Our Demand: Reducing Electricity Use in Victoria Through Demand Management

Our demand: reducing electricity use in Victoria through demand management

Akaash Sachdeva and Philip Wallis

Report 10/4

August 2010

OUR DEMAND: REDUCING ELECTRICITY USE IN VICTORIA THROUGH DEMAND MANAGEMENT

Akaash Sachdeva and Philip Wallis

Page i Produced by the Monash Sustainability Institute The Monash Sustainability Institute (MSI) delivers solutions to key sustainability challenges through research, education and action. For government, business and community organisations, MSI is a gateway to the extensive and varied expertise in sustainability research and practice across Monash‘s faculties and research institutes. Our research covers the many areas of water, energy, climate change, transport and urban design and biodiversity as solutions are found in a cross-disciplinary approach of the social sciences, economics, law, health, science and engineering. August 2010 ISBN: 978-0-9806387-7-6 © Monash Sustainability Institute, 2010 To be cited as: Sachdeva, A. and Wallis, P. (2010) ‗Our demand: reducing electricity use in Victoria through demand management‘. Monash Sustainability Institute Report 10/4, Melbourne.

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Page ii Acknowledgements The authors greatly appreciate the contribution of the many people who participated in our consultations for this project. These include the Essential Services Commission; the Consumer Utilities Advocacy Centre; the Californian Public Utilities Commission; and ClimateWorks Australia. Thanks also go to a large number of people with whom the authors had informal conversations about energy efficiency and demand management. Thanks go to Professor Graeme Hodge and Dr. Diana Bowman for early contributions to this project. The authors thank Peter Eben and Patricia Boyce of Seed Advisory for reviewing this report. The authors also acknowledge the support and contribution of Professor John Langford of Uniwater, Professor Dave Griggs and Dr Janet Stanley of the Monash Sustainability Institute and Anna Skarbek of ClimateWorks Australia.

Page iii CONTENTS PART A. INTRODUCTION AND RECOMMENDATIONS ...... 1 A.1. Summary ...... 1 A.2. Recommendations and targets ...... 3 A.3. Introduction ...... 5 A.4. Detailed recommendations ...... 9 PART B. DEMAND MANAGEMENT MEASURES ...... 14 B.1. Summary ...... 14 B.2. Demand management strategies, methods and techniques ...... 15 B.3. Pricing...... 17 B.3.1. Pricing structures ...... 17 B.3.2. Consumer incentives ...... 22 B.4. Smart operating systems ...... 26 B.4.1. Metering ...... 26 B.4.2. Direct load control ...... 27 B.4.3. Power factor correction ...... 28 B.5. Regulation ...... 30 B.5.1. Utility incentives ...... 30 B.5.2. Efficiency ...... 34 B.6. Behaviour change ...... 36 B.6.1. Influences on behaviour ...... 36 B.6.2. Strategies for behaviour change ...... 37 B.6.3. Consumer information ...... 39 B.7. Conclusion ...... 41 PART C. THE VICTORIAN CONTEXT ...... 43 C.1. Summary ...... 43 C.2. The Victorian electricity situation ...... 44 C.2.1. History of economic reform in the Victorian electricity sector ...... 44 C.2.2. The current Victorian electricity situation ...... 45 C.3. Stakeholder analysis ...... 46 C.3.1. Industry ...... 46 C.3.2. Victorian Government ...... 51 C.3.3. Federal Government ...... 52 C.3.4. Supporting and interest groups ...... 53 C.4. Policies, Programs and Projects to reduce electricity use ...... 55 C.4.1. The Victorian Energy Saver Incentive Scheme ...... 55 C.4.2. Advanced metering infrastructure rollout ...... 58 C.4.3. Victorian Climate Change White Paper ...... 58 C.4.4. Emissions trading ...... 58 C.4.5. National Strategy on Energy Efficiency ...... 60 C.4.6. The National Framework for Energy Efficiency (NFEE) ...... 60 C.4.7. Energy Efficient Homes Package ...... 61 C.4.8. Green Loans Program (Green Start) ...... 62 C.4.9. Australian Carbon Trust ...... 63 C.4.10. COAG Agreements ...... 63 C.5. Institutional barriers ...... 65 C.5.1. Market failures limiting energy efficiency investment ...... 65 C.5.2. Barriers to installation of energy-saving devices in households...... 65 C.6. Conclusions ...... 66 PART D. REFERENCES AND GLOSSARY ...... 67

Page iv Preface

This research enquiry into demand management began as a project that linked the water, transport and energy themes of the Monash Sustainability Institute (MSI). MSI was invited to submit a working paper on demand management to the Australian Davos Connection Infrastructure 21 Summit, held in October 2008. The paper advocated a whole-of-system approach to managing demand in water, transport and electricity sectors, and proposed a set of demand management principles that drew on experience from the three sectors. Our main realisation was that the electricity sector has not yet made significant progress with demand management or efficiency, compared to the water and transport sectors, and would benefit greatly from development of a comprehensive strategy to reduce electricity consumption. This project received funding from the Helen Macpherson Smith Trust (under the title ―Improving the efficiency of electricity and water use in Victoria‖) in order to: 1) review best- practice demand management and efficiency measures in the electricity sector both in Australia and Internationally; 2) evaluate the ‗situation‘ in Victoria relating to electricity regulation, policy and industry structure; 3) to develop a program of electricity demand management measures for Victoria; and 4) to facilitate the uptake of this program. The scope of this project was originally to consider ‗improving the efficiency of electricity and water use in Victoria‘. Through our research we found that Victoria‘s urban and rural water sectors have become significantly more efficient over the past decade, and are on a trajectory to achieve even greater efficiency gains, simply because there have been strong incentives to save water. The factors driving this have included on-going drought, increasing population, an increase in water allocated to the environment and the threat of further reduced water availability due to climate change. The challenges facing Melbourne‘s water supply situation are detailed in a 2009 report published by the Monash Sustainability Institute, which includes recommendations for dealing with the water crisis through strengthened demand management and water efficiency programs (Wallis et al., 2009). Thus, for this report, we did not consider measures that can improve the efficiency of water use in Victoria, as we believe that there are strong drivers of efficiency already in place; namely a lack of water. In contrast, there is no lack of inexpensive brown coal to generate electricity in Victoria, explaining why there have been no serious attempts to reduce electricity demand in this State. In the context of human-induced climate change, a desirable transformation of Victoria‘s electricity system would involve a transition from the current carbon-intensive and high- demand electricity regime to one characterised by low carbon intensity and low electricity demand. Strategies to achieve this goal include:

 replacement of fossil fuel-based power generation with renewable energy;  reduction of wasted energy through energy efficiency; and  improvement of end-use energy efficiency through demand management. The purpose of this study, therefore, was to identify measures to reduce electricity consumption through demand management and energy efficiency in order to facilitate this transition to a post-carbon society in Victoria.

