Intention to declare a discount factor by thespindoctor1

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									Intention to declare a discount factor


Victorian Energy Efficiency Target Act 2007

Response to submissions

July 2009




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                             Table of Contents
1.   Background.................................................................................................3
2.   Introduction................................................................................................3
3.   Purpose of this document......................................................................4
4.   Submissions ...............................................................................................4
5.   Issues raised ..............................................................................................4
6.   Conclusion ................................................................................................10




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    1. Background
The Energy Saver Incentive scheme delivering on the Victorian Energy Efficiency Target
commenced operation on 1 January 2008.

The Victorian Energy Efficiency Target Act 2007 (‘the Act’) which establishes the scheme was
passed on 11 December 2007. The objectives of the scheme are to:

    a)   reduce greenhouse gas emissions;

    b)   encourage the efficient use of electricity and gas;

    c)   encourage investment, employment and technology development in industries that
         supply goods and services which reduce the use of electricity and gas by consumers.

The supporting regulations, the Victorian Energy Efficiency Regulations 2008 determine a
range of matters essential to the operation of the scheme such as prescribing eligible energy
efficiency activities and the number of certificates made by each activity. The Regulations
came into effect on 1 January 2009 and included ceiling insulation as a prescribed activity
under the scheme.

On 3 February 2009, the Prime Minister announced a $42 billion Nation Building and Jobs
Plan that seeks to support jobs and secure long term economic growth. Among the range of
measures introduced by the Commonwealth was the $3.9 billion Energy Efficient Homes
Package which delivers:

    •    free ceiling insulation (up to $1600 value) for all Australian owner-occupiers who do
         not currently have ceiling insulation or have ceiling insulation with an R-value of 0.5 or
         less, available until 31 December 2011;

    •    increased Solar Hot Water Rebate from $1,000 to $1,600 and the existing means test
         scrapped, available until 30 June 2012; and

    •    an increased Low Emissions Plan for Renters rebate which will be doubled to up to
         $1,000 for landlords with tenants to install ceiling insulation in their rental property
         and will be available until 30 June 2011. The number of rebates will be uncapped.

Homeowners can access either the insulation program or the Solar Hot Water Rebate.


    2. Introduction
Following the introduction of the Commonwealth’s Energy Efficient Homes Package, the
Department of Primary Industries (‘the Department’) responsible for the Energy Saver
Incentive scheme policy noted that there is potential for uncertainty associated with the
reduction in greenhouse gas emissions in relation to ceiling insulation activities conducted
under the Energy Saver Incentive.

This uncertainty relates to the “double counting” of emissions, both through the Federal
Government Energy Efficient Homes Package and those corresponding activities incentivised
under the Energy Saver Incentive scheme in Victoria.




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The Energy Saver Incentive scheme prescribes activities that result in a reduction in
greenhouse gas emissions that would not otherwise have occurred if the activity was not
undertaken.

Section 19 of the Act provides that the Minister can propose to make a declaration specifying
the discount factors which are to be used to calculate the carbon dioxide equivalent of
greenhouse gas emissions to be reduced by a prescribed activity.

The Minister for Energy and Resources published a Notice of Intention to declare a discount
factor of zero in respect of ceiling insulation activities prescribed under the scheme on
Monday 20 April 2009. It is intended that the discount factor will apply to reduce to zero the
carbon dioxide equivalent of greenhouse gases to be reduced by ceiling insulation activity
undertaken while the discount factor applies. Public comment was invited on the proposal
and submissions closed on 1 May 2009.


    3. Purpose of this document
This document outlines the issues raised in submissions responding to the Minister’s Notice
of Intention, and provides the Department’s position on each of the matters raised.


    4. Submissions
The Department received one confidential response to the Notice, and five (non-confidential)
submissions from:

    •    AGL;

    •    Clean Energy Council;

    •    ecovantage;

    •    Energy Retailers Association of Australia (ERAA); and

    •    TRUenergy.

Submissions raised four main themes/issues around the declaration of a discount factor. Each
of these issues is addressed below with discussion of the issue and the Department’s position.


    5. Issues raised

    1.   Reduction in the energy savings target and increased costs to deliver the scheme
Generally, submissions acknowledged the issue of “double counting” of emissions reductions
or “double dipping”, and that the declaration of a discount factor attempts to eliminate this.

Respondents noted that removal of insulation will lead to increased costs to deliver the VEET
target as it reduces the available prescribed services without a commensurate reduction in the
energy savings target. Two respondents recommended that the Victorian Government reduce
the three year energy saving target (by 1.4 million tonnes) based on early modelling of the
potential number of certificates that may be generated by ceiling insulation under the scheme.




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         Discussion
In its original modelling the Department estimated an uptake in ceiling insulation activities of
11,929 per annum in the first (three year) phase of the Energy Saver Incentive scheme. This
means there is a technical certificate potential of 480,494 certificates per year. As noted by
respondents, this potential could contribute to 17% of the first year target.

Since the commencement of the scheme on 1 January 2009, the Department notes that:

    •    8 accredited businesses participating in the scheme have indicated they may
         undertake insulation (this includes both ceiling and under-floor insulation) as a
         prescribed activity. The Department understands that these businesses are not
         undertaking ceiling insulation activities as their primary activity; and

    •    to date, 146 certificates have been registered for ceiling insulation activity and pertain
         to two households under the scheme.

Whilst there is potential for other ceiling insulation activities to have already occurred for
which certificates have not yet been registered, neither the Department, nor the ESC, has had
any representations from accredited parties to that suggest this is the case.

         Departmental response
It is the Department’s position that a reduction in the Victorian Energy Efficiency Target would
work against the objectives of the scheme to reduce greenhouse gas emissions. Declaring a
discount factor for ceiling insulation does not mean that parties’ liability under the Act cannot
be achieved.

Whilst the declaration of a discount factor for ceiling insulation may result in increased costs
to deliver the target, it is anticipated that these costs would be small and could be offset by
including additional activities in the scheme. The Department is to conduct a review of
eligible activities beginning in July 2009 and will consider other potential activities for
inclusion within the scheme. The Department may consider the inclusion of “top-up”
insulation or upgrades to ceiling insulation as part of this review, however the Commonwealth
rebate is available to households who are currently uninsulated, or have ceiling insulation with
an R-value of 0.5 or less. Practically, this means the Commonwealth rebate will cover a
portion of “top-up” insulation as well.

By lowering the VEET target without considering alternative activities that could help reach the
target, the achievement of the scheme objectives to reduce greenhouse gas and increase
energy efficiency would be lessened. It is also prudent to note that the estimated uptake of
ceiling insulation is an estimate only and that the Victorian Energy Efficiency Target is
expressed in tonnes of CO2 – equivalent abatement and does not set targets for the number
of prescribed activities to be undertaken. Targets can be met through any of the activities
prescribed within the Regulations.

    2.   Removal of prescribed activities and uncertainty
Some respondents noted that removing prescribed services from the activities prescribed in
the Regulations during the operation of the scheme also generates policy and regulatory
uncertainty and this impacts on the effectiveness and efficiency of the scheme. Views noted




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that industry participants who have targeted insulation as part of their strategy are now left
incurring sunk costs and time associated with their preparations without reward.

Respondents noted that:-

    •    the regulatory risk created for liable entities and service providers, with a fear of
         unrecoverable sunk costs, will be more reluctant to commit economic investment and
         resources required to meet the target at least cost;

    •    the discount factor will have an effect on commercial contracts such that no further
         action will be undertaken for ceiling insulation in the latter years of the scheme;

    •    sufficient time should be allowed before the discount factor becomes effective so that
         planned marketing activities and ceiling installation can occur without entities being
         at a financial disadvantage. The respondent suggested 1 July 2009 as an appropriate
         effective date for the discount factor.

         Discussion
It is acknowledged that some participants may have incurred costs as a result of this change
that will not be recoverable. However the Department expects that any losses will be offset by
opportunities presented through the Commonwealth Energy Efficient Homes Package.

Liable parties may need to adjust their approach to certificates that were intended to be
created for ceiling insulation activities by increasing their activities in other eligible areas, or
taking advantage of new activities that emerge. A large number of accredited parties under
the scheme are offering a suite of eligible energy saving actions to customers not solely
ceiling installation, therefore it is not anticipated that this adjustment will pose a major
difficulty.

The Department is concerned to preserve the integrity of the scheme and avoid “double
counting” greenhouse gas emissions abatement. Extending the date from which the discount
factor will apply effectively allows parties to continue to “double dip” from both the
Commonwealth free ceiling insulation and incentives under the Energy Saver Incentive scheme.
This means that not only are greenhouse gas emissions counted under two schemes but that a
generous financial benefit can continue to be generated to the advantage of certificate
creators and/or their customers during this time.

         Departmental response
The Department agrees that there is the potential for no ceiling insulation activities to occur
even after the expiry of the discount factor. For example, Victorian homes not previously
insulated may be insulated under the Commonwealth ceiling insulation offer which results in a
reduced appetite for this activity under the Energy Saver Incentive. Following the expiration of
the discount factor for ceiling insulation however, it is anticipated that business will assess the
potential for certificate creation for ceiling insulation activity and where cost-beneficial, will act
to resume this activity.

The Department is not inclined to recommend that the date the discount factor becomes
effective should be extended given that sufficient time following the publication of the Notice
of Intention has already elapsed enabling industry to adjust to the prospect of a discount




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factor or similar response. This would operate against the desire to maintain the integrity of
the scheme and avoid “double counting” emissions, or continue to facilitate “double dipping”
of incentives.

Any negative effects of ending marketing promotions early and concerns about the recovery of
costs, are likely to have been offset by opportunities following the announcement of free
ceiling insulation in the Commonwealth package since February 2009.

    3.     Consistency with other energy efficiency schemes
Some submissions noted their concern that as a consequence of the multiplicity of disparate
jurisdictional schemes, the potential for funding/incentives from other programs (such as
Energy Efficient Homes Package) to be denied to energy consumers on additionality grounds.

Two respondents urged consideration of a nationally co-ordinated energy efficiency program.

Submissions also noted that energy efficiency schemes such as the South Australian scheme
has not changed as a result of the Commonwealth Government’s Energy Efficient Homes
Package.

           Discussion
The Department notes the Council for Australian Governments (COAG) has recently reaffirmed
its commitment to introducing a comprehensive National Strategy on Energy Efficiency 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. The Strategy will accelerate energy efficiency efforts and streamline roles
and responsibilities across governments.

The National Strategy does not include an energy efficiency scheme such as VEET. As a result,
Victoria, NSW and South Australia have developed their own schemes. Whilst the energy
efficiency schemes share many commonalities there are also some distinct differences in
operation of the schemes.

The South Australian Residential Energy Efficiency Scheme (REES) requires retailers to
undertake energy saving actions measured in tonnes of greenhouse gas abatement which
contribute directly to meeting their targets. The REES does not generate tradeable certificates
for energy saving activities for which financial consideration is given and so are not faced with
a potential “double dipping” situation. The creation of certificates is fundamental to the
market-based scheme in Victoria which is underpinned by commercial arrangements between
parties.

The New South Wales, Energy Savings Scheme (ESS), which started on 1 July 2009, does not
include ceiling, wall or floor insulation as eligible activities.

           Departmental response
Jurisdictions with existing energy efficiency schemes, including Victoria, are working to
harmonise elements of energy efficiency schemes where possible to reduce administrative
costs and costs for participants, recognising each schemes’ differing objectives. The
Department recognises that there is also potential for further harmonisation, particularly in




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the development of consistent methodologies for determining greenhouse gas abatement for
specified scheme activities.

    4.   Change assumes Commonwealth rebate has been accessed
One respondent stated that the declaration of a discount factor assumes that a person has
taken up the $1600 Federal ceiling insulation rebate. The respondent suggested that the
proposal be modified to make the discount factor apply only to customers that have taken up
the Federal ceiling insulation rebate thereby encouraging customers to both insulate and
obtain more efficient hot water. This would allow consumers who have taken up
Commonwealth solar hot water rebate to also access incentives for ceiling insulation under the
Energy Saver Incentive.

         Discussion
The purpose of the regulations is to prescribe activities that result in reduction of greenhouse
gas emissions that would not otherwise have occurred if the activities were not undertaken.
Section 15(2) of the Act provides that:

    an activity may be prescribed to be a prescribed activity if the activity will result in a
    reduction in greenhouse gas emissions that would not otherwise have occurred if the
    activity was not undertaken.

The announcement of free ceiling insulation from the Commonwealth requires that an
assessment be made about the “additionality” associated with the activity in respect of the
Energy Saver Incentive scheme. Additionality is a consideration of whether an activity would
have taken place (either generally or in some instances) in the absence of the scheme.

         Departmental response
It is the Department’s position that, in the absence of the Energy Saver Incentive scheme,
ceiling insulation activity would take place given the existence of free ceiling insulation under
the Commonwealth’s scheme. This, therefore, gives rise to uncertainty around the extent to
which additional greenhouse gas emissions may occur.

Modifying the discount factor to apply only where the Federal Government rebate has been
accessed would add further complexity given that verification systems would need to be
established. The VEET Regulations would need to be amended to prescribe the conditions or
circumstances under which ceiling insulation could create certificates under the scheme.
Consumers would need to demonstrate they have received the Commonwealth Solar Hot Water
rebate in order to access the Energy Saver Incentive for ceiling insulation. Participating
businesses would need to assess that the verification provided by customers was adequate
and demonstrate this when lodging certificates for creation with the ESC. Alternatively
systems would need to be established between Commonwealth and State to establish if
consumers have previously accessed the rebate.

The Energy Saver Incentive scheme was developed without reference to its interaction with
other State or Commonwealth energy efficiency incentives thereby making the scheme
straightforward to administer and ensure costs would remain low. By adding a layer of
complexity to the scheme and allowing a specified subset of activities to generate certificates,
scheme costs are increased for what may be little benefit. Consistent with the low number of



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ceiling activities that have occurred to date (as indicated earlier), the Department believes that
minimal additional ceiling insulation will occur, and therefore the costs of incorporating a
modified activity for ceiling insulation are not justified.

Additional comments from stakeholders
             a)    Current proposal will remove all forms of insulation from VEET
The discount factor of zero will only apply to ceiling insulation activities currently outlined in
Schedule 11 of the Regulations. The discount factor would not extend to other insulation
activities in the Regulations such as under floor insulation (Schedule 12) and window
insulation. Further, the only type of ceiling insulation activity covered within the Regulations
is for installation of insulation in a ceiling area not previously insulated – the existing
Regulations do not provide for top-up ceiling insulation or upgrades.

It is intended that the proposed discount factor would apply until the Commonwealth rebate
scheme ends after which ceiling insulation could again generate certificates under the Energy
Saver Incentive.

             b)    Suggestions from stakeholders to address this issue
It was suggested by one stakeholder that Government work with industry to find a solution
that delivers long term savings while minimising double counting – until then all types of
insulation should remain in VEET.

Another suggestion was that if the Department wants to maximise energy efficiency activities
at lowest cost, it could consider two additional ceiling insulation activities not covered by
Commonwealth program such as top-up insulation and insulation upgrades.

As noted earlier, these additional activities are likely to be given serious consideration in the
upcoming review of eligible activities.

             c)    Declaring a discount factor departs from the Department’s initial position
A respondent stated that declaration of a discount factor sends mixed messages as the
Department’s previous position was that “double dipping” was not a concern.

The Regulatory Impact Statement published during the development of the scheme noted that
in regard to financial additionality that, “it is easier to avoid double-counting through the
administration of a rebate program rather than through the VEET scheme.”

Since the announcement of the Commonwealth Energy Efficient Homes Package providing zero
or low-cost ceiling insulation, it was clear that in addition to “double counting” of emissions
that a financial windfall gain would result for certificate creators where ceiling insulation was
undertaken. DPI did not foresee the situation whereby the financial incentive was provided for
an activity under the scheme which would essentially make it free for consumers and cover the
costs of installers. The risk of no action under this scenario exposes the potential for gaming
of incentives and “rent seeking” behaviour to occur from accessing available State and Federal
rebates/incentives for ceiling insulation. It is the Department’s view this potential necessitates
action from Government and that these risks should be addressed promptly.




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    6. Conclusion
The Department’s response to the issues raised in submissions is to recommend that the
current proposal to declare a discount factor be retained.

The purpose of the regulations is to prescribe activities that result in a reduction of
greenhouse gas emissions that would not otherwise have occurred if the activities were not
undertaken. The Commonwealth initiative and the “double counting” of greenhouse benefits
of this initiative cannot be disregarded if the Department wishes to maintain the integrity of
the scheme and ensure that greenhouse gas emissions attributed to the Energy Saver
Incentive are not counted elsewhere.

The Department recognises that ceiling insulation activities could make a contribution to the
scheme target in future and therefore does not propose to indefinitely remove this activity
from the scheme. Rather, a discount factor would apply until the Commonwealth rebate ends,
at which time ceiling insulation as prescribed in Schedule 11 of the Regulations would again
have the potential to generate certificates under the scheme.

The Department is to conduct a review of eligible activities, beginning in July 2009, with a
view to including additional activities. As part of this review, and in light of comments
provided by respondents, the Department will consider the inclusion of “top-up” or upgrades
to ceiling insulation in this Review.

The Department welcomes submissions for the inclusion of new activities under the scheme.
Details of the process for submissions can be found on the Department’s website under
Eligible Activities Review Panel, www.dpi.vic.gov.au/energysaverincentive




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