Cost Recovery in Energy Efficiency Standards and Labelling Programs

Cost Recovery in Energy Efficiency Standards and Labelling Programs

September 2012

Prepared by:

Contents

1 Introduction 1

2 Public policy issues 1

3 Examples of cost recovery in S&L Programs 2

3.1 Registration or entry fee 2

3.2 Cost-recovery for verification testing 2

3.3 Certification 3

3.4 Laboratory registration 4

4 Approaches to Cost-Recovery 4

4.1 Total costs 5

4.2 Key issues 6

4.3 The allocation of costs 7

4.4 Feasibility and timing 8

5 Conclusions 8

6 Options for the Vietnam S&L Program 9

Tables

Table 1: UK Energy Saving Trust Recommended scheme - Annual model-based fees 3

Table 2: Approximate annual expenditure on verification tests (USD ‘000s) 5

Table 3: Indicative distribution of costs 6

Table 4: Indicative costs of testing costs in Australia by product 8

Figures

Figure 1: Annual total funding spent on off-the-shelf testing (USD) (11 responding programs) 5

1  Introduction

In many economies, energy efficiency initiatives are at the heart of national policies designed to reduce energy consumption, tackle climate change and improve energy security. In particular, Standards and Labelling (S&L) Programs for appliances and equipment have been proven to deliver the greatest energy savings at the lowest cost.

S&L Programs can only succeed, however, with the support of effective market compliance regimes. These ensure that products perform as claimed and consumers receive the services they pay for.

High compliance rates benefit all stakeholders in the S&L process. Industry can operate within a fair market that encourages investment and technological innovation. Consumers and businesses can rely on lower energy costs. Governments achieve key environmental, energy security and economic policy objectives.

The integrity of S&L programs depends on adequate funding of staff, infrastructure and process delivery, however this investment is small in comparison to the value of the savings achieved. The expenditure of countries with the most effective compliance regimes is estimated to be a mere 0.2% of the savings achieved[1]. Nonetheless given the pressure on national budgets, many S&L Programs seek alternative funding for their core activities, particularly those which ensure proper functioning of the market.

This paper discusses opportunities and considerations for recovering the costs of energy efficiency S&L Programs, using examples from current national programs.

2  Public policy issues

S&L Programs are justified by governments as being the most cost-effective means of overcoming the market barriers and distortions that reduce the competitiveness of appliance and equipment markets[2]. It is therefore a legitimate concern that these S&L Programs in themselves do not add to market distortions. As a result, it should be the proper function of governments and their agents to ensure that S&L Program requirements are adhered to. This ensures markets are not distorted by unscrupulous suppliers undercutting those investing in more efficient products.

As with other government ‘regulatory’ functions, there is often limited public funding for regulating product energy efficiency. Because of this some governments have adopted a ‘user-pays’ approach to at least partially meet expenditure. This means that regulatory costs are shifted to product suppliers, and ultimately to consumers.

Whether government or industry funded, the regulatory cost to consumers is likely to be similar (except in developing countries where the profile of appliance purchases is highly income related). However under a user-pays system, those buying the most products would fund a greater proportion of the flow-on regulatory costs.

Effective product registration and compliance processes are the key to successful regulation. They allow the impacts of policy intervention to be tracked, improved and evaluated. Registration processes improve the transparency of the system by allowing competitors to view product information. This enhances competitive pressure, encouraging industry to produce more efficient appliances.

Where online registration processes are used, there are additional benefits to users, including:

·  24 hour internet access to a complete listing of all their current, past and pending registrations.

·  Faster approval processing by regulators.

3  Examples of cost recovery in S&L Programs

3.1  Registration or entry fee

3.1.1  Australia

Under the Australian/New Zealand S&L Program, suppliers must register all regulated products before offering them for sale in either country. Under current legislation, product registrations are administered by State Government regulators in Australia and the regulator for New Zealand.

Most applications are made through the Online Registration Database, a web-based registration system available to anyone with access to the internet. Users fill in an online form and electronically submit it to their chosen regulator for approval. The system carries out automatic checks to ensure all mandatory information is provided and to remove data entry errors. It also performs a number of calculations to help regulators determine if performance requirements are met. A user guide is provided[3].

A fee is required by State regulators in Australia (but not by the NZ regulator) for the processing of registration applications for each model or family of models. These fees vary slightly; for example the fee to register with the Queensland regulator is A$177.35[4] and the equivalent fee charged by the NSW regulator is A$205[5].

In Australia, new national legislation (the Greenhouse and Energy Minimum Standards Act [GEMS]) is scheduled for introduction in 2012. This will establish a single national regulator for the Australian S&L Program. Under GEMS, there will be a new schedule of registration fees that will better reflect the cost of registration and compliance activities undertaken by the regulator. More detail on the rationale behind the allocation of costs is included in Section 4. While the fees have yet to be announced, it is possible that the cost of registering a model (or family) will range between A$230 and $780.

3.1.2  Korea

A registration fee is also charged for suppliers to register products for the voluntary High-Efficiency Appliance Certification Program. The fee is $300 USD per model.

3.2  Cost-recovery for verification testing

A number of S&L Programs require that suppliers pay full verification test costs if they challenge the result of a preliminary screen test indicating that a model may not meet performance requirements.

For example under the Efficient Lighting Initiative (ELI), which operates in a number of economies, suppliers must abide by a certification agreement which contains the following clause:

Should the verification testing results indicate that the product samples in the market do not comply with ELI technical specifications, certification holders may choose to remove the product in question from participation in ELI Program; or alternatively, they may request a second round of performance verification testing. This second round testing shall be based on product samples randomly purchased by the ELI Institute in any retail market, and tested in a laboratory selected by the Institute, at the certification holder’s expense[6].