Page v PART A. INTRODUCTION AND RECOMMENDATIONS

A.1. Summary Australia faces a grand challenge to reduce its emissions of greenhouse gases. Electricity generation is Australia‘s single largest source of greenhouse gas emissions, increasing nearly twelve-fold since 1961, and both supply and demand elements of energy must be addressed in the transition to a low-carbon society. The growth in energy use has also led to an increase in peak electricity demand on hot days, and in Victoria critical peak demand1 accounts for 0.3 percent of electricity supply by time (about 25 hours annually on average since 2001), but is responsible for nearly 18 percent of the annual wholesale cost of electricity. A massive growth in expenditure on the electricity distribution network is also projected, directly as a result of increasing peak demand. Reducing the carbon intensity of electricity supply, cutting unnecessary waste of electricity and improving end-use energy efficiency are key to Victoria‘s and Australia‘s response to reducing greenhouse gas emissions. Reducing the carbon intensity of the electricity industry in Victoria necessitates a shift from fossil fuels to renewable energy. Improving the energy efficiency of appliances and buildings and thereby reducing energy waste can be achieved, without changing behaviour, by following the measures outlined in the ClimateWorks Australia Low Carbon Growth Plan (ClimateWorks Australia, 2010). Increasing end-use energy efficiency, so as to reduce the energy needed to perform specific tasks, requires changes in behaviour facilitated by a range of demand management strategies.

1 Here, critical peak demand refers to the highest spot-price class of electricity (>$300 per megawatt).

Page 1 This report presents a review of electricity demand management measures that have been implemented internationally and assesses how these measures could be implemented in the Victorian context, with recommendations for systemic change to reduce energy use. In summary, it is recommended that the State of Victoria, as part of the National Electricity Market, implement electricity pricing for households and business consumers that better reflects the time-dependent costs of providing electricity. This can be implemented in conjunction with the use of smart meters in order to provide consumers with feedback on the costs and impacts of their electricity use. These measures, if applied properly and equitably, can be used to achieve reductions in peak electricity demand and reductions in overall demand for electricity. Price signals, however, are not sufficient measures by themselves to reduce energy use and greenhouse gas emissions, so it is also recommended that a comprehensive behaviour change strategy for electricity use is established, in conjunction with the provision of an enabling framework for consumers to reduce electricity use. In Victoria, this framework could take the form of an enhanced and strengthened energy efficiency certificates scheme2, in addition to the feedback provided by smart meters. These measures would foster ‗responsible‘ energy-using behaviour among consumers, as well as meeting the conditions for ‗response-ability‘ by arming them with the means and information needed to actually reduce their electricity use. It is also recommended that incentives should be provided to the electricity distribution industry to pursue efficiency and demand management, in order to shift the focus away from earnings based on electricity sales, to earnings based on efficiency. It is crucial that the electricity industry is motivated to reduce electricity demand and is rewarded for doing so. Finally, we recommend embedding the goal of transitioning to a ‗post-carbon society‘ in the strategic focus of the National Electricity Market. These measures would support a regime- change to an electricity system that rewards energy efficiency and help to overcome some of the barriers to change.

2 The Victorian Energy Saver Incentive (ESI) scheme

Page 2 A.2. Recommendations and targets

Recommendation Actions to be taken Relevant parties

1. Pricing/Smart meters. Rollout smart meters and Victorian Government Implement electricity pricing that captures compensate low-income time-dependent costs using smart meters households for costs Electricity retailers for households and small business. Time- Introduce time-dependent Individuals and variable price signals, and the smart pricing and give low-income households meters that enable them, provide households ‗opt-in‘ ability consumers with an incentive to shift Small and medium businesses demand from peak periods and also Provide the means for enable consumers to get feedback on direct/indirect feedback on their consumption, which is important in consumption. reducing energy use.

2. Behaviour change. Implement a comprehensive Victorian Government Build on the planned behaviour change behaviour change strategy to Sustainability Victoria strategy for electricity use in the Victorian reduce energy consumption in Climate Change White Paper. Electricity Victoria that involves Community NGOs has been treated as an infinite resource, persuasion campaigns backed Environment Victoria as evidenced by the massive growth in up by participatory decision- per capita use over the last fifty years. A making and community strategy that encourages responsible programs. behaviour by the community would provide a signal that electricity demand is too high.

3. Efficiency We recommend strengthening Essential Services Provide an enabling framework for and expanding the Victorian Commission consumers to reduce electricity use. In Energy Saver Incentive Appliance Retailers addition to efforts to promote scheme, making it more (Harvey Norman, ‗responsible‘ behaviour, efforts need to accessible and broad-ranging, Bunnings, etc.) be made to ensure the circumstances for to support consumer ‗response-ability‘ are also created; that is, behaviour change. a framework that enables the community to translate their intentions into actions. 4. DM Incentives Provide the energy industry Australian Energy To effectively reduce electricity use in with incentives for undertaking Regulator Victoria, the industries involved in Demand Management and Australian Electricity electricity distribution and retail need to address current barriers to Market Commission be provided with strong incentives to action. Regulatory incentives implement demand management that have been implemented Energy industry programs. internationally provide guidance.

5. Sustainability We recommend embedding Australian Electricity Embed environmental concerns in the the goals of environmental Market Commission strategic focus of the regulators. The protection and the transition to Australian Energy priorities of the agencies that regulate a low carbon society as Regulator and manage the National Electricity priorities of the National Market are almost solely focused on Electricity Market in order to Ministerial Council on price, quality, safety, security and facilitate a transition to a more Energy - COAG reliability of supply. Consumer advocacy sustainable electricity supply issues are addressed in a limited way, regime. and environmental issues are not considered at all.

Page 3 Purpose Target Mechanism Recommendation

1 TIME- Pricing DEPENDENT PRICING USING SMART METERS

CONSUMERS: Consumer COMPREHENSIVE attitudes and BEHAVIOUR Responsibility and CHANGE awareness response-ability STRATEGY

Consumer access and knowledge 3 ENABLING FRAMEWORK FOR REDUCING ELECTRICITY DEMAND (EFFICIENCY SCHEMES) Consumer access Reducing BUSINESS: Efficiency of Electricity equipment and Use appliances Regulation & standards

4 INCENTIVES FOR Organisational ELECTRICITY attitudes and INDUSTRY TO incentives PURSUE DEMAND MANAGEMENT ELECTRICITY INDUSTRY: Investment in demand management 5 EMBED Regulatory policy SUSTAINABILITY IN REGULATORY FRAMEWORK

The five recommendations of this report target consumers, business and the electricity industry to address specific barriers to action and also incorporate leading practice from international examples that all together will lead to the goal of reducing energy use.

Page 4 A.3. Introduction There is international consensus on the need to reduce human-induced greenhouse gas emissions in order to stabilise and decrease the amount of these gases in the atmosphere, so as to prevent or ameliorate adverse climate change (CSIRO, 2007, IPCC, 2007). The transition to a ‗post-carbon society‘ requires a concerted global effort to respond to climate change, within which mitigation strategies will play a key role, in order to simultaneously reduce the likelihood of adverse effects from climate change and be better able to withstand the unavoidable consequences that will result. The majority of Australia‘s greenhouse gas emissions3 come from stationary energy sources; typically coal-fired electricity-generating power plants (Figure 1). In reducing greenhouse gas emissions, Australia must focus its efforts primarily on the stationary energy sector. This should encompass the whole energy industry, including the generation, transmission, distribution and use of electricity.

