Analysis of the impact of the Victorian Energy Efficiency Target scheme on energy consumption and Victorian energy markets
Disclaimer
This report has been prepared for the Department of State Development, Business and Innovation (DSDBI) as an input to its review of the Victorian Energy Efficiency Target (VEET).
The analysis and information provided in this report is derived in whole or in part from information prepared by a range of parties other than Oakley Greenwood (OGW), and OGW explicitly disclaims liability for any errors or omissions in that information, or any other aspect of the validity of that information. We also disclaim liability for the use of any information in this report by any party for any purpose other than the intended purpose.
Document information
Project / Impact analysis of the VEET 2009 - 2012Client / Department of State Development, Business and Innovation
Status / Final Report
Report prepared by / Lance Hoch ()
Rohan Harris ()
Greg Thorpe ()
Date / 6 December 2013
by
Impact analysis of the VEET 2009 - 2012
27 September 2013
Draft Final Report
Table ofcontents
1.Executive summary
1.1.Project background and purpose
1.2.Approach
1.3.Findings and caveats
1.3.1.Findings
1.3.2.Caveats
2.Introduction
2.1.Overview of the Victorian Energy Efficiency Target (VEET) scheme
2.2.Purpose of this study
2.3.Overview of the methodological approach requested in the ToR
2.4.Findings concerning the efficacy of the approaches undertaken
2.4.1.The bottom-up approach
2.4.2.The top-down approach
2.5.Organisation of this report
3.Key assumptions
3.1.General assumptions regarding the VEET and other factors
3.2.Assumptions regarding VEET impacts on the transmission and distribution components of the retail bill
3.3.Assumptions regarding the VEET’s impact on the retail component of the bill
3.4.Key assumptions made in the analysis of the distributional impacts of the VEET
3.5.Key assumptions made in the analysis of the net economic benefits of the VEET
4.Impact of the VEET on energy consumption
4.1.Purpose and overview of the bottom-up approach
4.2.Bottom-up energy consumption impacts
5.Impact of the VEET on energy markets
5.1.Purpose and overview of this task
5.2.Impact on wholesale electricity market and wholesale component of the retail bill
5.2.1.Overview of the approach used
5.2.2.Model configuration
5.2.3.Key inputs to the modelling
5.2.4.Estimation of the peak demand and load shape impacts of the VEET
5.2.5.Results of the CEMOS analysis
5.3.Impact on transmission and distribution components of the retail bill
5.3.1.How energy efficiency affects network prices
5.3.2.Calculating the impact of the VEET on the transmission component of the retail bill
5.3.3.Calculating the impact of the VEET on the distribution component of the retail bill
5.3.4.Findings
5.4.Impact on retail operating costs and margin
5.4.1.Nature of the costs incurred by retailers
5.4.2.Findings
6.Distributional impacts of the VEET
6.1.Purpose and overview of this task
6.2.Findings
6.2.1.Costs of the scheme as allocated to participants and non-participants
6.2.2.Benefits of the scheme accruing to participants and non-participants
6.2.3.Net benefits accruing to participants and non-participants in Victoria
6.3.Net economic benefits (electricity sector total resource cost perspective)
7.Conclusions, caveats and recommendations
7.1.Conclusions
7.2.Caveats
Appendix A : Terms of Reference
Project description
I. Measure the impact of VEET on energy consumption
II. Evaluate the effect of VEET on energy markets
III. Assess the distributional impacts of VEET
Scope
Project tasks and deliverables
Appendix B : Findings of the top-down approach
B.1Purpose and overview of the top-down approach
B.2Change in average consumption
B.3Weather correction
B.4Price impacts
B.5Policy impacts
B.6Results of the top-down analysis
B.7An alternative use for the top-down approach
Appendix C : Allocation of VEET measure annual savings to seasons and times of day to create load shape impacts for use in the market modelling
Table of Figures
Figure 1: Delivered gas prices ($/GJ)
Figure 2: AEMO’s estimated reductions in residential and commercial consumption in the NEM
Table of TaBLEs
Table 1: Average VEET benefits & costs per participant and non-participant in Victoria ($2012, 2009 – 20)
Table 2: VEET economic benefits and costs – TRC perspective ($2012 million, 2009 – 20)
Table 3: Comparison of policy impacts from the top-down approach with the bottom-up impact estimate of the VEET (GWh)
Table 4: Overview of energy consumption impacts from 2009 through 2012 of VEET activity measures installed between 2009 and 2012
Table 5: VEET savings by activity measure and end use
Table 6: 2012 ESOO energy and summer peak demand forecast – Victoria
Table 7: Forecast energy reductions (GWh, sent-out) due to national and state-level energy efficiency programs and policies
Table 8: Forecast summer maximum demand reductions (MW) due to national and state-level energy efficiency programs and policies
Table 9: Carbon price schedule
Table 10: Impacts of the VEET on the wholesale electricity market (FY)
Table 11: Impacts of the VEET on the wholesale electricity market (CY)
Table 12: VEET impact on use of fuels for generation 2009 – 2020, GWh
Table 13: VEET impact on amount and type of generation capacity 2020 (MW)
Table 14: VEET impact on generation production costs ($millions2012)
Table 15: Network revenue reductions ($million 2012)
Table 16: Comparison of VEET impacts (MW) with total forecast network non-coincident peak demand
Table 17: Certificate price ($nominal)
Table 18: Number of certificates created (‘000s)
Table 19: Retailer costs ($million 2012)
Table 20: Annual and total cost of the VEET per average customer for each customer class ($2012)
Table 21: Proportion of customers on standing offers and market offers
Table 22: Annual and total benefit of the VEET per average customer for each customer class ($2012)
Table 23: Annual and total benefit of the VEET accruing to non-Victorian customers in aggregate ($2012)
Table 24: Distributional impacts – net annual and total financial benefit of the VEET per average customer for each customer class ($2012)
Table 25: Economic benefits of the VEET – electricity sector total resource cost perspective ($2012, millions)
Table 26: Economic costs of the VEET – electricity sector total resource cost perspective ($2012, millions)
Table 27: Net economic benefits of the VEET – electricity sector total resource cost perspective ($2012, millions)
Table 28: Impact of VEET on wholesale electricity price, by jurisdiction ($2012/MWh)
Table 29: Average VEET benefits & costs per participant and non-participant in Victoria ($2012, 2009 – 20)
Table 30: VEET economic benefits and costs – TRC perspective ($2012 millions, 2009 – 20)
Table 31: Average annual consumption per residential customer
Table 32: Average change in residential consumption – pre- and post-weather correction
Table 33: Estimated cumulative residential price changes
Table 34: Estimated per-annum price elasticity impacts
Table 35: Total per annum impact of policy drivers on residential consumption relative to 2008 levels (GWh)
Table 36: Breakdown of the residential energy reduction impact of each policy measure, by distribution area (GWh)
Table 37: Policy impacts (GWh)
Table 38: Clean Energy Council estimates of cumulative Solar PV output (GWh)
Table 39: Clean Energy Council estimates of installed capacity of Solar PV (GWh)
Table 40: Year-on-year increase in installed capacity (MW) and output (GWh)
Table 41: Residual impact possibly attributable to VEET scheme
Table 42: Sensitivity associated with using alternative elasticity estimates
Table 43: Residual impact attributable to the VEET Scheme with different elasticities
Table 44: Comparison of VEET scheme with key policy impacts
1
Impact analysis of the VEET 2009 - 2012
27 September 2013
Draft Final Report
1.Executive summary
1.1.Project background and purpose
The Victorian Energy Efficiency Target (VEET) scheme (promoted publicly as the "Energy Saver Incentive" or "ESI") is a market-based scheme designed to promote the uptake of energy efficiency improvements in residential and non-residential premises.
The scheme works by setting a greenhouse gas (GHG) abatement target that is to be met through the uptake of prescribed energy efficiency activities for which certificates are granted. Each certificate represents an energy saving equivalent to one tonne of GHG abatement. Large energy retailers operating in Victoria are required to surrender certificates annually in amounts proportional to their energy sales.
