1.6           7.8
         S4 (WHIP)        $ 202 −$ 360 −$ 157                     1.7           3.1


       Table 28 Per household impacts of proposals, 2011-2030 (Truncated)
                             Change from NR Scenario           B/C ratios     tonnes
                                                                            CO2-e saved
                         Capital cost Energy cost Total cost                 per HH
         S1 (No Regs)             $0          $0          $0
         S2 (Rapid)         $ 246 −$ 374 −$ 129                   1.5           6.0
         S3 (Extended)      $ 218 −$ 343 −$ 125                   1.6           5.7
         S4 (WHIP)          $ 165 −$ 287 −$ 122                   1.8           2.6


         Table 29 Per household impacts of proposals, 2011-2030 (Cohort)
                             Change from NR Scenario           B/C ratios     tonnes
                                                                            CO2-e saved
                         Capital cost Energy cost Total cost                 per HH
         S1 (No Regs)             $0          $0          $0
         S2 (Rapid)         $ 246 −$ 439 −$ 194                   1.8           7.6
         S3 (Extended)      $ 218 −$ 405 −$ 187                   1.9           7.3
         S4 (WHIP)          $ 165 −$ 347 −$ 182                   2.1           3.5




                                                                                          94
           National impacts excluding South Australia

           SA has implemented measures which will affect a higher share of households than
           would be impacted under Phase 1 of S3 or under S4, but a somewhat lower share than
           would be impacted in Phase 2 of S3 or under S2. The analysis in this RIS has not
           extended to estimating the differences in impact resulting from the different rules and
           selection criteria that apply, and the rate of application of those criteria, eg with regard
           to share of households exempted.

           To clarify the impacts of the proposed measure beyond the impact of the current
           regulations applying in SA, Table 30 to Table 33 present the results of the analyses
           excluding the SA impacts, because that State is already committed to measures which
           capture most of the impacts of S2, S3 or S4. These tables indicate national impacts
           excluding SA.

           Table 30 National (less SA) costs and benefits of proposals, 2011-2020 (Truncated)
Scenario            $M Net Present Value at 6% discount rate       $M change from NR Scenario B/C           Mt $/tonne
                                                                    Capital Energy Total net ratios CO2-e saved
              Purchase Install Capital Energy             Total       cost      cost      cost             saved   (a)
S1 (NR)         $5,605 $2,679 $8,284 $16,505 $24,789                       $0        $0        $0
S2 (Rapid)      $6,767 $3,675 $10,442 $14,559 $25,001 $2,158 −$1,946                        $212     0.9      30.6    6.9
S3 (Extend)     $6,567 $3,570 $10,138 $14,805 $24,943 $1,854 −$1,699                        $154     0.9      27.5    5.6
S4 (WHIP)       $6,320 $3,182 $9,503 $15,179 $24,681 $1,218 −$1,326                        −$107     1.1      10.8 −10.0
            < Aust E.xls> (a) Negative values indicate that value of energy savings cover the abatement costs


           Table 31 National (less SA) costs and benefits of proposals, 2011-2020 (Cohort)
Scenario            $M Net Present Value at 6% discount rate      $M change from NR Scenario B/C            Mt $/tonne
                                                                    Capital Energy Total net      ratios CO2-e saved
             Purchase Install Capital Energy             Total       cost      cost       cost            saved   (a)
S1 (NR)        $5,605 $2,679 $8,284 $21,929 $30,213                       $0        $0         $0
S2 (Rapid)     $6,767 $3,675 $10,442 $18,642 $29,084 $2,158 −$3,287 −$1,129                           1.5    54.3 −20.8
S3 (Extend)    $6,567 $3,570 $10,138 $19,007 $29,145 $1,854 −$2,921 −$1,068                           1.6    50.2 −21.3
S4 (WHIP)      $6,320 $3,182 $9,503 $19,663 $29,166 $1,218 −$2,266 −$1,048                            1.9    20.0 −52.5
            <Aust E.xls> (a) Negative values indicate that value of energy savings cover the abatement costs


           Table 32 National (less SA) costs and benefits of proposals, 2011-2030 (Truncated)
Scenario             $M Net Present Value at 6% discount rate      $M change from NR Scenario B/C            Mt $/tonne
                                                                    Capital Energy Total net ratios CO2-e saved
             Purchase Install      Capital Energy         Total       cost      cost      cost             saved   (a)
S1 (NR)         $8,568 $4,138 $12,706 $26,231 $38,937                      $0        $0        $0
S2 (Rapid)    $10,171 $5,480 $15,651 $21,776 $37,426 $2,945 −$4,455 −$1,510                          1.5      73.1 −20.7
S3 (Extend)     $9,952 $5,363 $15,315 $22,163 $37,478 $2,609 −$4,068 −$1,459                         1.6      69.6 −21.0
S4 (WHIP)       $9,686 $4,905 $14,590 $22,814 $37,405 $1,885 −$3,417 −$1,532                         1.8      31.2 −49.1
            <Aust E.xls> (a) Negative values indicate that value of energy savings cover the abatement costs




                                                                                                          95

           Table 33 National (less SA) costs and benefits of proposals, 2011-2030 (Cohort)
Scenario             $M Net Present Value at 6% discount rate      $M change from NR Scenario B/C            Mt $/tonne
                                                                    Capital Energy Total net      ratios CO2-e saved
             Purchase Install      Capital Energy         Total       cost      cost      cost             saved   (a)
S1 (NR)         $8,568 $4,138 $12,706 $29,127 $41,833                      $0        $0        $0
S2 (Rapid)    $10,171 $5,480 $15,651 $23,896 $39,547 $2,945 −$5,231 −$2,287                           1.8     92.4 −24.8
S3 (Extend)     $9,952 $5,363 $15,315 $24,321 $39,636 $2,609 −$4,807 −$2,197                          1.8     88.9 −24.7
S4 (WHIP)       $9,686 $4,905 $14,590 $24,984 $39,575 $1,885 −$4,143 −$2,258                          2.2     42.1 −53.7
            <Aust E.xls> (a) Negative values indicate that value of energy savings cover the abatement costs



           Sensitivity tests by Jurisdiction

           The national benefit/cost ratio for Scenario 3, in which the measure is implemented in
           some areas in 2010 and in all areas in 2012, is in the range 0.9 to 1.9, depending on the
           time period of analysis (10 or 20 years) and whether truncated or cohort (Table 34,
           Table 35). The benefit/cost ratios vary by jurisdiction, as indicated in Table 34. The
           ‘central projection’, which uses the most likely capital cost and energy price projections,
           gives jurisdictional B/C ratios ranging from 0.6 to 0.9 (10 year Cohort), 0.7 to 2.9 (20
           year Cohort), 0.3 to 1.6 (10 year Truncated) and 0.6 to 2.5 (20 year Truncated). B/C
           ratios of 1 or higher are highlighted in green, and those below 1 in orange.

           Victoria and WA have the highest B/C ratios, and ACT and Queensland the lowest.
           This is partly because Victoria and WA have high gas availability, so more households
           have access to the least costly compliance option: for Queensland and NSW the reverse
           is true. The low B/C ratios for the ACT are due to comparatively lower energy prices.

           While the modelling takes into account the full range of energy prices, water heater
           capital costs and operating efficiencies, the projected relativity between energy prices in
           each jurisdiction has a major impact on cost-effectiveness (even after allowing for
           differences in the operating efficiencies of, say, gas and electric water heaters). When
           electric water heaters are excluded from the options mix, householders who would have
           chosen electric must make one of the following transitions:

              1.	 Day rate electricity to natural gas;
              2.	 Day rate electricity to solar-electric or heat pump, the tariff for which may be
                  day rate, restricted hours off-peak or an intermediate off-peak tariff (not
                  available in all jurisdictions). The model calculates a weighted electricity tariff
                  from the expected mix of day rate and off-peak solar and heat pump installations
                  in each jurisdiction (see Appendix 6);
              3.	 Day rate electricity to LPG;
              4.	 Off peak (restricted hours) electricity to natural gas;
              5.	 Off peak electric to solar-electric or heat pump;
              6.	 Off peak electric to LPG.

           The ACT shows the lowest price benefit (ie the lowest saving in c/MJ) for cases 1, 2
           and 3, is about the middle of jurisdictions for the other cases. The price relativity
           curves for all jurisdictions are at Appendix 6.




                                                                                                         96

Table 34 tests the sensitivity of the B/C ratios to capital and energy cost assumptions.
For example, if future water heater capital costs turned out to be 5% lower than
projected and energy prices 5% higher, the national B/C ratio would increase from 1.6
to 2.3 (10 year Cohort), from 1.9 to 2.8 (20 year Cohort), 0.9 to 1.3 (10 year Truncated),
from 1.6 to 2.3 (20 year Truncated), Conversely, 5% higher capital cost and 5% lower
energy prices would drive B/C ratios down, to 1.2, 1.4, 0.7 and 1.1 respectively.

Table 36 indicates, for each jurisdiction, the change in the central capital and energy
cost assumptions that would produce a B/C ratio of exactly 1. (Only capital or energy is
adjusted at the one time). Varying the energy price assumption is especially relevant in
jurisdictions where residential energy prices may not be fully cost reflective. For
example, if residential energy prices were 10% less than the cost-reflective level, adding
10% to the price indicates the cost-effectiveness of the measure at cost-reflective prices.
The green cells indicate combinations that are cost-effective under the cental
assumptions.

In Queensland, for example, a B/C ratio of 1.0 would be achieved over the 10 year
(Cohort) period if capital costs were 3% lower than in the central assumption, or if
energy prices were 15% higher. Outcomes are more sensitive to capital cost
assumptions than to energy price. To achieve B/C ratios of at least 1.0 in all
jurisdictions for all time periods for Scenario 3, the capital costs would need to be 3% to
14% lower than projected, but energy prices would need to be 9% to 116% higher than
projected.

Figure 38 illustrates the sensitivity of the findings to discount rate. A 3% discount rate
gives the highest B/C ratios in each case, while a 9% discount rate gives the lowest B/C
ratios. For Australia as a whole, the B/C ratio over 10 years (Truncated) is more or less
neutral under the full range of assumptions (ie the sensitivity points straddle 1.0). This
indicates that the measure is just cost-effective under the most stringent test, and over
the other periods the cost-benefit ratio ranges between 1.4 and 2.4.