Land use, Waste Land-use 3% change and forestry 5%

Agriculture 15%

Industrial Processes Stationary 5% Energy 51%

Fugitive Emissions 7%

Transport 14%

Figure 1 Australia’s Net greenhouse gas emissions (Mt CO2-e) by sector – December 2009 update (Source: DCC, 2009). Note: land use based on 2008 estimate.

Australia cannot continue to ignore the large inefficiencies in its electricity use. Figure 2 shows national per capita consumption for electricity and automotive fuel and for water in Melbourne, plotted against national population. This demonstrates that while Australia‘s population has more than doubled as of 2009 (206 percent of 1961 levels), the water consumption in an urban centre (Melbourne) has decreased (73 percent of 1961 levels), personal vehicle fuel use has remained largely constant since 1980 (currently 191 percent of 1961 levels) and per capita electricity use has increased dramatically (555 percent of 1961 levels). When combined with population growth, the total electricity consumption has increased nearly twelve-fold since 1961 across Australia.

3 In carbon dioxide (CO2) equivalents

Page 5 600 Electricity

Fuel 555% 500 Population

Water (with restrictions) 400

300

206% 200

191% Index of per capita Index of per capita consumption (%) 100 99% (73%)

0 1960 1970 1980 1990 2000 2010 2020

Year Figure 2 Index of per capita consumption of electricity and automotive gasoline (Australia) and water (Melbourne only) versus population, 2009 levels relative to 1961 levels (Sources: ABARE, 2009, ABARE, 2010, ABS, 2008 and Melbourne Water).

There are a variety of factors that can be considered to have influenced this increase, including the relative energy intensity of industries such as mining and also the relatively low price of electricity in Australia. It should be noted however, that fuel switching from electricity to gas means that per capita energy use would be higher than portrayed in Figure 2. Even considering these factors, substantial efficiency gains can still be made cost effectively to energy users and the industry. There is plenty of ‗low hanging fruit‘ available, as demand management is not currently used effectively in Australia, even for peak use, which is a key driver of infrastructure costs. The electricity sector in Australia can learn from international approaches to stimulate efficiency and demand management that include regulation, pricing reform and behaviour change programs, which together can form a comprehensive strategy to reduce energy use. Internationally, governments are responding to concern about climate change by changing the way they manage energy generation, distribution and use. Energy efficiency, demand management, pricing and utility incentives to promote efficiency are cost effective measures to reduce energy demand and consumption. Consumers benefit from lower energy costs through greater efficiency and energy utilities can benefit from reduced peak loads, which are a major driver of their costs. A variety of regulatory initiatives have been developed internationally to achieve these savings which could provide Australia with guidance on potential opportunities.

Page 6 California has achieved a levelling-out of per capita electricity demand for the past 30 years (Figure 3) mostly as a result of a comprehensive demand management strategy to improve efficiency, including building codes, comprehensive minimum energy efficiency standards for appliances and incentives that mean energy utilities do not lose revenue from improved efficiency of electricity use. Most notably, the California Public Utilities Commission has used the rate decoupling mechanism to break the connection between increased energy consumption and the revenue energy utilities earn thereby providing them with an incentive to promote efficiency. It should be noted that other factors influenced the result seen in California that distinguish it from other parts of the United States and from Australia, including relatively high electricity prices and a less energy intensive industry profile, as well as a more vertically-integrated electricity industry structure. Similarities in lifestyle, climate and in the availability of gas however, suggests that the Californian experience provides a valid case study for Victoria in responding to climate change.

Figure 3 a) Per capita electricity use in the USA, Australia and California 1961-2006; b) Total electricity consumption in California and Australia 1961-2008 (Sources: ABARE 2008, ABS 2008; Energy Information Administration (US), Annual Energy Review 2007).

Demand management is an important but underutilised response in Australia to responding to climate change. Implementing energy efficiency measures to reduce carbon pollution does not have to be expensive. For example, a 2010 report by ClimateWorks Australia, based on the methodology of McKinsey & Company, demonstrated that significant carbon abatement opportunities can be achieved in Australia at negative net cost to the economy through improved efficiency of electricity use (ClimateWorks Australia, 2010). According to this analysis, a total of 249 MtCO2e of emissions could be reduced at cost of A$7.20 per tonne in 2020, on a societal basis, without major changes to the economy. Efficiency is a tool of demand management, and is effective in reducing resource consumption in circumstances where wastefulness occurs. However, efficiency itself is not sufficient to reduce greenhouse gas emissions unless the wasteful systems of economic productivity and personal lifestyle are addressed (Foran, 2009). A comprehensive demand management strategy that addresses energy efficiency as well as behaviour change is essential in bringing about the changes to economy and lifestyle that are required in transitioning to a low carbon society.

Page 7 An analysis of the patterns in electricity demand and its relationship with price indicates the ways in which demand management strategies could be implemented and also the benefits associated with them. Demand for electricity typically exhibits peak/off-peak cycles, depending on air temperatures, time of day and season. During summer, highest consumption usually occurs in the middle of the day and lowest consumption overnight (Figure 4) driven by energy intensive air-conditioner use. In winter, there are typically two demand peaks; one in the morning and one in the evening which correlate with the times individuals leave and come home from work.

10000 160

9000 140 8000 120 7000 100 6000

5000 80 Demand curve - winter 4000 Demand curve - summer 60

3000 Price curve - winter Half hourlyHalf price $ / 40 Price curve - summer

Half hourlyHalf demand / MWh 2000 20 1000

0 0

1:00 1:00 AM 6:00 AM 7:00 AM 1:00 PM 5:00 PM 6:00 PM 7:00 PM 2:00 2:00 AM 3:00 AM 4:00 AM 5:00 AM 8:00 AM 9:00 AM 2:00 PM 3:00 PM 4:00 PM 8:00 PM 9:00 PM

12:00 PM12:00 PM11:00 AM12:00 10:00 10:00 AM 11:00 AM 10:00 PM

Figure 4 Electricity demand and price curves: i) winter weekday (8 July 2009); ii) summer weekday (20 January 2009) (Source: AEMO, 2010).

Figure 4 also shows a strong relationship between price and demand where peaks in demand during summer and winter drive the price of electricity. Provision of electricity during periods of peak demand costs significantly more than base demand because more expensive generators, such as gas-fired or hydroelectric power stations, are required to meet demand. Analysis of price and demand in the National Electricity Market (NEM) indicates that a very small amount of electricity demand (0.29 percent – about 25 hours of the year) accounts for nearly 18 percent of the total wholesale cost of electricity annually, averaged over 2001 - 2009 (See C.3: Figure 11). As well as influencing the cost of electricity generation, peak demand also drives the cost of electricity distribution through the need for investment in infrastructure to meet maximum demand. In Queensland, for example, large increases in peak demand over the past decade has driven investment in distribution and transmission infrastructure to ensure the grid can handle peak demand. This increase in costs has led to a doubling of electricity prices, even as generation costs have fallen (Townsend, 2010). Demand management strategies, as reviewed in this report, have the potential to reduce demand peaks as well as overall reductions in electricity use and carbon emissions and so can play a vital role in meeting the challenge of climate change. The recommendations for implementing demand management strategies in Part A.2 are elaborated on below. These recommendations are based on the evaluation of different demand management strategies and methods considered in detail in Part B and an evaluation of the Victorian context detailed in Part C. Part D.2 provides a glossary for terminology and acronyms used in the report.