A similar arrangement is employed in S&L programs in Australia/New Zealand and in several other S&L Programs countries.

In Vietnam, Article 12 (Chapter VI) of Circular No.7 issued in 2012 provides for the reclamation of testing costs from ‘enterprises’ where products are found not to meet the performance requirements.

There are also some initiatives which cover the capital cost of the product samples used for test purposes. For example, the US Department of Energy requires manufacturers to provide the test units for enforcement testing at the manufacturer’s expense. In most cases an initial sample of not less than four units must be provided.

In Australia, arrangements have been made with some industry associations and suppliers to buy back test units originally purchased by the government. These funds are made available for further compliance testing.

3.3  Certification

The Energy Saving Trust Recommended scheme[7] is a voluntary labelling scheme for energy saving products run by the UK Energy Saving Trust. The scheme, which endorses the best products in specific categories, sets energy performance standards based primarily on the in-use phase of the product’s life cycle (although other characteristics are also considered).

To achieve and maintain certification, product suppliers are required to lodge an application and pay membership of £375, followed by an annual fee of £275. Suppliers must also pay an additional fee every year based on the number of certified models, as shown in Table 1.

Table 1: UK Energy Saving Trust Recommended scheme - Annual model-based fees

Number of products / Product Certification fee (per product) excluding VAT
1-10 / £1000
11-25 / £700
26-50 / £600
51-75 / £500
76-100 / £400
101-150 / £300
151-250 / £250

Many programs use an independent organisation (or organisations) to provide third-party certification as a condition of participation. The Canadian S&L Program is the longest running example where certification (indicated by the Energy Efficiency Verification Mark) is required as a condition of its mandatory MEPS and Labelling program[8]. More recently, the US Energy Star endorsement label program has introduced third-party certification as an obligation for several categories of participating products[9].

Third-party certification bodies ensure that member’s products meet specifications by methods such as periodic testing of a sample of models. The frequency and sample size of tests may be set out in the accreditation rules for certification bodies.

Where third-party certification is used, testing costs are borne by product suppliers, who can often choose from a range of certification organisations10. Because of competition between certification suppliers, certification fees are not made publicly available and vary by product category. Anecdotally, the typical fees for certification and testing per model appear to be in the region of US$1,000 - $2,500 for most product categories.

3.4  Laboratory registration

Most S&L Programs require that energy performance claims are supported by test results from accredited laboratories – i.e. those able to undertake procedures according to the nominated international or local test method. Some programs require laboratories to meet additional criteria to demonstrate their competence.

For example, local suppliers to the Chinese mandatory energy labelling program must provide test reports conducted by laboratories registered with the China National Institute of Standardisation (CNIS). To achieve CNIS registration, laboratories must either be accredited to ISO17025 or receive an on-site inspection by CNIS. Those inspected by CNIS must pay a fee to cover this expense. In addition, CNIS registered laboratories are required to participate in at least one round-robin test each year. Laboratories pay for the costs of participation in these round-robins.

For government funded verification testing, S&L Programs typically use independent laboratories with a higher level of expertise. These generally receive accreditation to perform the specified test from the national accreditation authority. These laboratories bear the cost of their accreditation.

4  Approaches to Cost-Recovery

In considering what to charge product suppliers, a reasonable approach is to identify how much it costs an S&L Program to operate their compliance program. This can be justified on the basis that market participants benefit from operating within a fair and uniform competitive market.

These costs comprise both fixed and variable costs for the following activities:

·  Administration of application for registration;

·  Development and maintenance of the on-line registration system;

·  Market surveillance to check that all regulated products are registered;

·  Market surveillance in retail outlets to check that all relevant products are labelled correctly;

·  Product purchased for testing;

·  Initial screen tests (assuming full verification tests are conducted at cost of supplier).

There are also likely to be costs associated with management, staff training, and similar overheads.

4.1  Total costs

The total costs of effective registration and compliance processes vary according to the program design, scope (number of product categories) and market size. In the past, the investment by national S&L Programs in monitoring and verification activities has been patchy. Encouragingly, recent surveys confirm that there is now a greater focus on ensuring compliance and a corresponding increase in expenditure[10].

Table 2 and Figure 1 show investment by a number of national S&L Programs between 2006 and 2008 on verification testing, representing an increase of 130% over this period.

Table 2: Approximate annual expenditure on verification tests (USD ‘000s)

Country / Australia / India / Japan / Mexico / Korea / UK / US
Program / M&L / VL / TR / M&L / M&L / M&L / VL
2006 / $350 / $0 / $0 / $56 / $390 / n.a. / $100
2007 / $450 / $91 / $0 / $80 / $400 / $140 / $100
2008 / $550 / $251 / $100 / $65 / $335 / $570 / $100
Key: / M = MEPS / M&L = MEPS and Labelling / TR = Top Runner
VL = Voluntary Labelling / ML = Mandatory Labelling

Figure 1: Annual total funding spent on off-the-shelf testing (USD) (11 responding programs)

It should be noted that even where third-party certification is used, programs must still undertake post-market verification tests to check that the certification bodies are providing adequate quality assurance.

Verification testing is only one component of the total cost of providing adequate monitoring and verification. Table 3 shows the approximate distribution of costs for registration and compliance processes in the Australian system. Verification tests account for approximately one-third of total expenditure. Australia envisages spending in the region of A$2-5-3m per annum on these activities in future years.

Table 3: Indicative distribution of costs

Product Registration / Compliance Activities
Registration application processing / Admin, finance and management support / Technical help for registration / System and database maintenance / Store inspector training and equipment / Store audit / Check-tests
30% / 15% / 5% / 6% / 2% / 11% / 31%
57% / 43%

Note: Full verification tests are financed by industry

4.2  Key issues

Several key issues must be considered before proceeding with cost-recovery initiatives. These include: