Mar 23, 2012 - 12:49pm
Australia must improve its energy efficiency to maintain its competitiveness in a carbon constrained world. A national Energy Savings Initiative (ESI) is a critical component of this objective.
An ESI would:
Lower consumers’ energy costs: Households could save $90-300 per year by 2020. Medium-sized businesses could save $10,000-23,700 per year.1
Increase domestic pollution reduction and reduce the cost of achieving Australia’s emissions reduction targets: Cost effective energy efficiency measures could achieve more than a third of Australia’s minimum 5 per cent target and a quarter of a 25 per cent target in 2020, and save more than $7.5 billion.2
Reduce Australia’s reliance on international carbon credits and exposure to risks associated with international carbon markets: Energy efficiency can increase the amount of investment that occurs domestically to achieve Australia’s targets, reducing our exposure to the uncertain development of international carbon markets, and sudden shifts as well as long-term rises in global carbon prices.
Lessen Australia’s exposure to increasing global prices for energy resources: global oil prices are predicted to remain high, while Asian demand for Australian coal and LNG will put pressure on domestic prices.3
Cut compliance costs by replacing inconsistent State schemes: Energy retailers estimated that harmonising the existing schemes would cut their implementation costs by 12 per cent.4
TCI supports a national ESI whose key objective is to unlock socially cost-effective emissions reduction opportunities across the Australian economy. Such a scheme is complementary to a carbon price: it addresses significant market failures that are not resolved solely by the carbon price package. These failures prevent profitable investment in energy efficiency and forestall socially cost-effective domestic pollution reductions that would maximise the economic opportunities that will come from acting on climate change. By unlocking such investment, a national ESI reduces the overall cost of achieving Australia’s emissions reduction targets and fosters jobs growth in the energy services and related sectors, accelerating transformation to a low-carbon economy.
Australia lags other countries on energy efficiency
Australia has a higher proportion of energy intensive industries than many other countries, but even accounting for this Australia is less energy efficient and is improving more slowly than its peers. Australia lags behind the United States, Canada, the United Kingdom and New Zealand, among others, in terms of its improvement in energy efficiency over time.
The era of cheap energy is over. Low cost energy has meant Australia has not invested in energy productivity. Despite our historically low cost energy supply, we pay electricity bills comparable to other countries.5 Australia can also no longer expect to be insulated from rising global prices for resources like carbon, coal, oil and gas. Improved energy efficiency is vital to maintaining Australia’s competitiveness and building resilience to global economic forces.
Cost effective energy efficiency drives domestic emissions abatement and saves money
By unlocking investment in energy efficiency, a national ESI reduces the cost of achieving Australia’s emissions reduction targets. By lowering the costs of adjustment, such a scheme can strengthen institutional support for Australia’s response to climate change, and build the case for more ambitious emissions reduction targets in the future. It can also improve Australia’s management of risks associated with climate change policy uncertainty by reducing the country’s reliance on international carbon markets.
Existing schemes overseas have driven significant reductions in energy costs and emissions. In Europe, five countries have implemented - and expanded - their energy saving schemes. Independent evaluations show that in all cases the total cost of saving a unit of energy is between two and six times smaller than the price for residential use of that energy. Moreover, energy efficiency has become cheaper over time – economies of scale have driven down prices for high-efficiency appliances or services, and companies have become more adept at marketing and delivering them.6
Example 1 – France
The clean energy sector employment grew by 28 per cent to 260,000 jobs. Nearly half of these were in the residential Energy Savings Certificates Scheme (ESCS) obliges all large energy suppliers to find energy efficiency improvements in commercial and residential building, industry, agriculture and transport. The first phase of the ESCS (2006-9) resulted in annual energy savings of 7.7 terawatt hours (TWh), or about 1.4 per cent of France’s annual electricity generation, and 1.83 million tonnes (Mt) of carbon pollution reductions.7 Consumers saved approximately EUR 1.4 billion ($AU 1.7 billion). In addition, energy efficiency industry (110,000 jobs).8 In the second phase (2011-2013) France has increased its target fivefold and extended the obligation to the transport sector through motor fuel suppliers.9
Example 2 - United Kingdom
The Energy Efficiency Commitment (EEC) began in 2002, and became the Carbon Emissions Reduction Commitment (CERT) in 2008. Large gas and electricity suppliers are obliged to improve energy efficiency in households. During the second phase of the EEC, it achieved 140 per cent of targeted energy savings, and delivered GBP 8.4 billion ($AU12.7 billion) of benefits to households in its last round, with every dollar spent by energy retailers delivering GBP 6 ($AU 9) worth of benefits to households.10 CERT is expected to deliver emissions pollution reductions of 293 Mt by December 2012, with a net present value to society of approximately GBP 17 billion ($AU 22 billion).11
A national Energy Savings Initiative addresses market failures not overcome by the carbon price:
Imperfect information. Consumers and investors often lack sufficient expertise in energy efficiency to make informed decisions, leading to under-investment in energy efficiency.12 A national ESI creates a financial incentive for energy retailers to educate their customers to reduce their energy consumption by obligating them to do so.