            Table 34 Benefit/Cost ratios for Scenario 3: Cohort analyses
                              10 years (Cohort)                 20 years (Cohort)
                      Central      Lower       Higher    Central       Lower      Higher
                       capital capital and capital        capital      capital    capital
                     & energy      higher    and lower  & energy         and     and lower
                        cost       energy      energy      cost        higher     energy
                     projection     costs       costs   projection     energy      costs
                                                                        costs
        NSW                1.5        2.2         1.1             1.8        2.7        1.3
        VIC                2.6        4.0         1.8             2.9        4.9        2.0
        QLD                0.9        1.2         0.7             1.1        1.6        0.8
        SA                 1.8        2.7         1.3             2.0        3.1        1.5
        WA                 2.1        3.0         1.5             2.4        3.7        1.8
        TAS                1.7        2.1         1.4             1.8        2.2        1.5
        NT                 1.4        2.0         1.1             1.7        2.4        1.3
        ACT                0.6        0.8         0.4             0.7        1.0        0.5
        Australia          1.6        2.3         1.2             1.9        2.8        1.4
        Excludes SA        1.6        2.3         1.2             1.8        2.7        1.4
                  <State NPVs V6.xls> B/C ratios calculated at 6% discount rate



                                                                                              97
98

         Table 35 Benefit/Cost ratios for Scenario 3: Truncated analyses
                           10 years (Truncated)              20 years (Truncated)
                     Central      Lower      Higher     Central       Lower      Higher
                      capital capital and capital        capital      capital    capital
                    & energy      higher    and lower  & energy         and     and lower
                       cost       energy     energy       cost        higher     energy
                    projection     costs      costs    projection     energy      costs
                                                                       costs
       NSW                0.8        1.2         0.6             1.5        2.2        1.1
       VIC                1.6        2.5         1.1             2.5        4.2        1.8
       QLD                0.5        0.7         0.4             0.9        1.3        0.7
       SA                 1.1        1.6         0.8             1.7        2.6        1.2
       WA                 1.2        1.8         0.9             2.0        3.1        1.5
       TAS                1.0        1.2         0.8             1.5        1.9        1.3
       NT                 0.8        1.1         0.6             1.5        2.0        1.1
       ACT                0.3        0.5         0.3             0.6        0.8        0.4
       Australia          0.9        1.3         0.7             1.6        2.3        1.2
       Excludes SA        0.9        1.3         0.7             1.6        2.3        1.1
                 <State NPVs V6.xls> B/C ratios calculated at 6% discount rate


 Table 36 Sensitivity of Scenario 3 B/C ratios to capital and energy price changes
               % change in capital cost required to
                                                       % change in energy cost required to achieve
             achieve B/C = 1 at central energy cost
                                                        B/C = 1 at Central capital cost projection
                           projection
         10 Years 20 Years 10 years 20 years 10 Years 10 Years 20 years 20 years
          Cohort     Cohort Truncated Truncated Truncated Cohort Truncated Truncated
NSW            8%        13%         −3%            8%    −32%        −44%          20%        −33%
VIC           24%        26%           9%         21%     −61%        −66%         −60%        −37%
QLD           −3%         2%        −11%          −2%       15%        −9%         116%           9%
SA            14%        16%           2%         12%     −45%        −51%         −42%          −8%
WA            18%        23%           4%         17%     −51%        −59%         −51%        −19%
TAS           25%        26%           0%         18%     −42%        −43%         −34%        −34%
NT             9%        15%         −4%            9%    −31%        −42%          23%        −31%
ACT           −9%        −6%        −14%          −8%       72%        44%          71%          71%
                 <State NPVs V6.xls> B/C ratios calculated at 6% discount rate




                                                                                              99
                                                                    Figure 38 Variation of Benefit/Cost ratios with discount rate
                      3.5




                      3.0




                      2.5
 Beneft/cost ratios




                      2.0

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   S2 (3%)

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   S3 (3%)
                      1.5
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   S4 (3%)

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   S2 (6%)
                      1.0
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   S3 (6%)

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   S4 (6%)

                      0.5                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          S2 (9%)

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   S3 (9%)

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   S4 (9%)
                      0.0




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                Austs (20yr T)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                Aust (10yr C)


                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 Aust (20yr C)
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                                                                                                                                                                                                                                                                                                                                                                                                          NT (10yr C)


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                                                                                                                                                                                                                                                                                                                                                                                                                                                    ACT (10yr T)


                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  ACT (20yr T)
                                                                                                                                                                                                                              SA (10yr C)


                                                                                                                                                                                                                                                          SA (20yr C)




                                                                                                                                                                                                                                                                                                                                Tas (10yr T)


                                                                                                                                                                                                                                                                                                                                                              Tas (20yr T)


                                                                                                                                                                                                                                                                                                                                                                                            NT (10yr T)


                                                                                                                                                                                                                                                                                                                                                                                                                        NT (20yr T)
                                                                                                       Vic (10yr C)


                                                                                                                                     Vic (20yr C)




                                                                                                                                                                                                                                                                                      WA (10yr C)


                                                                                                                                                                                                                                                                                                                  WA (20yr C)
                                                                                                                                                                   Qld (10yr C)


                                                                                                                                                                                                 Qld (20yr C)
                                                                                                                                                                                                                SA (10yr T)


                                                                                                                                                                                                                                            SA (20yr T)
                                           NSW (10yr C)


                                                                         NSW (20yr C)
                                                                                        Vic (10yr T)


                                                                                                                      Vic (20yr T)


                                                                                                                                                    Qld (10yr T)


                                                                                                                                                                                  Qld (20yr T)




                                                                                                                                                                                                                                                                        WA (10yr T)


                                                                                                                                                                                                                                                                                                    WA (20yr T)
                            NSW (10yr T)


                                                          NSW (20yr T)




                                                                                                                                                                                                                                                 <State NPVs V6.xls>



By Income Category

Scenarios 2 and 3 would be about equally cost-effective for all household income
groups, with slightly greater benefit for the lowest incomes (less than $k 20) and the
highest (more than $k 100). This may reflect the concentration of those households in
urban areas where natural gas is available. For the group of households considered
‘low’ income’ (less than $k 40) the Scenario 3 B/C ratios are higher than for the middle
and upper income groups.

This means that higher capital costs identified earlier are matched or exceeded by the
value of energy savings.

                       Table 37 Benefit/Cost ratios for Scenario 3 by Household Income Category
                                                                                        Income Category                                                                                                                          10 Years 20 Years 10 Years 20 years
                                                                                                                                                                                                                                  Cohort   Cohort Truncated Truncated
                                                                                        $0-20k                                                                                                                                        1.09     1.71     1.69     2.00
                                                                                        $20-40k                                                                                                                                       0.87     1.61     1.60     1.89
                                                                                        $40-60k                                                                                                                                       0.93     1.58     1.57     1.86
                                                                                        $60-80k                                                                                                                                       0.83     1.38     1.37     1.62
                                                                                        $80-100k                                                                                                                                      0.86     1.54     1.53     1.80
                                                                                        >$100k                                                                                                                                        1.02     1.68     1.67     1.97
                                                                                                                                                                                                                                      0.93     1.59     1.57     1.86
                                                                                        <$40k                                                                                                                                         0.96     1.65     1.64     1.93
                                                                                        >$40k                                                                                                                                         0.91     1.53     1.52     1.80
                                                                                                                                                                                                                                  <NSUM 4 V3.xls>




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 100

      Greenhouse impacts

      The greenhouse gas emissions associated with residential water heating energy under
      each scenario are summarised in Figure 17. Emissions in the No Regulations scenario
      are projected to decline, mainly due to a continuing shift away from electric water
      heating but also partly because of falling average hot water use and the progressive
      demolition of pre-2011 houses.

      Figure 39 indicates that under Scenario 2, rapid implementation, the reduction in
      emissions would reach 5.0 million tonnes CO2-e per annum by 2020. It would then
      plateau and start to fall, because by then virtually all electric water heaters would have
      been replaced, and all water heaters in use would be low-emissions. Furthermore the
      greenhouse intensity of electricity should start to fall under the influence of the CPRS,
      impacting on emissions from heat pump and solar-electric water heater operation. The
      emissions reduction profile under Scenario 3 is similar, but accumulated savings over
      each period would be somewhat lower than under Scenario 2 (Table 38). The emissions
      reductions under S4 would be significantly lower

      Jurisdictional emission reductions in Scenario 3 are shown in Figure 40. NSW is
      projected to account for 44% of reduction, Qld for 25% and Victoria for 16%.

               Table 38 Aggregate greenhouse emissions and reductions (Mt CO2-e)
Scenario               2011-20 Truncated        2011-20 Cohort (c)        2011-30 Truncated            2011-30 Cohort
                      Aust (a)    Ex SA(b)      Aust (a)     Ex SA(b)     Aust (a)    Ex SA(b)       Aust (a)   Ex SA(b)
S1 (NR) emissions         114.3       106.3        165.6         153.8       208.1        192.9         251.6      233.0
                                       Mt CO2-e Reductions compared with S1
S2 (Rapid)                 32.5         30.6        57.8          54.3         77.9         73.1         98.6       92.4
S3 (Extended)              29.4         27.5        53.6          50.2         74.4         69.6         94.9       88.9
S4 (WHIP)                  11.8         10.8        21.9          20.0         34.2         31.2         46.2       42.1
                                            % Reductions compared with S1
S2 (Rapid)                 28%         29%          35%           35%         37%          38%           39%        40%
S3 (Extended)              26%         26%          32%           33%         36%          36%           38%        38%
S4 (WHIP)                  10%         10%          13%           13%         16%          16%           18%        18%
        (a) Includes SA, so basis for comparison is S1 (No Regulations) (b) Excluding SA, which already has
          regulations. (c) Only covers water heaters installed up to end year of period, but takes into account
                                       lifetime energy use of surviving cohorts.




