PLEASE NOTE
The Australian Government is undertaking further design work on a possible national Energy Savings Initiative (ESI). Reports, such as the one which is provided below, have been prepared by consultants to assist with this work. However:
• no decision has been made about whether a national ESI will be introduced;
• the report should not be interpreted as reflecting Government thinking on the design of a possible national ESI (for example, comments by consultants about the eligibility of activities for creating certificates should not be interpreted as a proposed list of eligible activities under a possible national scheme); and
• the report should not be interpreted as a commitment by Government to a policy or course of action.
Analysis of Compliance Costs for a National Energy Savings InitiativeFinal Report for the Department of Climate Change and Energy Efficiency
December 2012
Project Team
NERA Economic Consulting
Jordan Narducci
Adrian Kemp
Martin Chow
Luke Wainscoat
Julian Secomb
Oakley Greenwood
Lance Hoch
Matthew Goh
Commonwealth Government Disclaimer
This report was prepared by NERA Economic Consulting and Oakley Greenwood for the Commonwealth of Australia as represented by the Department of Climate Change and Energy Efficiency, as part of the Australian Government’s efforts to investigate the cost and benefits of a possible national Energy Savings Initiative.
This report provides information about compliance costs associated with existing state-based energy efficiency obligations schemes, and potential compliance costs associated with a national Energy Savings Initiative and is provided on the understanding that the Commonwealth is not providing professional advice. The report includes views and opinions of third parties and does not necessarily reflect the views of the Commonwealth or any State or Territory Government, or indicate a commitment to a particular policy or course of action.
While reasonable efforts have been made to ensure that the report is accurate, correct and reliable, the Commonwealth accepts no liability for the accuracy of, or inferences from, the material contained in the report, and expressly disclaims liability for any person’s loss arising directly or indirectly from the use of, inferences drawn, deductions made, or acts done in reliance on this report.
NERA Economic Consulting
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Executive Summary
Executive Summary iii
What are compliance costs? iii
What policy scenarios have been considered? iv
What are the compliance costs for each scenario? v
1. Introduction 1
2. Approach to the Project 4
2.1. Definition of compliance costs 4
2.2. Collection of compliance cost data 6
2.3. Quantification of current compliance costs 8
2.4. Modelling of prospective future compliance costs 9
3. Current Costs of Administering the Schemes 12
3.1. Scheme establishment costs 12
3.2. On-going administrative costs 14
3.3. Administrative cost drivers 16
3.4. Summary of administrative costs 17
4. Current Compliance Costs for Retailers 18
4.1. Establishment costs for retailers 18
4.2. On-going compliance costs for retailers 20
4.3. Compliance cost drivers for retailers 22
4.4. Summary of compliance costs for retailers 24
5. Prospective Future Compliance Costs 26
5.1. Detailed description of the base case and policy scenarios 26
5.2. Estimated prospective future compliance costs 33
Appendix A. Interview Protocols 48
A.1. Templates for data collection 48
A.2. Key questions for the interview process 48
A.2.1. Interview questions for scheme administrators 49
A.2.2. Interview questions for retailers 52
A.2.3. Interview questions for certificate creators 54
A.3. Stakeholders interviewed 57
A.3.1. Administrators and scheme designers 57
A.3.2. Electricity and gas retailers 58
A.3.3. Certificate creators 58
A.4. Compliance cost benchmarks 59
A.4.1. Compliance cost benchmarks for New South Wales 59
A.4.2. Compliance cost benchmarks for South Australia 60
A.4.3. Compliance cost benchmarks for Victoria 60
A.4.4. Compliance cost benchmarks for the Australian Capital Territory 61
A.4.5. Summary of current compliance cost benchmarks 61
Appendix B. Summary of Existing Schemes 62
B.1. Victorian Energy Efficiency Target Scheme 62
B.2. New South Wales Energy Savings Scheme Error! Bookmark not defined.
B.3. South Australian Residential Energy Efficiency Scheme 64
B.4. Australian Capital Territory’s Energy Efficiency Improvement Scheme 65
B.5. Summary of existing schemes 67
Appendix C. Detailed Modelling Assumptions 70
C.1. Overview of the model 70
C.2. Costs and cost savings by scenario 70
C.3. Data sources 72
C.4. Input sheets 73
C.5. Cost calculation 75
C.6. Results 80
C.7. Cost drivers and unit cost values 80
Appendix D. Modelling Results for a GJ Target 83
Appendix E. Total Compliance Costs by Scenario 88
Executive Summary
NERA Economic Consulting (NERA) and Oakley Greenwood (OGW) have been engaged by the Department of Climate Change and Energy Efficiency (DCCEE) to estimate the administrative and compliance costs of a potential national Energy Savings Initiative, including a number of possible harmonisation scenarios for existing schemes, using a cost benefit analysis (CBA). Specifically, we were asked to consider current and prospective future administrative and compliance costs for: electricity and gas retailers; certificate creators;[1] and scheme administrators (including relevant government departments).
What are compliance costs?
The starting point for an analysis of compliance costs is to establish a clear definition for these costs. Importantly, we were asked not to consider the costs of undertaking energy saving activities (including the cost of purchasing certificates) in our analysis.[2] As a result, when collecting information on current costs from stakeholders there was a need to distinguish and separate the costs of undertaking energy savings activities from the other costs (ie, administration-related compliance costs of scheme administrators and participants).
Figure ES.1 provides a high-level summary of the cost interactions and transfers between the key stakeholders within a generic energy efficiency scheme.[3] The focus of this study was on collecting information on the costs above the dotted line,[4] which represents our definition of compliance costs – ie, all costs that are not directly related to undertaking the energy savings activities themselves. We have assumed that all costs below the dotted line are incurred to undertake energy saving activities.
Figure ES.1: Summary of compliance cost interactions and transfers between energy efficiency market participants
What policy scenarios have been considered?
The starting point for the CBA was estimating the compliance costs of the ‘business-as-usual’ base case against which the costs and benefits (ie, cost savings) of each potential policy scenario could be assessed. The base case assumes that the existing energy efficiency schemes operating in New South Wales, Victoria, South Australia and the Australian Capital Territory (which will commence on 1 January 2013) continue to operate separately for the entire period considered in the analysis, and the current energy efficiency targets will not increase beyond the targets that have already been announced.
In addition to the base case, we were asked to consider five broad policy scenarios, namely:
· Scenario 1: The introduction of a single national ESI covering all jurisdictions;
· Scenario 2: The introduction of a single ESI covering only National Electricity Market jurisdictions (ie, NSW, VIC, SA, the ACT, QLD and TAS);
· Scenario 3: Full harmonisation of the existing state schemes only (NSW, VIC, SA and the ACT);[5]
· Scenario 4: Harmonisation of products, accreditation standards and certificate trading only; and
· Scenario 5: Harmonisation of products and accreditation standards only.
Scenarios 3 through 5 allow for the implications for compliance costs of progressive harmonisation of existing schemes to be considered, initially where the schemes remain administered by the current scheme administrators (Scenarios 4 and 5) and then by a single national scheme administrator (Scenario 3). Scenario 3 also considers an expansion of scope to additional fuel (ie, electricity and gas) and sector (ie, residential, business and commercial/industrial) coverage.
Scenarios 1 and 2 build upon Scenario 3 by extending the fully harmonised scheme with a single national scheme administrator to cover new jurisdictions (ie, jurisdictions not covered by an existing scheme, including Queensland and Tasmania in Scenario 2, and Queensland, Tasmania, Western Australia and the Northern Territory in Scenario 1).
What are the compliance costs for each scenario?
Table ES.1 provides a summary of the total (ie, establishment and on-going) compliance costs for scheme administrators and retailers for the base case and each policy scenario on a per certificate basis (we used $/tonne of CO2-e savings reported in South Australia as there is no certificate market).[6]
The compliance costs for each scenario are presented as ranges, reflecting the range of costs observed from current participants in the New South Wales Energy Saving Scheme (ESS) and Victorian Energy Efficiency Target (VEET) scheme. We have not used the compliance costs for participants in the South Australian Residential Energy Efficiency Scheme (REES) as an input into our analysis of the future potential compliance costs associated with a national ESI. [7] That said, we have used information on the cost of compliance per certificate[8] for the REES as a proxy for the costs of the Australian Capital Territory’s Energy Efficiency Improvement Scheme (EEIS), which commences 1 January 2013, as the REES is the most similar in scheme design. [9]
The base case costs per certificate represent a weighted average of the costs in the four existing schemes using the projected number of certificates[10] surrendered in each jurisdiction over the modelling horizon (ie, 1 January 2015 to 31 December 2030). The weighted average costs used for the base case means that these costs are more in line with schemes that have a higher target.
Table ES.1: Estimated total compliance costs for each policy scenario (2012$/certificate for 1 January 2015 – 31 December 2030)
Scenario / Scheme Administration[11] / Retailers / Total[12] /Base Case (weighted average of current costs) / $1.10 / $0.95 / $2.05
1: National ESI covering all jurisdictions / $0.74 ~ $0.84 / $0.53 ~ $0.64 / $1.37 ~ $1.39
2: National ESI (NEM only) / $0.76 ~ $0.84 / $0.53 ~ $0.65 / $1.37 ~ $1.41
3: Full Harmonisation of existing schemes / $0.78 ~ $0.84 / $0.54 ~ $0.66 / $1.38 ~ $1.43
4: Harmonisation of products, accreditation standards, and certificate trading / $0.98 ~ $1.22 / $0.90 ~ $1.01 / $1.97 ~ $2.15
5: Harmonisation of products and accreditation standards / $1.00 ~ $1.27 / $0.87 ~ $1.01 / $1.98 ~ $2.20
Note: there are a number of approaches that could be adopted to harmonise the current jurisdictional schemes. The choice of approach will influence the costs and benefits (ie, cost savings) expected to arise from harmonisation. To account for this uncertainty, in addition to the range of costs observed from current participants in the ESS and VEET, as noted above, we have incorporated low-cost and high-cost assumptions into the cost benefit analysis model for Scenarios 4 and 5. Despite this, a significant level of uncertainty about the range of possible costs remains and so we would recommend further and more detailed analysis of the approach to harmonisation be undertaken to assess the relative merits of alternative approaches.
Figure ES.2 sets out the net present value (NPV) ranges of the estimated total incremental compliance costs for scheme administrators and retailers relative to the base case. Notably, the NPVs presented below represent the incremental costs for each scenario as compared to the base case costs and so a negative value means that the scenario is expected to be net beneficial overall (ie, current compliance costs are higher than those estimated under the scenario).
Figure ES.2: Estimated total incremental compliance costs for each policy scenario ($2012 million, NPV for 1 January 2015 – 31 December 2030)
The results highlight that depending on our modelling assumptions regarding the cost associated with harmonisation and associated incremental compliance cost savings, there could be net benefits or net costs from harmonisation (ie, Scenarios 4 and 5).[13] Notably, we have assumed that a proportion of the establishment costs for both scheme administrators and retailers will be incurred again to harmonise the schemes, based on low-cost (ie, a small proportion of costs are incurred again) and high-cost assumptions (ie, a significant proportion of costs are incurred again). However, these incremental costs are assumed to be offset by a range of potential cost savings, which are achieved by removing duplication from maintaining separate activities, accreditation standards and certificate trading (if applicable), also reflecting low-cost and high assumptions.[14] Notwithstanding, we would recommend further analysis given the significant level of uncertainty about the costs and cost savings associated with harmonisation.
It is important to recall that these results relate to administration-related compliance costs for scheme administrators and participants only, and not the broader costs and benefits that may arise from undertaking energy savings activities under harmonised schemes. Which scenario delivers the highest overall net benefits will therefore depend on the outcomes of the broader economic and energy market modelling of a national ESI being undertaken by the Secretariat.
NERA Economic Consulting / viiProspective Future Compliance Costs
1. Introduction
A national Energy Saving Initiative (ESI) that replaces existing jurisdictionally-based schemes was one of five proposals put forward by the Prime Minister’s Task Group on Energy Efficiency for achieving a step change in Australia’s energy efficiency.[15] A national ESI would place an obligation on energy retailers to find and implement energy savings in households and businesses. This would involve setting a mandatory target for energy efficiency gains that must be made by retailers in a specified timeframe, and developing rules about who falls under the obligation and what energy saving activities are eligible for meeting the target.
As recommended by the Prime Minister’s Task Group, the government is undertaking further modelling and conducting a regulatory impact analysis before a final decision is made on whether to pursue the implementation of a national ESI.[16] The factors that will be considered during this investigation include:[17]
· economy-wide targets to maximise the benefit of the scheme;
· sectoral and fuel coverage issues;
· the energy saving activities that will be eligible; and
· how to transition from jurisdictionally-based schemes.