Page 8 A.4. Detailed recommendations Recommendation 1: Implement retail electricity pricing that captures time-dependent costs using smart meters. Time-variable price signals, and the smart meters that enable them, provide consumers with an incentive to shift demand from peak periods and also enable consumers to get feedback on their consumption, which is important in reducing energy use. A retail pricing structure that reflects the wholesale cost of electricity more accurately is a key element in encouraging demand management among residential and small business consumers, and time-of-use and real-time pricing will help to reduce peaks and lower demand. For residential and small business consumers, the key recommendation is the creation of a framework for energy retailers to offer a variety of pricing products, including time-variable rates and the option of critical peak pricing4.Trials have found that time-variable pricing is effective in demand shifting but not necessarily at reducing overall demand, at least in isolation of any feedback on use. A smart meter rollout does allow, however, the capacity for mechanisms that in conjunction with time-variable pricing can achieve reductions in energy use. The most significant is the ability to provide consumers with detailed feedback on their use, which can reduce overall demand by 5 - 15 percent. Feedback can be provided directly through electronic In-Home Displays, or indirectly through a website or via energy bills. In evaluating the effectiveness of smart meters, it is important to recognise the essential role of feedback in changing energy use patterns. As a minimum, it is recommended that consumers be able to access usage information on-line and that rebates be offered on the purchase of In-Home Displays. The introduction of time-variable pricing in Victoria is driven by the mandated rollout of smart meters, which will give the electricity industry the ability to provide time-variable tariffs. The Victorian government expects that the adoption of these rates will lead to the phasing out of pricing rates that inhibit demand management (DSE, 2006). The Victorian Energy minister, in March 2010, announced a moratorium on the introduction of time-variable pricing, although the smart meter rollout will continue as planned. There are equity concerns that the introduction of time-variable pricing and the rollout of smart meters could financially disadvantage low-income households who will bear costs for the rollout of smart meters that are disproportionately high relative to their energy use and also through facing higher prices under time-variable pricing. In addressing the cost of smart meters to consumers, the most straightforward option is to have the distributors directly compensate identified low-income households for the costs of the smart meter rollout. The St Vincent de Paul Society and the Consumer Utilities Advocacy Centre (CUAC) recommend that pricing principles be applied to allocate the costs for the rollout to higher consumption households by only passing through these costs once a certain consumption threshold has been reached (Johnston, 2010). With regards to pricing, the concern is that time-variable pricing may be imposed on all households and those who would be worse off would not be able to opt-out. While it has been argued that market competition will ensure some retailers offer more straightforward products for low-income consumers, this is not guaranteed because of the deregulated nature of Victoria‘s retail energy market. It is therefore important that regulatory measures

4 Critical Peak Pricing (CPP) involves a discretionary number of high or ‗‗critical‘‘ price periods applied on days where particularly high demand is forecast such as hot summer days. For more detail see B.3.1.4.

Page 9 ensure time-variable pricing is an ‗opt-in‘ measure for those who would be adversely affected and that simpler and more equitable contracts are provided by retailers. Low-income households and pensioners currently receive concessions on their electricity bills which can go some way towards ameliorating the adverse effects of time-variable pricing, as well as the increased fixed service charges from the smart meter rollout. The St Vincent de Paul Society identified that under variable pricing, affordability is no longer just linked to a household‘s total consumption, but also to daily consumption patterns. A percentage-based concession will not necessarily improve affordability for a household with proportionally high peak consumption and so concessions need to be developed that address the problem of households with high non-discretionary usage during peak-times (Johnston, 2010). In the development of variable pricing mechanisms, it is also important to consider their interaction with carbon emissions and also the future scenario of a price on carbon. For instance, in Victoria, load shifting from peak to off-peak could increase carbon emissions, as base load is provided by brown coal, and peaks by more efficient gas powered plants, which under a carbon price would lead to more expensive electricity. In the short term, the two measures of carbon pricing and variable pricing may work against each other, but over time if demand management strategies lead to avoided generator capacity, this could complement a carbon price that would pressure inefficient plants to close.

Recommendation 2: Establish a comprehensive behaviour change strategy for electricity use. Electricity has been treated as an infinite resource, as evidenced by the massive growth in per capita use over the last fifty years. A strategy that encourages responsible behaviour by the community would provide a signal that electricity demand is too high. A broad-based strategy would involve persuasion campaigns backed up by participatory decision-making and community programs. Price signals play an important part in determining consumer consumption and efficiency, but price in isolation is not enough to achieve behaviour change, particularly where consumers are faced with mixed messages. Establishing energy efficient and low energy use behaviour as social norms requires a comprehensive behaviour change strategy that includes pricing, regulation, social marketing and other mechanisms, all providing consumers with a consistent message. In its Climate Change White Paper, the Victorian government announced a behaviour change program that will build on the ‗black balloons‘ campaign. Encouraging ‗responsible‘ behaviour through advertising and public campaigns is an important part of raising awareness, and the plan to encourage the adoption of a personal savings target similar to the ‗Target 155‘ program for water is to be commended. As well as encouraging positive behaviour, the program must address barriers to action that consumers face to ensure changes in action. It is important that these persuasion campaigns are followed up by community programs that encourage social and participatory learning and address habitual behaviour. Behaviour change campaigns that encourage ‗responsible‘ behaviour need to be supported by programs that create the circumstances for ‗response- ability‘. This has been something lacking the original ‗black balloons‘ campaign and which should be addressed as part of the government‘s planned program. It is recommended this is done through a strengthening and expansion of the Victorian Energy Saver Initiative, as detailed in Recommendation 3.

Page 10 Recommendation 3: Provide an enabling framework for consumers to reduce electricity use. In addition to efforts to promote ‘responsible’ behaviour, efforts need to be made to ensure the circumstances for ‘response-ability’5 are also created; that is, a framework that enables the community to translate their intentions into actions. A plethora of schemes already exist that seek to reward good behaviour in this context, but are collectively less effective than they could be. We recommend strengthening and expanding the Victorian Energy Saver Incentive (ESI) scheme to support consumer behaviour change. As well as encouraging the public to enact different forms of ‗responsible‘ behaviour in their electricity use, it is also important to address the context in which individuals act by creating the right circumstances for ‗response-ability‘. The introduction of pricing that more clearly reflects variable costs is one such policy, as are efficiency standards and incentive and rebate schemes such as the Energy Saver Incentive (ESI) scheme. Efficiency standards have been effective in bringing about ‗systematic‘ changes by improving the energy efficiency of individual appliances or items. A comprehensive strategy must include these systematic measures, but must also take a more ‗systemic‘ (or whole-system) approach that looks to improve the efficiency of how consumers use products, not just the efficiency of the products themselves. The ESI scheme provides incentives to replace items like lighting and fridges, space and water heating. The Victorian Government‘s Climate Change White Paper flags expanding the scheme by doubling the initial target, including more products like air conditioning and televisions and also enabling small and medium businesses to participate. The White Paper also outlines plans for a single web portal to provide information and access to all State rebates and incentives. This can address the barrier of ‗information overload‘ that leads to inaction from consumers who are confused about what they are eligible for and also allows a broader range of opportunities to be accessed. We consider that there may be greater scope in the scheme to encourage systemic behaviour change and to address the context in which consumers make decisions, thereby increasing the effectiveness of the scheme. Our recommendations for improving the scheme include:  Increasing awareness of the ESI among the public and improving their engagement with it. Using electricity bills to provide information on opportunities and also engaging retailers to promote the benefits of the ESI would improve the public‘s knowledge of it.  Including additional items that can help consumers avoid energy consumption, such as such as switchable power-boards, timers and motion-sensitive lighting products.  Encourage large retailers of efficient products, such as lighting and whitegoods, to become accredited persons and simplify the generation of energy efficiency certificates at the point of sale. Using retailers can reduce barriers to uptake, as consumers can exercise their own choice over products and have the reassurance of the retailer‘s brand presence. In addressing the social equity issues that arise from the transition to time-variable pricing, a targeted energy efficiency scheme can play a significant role in easing the burden on those who would be most disadvantaged. Low-income households are exposed to energy expenditure that is proportionally higher, and they also often have less energy efficient

5 For more on the meaning of this term, see: Fisher, F. 2006. Response ability: environment, health and everyday transcendence, Elsternwick, Victoria, Vista Publications.

Page 11 housing and old or inefficient appliances. The ability of these households to respond to variable prices is therefore limited by their inability to switch to more energy efficient appliances due to the upfront capital investment required (Johnston, 2010). A directed program to address the efficiency of housing and appliances can allow households to reduce their energy demand and also reduce their exposure to higher peak pricing.

Recommendation 4: Provide incentives for the electricity industry to pursue demand management. To effectively reduce electricity use in Victoria, the electricity transmission and distribution industries need to be provided with strong incentives to implement demand management programs. Regulatory incentives that have been implemented internationally provide guidance. To encourage electricity distributors to pursue demand management programs as alternatives to massive network infrastructure investment, it is necessary to address the financial barriers that limit action. Currently the Australian Energy Regulator (AER) provides incentives for electricity distributors to implement demand management through the Demand Management Incentive Scheme (DMIS) (AER, 2009a). The DMIS comprises a revenue allowance which allows distributors to recover the costs of demand management initiatives on a use-it-or-lose-it basis and also allows the distributor to recover forgone revenue as a result of successful demand management initiatives (AER, 2009a). It is recommended that these are continued and expanded and also complemented by findings from the behaviour change literature to address non-financial barriers to actions among management. As well as providing a means for cost and revenue recovery, it is important that regulation provides positive incentives for demand management to motivate organisations. Incentive schemes are effective and commonly used approaches that go beyond cost recovery measures. By linking efficiency to shareholder rates of return, these schemes encourage organisations to see demand management as a central part of the business. Possible options for schemes include Cost Capitalisation, where the distributor is provided with an opportunity to earn a rate of return on demand management investments equal to other capital investments, or Performance Target Incentives, where organisations receive financial rewards for achieving savings targets. In 2007, California introduced ‗decoupling plus‘; this provides revenue decoupling6 for cost recovery as well as the ‗plus‘ of performance incentives for meeting or exceeding energy efficiency targets. This, in effect, pays utilities for energy they have conserved. The provision of incentives provides motivation and positive reinforcement to organisations, which can address the non-financial barriers to action. In Australia, distribution and retail businesses in electricity are disaggregated, which presents institutional difficulties for implementing such incentives; however, there is still scope for a similar mechanism to be employed for distributors. It is recommended that the regulator consider some form of incentive scheme to build upon the existing DMIS structure that clearly links profitability and shareholder performance with efficiency.

6 Revenue decoupling addresses the incentive utilities have to maximise revenue through increasing consumption over promoting efficiency and the revenue ‗losses‘ experienced through implementing DM. Revenue is ‗decoupling‘ from sales through annual rate-making adjustments that ensure utilities collect an agreed-upon level of revenue.

Page 12 Recommendation 5: Embed environmental concerns in the strategic focus of the regulators. The priorities of the agencies that regulate and manage the National Electricity Market are almost solely focused on price, quality, safety, security and reliability of supply. Consumer advocacy issues are addressed in a limited way, and environmental issues are not considered at all. We recommend embedding the goals of environmental protection and the transition to a low carbon society as priorities of the National Electricity Market in order to facilitate a transition to a more sustainable electricity supply regime. The Australian Energy Regulator (AER) is responsible for regulating the wholesale electricity market and the economic aspects of electricity transmission and distribution. The AER operates according to the National Electricity Objective, which is: To promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to – a. price, quality, safety, reliability, and security of supply of electricity; and b. the reliability, safety and security of the national electricity system. The Australian Energy Market Commission (AEMC) makes the rules by which the National Electricity Market operates. The AEMC hosts two advisory panels: 1) the Reliability Panel, which deals with the reliability, safety and security of the electricity system; and 2) the Consumer Advocacy Panel, which provides grants to consumer advocacy groups to conduct research and support policy and decision-making. It is recommended that the National Electricity Objective, which guides the regulator‘s actions, be updated to specifically include the goals of achieving environmental protection and carbon reduction on an equal footing with economic and consumer oriented objectives. To embed these goals into the organisational culture that implements the regulatory framework, it is also recommended that a third ‗environment and sustainability‘ board is established in the AEMC on similar grounds to the Reliability panel, with the role of monitoring, reviewing and reporting on sustainability concerns such as efficiency, greenhouse gas reduction, renewable energy and cogeneration. In the United Kingdom, Ofgem regulates the operation of the electricity and gas markets. Similarly to the AER, Ofgem was established following privatisation with the primary duty of ensuring ‗the affordability, availability, security and quality of gas and electricity supplies‘ and a principal objective to protect the interests of consumers. In response to the issues of climate change and energy security, and in light of the need to transition towards a low carbon economy, Ofgem‘s focus was refined. In 2000, it was given a duty to protect the environment and in 2004 the duty to contribute to the achievement of sustainable development was also added (Sustainable Development Commission, 2007). In 2008, the Energy Act placed Ofgem‘s duty to contribute to sustainable development on an equal footing with its other duties (Ofgem, 2010). The Act also refined Ofgem‘s principle objective, being protecting the interests of consumers to refer to future as well as existing consumers (Ofgem, 2010). In making its recommendations, the Sustainable Development Commission referenced the case of California, where the energy regulator has also taken an active role in pursuing efficiency and other positive environmental outcomes through interpreting its general duties to protect consumers to include the promotion of a sustainable energy policy (Sustainable Development Commission, 2007). Following the Energy Act‘s revision, Ofgem was restructured with the creation of a new Sustainable Development Division that brought together Environmental, Social and Consumer Policy (Sustainable Development Commission, 2010).

Page 13 PART B. DEMAND MANAGEMENT MEASURES

B.1. Summary Australia cannot continue to ignore the large inefficiencies in its electricity use. It has been recognised that even with a price signal for carbon provided by an emissions trading scheme (ETS), market impediments may cause underinvestment in cost-effective demand management and energy efficiency opportunities in the electricity sector. Complementary measures to an ETS are available that will facilitate cost-effective reduction in electricity consumption and subsequent reduction in greenhouse gas emissions. This part of the report is a review of best-practice demand management strategies both in Australia and Internationally. The intended target was to review demand management measures for the electricity sector; however, experiences in the water and transport sectors were drawn upon where appropriate. Demand management strategies at the policy level were reviewed and sub-divided into methods, which are relevant at the planning and management level and are comprised of individual techniques for implementation. The four broad strategies reviewed were pricing, smart operating systems, regulatory measures and strategies for behaviour change. Pricing techniques include the use of time- variable pricing that leads to demand reduction by providing more accurate price signals to consumers. This strategy is complemented by smart operating systems, which include technology like smart meters that enable time-variable pricing measures and In-Home Displays that provide feedback on price and consumption to consumers. Regulatory measures include incentives for the electricity industry to encourage demand management spending. Other regulatory measures considered were energy efficiency regulations for appliances. The section on strategies for behaviour change considers the models behind energy consuming behaviour and techniques to bring about behaviour change, such as social and community-based learning.

Page 14 B.2. Demand management strategies, methods and techniques The fundamental objective of policies and regulation regarding demand management (DM) of electricity is to positively influence consumer behaviour in regard to their energy usage. DM is also referred to in the literature as demand-side management (DSM) and/or energy conservation; however, we use the catch-all phrase ‗demand management‘ to describe any technique that influences consumption of electricity. This section of the report presents a review of demand management policies and regulations that have been designed to reduce overall electricity consumption or reduce peak load. Demand-side policies can be divided into four general strategies, as shown in Table 1. These can be further defined at the management level as ‗methods‘, which are further made up of ‗techniques‘. In this section of the report, each of these strategies, methods and techniques are described in detail, with examples given of their implementation. Energy efficiency is often cited as a means of achieving reduction in electricity demand while meeting consumer demand for services. This takes the assumption that demand for services (e.g. refrigeration, television viewing) is the element in demand rather than the actual energy needed to provide the service (Wirl, 1997). Energy efficiency can thus be broken down into two elements; systematic and systemic: Energy used for a particular item (systematic) This refers to the rate of energy use for items with comparable utility. For example, a compact fluorescent light can generate the same amount of light as an incandescent bulb using fewer watts. Energy efficiency on this level is a ‗systematic‘ approach to reducing electricity consumption that tries to reduce the energy consumption of all items, typically through regulation (e.g. minimum efficiency standards). Energy used to meet a human demand (systemic) A household can replace all of its lights with low-energy compact fluorescent lights, however, if many more lights than required to light an area are used, then the energy efficiency is less than it could be. Similarly, a highly energy efficient refrigerator is less efficient overall (at keeping food cold) if it has a much greater volume than needed. Programs aimed at reducing electricity consumption through changing energy behaviour and choice, are part of a more ‗systemic‘ (or whole-system) approach. In this report, we pick up energy efficiency through demand management strategies. The ‗systematic‘ aspects of energy efficiency are dealt with under regulation, and the ‗systemic‘ aspects come under behaviour change strategies.

Page 15 Table 1 Summary of demand management strategies, methods and techniques for altering patterns of electricity consumption

STRATEGY METHOD TECHNIQUE

Pricing Pricing structures Time-of-use variable pricing Real-time pricing Pre-paid electricity Critical-peak pricing

Consumer incentives Rebate schemes and subsidies Energy saving certificates Green loans Peak-time rebates

Smart operating Metering Real-time electricity metering systems In-Home displays

Direct load control Direct load control

Power factor correction

Regulation Utility incentives Rate decoupling New South Wales D-Factor Systems benefit charges Shareholder incentives Demand Bidding Loading Order

Efficiency Mandated minimum efficiency standards Voluntary efficiency standards

Behaviour Influences on behaviour The rational economic model of behaviour change Social-psychological factors and models

Strategies for behaviour Information change Consultation and participation Social learning

Consumer information Appliance Labelling Consumption information at billing

Page 16 B.3. Pricing Price indicates the value of a resource and represents the cost of production and services to provide the resource. In many cases, there are impacts generated by the production and supply of a resource that are not included in its price; these are termed externalities. These can be positive, such as the jobs and livelihoods of those living in energy producing regions; or they can be negative, such as the emission of greenhouse gases and their effect on climate. Traditionally, the generation, transmission and distribution of electricity have not been priced to include negative externalities such as climate change, environmental degradation, social inequities and intergenerational inequities. B.3.1. Pricing structures For consumers such as households and small businesses electricity is typically priced at a fixed rate, where a guaranteed fixed price is assigned in advance of electricity consumption and is only periodically redefined by a regulatory body. This pricing mechanism can inhibit energy conservation as it hides the higher cost of using electricity at certain times, as well as providing no disincentive for higher than ‗normal‘ levels of consumption. Alternatives to fixed- rate pricing are described below that either limit peak electricity consumption, or are designed to reduce overall electricity consumption. B.3.1.1. Time-of-use variable pricing Time-of-use (TOU) pricing is a technique where electricity is provided at variable prices depending on demand. The simplest form of time-of-use pricing is peak/off-peak tariffs, where electricity consumed for water heating between 11.00 pm and 7.00 am (in Victoria) is charged at a lower rate than electricity consumed during the remaining period. Residential trials show that TOU tariffs flatten loads profiles by moving usage from high-price periods to low-price periods (Herter, 2007). A three-tier TOU pricing structure includes peak, shoulder and off-peak periods, which are different for business days and non-business days and can also differ for residential and non-residential customers (see Figure 5). A basic TOU program can expect to yield peak reductions of approximately 5 percent (Newsham and Bowker, 2010). While this appears relatively small, it has been estimated that a reduction of 2–5 percent in system demand at peak times could reduce the spot price of electricity by 50 percent or more (Rosenzweig et al., 2003). This may have a significant effect on wholesale prices in Victoria, as the top 0.29 percent peak of annual electricity consumption represents nearly 18 percent of the total annual wholesale cost of electricity (Figure 11). TOU may not be effective in reducing electricity costs where demand shifting or reduction leads to the avoidance of highest bids in the spot market. While this could lower average prices if it leads to avoided generation investment in expensive peak-load supply, it could increase prices where generators not only need to maintain capacity but also have less volume over which to ensure their overall profitability. Table 2, over-page, summarises demand responses from a range of TOU trials. The California State-wide Pricing Pilot included 1,861 residential customers assigned to different tariff structures. A control group of 553 participants had the standard flat tariff and 252 participants had a standard flat tariff but were provided with information about reducing loads in peak times and notified of peak days. The result in Table 2 was yielded by groups of 200 participants who were subject to seasonal TOU tariffs and another 856 participants who had a TOU tariff and also some form of CPP tariff. (NERA Economic Consulting, 2008b).

Page 17 Table 2 Demand responses from time-of-use pricing trials

Trial Reduction in consumption

California State-wide Pricing Pilot 4.71 percent reduction in peak demand (TOU) 0.17 percent overall increase in demand 0.02 percent decrease in winter demand

Ontario Smart Price Pilot 5.7 percent reduction in peak demand 6 percent overall decrease in demand

Hydro One Time of Use Pilot 2.9 – 3.7 percent load shifting from peak 5.5 – 8.5 percent shift with In-Home Displays 3.3 percent overall decrease in demand 7.6 percent overall decrease with In-Home Displays

Australian Integral Energy, Energex No statistically significant result with TOU and EnergyAustralia Positive result with critical peak pricing

In Ontario, the Smart Price Pilot was run by the Ontario Energy Board. 124 participants were subject to a TOU tariff and were not informed of critical peak events, another 124 participants were on a TOU tariff with a CPP element and a third group of 125 participants were on a TOU tariff and received a ‗critical peak rebate‘ for reducing use below a baseline during peak periods (NERA Economic Consulting, 2008b). Also in Ontario, the utility Hydro One‘s time-of- use pilot which took place in 2007 and involved 486 customers. Of these, 153 customers had TOU rates and were also given In-Home Displays (IHDs), 177 customers had only TOU rates and 81 customers only IHDs (Faruqui et al., 2010). In Australia, Integral Energy, Energex and EnergyAustralia have recently conducted TOU trials. Integral‘s involved 900 participants in three groups; 300 had seasonal TOU tariffs, the second 300 were on TOU tariffs with critical peak pricing as was the third group, which was also provided with In-Home Displays. Participants in the trial were also provided with access to a web site which provided information on consumption and pricing. Energex conducted a trial in Brisbane that involved 370 participants in five groups subject to a TOU tariff with and without timers to switch off appliances during peak times, and direct load control mechanisms (NERA Economic Consulting, 2008b). EnergyAustralia‘s trial included an information-only group of 99 households, a TOU group of 108 households and three CPP groups, with and without IHDs and at different rates. Domestic CPP saw positive results but there were no clear results from TOU rates or from the addition of IHDs (NERA Economic Consulting, 2008b). TOU has been effective in load shifting but is not as effective at reducing overall energy use as consumers are encouraged to shift usage but not necessarily to avoid consumption (Newsham and Bowker, 2010). The ability to shift loads depends on the consumers‘ load profile and also on their energy use, household size and appliance mix (NERA Economic Consulting, 2008b). Consumers who have the ability to shift demand from peak to off-peak periods will be better off under a TOU tariff because they will pay an off-peak rate that is lower than the average flat rate tariff. Consumers who are unable to shift demand may be better or worse off depending on what proportion of their load is peak and off-peak (NERA Economic Consulting, 2008b).

Page 18 There is a risk of low-income households being exposed to greater vulnerability under TOU pricing, particularly in the case where pensioners, young families and the unemployed are at home during peak times. Other issues of concern are that low-income households own older and less efficient appliances and live in older houses that require greater heating and cooling and may not have access to mains gas (McGann and Moss, 2010).

B.3.1.2. Real-time pricing More sophisticated variable pricing uses smart meters (discussed in more detail in Section B.4.1) so electricity prices can respond to real-time demand. Real-time pricing (RTP) involves price changing regularly to reflect underlying wholesale costs, which provide accurate price signals to consumers. Real-time pricing can make electricity markets more efficient by reducing wholesale price spikes, which in turn could reduce consumers‘ electricity bills by lowering the average price of wholesale energy (Horowitz, 2007). Figure 5 demonstrates how real-time pricing would compare to other pricing structures. Questions have been raised about the negative impacts of real-time pricing on consumers through the exposure to variability and high prices during peak periods. However, economic research suggests price volatility can actually be reduced under RTP as it reduces spikes in the wholesale electricity market (Horowitz, 2007). Even with some short-term exposure to spikes, real-time pricing should in principle lead to long-term savings for consumers over traditional fixed pricing, which involves higher average costs. Price volatility on consumers‘ electricity bills can also be reduced through risk-management products like long-term contracts and financial hedges (Horowitz, 2007). While the cost of implementing real-time pricing, through the roll out of smart meters, is large, the potential gains are considered to be many times the costs. It has been estimated that one-half of savings from RTP could result from only one-third of users adopting the mechanism (Borenstein, 2009). Real-time pricing is not as cost-effective for residential and small consumers because they tend to have less capacity to shift loads and will bear higher per capita costs for metering. US studies suggest that initially only large consumers should be offered real-time pricing, either on a voluntary or mandatory basis (Horowitz, 2007). However, this conclusion is not supported by the Australian experience where commercial users have had access to time-variable rates since the deregulation of the industry but uptake has been negligible, likely because businesses are unwilling to expose themselves to variability in prices. Time-of-use and real time pricing can shift demand to off peak periods, which means that additional generation capacity does not need to be switched on to meet demand. This reduces the cost of providing electricity, as this additional generation is significantly more expensive than base-load supply. However these efficiency gains and the smoothing out of peaks will not necessarily lead to reduced energy consumption or other environmental benefits. Consumers‘ exposure to more accurate and higher peak prices may act as a disincentive to energy use, but could also simply move demand to other times (e.g. running a dishwasher overnight), in which case there is no net reduction in demand. Furthermore, the electricity supplied during off-peak periods is generated by base-load coal (in Victoria), which emits more greenhouse gases than peak generators (typically natural gas) (Holland and Mansur, 2007).

Page 19 a)

40 Critical peak pricing High demand day Time of use tariff 35 Real time pricing 30 FlatPostage rate stamp tariff

10 Retail electricity price / c/kWh / price electricity Retail

2:00 AM 2:00 AM 3:00 AM 5:00 AM 6:00 AM 8:00 AM 9:00 PM 2:00 PM 3:00 PM 5:00 PM 6:00 PM 8:00 PM 9:00 1:00 AM 1:00 AM 4:00 AM 7:00 PM 1:00 PM 4:00 PM 7:00

11:00 AM 11:00 PM 12:00 AM 12:00 10:00 PM 10:00 PM 11:00 10:00 AM 10:00 b)

40 Time of use tariff Average demand day Real time pricing 35 FlatPostage rate stamp tariff 30

10 Retail electricity price / c/kWh / price electricity Retail

2:00 AM 2:00 AM 3:00 AM 5:00 AM 6:00 AM 8:00 AM 9:00 PM 2:00 PM 3:00 PM 5:00 PM 6:00 PM 8:00 PM 9:00 1:00 AM 1:00 AM 4:00 AM 7:00 PM 1:00 PM 4:00 PM 7:00

11:00 AM 11:00 PM 12:00 AM 12:00 10:00 PM 10:00 PM 11:00 10:00 AM 10:00 c) 40 Time of use tariff Low demand day Real time pricing 35 FlatPostage rate stamp tariff 30

10 Retail electricity price / c/kWh / price electricity Retail

2:00 AM 2:00 AM 3:00 AM 5:00 AM 6:00 AM 8:00 AM 9:00 PM 2:00 PM 3:00 PM 5:00 PM 6:00 PM 8:00 PM 9:00 1:00 AM 1:00 AM 4:00 AM 7:00 PM 1:00 PM 4:00 PM 7:00