                                                                                                          101

                  Figure 39 Projected reduction in annual emissions from water heating under
                                various scenarios, compared with NR Scenario
                         6.00




                         5.00




                         4.00
Mt CO2-e below S1 (NR)




                                                                                                                                                                                                                                  S2 (Rapid)
                         3.00                                                                                                                                                                                                     S3 (Extended)
                                                                                                                                                                                                                                  S4 (WHIP)



                         2.00




                         1.00




                         0.00
                                   2010

                                           2011

                                                  2012

                                                         2013

                                                                  2014

                                                                                2015

                                                                                          2016

                                                                                                  2017

                                                                                                         2018

                                                                                                                2019

                                                                                                                         2020

                                                                                                                                   2021

                                                                                                                                             2022

                                                                                                                                                      2023

                                                                                                                                                             2024

                                                                                                                                                                    2025

                                                                                                                                                                            2026

                                                                                                                                                                                      2027

                                                                                                                                                                                                    2028

                                                                                                                                                                                                             2029

                                                                                                                                                                                                                    2030
                          Figure 40 Projected reduction in annual emissions from water heating by
                                 jurisdiction under Scenario 3, compared with NR Scenario

                         6.00




                         5.00
Mt CO2-e below S1 (NR)




                         4.00                                                                                                                                                                                                               ACT
                                                                                                                                                                                                                                            NT
                                                                                                                                                                                                                                            TAS
                                                                                                                                                                                                                                            WA
                         3.00
                                                                                                                                                                                                                                            SA
                                                                                                                                                                                                                                            QLD
                                                                                                                                                                                                                                            VIC
                         2.00                                                                                                                                                                                                               NSW




                         1.00




                         0.00
                                2011

                                          2012

                                                  2013

                                                           2014

                                                                         2015

                                                                                       2016

                                                                                                 2017

                                                                                                         2018

                                                                                                                  2019

                                                                                                                            2020

                                                                                                                                          2021

                                                                                                                                                    2022

                                                                                                                                                             2023

                                                                                                                                                                     2024

                                                                                                                                                                               2025

                                                                                                                                                                                             2026

                                                                                                                                                                                                           2027

                                                                                                                                                                                                                    2028

                                                                                                                                                                                                                           2029

                                                                                                                                                                                                                                   2030




                                                                                                                <State NPV V3.xls>




                                                                                                                                                                                                                                          102

                            5. Other Impacts 

Product Type and Cost

With phased implementation (S3), the proposed measure would reduce the residential
sector sales of large electric storage water heaters by between 50% and 70% in 2011
and 2012, and then exclude them from the market entirely from 2013. With rapid
implementation (S2) electric storage water heaters would be excluded from 2011. The
WHIP proposal (S4) would have the least effect on electric storage water heaters: they
would remain on the market indefinitely, but annual sales would fall by 30% to 40%.

The demand for water heaters would be the same in the first instance, because whenever
an existing water heater fails it will still need to be replaced. The replacements that
would otherwise have gone to electric units will be diverted to other types, in the
proportions indicated in Table 18. After 2021 the size of the market would be affected
by differences in the service life of water heaters installed in the first decade of the
measure, because solar water heaters last longer.

Non-electric water heaters are well established in the market already, so there would be
no shortage of product choice. There are 45 models of gas storage water heater on the
Australian Gas Association register, and 92 models of gas instantaneous water heater.

If the proposed measure establishes similar performance criteria for solar and heat pump
water heaters as is proposed for new buildings in the BCA (Table 39), complying
products would need to be registered with ORER and qualify for a specified minimum
number of RECs in the Zone where they are to be installed. This is intended to ensure a
minimum level of water heating service for that climate zone, for the likely maximum
number of permanent occupants in that house.

The Commonwealth, NSW, SA, Queensland and the ACT use numbers of RECs as the
basis for solar and heat pump water heater eligibility for rebates, for use in new homes
or as replacements (see Table 8 and Appendix 5). Victoria and WA use ‘% solar
contribution’. If those States wished to retain this criterion, they could either continue
to maintain their own registers of approved models, or all jurisdictions could co-operate
on national register, based on or merged with ORER’s. AS/NZS 4234 is the basis for
both approaches, so the same product information is used to produce both values.

There are over 6,800 solar-electric, solar-gas and heat pump water heaters registered
with ORER (Table 39). This is because each feasible permutation of tanks, boosters,
panel types and panel numbers is registered as a separate ‘model’. The great majority of
these exceed 28 RECs in all four solar zones, so could be installed on any size house
anywhere in Australia. Over 700 models exceed 14 RECs but not 22, so could only be
installed on houses of up to 2 bedrooms in Zones 1, 2 and 3. Several hundred models
which rate 22 or more RECs in Zones 1,2, and 3, and so would be suitable for houses of
3 or 4 bedrooms, will not achieve that rating in Zone 4, but could still be used on
smaller houses in that Zone.

There are at least six suppliers of heat pumps in Australia. Most of the models on offer
have the compressor integrated with the tank in a single unit, and have to be located


                                                                                    103
outside. There are also split systems where both components are located outside, at
least two split systems, where the tank can be located inside, and one unitary system
that is capable of working indoors.

Given the wide range of water heater types that would comply with the proposed
provisions, and the number of models and suppliers, it is not envisaged that there would
be any reduction in competition or upward price pressure on each type.

             Table 39 Registered solar and heat pump water heater models
                        Can be used on houses Number of models meeting RECS criteria for this Zone(c)
Number of RECs           with this number of
                            bedrooms (a)          Zone 1         Zone 2        Zone 3          Zone 4

Less than 14               Not useable                   45       1306(b)                45          185
At least 14             Up to 2 bedrooms               6825          5564             6825         6614
At least 22             Up to 4 bedrooms               5507          4722             5507         4736
At least 28                 All houses                 4834          4099             4834         3473
Total models                                           6870          6870             6870         6870
   Derived by author from RECs database December 2008 (a) Under Proposed BCA Regulations, and
  proposed for this measure (b) Many suppliers have opted not to calculate or register a RECS value in
 Zone 2 because the market is so small. (c) At time of writing ORER had not published REC values for
                                Zone 5, to which ACT regulations refer.

About 70% of existing electric storage water heaters are located outdoors (Table 40).
These have the widest range of convenient replacement options: heat pump in the same
location, solar-electric with the tank in the same location or on the roof with the
collectors, LPG or natural gas, if available. For the 30% of electric water heaters
located indoors, there would be additional costs associated with installing a replacement
water heater. The options would be changing the plumbing configuration to an outside
location, installing an indoor tank with an outside heat pump compressor or, if gas or
LPG were available, installing an indoor unit with a flue.

About a third of indoor electric water heaters are older style low-pressure units in
ceilings, which would most likely be replaced by mains pressure units in other locations
in any case. ‘Forced relocation’ will probably affect no more than 20% of electric water
heater replacements. These costs have been factored into the cost-benefit analysis.

               Table 40 Existing water heaters by location, Australia 2008
                                     NSW          Vic        Qld         SA       WA    5 States
Gas IWH             Out                  13%         26%          4%        30%     26%      20%
Gas SWH             Out                  23%         46%          3%        18%     35%      27%
                    In                     1%         3%          1%         3%      3%        2%
                    Ceiling                0%         1%          0%         2%      0%        1%
Elec SWH            Out                  41%         12%        59%         27%     10%      29%
                    In                   15%          3%        19%          4%      0%        8%
                    Ceiling                3%         6%          0%        10%      1%        4%
Solar SWH           Out                    5%         2%        13%          7%     24%        9%
Indoor gas                      0          1%         4%          1%         5%      3%        3%
Indoor electric                 0        17%          9%        19%         14%      1%      12%
Indoor/total electric           0        30%         43%        24%         34%     12%      30%
Indoor/total gas                0          3%         5%        13%          9%      4%        5%
                              Houses only. Author estimates based on BIS (2008)


                                                                                                 104
  The demand for small electric storage water heaters will also be affected by the
  measure. They would continue to be useable as supplementary water heaters at remote
  supply points, but not as the main or sole water heater. However, most of the market
  for small electric water heaters is Class 2 dwellings, which are not affected by the
  measure. Therefore the continuing manufacture of small electric water heaters should
  remain economic for the time being.


  Manufacturers and Importers
  Under Scenarios 2 and 3, manufacturers of larger electric storage water heaters would
  no longer be able to supply these products as replacements in houses after 2010 (or after
  2012 for S3). Under the proposed BCA requirements these products could not be
  installed in new houses from 2010. The only remaining market would be central water
  heating installations in Class 2 residential buildings or in commercial applications,
  where electric storage water heaters are already being phased out in favour of natural
  gas (where available) or heat pumps, because of their large RECs value, and Tasmania,
  which does not intend to phase-out electric storage water heaters.

  Under all scenarios the demand for large electric water heaters would be much reduced
  – in the case of S2 and S3, to near zero by 2013, and under the Water Heater Industry
  Proposal (Scenario 4) by about two thirds. This raises questions of how many
  manufacturers and importers would remain viable, and whether the remaining markets
  for large electric water heaters (eg Tasmania) could continue to be supplied.

  The manufacture of electric and other types of water heaters is highly integrated, both
  commercially and technically. Commercially, none of the manufacturers or importers
  of electric storage water heaters would be excluded from the market, because all of
  them supply one or more other water heater types (Table 41).

       Table 41 Complying product types made by electric water heater suppliers
Supplier and Brands                                       Solar-      Solar-       Gas      Gas        Heat
                                                           elect       gas       Instant Storage      Pump
Rheem,Vulcan, Aquahot, Panther, Paloma, Aquamax              9          9           9         9          9
Dux, Radiant, Mercury                                        9          9           9         9          9
Rinnai, Beasley, Suntech                                     9          9           9         -          -
Saxon                                                        9           -          -         -          9
Everlast (supply tanks to others)                             -         9           9         -          -
Everhot, Reece                                                -         9           9         -          -
Chromagen                                                    9          9           9         -          -
  Source: Extracted by author from list of registered electric water heaters at www.energyrating.gov.au and
                                               supplier websites

  Technically, all mains pressure water heater types are made up of at least one and up to
  three of the following basic components:

  •	 A pressure tank for storing water; in electric, gas, LPG, heat pump, solar-electric
     and some solar-gas water heaters the primary or supplementary heat source is
     located in the tank, but in some solar-gas units the tank has no heater of its own, but



                                                                                                   105

     stores water pre-heated by solar for supply to the ‘in-line’ booster. Gas-heated
     storage water heater tanks differ from others in that they have a central flue;

•	 An instantaneous gas water heater (whether natural gas or LPG). In some solar-gas
   units the gas booster is in fact a separate instantaneous (‘in-line’) gas water heater;

•	 For solar water heaters, a solar collector array consisting of one or more flat plates
   or a manifold with between 10 and 30 evacuated tubes.

Solar or heat pump water heaters will also have additional components according to
their design and configuration. Split solar designs have a solar controller and pump,
which accounts for some electricity use in addition to the thermal boost energy. Heat
pump water heaters have what amounts to a small air conditioning unit, either housed in
the same casing as the tank or separate, and connected by refrigerant or water lines.

All the storage pressure tanks used in larger electric, gas, solar-electric and solar-gas
water heaters are made in Australia, so the fact that the proposed measure would mainly
shift market share from electric storage to other storage types would mitigate the impact
on the manufacture of locally made pressure tanks.35 The continuing manufacture of
pressure tanks would also mean that a proportion could still be equipped with electric
resistance elements (and would be in any case for some solar-electric configurations) so
markets such as Tasmania could continue to be supplied.

According to Rheem About 80% of the solar arrays used in Australia are locally made,
as are 80% of heat pumps.36 All gas instantaneous water heaters are imported, mainly
from Japan and China, with smaller numbers from Europe.

Table 42 summarises the demand for water heaters by type over the period 2011-2020,
projected by the NIEIR modelling, with the following additional assumptions:

•	 Instantaneous water heaters maintain their current 55% of natural gas and LPG
   water heater sales, and storage water heaters 45%;

•	 Of solar-gas water heaters, 90% have in-line boosters and 10% in-tank boosting;

If each storage tank, solar collector ‘array’ (each array could be 2 panels) and each
instantaneous gas/LPG water heater and solar/gas in-line booster is treated as a single
‘component’ for manufacturing purposes, it is possible to estimate the total number of
major components required under each scenario: 7.8 million in S1, 9.0 million in S2, 8.9
million in S3 and 8.5 million in S4 (Table 42). In this analysis, S4 leads to a lower
number of components because it allows the continuing production of single-component
electric water heaters at the expense of solar water heaters, which comprise at least two
and sometimes three major components.



35
   Chromagen appears to be the only importer of storage tanks, for the smaller volumes not used in solar
configurations.
36
   http://www.ipart.nsw.gov.au/files/Submission%20­
%20Climate%20Change%20Mitigation%20Measures%20-%2016%20February%202009%20­
%20Rheem%20Australia%20-%20Gareth%20Jennings%20-%20APD.PDF


                                                                                                   106
Of course, not all major components are locally manufactured. In particular, there is no
local manufacture of instantaneous gas or LPG water heaters, which are also used in
modified form as in-line solar-gas boosters, so if the market for these expands it will be
entirely supplied by imports. There is little prospect of an IWH plant being established
in Australia, especially given that the owner of the largest local water heater
manufacture (Rheem) is itself a major global IWH manufacturer, as is Rinnai.

Local manufacture supplies the entire market for gas storage water heaters, which
would gain significantly under S2 and S3, and to a lesser extent under S4, provided that
gas storage holds its share of the gas market in competition with IWHs. Gas storage will
be advantaged by the fact that some conversions from electric to gas water heating will
be in houses with existing gas connections, which may be unable to cope with the high
MJ/hr gas flow capacity needed by IWHs. Of course, all new gas connections will be
higher capacity.

Local manufacture supplies almost the entire market for storage pressure tanks, so
although there is no significant import competition it would lose some production
because the market gain by locally made solar and heat pump units will be less than the
market loss from the phase-out of electric units.

The most active areas of competition between local manufacture and imports are in
solar arrays, which will nearly all be sold with locally made pressure tanks, and in heat
pump water heaters, where both the storage tank and the heat pump may be imported.

Two types of collector array dominate the solar water heating market: flat plate
collectors, which are mostly locally made, and evacuated tubes which are now all
imported. It is projected that the demand for solar collector arrays would be about
174% higher than S1 under S2, 159% higher under S3 and 102% higher under S4. The
extent to which local manufacturers could maintain or increase their share of the
growing market would depend on their ability to hold panel sales against evacuated
tubes, and to compete against imported panels.

The early signs are that this is likely to be the case: in June 2009 Rheem announced an
expansion of solar water heater manufacturing at Welshpool (Perth) and Rydalmere
(Sydney) and reported it has ‘created 350 new jobs since the Australian Government
boosted the Solar Hot Water Rebate in February 2009 to $1,600 and removed the means
test.’37

There is also significant heat pump manufacture in Australia by Rheem, Dux and Saxon
(Table 41). Dux and Saxon have recently increased production capacity and
manufacturing employment.38 Specialist heat pump importers include Stiebel Eltron
(based in Germany). Quantum Energy Limited and Siddons Solarstream used to
manufacture locally but now import heat pumps from China.

The projected impact on local manufacture therefore depends on the proportion of the
projected market growth which local manufacturer can retain. Table 43 explores a
‘higher’ manufacturing case where imports of solar arrays and heat pumps are restricted
to the same absolute number as under the NR case, and a ‘lower’ manufacturing case in
37
     http://www.economicstimulusplan.gov.au/infocus/pages/if_300709_rheem.aspx
38
     http://www.economicstimulusplan.gov.au/infocus/pages/if_011009_solar.aspx


                                                                                    107
           which imports retain a 20% share of the solar and heat pump markets. Under the
           ‘higher’ case the number of major components manufactured locally remains about the
           same as S1 under S2 and S3, and increases by about 7% in S4. Under the ‘lower’ case
           the number of major components manufactured locally is 7% to 8% below S1 under S2
           and S3, and increases by about 3% in S4.39

           The conclusions are:

           •	 The demand for water heater components on the Australian market will increase
              significantly under the proposed measures (while the demand for complete water
              heaters should remain largely unchanged, at least for the next decade);

           •	 There will be a shift in the component mix;

           •	 The increased demand could have a small positive or a small negative impact on
              local manufacture, depending on their ability to compete in those component
              markets where there is significant import; and

           •	 The indications are that local manufacturers are already expanding capacity and so
              should be in a strong position to compete.

                Table 42 Projected manufacture and sales of water heaters by type, 2011-2020
                                  S1 (NR)       Share     S2 (Rapid)     cf S1 S3 (Extend)     cf S1     S4 (WHIP)      cf S1
Electric storage                   3809750         54.0%            0    −100%       219963       −94%       2553445       −33%
Gas storage                          808116        11.5%     1129635        40%     1151707         43%        857733         6%
Gas instant                          987697        14.0%     1380666        40%     1407642         43%      1048340          6%
Solar-elec                           537748         7.6%     1455878      171%      1373096       155%         993102       85%
Heat pump                            371434         5.3%     1226526      230%      1087806       193%         817809      120%
Solar-gas (in-tank boost)             15592         0.2%       44439      185%         42171      170%          40575      160%
Solar gas (in-line boost)            140324         2.0%      399953      185%       379536       170%         365176      160%
LPG storage                          173713         2.5%      638816      268%       627646       261%         171229       −1%
LPG instant                          212315         3.0%      780776      268%       767123       261%         209280       −1%
Total                              7056689       100.0%      7056689          0%    7056689           0%     7056689          0%
Total storage tanks (c)            5716352                   4495295      −21%      4502388       −21%       5433892        −5%
Total gas instant units            1340337                   2561394        91%     2554301         91%      1622797        21%
Total solar arrays                   693664                  1900270      174%      1794802       159%       1398853       102%
Total Components                   7750353                   8956959        16%     8851491         14%      8455542          9%
Locally made components            6196996                   6182545          0%    6084171         −2%      6619726          7%
Local solar (a)                                      80%                    93%                     92%                     90%
Imported solar components(a)         138733          20%      138733          7%     138733           8%       138733       10%
Local heat pump (a)                                  80%                    94%                     93%                     91%
Imported heat pumps (a)               74287          20%       74287          6%       74287          7%        74287         9%
Local share                             80%                      69%                    69%                       78%
             (a) If local manufacture picks up the market growth and imports remain at same absolute level as in NR,
             (c) Heat pumps are treated as single ‘storage tank’ components, even though they may be split units.
             <NSUM 3 V3>




           39
                Note that this does not take account of the value of components, but these are roughly comparable.


                                                                                                                108

            Table 43 Comparison of Scenario manufacture and installation impacts
                                                                     S1 (NR) S2 (Rapid) S3 (Extend) S4 (WHIP)
Major component demand - million units                                      7.8         9.0         8.9   8.5
Change in major component demand - million units                            NA          1.2         1.1   0.7
Solar share of installations                                               10%         27%        25%    20%
Solar installations                                                         0.7         1.9         1.8   1.4
Change in solar installations                                               NA          1.2         1.1   0.7
Local manufacture share                                   Higher(a)        80%         69%        69%    78%
                                                          Lower(b)         80%         64%        65%    76%
Local major component manufacture - million units         Higher(a)         6.2         6.2         6.1   6.6
                                                          Lower(b)          6.2         5.8         5.7   6.4
Change in major component manufacture - million units Higher(a)             NA          0.0       −0.1    0.4
                                                          Lower(b)          NA         −0.4       −0.5    0.2
Net change in component and solar installation units      Higher(a)         NA          1.2         1.0   1.1
                                                          Lower(b)          NA          0.8         0.6   0.9
Net change in component and solar installation units ­    Higher(a)         NA          3.6         3.2   2.5
Employment-weighted (c)                                   Lower(b)          NA          3.2         2.8   2.3
      (a) Corresponding to Table 42 (b) If component import rates remain at NR levels. (c) Assuming that
      marginal solar installation has 3 times the employment impact of marginal component production.


     Employment

     Manufacturing

     The main Australian manufacturing sites for water heaters and their components are:

     •	 Rheem: Rydalmere in Sydney (electric, solar and heat pump); Welshpool in Perth
        (solar); Scoresby in Melbourne (gas) and Moorabbin in Melbourne (Aquamax gas
        water heaters);

     •	 Dux: Moss Vale, NSW (all product types).

     •	 Beasley (solar water heater manufacturer owned by Rinnai): Adelaide

     •	 Saxon: Zillmere in Brisbane (heat exchange water heaters, heat pumps).

     The total value of the water heater market and hence total revenues to suppliers would
     increase because of the higher capital costs of water heaters. Local manufacturers are
     already expanding capacity and employment in response to the growing demand for
     solar and heat pump water heaters created by the Commonwealth and State rebate
     schemes. However, there could be some loss of production and employment if electric
     water heater production ceased. The net impact on local water heater manufacturing
     activity and hence employment ranges from slightly negative to slightly positive (see
     Table 43). S4 shows the strongest positive impact.

     It is not possible to assess where manufacturing gains or losses would be located.
     Manufacturers would no doubt evaluate the impacts of the proposed measures on
     different product lines in the light of their own business plans, and invest accordingly.



                                                                                                 109

Installation

The same number of water heaters would be installed annually for the first decade of the
proposed measure as in the NR scenario, but the shift in product types would change the
demand for installation skills and services.

The increase in the use of gas water heating would increase the demand for gas
plumbing work. All water heaters except gas storage require some electrical work.
Therefore there would continue to be high demand for electrical skills, but a growing
proportion of installations would require additional skills such as solar installation
(requiring roof work and expertise in siting and connection of system components) or
refrigeration expertise (for some heat pumps).

Solar water heater installation is particularly labour intensive, because there are extra
components in addition to what amounts to a full electrical or gas water heater
installation, and it often requires two people to lift the collectors on to the roof.
Contractors have already reported increasing their employee and apprentice numbers in
response to the current surge in demand for solar water heaters prompted by rebates40

The increase in installations employment in each State would be more or less in
proportion to the increase in solar takeup (Figure 41).

                                                 Figure 41 Projected increase in annual solar installations, S3 (Extended
                                                          implementation) compared with SI (No Regulations)


                                                140000



                                                120000
     Additional solar installations: S3 cf S1




                                                100000
                                                                                                                                ACT
                                                                                                                                NT
                                                 80000                                                                          TAS
                                                                                                                                WA
                                                                                                                                SA
                                                 60000                                                                          QLD
                                                                                                                                VIC
                                                                                                                                NSW
                                                 40000



                                                 20000



                                                     0
                                                         2011




                                                                2012




                                                                       2013




                                                                              2014




                                                                                     2015




                                                                                            2016




                                                                                                   2017




                                                                                                          2018




                                                                                                                 2019




                                                                                                                        2020




40
            http://www.economicstimulusplan.gov.au/infocus/pages/if_011009_solar.aspx


                                                                                                                               110
Net Effects

Figure 40 indicates that the demand for solar collector arrays, and hence installations,
would be about 174% higher than S1 under S2, 159% higher under S3 and 102% higher
under S4. This means 1.1 to 1.2 million extra solar installations over the period 2011­
2020 under S2 and S3, and 0.7 million extra installations under S4.

It is assumed that the employment benefit of each solar installation compared with a
conventional installation is at least three times the employment benefit of water heater
component manufacturing.41 If so, the net employment benefits of S2 and S3 would be
significantly greater than for S4 (Table 43). In effect, the gain in water heater
installation employment is likely to significantly exceed any loss in manufacturing
employment. Growth in installation employment would be fairly evenly distributed
across Australia, whereas the impacts on manufacturing employment would be
concentrated at the locations identified.


Plumbers and Other Installers
As water heaters are connected to the domestic water supply they come within the scope
of State and Territory plumbing regulations, and this is the proposed mode of
implementation (see Chapter 6). Plumbers and water heater installers replacing electric
water heaters would need to be aware of their obligations and take the following steps.

Scenario 3 (Phased Implementation)

In 2011 and 2012:

     1.	 Check whether the house is in a zone where the installation of electric water
         heaters is permissible (as it would be in some areas until 2012);

     2.	 If in an area where the installation of an electric water heater is not universally
         permissible, check whether the installation is covered by a general exemption
         (eg if the house is small or the water heater is a remote secondary unit) or if
         there is a case for applying for a special exemption;

     3.	 If the water heater type selected is heat pump or solar, ensure that the model
         meets the required performance criteria.

     4.	 If the water heater is an electric water heater subject to general exemption,
         ensure that the model does not exceed the size (or heat loss) criteria;

     5.	 Install the water heater in accordance with all relevant codes and standards;

     6.	 Meet any reporting, certification or compliance obligations

41
  This may well be an underestimate. The additional cost of a solar installation compared with a
conventional is about $1,000 most of which is labour. The retail cost of a large conventional water heater
can be about $1,200 (Appendix 3). Assuming an ex-factory price of about 60% of retail, and a labour
component of 20%, the labour cost would be less than $150.


                                                                                                   111
After 2012, step 1 would no longer apply.

Scenario 2 (Rapid Implementation)

As for Scenario 3, but step 1 would not apply.

Scenario 4 (Water Heater Industry Proposal)

In 2011 and 2012, as for Scenario 3.

After 2012, there would be an additional step preceding the above:

Check the ‘occupancy status’ of the house. This would require information that could
not be ascertained on site, and would rely on a register or some other administrative
mechanism which each jurisdiction would need to establish.

If the house is classified as ‘owner-occupied’, then the same steps apply as in Scenario
3.

If the house is classified as ‘rental’, then:

    1.	 As a rule, electric water heaters would be excluded irrespective of location.
        However, there may still be a general exemption (if the rental house is small, or
        the water heater is a remote secondary unit) or a case for applying for a special
        exemption;

    2.	 Check whether the rental house is gas-connected or connectable. If so, a gas
        water heater, a solar water heater or a heat pump may be installed;

    3.	 If the houses is not connected or connectable, select a heat pump, solar-electric
        or a solar-LPG water heater which meets the required performance criteria;

    4.	 If the water heater can be a electric water heater under general exemptions,
        select a model that does not exceed the size (or heat loss) criteria;

    5.	 Install the water heater in accordance with all relevant codes and standards;

    6.	 Meet any reporting, certification or compliance obligations

Plumbers and installers would need enough information to advise customers on their
options, as well as to meet compliance obligations. They already take steps to keep up
to date with changes to the Building and Plumbing Codes, including State variations.
The regulators usually publicise relevant changes, and could readily use the same
channels to promote these provisions. This would require some planning and training
either by government agencies directly or via industry and trade associations, through
programs such as ‘Green Plumbers’. These programs could be streamlined, and the
scope for confusion reduced, if the rules for water heater replacements and new house
were aligned.




                                                                                       112
Learning about compliance processes and obligations would obviously impose some
costs on plumbers and installers, as would the additional time and inquiry processes
needed to complete water heater replacements. While initial training costs may be
borne by the installers themselves, in due course they would be passed on to customers.

In the longer term, the plumbing and installation industry would benefit from the higher
installation fees and higher demand for labour that would come from a rising proportion
of gas, solar and – to a lesser extent – heat pump installations.


Owner-occupiers
In 2008 about 37% of water heaters sold were electric (Table 4), so 63% of purchases
would have been unaffected by the proposed measure. As the electric share is falling, it
would be expected that about a third of households (rental or tenant) will be impacted,
but not until their existing water heater breaks down, which could be up to 10 years
after the proposal is first implemented.

When that occurs, householders who make inquiries about purchasing a large electric
storage water heater may discover warning notices about the circumstances in which
they may be used (during the 2011-2012 phase-in period) and eventually, could find
that they are no longer available. It is likely that water heater suppliers will ensure that
their brochures, catalogues and websites explain the regulations and guide customers
through the options available to them, but most buyers will first hear about the
constraints, discuss their options and get advice from their plumbers or installers.

The implementation of requirements for water heaters in new homes, the growing
market share of solar and heat pump units (where RECs numbers and values are
prominently advertised) and the growth of Commonwealth and State rebate programs
has already enabled many water heater buyers to better appreciate the environmental
and financial implications of water heater choice, and that there are other options than
simply replacing like with like. This growing level of awareness should facilitate
understanding and acceptance of the constraints that the proposal would place on water
heater choice.

Some householders will request plumbers or installers to install large electric storage
water heaters (while these are still available) in areas where they are prohibited, or in
situations not covered by general exemption. A proportion of installers will no doubt
comply, either through ignorance of the requirements or after making a judgment about
the likelihood of compliance checks. This option would be removed if the production
of large electric storage water heater ceased.

Some householders will be aware (or be made aware by installers) of the possibility of
seeking a special exemption, and will pursue this avenue or request the installer to do
so. The extent to which this happens will depend on the rules and time frames for
determining such cases and – if there are provisions for requesting exemptions after a
new water heater is installed – the consequences if any of the request being eventually
denied. As these arrangements will be up to each jurisdiction to develop and enforce, it
is not possible to speculate about the impacts.



                                                                                       113
Most householders will probably accept the requirement and consider their options.

The main factors in the decision will be:

•	 What the options are possible? If natural gas is not available in the area it will be
   ruled out. If there is no roof area of roughly the right orientation (within 45° of
   north), slope and strength to take solar panels, or the location of panels would
   conflict with a building’s heritage status, solar would be ruled out.

•	 Of the options that are possible, which are acceptable? The home-owner may not
   like the appearance of solar panels, or the location options for a heat pump water
   heater may be near bedroom windows (whether the home-owner’s own or a
   neighbour’s). This would make the operating noise levels of alternative heat pump
   models an issue.42

•	 Of the options which are possible and acceptable, which can be installed most
   quickly? Most householders will want replacement on the same day, or within 24
   hours at the most.

Speed of replacement has historically been a factor reinforcing the tendency to replace
electric with electric. Heat pump water heaters can usually be installed almost as
quickly as electric, especially if the same location is suitable. The suppliers of natural
gas and solar water heaters have also had to develop methods for accommodating the
requirement for speed.

Speed of response is already a point of marketing and competition among non-electric
water heater suppliers, and this would be expected to intensify if the proposed measures
are implemented. Some gas utilities install a gas water heater the same day and operate
it from a compressed natural gas bottle until the connection crew arrives, which is
usually within 48 hours. Some solar water heater suppliers offer to install a temporary
electric water heater until the solar installation can be arranged.43 The regulations in
each jurisdiction would need to allow for temporary water heaters in these situations, as
the Queensland Plumbing and Wastewater Code has done (QPW 2009).

If the house is already connected to gas, or of in a natural gas area, gas will usually be
the compliance option with the lowest capital cost as well as the lowest running cost,
although the capital cost will still be higher than the electric replacement cost. There
may well be scope for gas utilities to offer installation and financing packages under
which householder repay the costs with first few years of gas bills.

For those who prefer to replace with a solar or heat pump water heater, there would be
an initial capital impost. If the current Commonwealth and State rebates continue to
available to all, this would cover most of the impost, although timing would be an issue
if claims could only be made after installation, as is the case with the NSW and
Commonwealth rebates. (This is intended to sharpen price competition between


42
   Standard AS/NZS 5125 Heat Pump Water Heaters – performance assessment is currently being
developed by Standards Australia. There is an opportunity to include the testing and reporting of noise
levels in the standard, so installers and buyers would be able to take this inot account in model choice.
43
   See for example http://www.solahartmarion.com.au/


                                                                                                     114
suppliers and installers and to limit their retention of rebate value). In Victoria the
rebate is provided as a point of sale discount.

If rebates are reduced, targeted geographically or by income or discontinued entirely,
then some non-qualifying households would have difficulty in raising the capital. As
with gas utilities, there would be scope for solar and heat pump water heater suppliers to
set up their own financing options so the capital can be repaid out of energy savings.

One major supplier already offers an arrangement whereby the buyer pays 25% of the
capital cost up front and the balance over 12 to 18 months44

Another financing option would be interest-free loans under the Green Loans or similar
programs.45

The final option is LPG. For households with very low hot water use or with
intermittent use (eg for holiday homes) this could be the most cost-effective option in
both capital and running cost terms, because while the energy price per MJ would be
high, the energy use would be low. However, many households could be forced to LPG
due to the lower capital cost (comparable with electric), and then endure higher energy
prices. Unlike RECS and solar and heat pump rebates, which subsidise capital costs,
there are no programs through which LPG energy costs could be universally subsidised.
However, for lower income, pensioner or other selected households it may be possible
to compensate for higher energy costs via existing welfare or special assistance
programs.

All of the impact above could be ameliorated by prior planning to reconfigure existing
public programs, develop new ones if necessary and work with the private sector to
encourage (or expand) financing or loans schemes. It would also be useful to get
electric water heater owners to start thinking about the options ahead of time to some
extent, to increase the chance of a more cost-effective decision being made when the
water heater does eventually fail. Energy utilities could assist with this effort by, for
example, mailing out information to customers known to have electric hot water
because they are connected to the off-peak tariff.


Tenants and Rental Owners
For tenant households renting privately, the owner will be an additional stakeholder in
the water heater replacement process. The tenant will usually be the first to notice when
the water heater fails, and will contact the owner or the rental agent. The owner will
then work through much the same process as an owner-occupier (see above).

The main difference will be that the owner will usually prefer the lowest capital cost
option. If forced to a higher capital cost option, there will be a preference to recover the
incremental cost from the tenant as higher rental increases than would otherwise have
occurred. The extent to which this is possible will depend on the competitiveness of the
rental market. If not, the owner would have to accept a slightly lower net rental yield.


44
     http://www.solahart.com.au/solahart-for-your-home/smartpay.aspx
45
     http://www.westpac.com.au/green-loans/


                                                                                          115
The Commonwealth rebate rules state that:

•	 ‘An owner-occupier, landlord or tenant can apply for the rebate as long as the
   dwelling where the hot water system is installed is a principal place of residence.
•	 Government organisations are not eligible for the rebate.’

The ability of a tenant to apply for a rebate and receive the payment is useful in cases
where, say, the owner’s initial preference is to replace an electric with another electric,
but the tenants are willing to meet part or all of the additional capital costs of a solar or
heat pump because they stand to benefit from the running cost savings so long as they
remain at the property.

Whether or not the Commonwealth rebate will continue to be available once the
measure is implemented is not known, but the example shows that there are ways of
sharing costs and benefits between rental owners and tenants.

The most vulnerable group of rental households are those in non-gas areas without the
means to apply for solar or heat pump rebates – even if these continue to be available.
In these instances the owner may well install LPG, in the knowledge that the running
costs, however high, will be borne by the tenants. The Water Heater Industry Proposal
(S4) seeks to target these cases directly, but it is uncertain that this would be legally or
administratively enforceable.


Energy utilities
By excluding electric water heaters, the proposed regulations would reduce the average
consumption of electricity in existing homes in favour of natural gas, solar and ambient
energy. This would represent a small reduction in energy supplier revenues from the
sale of electricity, but partially compensated by a (smaller) increase in the sales of
natural gas.

The impact on electricity networks could be more significant. Off-peak electric
resistance water heaters have enabled network operators to reduce the domestic water
heating load at peak periods, when cooking, lighting, space heating and cooling loads
are heaviest. The proposed measure would mean that this capability would be reduced,
but the impact on the electricity networks could be mitigated by the following:

•	 day-rate electric water heaters, which are free to operate during peak periods, would
   also be excluded;

•	 much of the diversion would go to natural gas water heating, which would not affect
   peak loads. Many of the extra houses that connect to gas in response to the
   proposed regulations would also divert their cooking and space heating loads from
   electricity to gas, so reducing the potential peak load contribution from those end
   uses;

•	 summer peak period operation from solar-electric and heat pump water heaters is
   likely to be low, because these are the times when inlet cold water temperatures,
   solar radiation and ambient temperatures are at their maximum;


                                                                                        116
There is some potential for solar-electric and heat pump water heaters to contribute to
winter loads. This can be managed by ensuring that the water heaters are adequately
sized (as the proposed rules would require) and, where possible, connected to a
restricted hours tariff or a time-of-use tariff that discourages operation during peak
periods. Some water heater types do not operate well under restricted-hours (‘Off Peak
1’) tariffs. Heat pumps generally need extended-hours (‘Off Peak 2’) or continuous
supply. For solar-electric, operation on a restricted hours tariff will somewhat reduce
the solar contribution (especially in households where hot water demand peaks in the
evenings), but the lower tariff should more than compensate for the higher electricity
use.

Ultimately, the best way to manage electricity demand from any source is through a
combination of dynamic electricity pricing and the ability of appliances to respond
automatically to price signals (‘demand response’). Standards Australia is developing a
suite of demand response standards (the AS 4755 series). A standard for a demand
response interface in air conditioners has been published, and work has begun on
similar standards for electric and electric-boosted water heaters.


Announcements and Consultations
Stakeholders have been aware of government policies to discourage electric water
heating for several years, and the proposed measure is consistent with these policies.
The current State requirements for water heaters in new houses in NSW, Victoria,
Queensland, SA and WA came into effect between July 2004 (the NSW BASIX) and
September 2007 (the WA ‘5 Star Plus’ Code).

The SA provisions for replacement water heaters in existing houses were announced in
2008 and implemented in 2009. The Queensland provisions were announced in June
2007 and are due to commence in 2010. The ACT provisions were introduced in the
legislature in 2009 and will, if passed, take effect in 2010.

The intention of the present Commonwealth Government to adopt these requirements
nationally was first announced in October 2007. On 10 December 2008, the Ministerial
Council on Energy adopted a National Hot Water Strategic Framework, which stated:

       The framework provides for the reduction of greenhouse gas emissions
       associated with water heating, through the specification of minimum energy
       performance standards for water heaters and the phasing out of conventional
       electric resistance water heaters (except where the emissions intensity of the
       public electricity supply is low), together with a range of information and
       education measures.

       This initiative will deliver lifetime cost savings to households at times of rising
       energy costs as well as significant CO2 reductions.

       The phase-out of conventional electric resistance water heaters is intended to
       cover all new homes and established homes in gas reticulated areas from 2010,



                                                                                     117
       and new flats and apartments in gas reticulated areas and established homes in
       gas non-reticulated areas from 2012.46

On 30 April 2009 the Council of Australian Governments endorsed the draft National
Strategy on Energy Efficiency, which included the proposed measure.47 The National
Strategy on Energy Efficiency was published in July 2009.

In addition to these actions and announcements by governments and ministerial
councils, DEWHA has kept the water heater industry informed about the development
of the measure, including the preparation of this RIS. One of the Scenarios, S4, has
been modelled at the request of the industry.

The most recent consultation was an industry meeting in Melbourne on 11 March 2009,
attended by representatives of all water heater manufacturers and their industry
associations.




46
  http://www.ret.gov.au/Documents/mce/_documents/17th_meeting_communique20081212163223.pdf
47
  http://www.coag.gov.au/coag_meeting_outcomes/2009-04­
30/docs/National_strategy_energy_efficiency.pdf


                                                                                     118
       6. Conclusions and Recommendations
Summary

Impacts, Costs and Benefits

Electric resistance water heaters are the most greenhouse-intensive water heaters and
therefore represents an obvious focus to reduce emissions from households. Given the
nature of the Australian electricity supply system, they will remain by far the most
greenhouse-intensive water heaters well into the 2030s, despite the changes in
generation fuel mix expected to occur under the Carbon Pollution Reduction Scheme.
Therefore phasing out greenhouse gas-intensive water heaters essentially means phasing
out electric resistance water heaters.

The CPRS is projected to raise electricity prices significantly, but the way in which
replacement water heater purchase are made limits the impact of energy prices on the
purchase decision. Two factors predominate: capital cost and the tendency to replace
like with like. This conclusion is supported by consumer research as well as by
modelling the divergence of the actual water heater market from an ‘ideal’ market.

