Business Sector Energy Efficiency Modelling
25 March 2015| REF: J/N 123192Department of Economic Development, Jobs, Transport and Resources
VEET Energy Saver Incentive Scheme
Business Sector Energy Efficiency Modelling
Project details
Department of Economic Development, Jobs, Transport and Resources / Energetics ContactKathryn Lucas-Healey / Gordon Weiss
Description / Prepared By / Reviewed By / Approved By / Approval Date
Version 1: Initial Draft / Gordon Weiss / Emma Fagan / Gordon Weiss / 23/02/2015
Version 2: Revised version / Emma Fagan / Gordon Weiss / Gordon Weiss / 25/03/2015
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Disclaimer
The information contained in this document is of a general nature only and does not constitute personal financial product advice. In preparing the advice no account was taken of the objectives, financial situation or needs of any particular person. Energetics is authorised to provide financial product advice on derivatives to wholesale clients under the Corporations Act 2001 AFSL No: 329935. In providing information and advice to you, we rely on the accuracy of information provided by you and your company. Therefore, before making any decision, readers should seek professional advice from a professional adviser to help you consider the appropriateness of the advice with regard to your particular objectives, financial situation and needs.
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Table of contents
TABLE OF CONTENTS
1.Background
2.Modelling the VEET scheme
2.1.Consideration of non-financial barriers
3.Assumptions and parameters
4.Defining the measures
4.1.Large commercial and SME sectors
4.2.Large industrial sector
5.Outcomes: Results of the modelling
5.1.Business sector results
5.2.Results for certificate price scenarios
Appendix A.Key assumptions
Retail energy prices
Savings and cost of lighting upgrades
Payback thresholds
Appendix B.Industrial and mining measures
Appendix C.Details of the measures
Contact details
LIST OF FIGURES
Figure 1: Calculation of incentive level
Figure 2: Measure uptake for smaller measures – take up curves as a function of incentive percentage
Figure 3: Measure uptake for larger measures – take up curves as function of payback
Figure 4: Measures adopted
Figure 5: Three year target with large business exclusion
Figure 6: Seven year target with large business exclusion
Figure 7: Seven year target without large business exclusion
Figure 8: Large commercial site energy consumption
LIST OF TABLES
Table 1: Changes from previous VEET modelling
Table 2: Key assumptions and parameters in the model
Table 3: Parameters defining each measure
Table 4: Example of a measure
Table 5: List of stationary energy savings measures by commercial market segment
Table 6: List of stationary energy savings measures by industrial market segment
Table 7: Extract from ClimateWorks database
Table 8: Three year scenario certificate prices
Table 9: Five year scenario certificate prices
Table 10: Certificates generated in the three year VEET scenario
Table 11: Certificates generated in five year VEET scenario
Table 12: Certificates generated by measure in 5.4 million certificates, five year VEET scenario
Table 13: Model retail energy prices
Table 14: Savings per lighting installation
Table 15: Energy consumption by building class
Table 16: Derivation for commercial lighting upgrades in Victoria
Table 17: Industrial and mining measure parameters
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Business Sector Energy Efficiency Modelling
1.Background
On 1 January 2009 the Victorian Energy Saver Incentive (ESI) scheme was launched to promote the uptake of energy efficiency improvements in residential premises. The scheme is established in the Victorian Energy Efficiency Target Act 2007 (the Act). The objectives of the Act are to:
•reduce greenhouse gas (GHG) emissions
•encourage the efficient use of electricity and gas
•encourage investment, employment and technology development in industries that supply goods and services which reduce the use of electricity and gas by consumers.
The scheme is based on three year phases.
Phase 1 had an annual target of reducing lifetime GHG emissions by 2.7 million tonnes per annum in the residential sector, which was doubled to 5.4 million per annum for Phase 2 for the period to 2015, and expanded to include business and other non-residential sectors.
This objective of this review is to develop an appropriate target for Phase 3 of the VEET scheme.
In 2013 Energetics developed modelling as well as a number of scenarios examining business sector energy efficiency activities (as provided in VEET Energy Model Input Final Assumptions Report[1][the 2013 Assumption Report] and related spreadsheets). Sustainability Victoria modelled the residential sector energy efficiency activities.
In this report, Energeticsupdatesthe modelling of business sector energy efficiency activitiesto ensure that it is accurate and current. We also present a number of target scenarios to incorporate into a model of the energy market, including energy efficiency measures pursued by the parts of the Victorian business sector that buy energy from energy retailers rather than the wholesale market.