The purpose of this study was to identify costs and benefits of the VEET scheme in terms of the measures installed since its inception in 2009 through the end of 2012. Specifically, this review was undertaken to assess the impact that the reduction in energy consumption that has resulted from the measures installed under the program during that time has had on wholesale energy costs and retail energy prices, and how this has affected the bills of customers that have participated in the scheme and customers that have not done so.
1.2.Approach
The ToR requested that both a top-down and a bottom-up approach be used in estimating the impacts of the VEET on energy consumption that would subsequently be used to assess the impact of the scheme on wholesale and retail energy prices and the bills of program participants and non-participants.
DSDBI provided the bottom-up energy consumption impacts of the annual and lifetime electricity and gas consumption impacts associated with each of the energy efficiency measures that had been eligible for installation under the scheme in the years 2009 through 2012 that were to be used in the bottom-up analysis. These estimates included revisions that were informed by fieldwork that developed real-world information about the persistence of several of the measures that were installed under the scheme, and a subsequent extensive review of the algorithms that had been used in the setting the amount of certificates to be awarded for each of the eligible VEET measures. These activities resulted in a substantial reduction in the energy savings assumed to have been saved by several of the measures and therefore the scheme as a whole.
The top-down approach that was undertaken did not rely on any assumptions about the efficacy of the measures installed under the VEET, and was undertaken to provide a measure of the scheme’s impact that could be seen as being entirely external to and independent of any assumptions about the scheme itself. The top-down approach involved assessing the impact of a number of factors that would have contributed to differences between the amount of energy actually consumed in the years 2009 through 2012 from the amount that had been forecast to be consumed before the scheme was introduced. These included weather differences, price elasticity, and the impact of other energy efficiency policies and programs. Any residual difference between forecast and actual consumption after accounting for these factors would represent an estimate of the impact of the VEET.
The results of both the bottom-up and the top-down analyses were then to be used in assessing the impact of the VEET on wholesale and retail energy prices and the bills of customers that had participated in the VEET and those that had not.
Unfortunately, the top-down approach did not provide a feasible estimate of the impact of the VEET. The basic problem was that the raw, non-weather-corrected electricity consumption data for the base and evaluation period that was sourced from the Victorian distribution businesses indicated that the change in consumption for residential and small non-residential customers varied significantly across the distribution businesses. Three of the businesses reported reductions over the period that ranged from 5.1% to 8.9%. The other two businesses reported much smaller reductions over the period, at 1.6% and 1.8% respectively.
After accounting for the effects of the factors discussed above, the result of the top-down analysis was that the impact of the VEET for the two distribution businesses with very low reductions in consumption was that the VEET had served to increase consumption by between 5% and 6%. There were also concerns regarding the results of the top-down approach for the other three distribution businesses. As a result, use of the top-down approach as the basis for estimating the impact of the VEET scheme was not deemed to be appropriate, it was not used as an input to the assessment of the scheme’s impacts on wholesale and retail energy prices.
However, the results of the top-down approach can still provide a valuable, high-level sense-check to the bottom up estimates of the impact of the VEET. Specifically, DSDBI can cross-check the results of the bottom up approach against the estimated impact of other policy drivers as derived in the top-down approach. The relativity of their impacts can serve as a useful cross-check of the sensibleness of the bottom-up estimates.
1.3.Findings and caveats
1.3.1.Findings
These findings should be considered in light of the caveats discussed in section 7.2 below.
99.3% of all scheme savings were produced by just nine of the 28 eligible measures.
And these addressed just four end uses:
- lighting (64.7%) – which involved the replacement of GLS (incandescent) lamps with high efficiency lighting;
- water heating (17.3%) – which predominately included the replacement of electric storage water heating equipment with gas or LPG storage, instantaneous or gas-boosted solar water heating;
- standby power (13.8%) – which comprised the installation of control units that automatically reduce the amount of time appliances in the home such as home entertainment units and computers spend in standby mode; and
- space heating (3.6%) -- which predominately included the replacement of electric resistance space heating with ducted gas heating.