Energy labelling of water heaters would have little effect on overcoming these market
failures, because energy costs usually play only a minor part in the purchase. Rebates
are more effective because they address capital cost directly, but they need to be high to
divert buyers from electric water heaters.

The most effective and efficient way to phase-out electric water heaters is to regulate
against their installation, except in restricted circumstances. The three options
examined in this RIS are:

•	 exclusion of electric water heaters from the entire replacement market after 2010
   (the ‘S2 Rapid’ scenario),

•	 exclusion of electric water heaters from the replacement market in some areas after
   2010 and in all areas after 2012 (S3 Extended); and

•	 restricting the use of electric water heaters to owner-occupied houses in areas not
   supplied by natural gas, and requiring rental houses to replace with solar, heat pump
   or – where available – natural gas water heaters (S4 WHIP, for Water Heater
   Industry Proposal).

The main aspects of the three scenarios are summarised in Table 44. On the main
objective of the measure, greenhouse gas reduction, S2 indicates the largest reductions
compared with the no regulations scenario, followed closely by S3. The greenhouse
reductions of S4 are about 60% lower.

A preliminary assessment of the impacts of phasing out electric water heaters was
included in the latest estimate of the Equipment Energy Efficiency Program (E3 2009).
At that time the measure was provisionally called ‘Greenhouse and Energy Mandatory


                                                                                    119
Standards’ (GEMS). Table 45 compares the impacts calculated in this RIS with the
preliminary estimates and with the rest of the E3 program. This RIS estimates that
cumulative greenhouse reduction to 2020 will about 11% higher than the preliminary
estimate, and the impact in 2020 will be 30% higher.

The phase-out of electric water heaters would account for about 15% of the total
emissions impact of the E3 program to 2020, making it the largest single new reduction
measure, comparable to the sum of all lighting energy efficiency programs, including
the phase-out of incandescent lamps.


                   Table 44 Assessment of options against main criteria
Criterion                             Year or       Changes compared with ‘No Regulations’ Scenario (e)
                                      Period (a)      S 2 (Rapid)       S 3 (Extended)         S 4 (WHIP)
Cumulative greenhouse reduction 2011-20 T 32.5 Mt CO2-e                 29.4 Mt CO2-e        11.8 Mt CO2-e
compared with S1                      2011-20 C 57.8 Mt CO2-e           53.6 Mt CO2-e        21.9 Mt CO2-e
                                      2011-30 T 77.9 Mt CO2-e           74.4 Mt CO2-e        34.2 Mt CO2-e
                                      2011-30 C 98.6 Mt CO2-e           94.9 Mt CO2-e        46.2 Mt CO2-e
% emissions reduction compared 2011-20 T                 28%                 26%                   10%
with S1                               2011-20 C          35%                 32%                   13%
                                      2011-30 T          37%                 36%                   16%
                                      2011-30 C          39%                 38%                   18%
Greenhouse reduction in 2020          2020           5.0 Mt CO2-e        4.8 Mt CO2-e         2.0 Mt CO2-e
NPV Net benefit (cost) (b)            2011-20 T ($M 220) cost           ($M 140) cost        $M 71 benefit
                                      2011-20 C $M 1,235 benefit $M 1,192 benefit $M 1,111 benefit
                                      2011-30 T $M 1,669 benefit $M 1,621 benefit $M 1,614 benefit
                                      2011-30 C $M 2,512 benefit $M 2,427 benefit $M 2,410 benefit
Benefit/cost ratios (b)               2011-20 T           0.9                 0.9                   1.0
                                      2011-20 C           1.5                 1.6                   1.8
                                      2011-30 T           1.5                 1.6                   1.7
                                      2011-30 C           1.8                 1.9                   2.1
Implied $/tonne CO2-e saved (c) 2011-20 T                $+6.8               +$4.8                −$6.0
                                      2011-20 C         −$21.4              −$22.2               −$50.8
                                      2011-30 T         −$21.4              −$21.8               −$47.8
                                      2011-30 C         −$25.5              −$25.6               −$52.2
Increase in avg. WH capital cost 2011-20              $512 (29%)          $449 (26%)           $292 (17%)
Low-income HH WH cap costs (f) 2011-20                  $M 142              $M 119               $M 108
Impact on local manufacturing                           Neutral       Neutral to negative Small positive
Impact on installation activity                     More positive       More positive            Positive
Net impact on employment                            Most positive       More positive            Positive
Administrative complexity                              Simplest         More complex       Most complex (d)
       (a) T = analysis truncated at end of period. C = all lifetime energy use ‘locked in’ for water heater
          cohorts installed up to 2020 taken into account. (b) Net Present Value at 6% discount rate. (c)
     Negative values indicate that value of energy savings alone cover the abatement costs. (d) Requires
          workable and enforceable means of distinguishing ‘rental’ from ‘owner-occupied’ houses. (e)
     Includes costs and benefits for SA, which results in a slight overestimate of the national net benefits,
       as SA is already implementing regulations which capture most of the impacts of S2, S3 and S4. A
      separate analysis of the national impacts excluding SA are reported in the body of the RIS. (f) Total
      increase in capital costs of WH purchases by HH with income less than $40k. Will be exceeded by
                                       NPV of energy savings to those HH.




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            Table 45 Comparison of greenhouse impacts with E3 Program
                                           Cumulative greenhouse          Greenhouse reduction in 2020
                                             reduction 2009-20
                                           Mt CO2-e          % of total      Mt CO2-e        % of total
Total impact of E3 program (a)                 189.5               NA            19.5              NA
Less preliminary impact of GEMS                  26.5              NA             3.7              NA
Impact of other E3 measures                    163.0              85%            15.8             77%
Final estimate (S3) (b)                          29.4             15%             4.8             23%
Revised total impact of E3 program             192.4            100%             20.6           100%
                                  (a) E3 (2009), Table 6 (b) Table 44

In S3, emissions from household water heating in 2020 would be 4.8 Mt lower than
otherwise. This is equivalent to 1.6% of the total emissions from stationary energy
combustion in 2007, the latest published National Greenhouse Gas Inventory (291.7 Mt
CO2-e).48

The water heaters that would take the place of the electric resistance types excluded
from the market would cost about the same to purchase and install (LPG), slightly more
(natural gas, heat pump) or significantly more (solar). They would cost less to run
(solar, heat pump), about the same (natural gas) or significantly more (LPG).

Without the proposed regulations, about a third of existing households would replace an
electric water heater with another electric when it fails (about 3.7% of households will
be directly affected each year). The overall financial impact of selecting an alternative
will depend on the quantity of hot water used, the type of water heater selected and how
long it lasts, the purchase and installation cost and energy prices over the life water
heater. The availability of natural gas is usually a critical factor because it offer a
relatively low-cost alternative to electric water heating. Renewable Energy Certificates
and rebates (where available) make a significant difference to the financial impact of
solar and heat pump water heater purchases.

The cost-benefit analyses in this RIS have taken into account the value of RECs but not
rebates. On this basis it is projected that average water heater purchase prices over the
three years 2011-13 would be $512 higher than S1 under S2, $449 (26%) higher under
S3 and $292 (17%) higher under S4.

These capital cost increases will be offset by lower energy costs under all scenarios,
except that for some scenarios the savings take somewhat longer to exceed costs. In the
most stringent analysis (2011-20 T) the benefit/cost ratios are all close to 1, indicating
that all three scenarios are essentially cost-neutral, even over a truncated 10 year period.
Under longer time periods (2011-20 C and 2011-30 T) all three scenarios show
significant net benefits, with Benefit/Cost ratios ranging from 1.52 to 1.78.

For many water heater purchasers the higher initial capital expenditure will be an
impost, even though the NPV of the lifetime energy cost savings will more than
compensate. The annual increase in national water heater capital costs to low-income
households over the first 10 years of implementation is estimated at $M 142 per year for
S2, $M 119 per year for S3 and $M 108 per year under S4. By comparison, the total

48
  http://www.climatechange.gov.au/~/media/publications/greenhouse-acctg/national-greenhouse-gas­
inventory-2007.ashx


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value of Commonwealth and State rebates to solar and heat pump water heater
purchasers in 2009 is estimated at $M 246.

A value for CO2-e emissions has been internalised in this cost-benefit analysis to the
extent that the emission permit prices projected under the CPRS are expected to impact
on retail energy prices. If the value of the energy cost saving exceeds the capital cost
increase (ie B/C ratio is 1 or more) there are no further costs of greenhouse gas
reductions beyond those imposed by the CPRS, and the $/tonne avoided is a negative
value. If the B/C ratio is less than 1 there is an implied cost, and the $/tonne avoided is
a positive value. S2 and S3 indicate +$4.8 to $6.8 per tonne avoided over the period
2011-2020 T, but once energy savings increase, the $/tonne avoided value becomes
negative over the 2011-20 C and 2011-30 T periods (ie the greenhouse savings become
‘free’). S4 indicates negative cost per tonne avoided under all time periods.

The increase in capital costs means an increase in revenues to water heater
manufacturers, importers and installers. All suppliers of electric storage water heaters
also supply other types, so none would be excluded from the market by the proposed
measure. The largest suppliers both import and manufacture locally, so would gain
irrespective of how the growth in market value were distributed.

The employment implications of all three scenarios are positive. The net impact on local
water heater manufacture is expected to be relatively minor, ranging from a small gain
under S4 to a small loss under S2. The impact on installation activity, which is more
labour-intensive and more evenly distributed across jurisdictions, would be strongly
positive under all scenarios, but especially S2 and S3, which have a higher solar market
share.

The regulations could be implemented under State and Territory plumbing codes
initially, then in due course under the Plumbing Code of Australia. In S3 and S4 there
would be an initial two year phase in which the regulations apply to households with
lower compliance costs. The criteria for these would be set by each jurisdiction, as
would the ‘special exemption criteria’ allowing electric water heaters to be used in
special circumstances (general exemptions would follow the rules proposed for the
BCA).

The obligation to comply with these rules, once they are incorporated in the plumbing
regulations, will rest with plumbers and installers. Compliance can be verified by
current processes for inspecting plumbing work (or a proportion of it), which may need
to be expanded to deal with the additional workloads.

The implementation of S4 depends on a workable legal definition of a house as ‘rental’
or ‘owner-occupied’, on an administrative system for making this information
accessible to plumbers and installers and an obligation to act on this information when
advising customers and installing water heaters. These factors are presently beyond the
scope of the plumbing codes, which deal with products and their installation. S4
therefore appears to be unworkable under current legislation.

S3 differs from S2 in that it has a two year period where the measure applies in some
areas but not others. This adds administrative and compliance complexity because there
could be uncertainty about the criteria for coverage during that period, and the


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information, administration and enforcement regime would need to be revised after the
two year period. On the other hand, an extended implementation period allows early
impacts to be monitored and administration to be fine tuned by the time the measure
becomes universally applicable. It also allows more time for informing plumbers and
installers about the regulatory regime, and more time for water heater manufacturers
and installers to prepare for the expected market shifts. There would be some reduction
in greenhouse savings, but these appear to be fairly minor.




                                                                                  123
Sensitivities and Risks

Energy and Capital Costs

The projected energy costs used in this RIS correspond with the Treasury projections
under the CPRS-5 scenario, which would aim for national emissions to be 5% lower
than the 2000 levels by 2020. As there is a possibility that the Government may adopt a
more stringent target (up to CPRS-25) following the United Nations Climate Change
Conference in Copenhagen in December 2009, this represents the lower bound of
energy prices. Higher prices would make the proposed measure more cost-effective.

Water heater capital cost estimates are based on today’s costs. Solar water heating is a
mature technology with a significant market, and the manufacture of one of the
principal components – pressure tanks – is already highly integrated with the
manufacture of conventional water heater components. There may be some scope for
further returns to scale in the manufacture of some solar components, but these could be
offset by a reduction in the scale of pressure tank manufacture as the demand for
conventional storage systems falls. In all, there may be some scope for solar and heat
pump prices to be lower than modelled. Lower prices would make the proposed
measure more cost-effective.

Product performance

Electric and gas water heaters perform in highly predictable ways. The performance of
heat pumps is more variable with hot water demand and climate, and for solar water
heaters more variable still. This RIS has modelled a wide range of water heater types
and household hot water demand patterns to project water heating energy use, but the
higher the share of solar and heat pump in the mix the greater the risk that energy use in
the field will deviate from modelled energy use, because it is more sensitive to
variations in household behaviour. The available field measurements of energy use in
Australian households before and after the replacement of electric water heaters with
solar or heat pump indicate that energy reductions are consistent with the modelling.

Achieving the modelled energy savings in the field depends on proper product selection
and installation. For heat pump water heaters this would be assisted by identifying
which models are suitable for which climate zones and which tariff classes (continuous
or restricted hours).

Standards Australia has issued for public comment a draft standard for heat pump
performance testing (DR AS/NZS 5125). This proposes a fifth water heating climate
cold zone covering the ACT, much of Victoria and NSW, and all of Tasmania, where
heat pump performance can be severely affected by cold conditions. The draft proposes
that all heat pumps be classified as follows:

•	 Low temperature Class A: Suitable for low ambient temperature operation without
   auxiliary boosting;
•	 Low temperature Class B: Auxiliary boosting required for low air temperature
   locations




                                                                                    124
•	 Low temperature Class C: Limited to operation at ambient air temperature greater
   than 10°C

If all heat pumps carried this classification, and if the information were readily available
to buyers, plumbers and installers, the risk of selecting an unsuitable model would be
greatly reduced. Mandatory registration and labelling may be necessary to achieve this.

For solar water heaters the risks are poor matching of product performance to hot water
demand, and poor installation. Too small a tank or inadequate collectors could reduce
the solar contribution and lead to excessive use of boost energy, especially in winter.
To minimise this risk, it is recommended that the same sizing criteria be adopted as
proposed for new houses on the BCA.

Even where suitable products are selected, it is possible to compromise their
performance through poor installation. Solar collectors in particular need to be
correctly oriented and free of over-shadowing, and the system components correctly
connected. The level of plumber and installer expertise is progressively improving as
familiarity with solar installations grows, but the risks would be reduced with further
intensive training programs.

Compliance

The primary compliance obligation will fall on plumbers and installers. There will be a
risk that some will be unaware of the requirements, especially in the early stages. There
will also be a continuing risk that some will choose not to comply with the regulations,
either on their initiative or in response to customer requests or demands. The risk of
this would be highest in stage one of the Extended Implementation scenario (S3), while
large electric storage water heaters were still on the market; the manufacture of these
product is likely to cease once the second phase of implementation starts. The general
and special exemption provisions will provide a permanent compliance risk.

These risks can be minimised through clear rules and guidelines, training programs for
plumbers and installers, and monitoring by plumbing inspectors. In jurisdictions which
rely on random rather than universal inspection of plumbing work, the rate of
inspections may need to be increased in the early phases of implementation.

If there are 650.000 replacements pre year and 5% are randomly inspected at say $100
per visit the total cost would be $3.25 M per year compared with total additional capital
costs of $200M per year for S3 (see Fig 37), ie about 1.5%. This would be the
maximum, because:

•	 inspection costs could be (and probably would be) integrated with general plumbing
   work inspections in those jurisdictions that already have an effective regime (eg
   Victoria);
•	 it should be possible to target inspections to the half of household where an electric
   has been replaced, rather than all hot water replacements;
•	 inspection rates could be lowered from 5% random to say 2 to 3% after first 2 years,
   once installers become more familiar with the rules; and
•	 from year 3 the manufacture of large electric water heaters could cease, so the scope
   for non-compliance would be limited to the use of small electric water heaters in


                                                                                      125
   situations not properly covered by exemptions. This could be monitored indirectly
   through requiring reporting of annual sales of small electric water heaters.

LPG

There is a risk that some householders will adopt LPG solely because it is the lowest
capital cost option, and not because it is the most cost-effective for them. If so, they
could be left with high operating costs. Low-income households and rental households
may be especially vulnerable. The extent of this will not become apparent until the
electric water heater phase-out extends to areas without a natural gas supply. However,
monitoring programs and the early development of policy responses, should they turn
out to be necessary, would mitigate this risk.




                                                                                   126
Recommendations
It is recommended that:

   1.	 Greenhouse gas-intensive water heaters should be phased out from the Class 1
       buildings (ie houses) through prohibiting the installation of electric resistance
       water heaters, with certain exemptions.

   2.	 The phase-out should be implemented in two stages; the first stage in 2010 and
       the second stage in 2012.

   3.	 Each Australian jurisdiction should implement the first stage under its own
       plumbing regulations, and the second stage through common provisions, such as
       those which may be developed for the Plumbing Code of Australia.

   4.	 Each jurisdiction should determine its own rules for coverage in the first stage of
       implementation, based on criteria such as location and/or gas connection status,
       on the principle that coverage in this stage should be targeted to houses where
       compliance options are wider and compliance costs likely to be lower.

   5.	 The second stage should apply across the entire jurisdiction, subject to certain
       exemptions.

   6.	 The second stage should preferably take effect at the same time all implementing
       jurisdictions, to minimise confusion among water heater buyers and installers,
       and disruption to the water heater industry.

   7.	 The method of calculating the greenhouse gas intensity of water heaters similar
       to that proposed for the Building Code of Australia should be used if water
       heater suppliers wish to demonstrate that a product or design meets the criterion
       of ‘low emissions-intensity’, but for ease of implementation the basis of
       regulation should be acceptable types of water heaters and simple performance
       criteria.

   8.	 Provisions for general exemptions should be similar to those adopted for new
       buildings. These include rules under which electric resistance water heaters (up
       to a size or heat loss limit) can be installed in defined situations, or where the
       electricity is supplied directly from renewable sources. GreenPower, however,
       does not meet this criterion.

   9.	 Jurisdictions should develop guidelines and administrative procedures for
       assessing and granting special exemptions, in cases where installing any water
       heater other than electric would be unsafe or excessively costly.

   10. Where solar or heat pump water heaters are installed, the requirements should be
       similar to those adopted for new buildings.

   11. Information and training programs on the proposed phase-out should be 

       developed and implemented for plumbers and installers. 



                                                                                    127
12. Information programs on the proposed phase-out should be developed and
    targeted to households with electric water heaters, so they will be more aware of
    the options when it comes time to replace them.

                                     *****




                                                                               128
                                   7. Review 

If a phased implementation approach is adopted, the logical time to review the operation
of the measure is towards the end of the first phase, prior to the implementation of the
second.

The proposed measure interacts with a number of other programs and policies which are
themselves evolving, including:

•	 The CPRS: the assumptions about the CPRS’s projected operation and impacts in
   this RIS are based on Treasury’s 2008 modelling. These assumptions may need to
   be revised once the CPRS is legislated.

•	 The Commonwealth and State solar and heat pump water heater rebate schemes: the
   assumptions about these, and the decision to omit them from the cost-benefit
   modelling, are based on current stated policy for the duration of these programs.
   These assumptions may need to be revised if there are policy changes.

As with all other regulation, the impact of the measures should be monitored by
Governments. The effects of phase one on the water heater buyers and on
manufacturers, importers, plumbers and installers should be monitored, to ensure that
there is compliance and that there are no unforeseen or disproportionate impacts.

Certain compliance patterns have been assumed, based on the best information currently
available, and it will be necessary to check how suppliers, installers, home-owners,
tenants and rental owners do in fact respond. For example, if the rate of installation of
LPG water heaters increases more rapidly than expected, this would be evidence that
buyers are being unknowingly committed to high energy prices, and specific policy
responses may be warranted.

Once phase two is implemented, the operation of the program and the policy settings
should be re-evaluated every five years or so, although will be little scope for further
greenhouse gas reduction in water heating once electric resistance water heaters are
excluded from the market. If the greenhouse gas intensity of the electricity supply
system falls more rapidly than anticipated, and the cost of emission permits rises more
rapidly than anticipated, the greenhouse and cost relativities between natural gas, solar-
electric and heat pump water heaters may change. However, that is not expected to
occur until after 2030.

                                          *****




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                                                                                  130
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                                                                                 131
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                                                                                    132
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                                      *****




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