Constraints and limitations
There are a number of factors that may influence the growth of the VEET scheme in Victoria that have not been included in this model. Non-market barriers such as split incentives and limited knowledge and access to information about the benefits of energy efficiency activities, cannot be modelled accurately.
There are also policies in Australia that may impact the pool of opportunities potentially taken up under the VEET, particularly the Emissions Reduction Fund (ERF).While the influence of the ERF is difficult to estimate before it begins, we see possible outcomes where engagement with the VEET scheme is preferred. One such example arises where ERF assessment methodologies overlap with the VEET. Project proponents may choose the VEET scheme as payment for emissions reductions is made up front unlike the delivery model offered under the ERF. The lack of entry-level abatement thresholds in the VEET may also make the scheme more attractive.
Ultimately market conditions and the price of both ACCUs and VEECs will determine how the pool of opportunities offered under the VEET, may be impacted by the ERF.
Changes from the 2013 model
The business sector energy efficiency modelling described in this report built on work done for the 2013 Assumption Report. A number of changes have been made to the earlier model and these are outlined in Table 1below.
Table 1: Changes from previous VEET modelling
Changes / Reference in this reportMeasures for the large industrial sector are included / Section 4.2
A number of measures pertaining to the large commercial and SME sectors have been removed or combined / Section 4.1
Several measures pertaining to the large commercial and SME sectors have been amended / Table 5
The electricity and natural gas prices are updated / Appendix A
The year by year decay of the savings due to a measure has been changed / The value was changed from 0% to 3%.
Discount rate / The value for project based assessment (PBA) measures was changed from 20% to 10%.
Detail in Section 2.
2.Modelling the VEET scheme
This report focuses on commercial energy efficiency measures and the assumptions used to model their impact. The following section provides an overview of the functionality of the model.
Figure 1 to Figure 4outline the process usedto determine the number of certificates created for different certificate prices. Each energy efficiency measure was defined according to adjustable parameters such as the total pool of efficiency opportunities, the costs of implementation and the average electricity and gas savings that will result. The model also includes adjustable parameters. Examples include a certificate price ($/certificate[2]), a greenhouse gas (GHG) emissions factor and any administrative fees associated with the creation of certificates.
The total number of certificates created depends on the annual GHG emissions savings, the duration of the energy efficiency measure and the GHG emissions factor applied.
The incentive for participants is a function of the number of certificates created, multiplied by the value of each certificate. The latter is net of any fees associated with the administration of the scheme.
The model calculates the uptake of measures based on the incentive to participate. One of two approaches is used. For the less costly measures most suited to SME markets, the uptake is calculated based on a simple relationship between the size of the incentive and the cost of the energy efficiency measure. Figure 2shows the uptake of simpler measures such as replacing an old appliance. There is a default take-up curve plus one for low cost appliances and one for new technologies (where there can be resistance to early adoption).
Figure 1: Calculation of incentive level
The 5% fee used within the model reflects the observed administrative cost reported in the assessment of the ACT Government EEIS.
In determining the deemed savings for a project, the calculated emissions savings are discounted by 10% for each year of a project’s life up to 10 years. This differs from the 20% discount rate used in prior VEET modelling. This discount provides a balance between what is an adequate incentive for project proponents to drive energy saving measures and the need to ensure that certificates are only created for genuine savings.The change in the discount rate is material and has resulted in an effective project life of 5.5 years when generating VEECs as opposed to three years when using a 20% discount rate. It also results in a savings persistence of ten years rather than five.
The treatment of $0 certificate prices and the impact of the results are discussed in detail in section2.1.
Figure 2: Measure uptake for smaller measures – take up curves as a function of incentive percentage
If the commercial GHG emissions abatement measure is more costly and generally applicable to larger businesses then it is more appropriate to use an approach based on the payback. Figure 3 shows the calculation.The payback threshold, which establishes when the energy efficiency measure will be taken up, is a distribution function that reflects the range of thresholds for different participants.
Figure 3: Measure uptake for larger measures – take up curves as function of payback
Finally, the actual number of instances that the energy efficiency measure is adopted is expressed as the uptake rate times the total pool of opportunity. Total uptake figures are managedby a constraint that limits the maximum annual uptake to reflect the fact that the market has limited capacity to deliver any one measure within a fixed period of time. See Figure 4 for an overview on how this functionality works.
Figure 4: Measuresadopted
2.1.Consideration of non-financial barriers
Note that the assessments of payback periods within the model were undertaken on a purely financial basis. There are a range of non-financial barriers that may also limit the interest in energy efficiency projects. The impact of non-financial barriers is modelled through the use of payback periods that have actually been seen in the market, rather than payback periods that would be implied by realistic financial returns. As discussed in Section 3, the actual paybacks required by the market are as low as 1.75 years whereas projects with paybacks as high as 10 years would show a positive financial return.