As a result, the rest of the analysis concerned only these nine measures.
Business customers accounted for only 0.1% of the savings produced by these measures. Therefore, the impacts on business customers were not considered further in the analysis.
The VEET produced material energy savings – mostly reducing the use of coal – but did not impact peak electricity demand to any material extent.
The electricity savings produced by the measures installed under the VEET in the years 2009 through 2012 are material, amounting to just over 5,400 GWh cumulatively by the end of 2020. The 424,965 MWh saved in 2012 alone equates to approximately 2.2% of Victoria’s residential and SME electricity consumption in that year.
Virtually all of the energy saved (99.3%) comes from reduced use of coal for electricity generation, which is consistent with the scheme’s objective of reducing carbon emissions.
This high impact on coal in part reflects the times of day that the measures eligible for installation under the VEET from 2009 through 2012 affect electricity use. Just under 65% of the savings come from the replacement of standard light globes with high-efficiency alternatives. Clearly, most of these savings will occur in evening hours. Another 15% comes from energy efficiency measures installed on off-peak water heaters, where virtually all of the savings will accrue at night.
However, this time distribution of electricity savings – with most of its impact in the evening – means that the scheme’s impact on electricity peak demand, which tends to occur in the afternoon or early evening of hot summer weekdays, is correspondingly small. The analysis undertaken in this study suggests that the scheme’s impact on peak demand reaches its highest point at 41 MW in 2013, representing just 0.4% of the peak demand in Victoriathat year.
Impacts on gas were both smaller and in the opposite direction as compared to those for electricity.
Overall, gas consumption increased by over 134,000 GJ due to the program through 2020. This is not surprising given that a number of the most popular measures offered under the VEET during the years 2009 through 2012 involved changing out electricity equipment for gas-fired equipment. For example, 39% of the more than 45,000 installations that concerned water heating equipment involved the replacement of electric water heating equipment by gas-fired equipment.
Even so, the increase was not material: the increase in gas consumption of 110,600 GJ due to the scheme in 2012 represents only about 0.1% of Victoria’s residential gas consumption in that year. For this reason, the impacts on gas were not considered further in the analysis. As a result, the benefits to participants developed in this analysis are slightly overstated, as they do not include the increased cost of gas that participants would have incurred due to those measures that substituted gas for electricity use.
The reduction in electricity generation will have reduced electricity sector production costs, and because of that, wholesale electricity prices.
Based on the results of the analyses undertaken, the VEET will produce savings in electricity system production costs with a net present value of just over $103 million (in 2012 dollars) by 2020. These savings will almost wholly result from reduced fuel costs and reductions in other variable operating and maintenance expenses.
Those savings – and a slight impact on the bidding behaviour of generators due to the increased competition to meet reduced demand – result in downward pressure on wholesale electricity prices in Victoria and the other NEM jurisdictions. In Victoria, the VEET reduces wholesale market prices by $0.30/MWh (approximately 0.8%) on average over the study period. Average reductions over the study period in the other NEM jurisdictions range from a low of $0.03/MWh in South Australia to a high of $0.08/MWh in New South Wales.
The VEET will have produced material net financial benefits for program participants, EREP sites and all electricity users outside Victoria. However,customers in Victoria that did not participate in the VEET (other than EREP sites) will have experienced net financial costs.
All customers in the NEM benefits from the downward pressure exerted by the VEET on wholesale electricity prices, but VEET participants accrue additional benefits due to the reduced electricity consumption produced by the measures installed under the VEET – so they have a lower price and a lower volume. This combination is more than enough to overcome the increases that result from networks in Victoria needing to increase unit prices to recover their revenue requirements across reduced sales, and retailers needing to recover the costs of creating or purchasing certificates to meet their obligations under the VEET. The prices of EREP sites within Victoria and all non-Victorian electricity users are not subject to these cost-recovery price increases.