Principal-agent problems. Split incentives (such as the landlord-tenant issue) often prevent investment in energy efficiency, particularly investments in water- or space-heating.13 A national ESI can provide a split benefit for energy efficiency; for example a landlord can sell credits received for investing in more efficient water heating, while the tenant enjoys reduced bills.
Bounded rationality – overcoming the ‘hassle factor’. People may see small investments producing small savings as not worth the effort, while large investments with long payback periods are low priorities. However, an ESI will act as an aggregator of demand and supply. For example, individual households may be reluctant to go to the effort to install an energy efficient showerhead (high transaction costs and low level of information). But these costs can be minimised if a central aggregator walks door to door providing information and assistance.
Lack of access to finance. An ESI creates a revenue stream in addition to the energy saved. This increases the return on investment in energy efficiency projects and reduces their payback periods and should make it easier to attract finance.
The Climate Institute's full submission to the National Energy Savings Initiative Working Group can be found here.
1 Mclennan Maganasik Associates, ‘Electricity and Gas Market Benefits and Costs of an Energy Efficiency Obligation Scheme: Report to Prime Minister’s Task Group on Energy Efficiency’, July 2010, 53-54.
2 Savings of $7.5 billion result from 69Mt abatement at net average savings of $110/tonne. ClimateWorks Australia, ‘Low Carbon Growth Plan for Australia: Impact of the Carbon Price Package’, August 2011 and updated data provided to TCI, March 2012.
3 International Energy Agency, ‘World Energy Outlook 2011’, 2011; ABARES, ‘Energy in Australia 2011’, Department of Resources, Energy and Tourism, 2011.
4 Clean Energy Council, ‘Energy at home – what can be done?’ presentation at ACOSS/CHOICE workshop, 13 September 2011.
5 For example, Germany has some of the highest electricity tariffs in the world, but the average German household electricity bill is approximately EUR 1,080, (AUD 1,360) for 4,500kWh, compared with average annual bills of $1,433 for Queensland, $1,440 in NSW and $1,581 in WA. See German Energy Agency (DENA), ‘Electricity bills to rise by 20 per cent by 2020’, press release, 12 December 2011, [webpage] http://www.dena.de/presse-medien/pressemitteilungen/dena-strompreise-steigen-bis-2020-um-20-prozent.html and Australian Energy Market Commission, ‘Possible Future Retail Electricity Price Movements: 1 July 2011 to 30 June 2014’, Final Report, 25 November 2011. 6 E Lees, ‘Energy Efficiency Obligations: The EU Experience’, briefing commissioned for the Directorate-General for Energy of the European Commission, 2 March 2012.
7 France generated 542TWh in 2009. European Commission, ‘France’ factsheet, [web document], 29 June 2011, <http://www.energy.eu/country_overview/France_2011.pdf> accessed 1 March 2012. P. Bertoldi, ‘Assessment and Experience of White Certificate Schemes in the European Union’ presentation to Policies for Energy Provider Delivery of Energy Efficiency workshop, Sydney, 12 December 2011.
8 Environment and Energy Control Agency, ‘Green Economy: 90,000 New Green Jobs in France, The trades related to the energy and the development of renewable energy are resistant to the crisis’, Government of France, Paris, 2009.
9 France’s target was 54 TWh cumac [accumulated saved energy]; the ESCS achieved 65.2TWh. The new target is 345 TWh. Bertoldi, ‘Assessment and Experience’.
10 Clean Energy Council and Energy Efficiency Council, ‘The Benefits of a National Energy Saving Initiative’, May 2011.
11 UK Department of Energy and Climate Change, ‘Carbon Emissions Reduction Target (CERT)’ [webpage] <http://www.decc.gov.uk/en/content/cms/funding/funding_ops/cert/cert.aspx> accessed 1 March 2012
12 International Energy Agency, ‘Energy Efficiency Policy and Carbon Pricing’, Information Paper [web document], August 2011 <http://www.iea.org/papers/2011/EE_Carbon_Pricing.pdf>, accessed 23 February 2012.
13 International Energy Agency, ‘Energy Efficiency Policy’.