The data that defines the take-up of a measure comes from a number of independent sources – observed take-up of measures, reported costs to implement energy efficiency measures, savings based on a basket of specific activities within a broad measure and forecasts of energy prices. For instance, the measure “lighting upgrade” covers a broad range of potential activities that depend upon the existing form of lighting and the replacement technology. It is possible that some measures will be cost effective to some participants even if no incentive is in place. This is best considered as a component of the business-as-usual case.
The business-as-usual take-up that is predicted by the model was deducted from the take-up at various positive incentives (external to the VEET program)in order to give a true indication of the take-up driven by the incentive. As an example, if a measure saw 500 certificates generated at a $0 certificate price, and 10,000 generated a $15 certificate price, these 500 certificates are deducted from the 10,000 certificatesto give the actual impact of the incentive.
Note though that in the ‘real world’, factors such as an un-modelled increase in energy prices or a significant drop in implementation cost will result in the measure becoming more cost effective and therefore we would see take-up without any incentive. Similarly, a fall in energy prices or increase in implementation costs will mean that measures are less attractive.
3.Assumptions and parameters
Table 2outlines a number of key assumptions and parameters that define the overall properties of the model. Some of these assumptions and parameters relate to the structure of the model and others relate to the performance of the abatement measures.
Table 2: Key assumptions and parameters in the model
Item / DetailsBusiness-as-usual / Where activities involve the upgrade of equipment at the point of replacement (e.g. installing a high efficiency motor at the time the motor needs replacing), the business–as-usual (BAU) case assumes that a unit compliant with the Minimum Energy Performance Standards (MEPS) is installed.
In other cases, the savings associated with the measure represent a weighted average of savings for measures reported in the Commonwealth Energy Efficiency Opportunities (EEO) program and other energy audits.
In confidence, commercial data has also been used to derive installation costs and savings potentials for some measures, most notably commercial lighting.
Averaging different items / Energy savings for each measure where the averages of a number of uses of the measure are reported in EEO and other energy assessments. The aggregation of different instances of the measure will include the use of different pieces of equipment. The extensive, publicly available EEO dataset, which was used to derive the average savings for an energy efficiency measure, was assumed to be representative of the total pool of opportunitiesin the wider economy.
Average annual energy savings (MJ/yr) / Commercial buildings and SMEs: An average was calculated for annual energy savings for commercial buildings and SMEs, based on the fraction of the total energy used by the building or facility resulting from the implementation of the energy efficiency measure.
The baseline and measures developed for the modelling of the National Energy Savings Initiative [the NESI dataset] also included the average amount of energy used by each type of building. The product of these two values gives the average annual energy savings.
Industrial facilities: We used the “Percentage of total energy used by a facility that is saved by the measure” reported in the industrial component of the NESI dataset.[3]
Measure life (Years) / This is the estimated length in years that the measure is expected to deliver energy savings once installed. Sources included the Carbon Trust persistence factor data base, the Low Carbon Australia persistence factor data base, EES residential baseline study, RIS: NAEEEC Report 2003/10 Minimum Energy Performance Standards and Alternative Strategies for Linear Fluorescent Lamps, the BIS Shrapnel Household Appliances 2006 and Energetics commercial in-confidence figures.
VEET GHG coefficients / Provided by the Victorian Government and used consistently across all VEET modelling, the values applied were 0.963 tCO2-e/MWh for electricity and 0.0573 tCO2-e/GJ for natural gas.
Pool of opportunities / The following approach was used to estimate the number of opportunities for large commercial and SME buildings:
- The total energy consumption for each type of building or SME facility was estimated using the energy reported by ANZSIC sector, measures of building size and activity as reported to the ABS (e.g. employee numbers, sales volume, patient numbers, student numbers) and measures of energy intensity within various types of buildings.
- The average energy used by each type of building or facility was assessed by either:
- aggregating a set of representative assessments of a specific building type to directly estimate the average, or
- estimating the total number of buildings ina specific category and then dividing the total energy used by those buildings by the total number of buildings.
- Using our estimate for the total energy used by each type of building in Victoria, and our estimate of the average energy used by a building, we estimated the number of buildings of each type in Victoria.
- Using our estimate for the fraction of all buildings or facilities where a measure was applicable (eg an upgrade to a boiler is only applicable to a building with a boiler) and our estimate for the fraction of buildings where a particular measure has already been adopted, we adjusted the estimate of each type of building or facility in Victoria to give the number of buildings or facilities where a particular measure is still able to be implemented. This is the pool of opportunities.