11:00 AM 11:00 PM 12:00 AM 12:00 10:00 PM 10:00 PM 11:00 10:00 AM 10:00 Figure 5 Hypothetical pricing profiles for postage stamp, critical peak, time of use and real time pricing on a) high demand day; b) average demand day; and c) low demand day. Page 20 B.3.1.3. Pre-paid electricity Pre-paid electricity programs have traditionally been offered to consumers with poor credit, and in the United Kingdom for rental property tenants. In the developing world, South Africa has had considerable success in implementing pre-paid electricity to address the particular issues of supplying power to remote communities where account management, meter reading and billing are difficult (Tewari and Shah, 2003). The applicability of pre-paid electricity as a demand management tool has been highlighted by recent studies assessing the impact of In-Home Displays (IHDs) (see Section B.4.1.2). The direct feedback provided by IHDs encourages consumers to make more efficient use of energy with case studies from North America showing an average energy saving of 7 percent. When IHDs were combined with an pre-paid electricity program, energy savings were found to be about twice that amount (Faruqui et al., 2010). These studies highlight the importance of user-friendly feedback on consumption as a demand management driver that is effective with time-of-use, real-time or pre-paid pricing structures (Darby, 2006). The added savings seen in the above studies suggest that the consistent feedback and decision- making required on a pre-paid plan make it an effective demand management tool, although it should be noted that pre-paid pricing is currently banned in Victoria on equity grounds. B.3.1.4. Critical-peak pricing Real-time pricing (RTP) is effective at reflecting marginal wholesale costs; however there is concern that RTP may be too complex for users and some regulators are reluctant to allow residential customers to face the inherently volatile wholesale market. Where dynamic rates are being considered but RTP is deemed infeasible for residential customers, an alternative is critical-peak pricing (CPP). CPP tariffs add to a TOU rate structure a discretionary number of high or ‗‗critical‘‘ price periods that apply in times of system stress, such as very hot summer days (see Figure 5). The critical price is applied on a limited number of ―event‖ days per year, based on utility forecasts of a particularly high demand. Customers receive notification of the high price, normally one day in advance, and in some cases are provided with direct load control technology that automates the response of appliances like air conditioners (see Section B.4.2). Compared to the ‗standard‘ TOU rate, the ratio of peak to off-peak price is higher on CPP event days and the same rate is applied on every event day. The CPP price rate is preset and so CPP is not as economically efficient as RTP in responding to demand, but also bears less risk and variability than RTP (Herter, 2007). One issue that could arise with CPP rates and their effectiveness as a demand management tool is the discrepancy between retailer ‗price peaks‘ and distributor ‗demand peaks‘. If retailer-led CPP programs during the summer pushes usage from the afternoon (when price peaks) into the evening (when demand peaks) this would increase pressure on distributors. The Australian situation of having disaggregated electricity distribution and retail companies could therefore limit the effectiveness of CPP; however, trials here and overseas have seen positive results. In the California State-wide Pilot Program, participants were exposed to a CPP tariff and were not provided with any automated end-use controls. Under the CPP rate, prices were discounted on non-critical days and participants were given information about how to respond during critical high-price hours. On critical peak days in summer there was a 13.06 percent reduction in peak demand and 2.4 percent reduction in overall consumption. During winter the outcomes were 3.91 percent and 0.62 percent respectively (NERA Economic Consulting, 2008b). Demand response during CPP events averaged 5.1 percent; high-use single-family homes responded with an average 7.8 percent reduction, while customers in

Page 21 apartments averaged 2.9 percent and low-use single-family homes 3.2 percent. Different rates were tested and customer response to the $0.68/kWh critical-peak price was not higher than response to the $0.50/kWh critical-peak price, which suggests that as discretionary loads are curtailed, further curtailment becomes increasingly price inelastic (Herter and Wayland, 2010). Trials conducted in Australia have found higher levels of energy conservation on CPP days than were observed in the Californian Pilot. Country Energy found that it achieved a 25 percent reduction in demand on CPP days and an 8 percent reduction in overall energy consumption. Preliminary results in trials conducted by EnergyAustralia and Integral Energy found reductions of between 7 and 15 percent. In both trials, demand was reduced as opposed to just being deferred. It is suggested this is because a large amount of the critical peak usage in Australia is driven by air conditioning, which would not necessarily be deferred and so the energy that would otherwise have been used was saved (NERA Economic Consulting, 2008b). Members of NERA‘s focus group study on different pricing mechanism did not see much benefit in adopting CPP. Views included that the need to change behaviour to avoid CPP prices would impact adversely on people‘s way of life and there was no incentive to adopt a CPP tariff in the first place. Direct Load Control (DLC) was preferred was a measure to address high peak loads on hot days (NERA Economic Consulting, 2008b). B.3.2. Consumer incentives Consumer incentives from governments act as an enabling mechanism to encourage the uptake of efficient technology. They aid in creating the circumstances for ‗response-ability‘ by the public by addressing the financial barriers, such as relatively higher prices and longer payback periods incurred by efficient technologies. The simplest incentives are direct rebates and subsidies on the purchase of items or to reward efficient behaviour. Other measures include low interest loans for the specific purpose of improving energy efficiency and also energy certificates which are a market based mechanism that allow a financial benefit to be gained from energy saving actions. B.3.2.1. Rebate schemes and subsidies In many international examples, governments assist households directly with implementing highly cost-effective actions to reduce energy use. Examples of such actions, the ‗low hanging fruit‘ of energy reduction, include compact fluorescent light bulbs, home insulation, solar hot water systems, Energy Star rated appliances, electrical outlet timers, draught stoppers, fridge and freezer seals, photovoltaic systems, wind turbines and other renewable energy sources. Determining the rate of a rebate offered is important. While high rebates can increase participation and so give the appearance of success, they could lead to take-up being above economically viable levels and even lead to premature and unnecessary replacement of technology. High rates can also lead to an inequitable transfer of public money to participants. Where a wide range of products are available in the scheme, the rebate rate should be set on a dollar to energy or greenhouse gas saving basis to reflect the relative cost effectiveness of each product (Geller et al., 2006). In the United States, Federal tax credits were provided for energy efficiency measures by households and businesses in the late 1970s and early 1980s. The credit reimbursed 15 percent of costs for households and 10 percent for businesses. Studies found the tax credits scheme was not effective in encouraging the adoption of energy efficiency measures. It was

Page 22 concluded this was because of the small size of the credits and that the efficiency measures that the credits applied to had already been widely adopted (Geller et al., 2006). The US DOE provides grants for low-income households through the Weatherization Assistance Program (WAP). The WAP has provided funds for five million households since 1976. The program encouraged the development of home retrofit techniques and heating energy consumption in participating households fell by around 30 percent (Geller et al., 2006). In California, large-scale energy efficiency programs have run since 1977 (California Energy Commission, 2009). As of 2002, total spending was estimated at about $230 million on rebates for energy efficient technologies, free retrofits for low-income households and technical development for industry. Energy efficiency schemes are estimated to have reduced electricity use by the equivalent to 7 percent of the state‘s consumption and also provided $2.7 billion in life-cycle benefits to consumers (Geller et al., 2006). In Japan, tax incentives and low-interest loans are available for the construction of energy efficient buildings and also for the purchase of energy-efficient equipment. Financial incentives have led to the use of energy service companies (ESCO) for retrofit projects and the market has grown rapidly with total value of projects growing from about 170 million yen in 1998 to 665 million yen as of 2001 (Geller et al., 2006). Many European nations have provided grants and/or tax incentives for energy efficiency upgrades since the 1970s. In Sweden, low interest loans and grants improved energy efficiency in housing and industry and also expanded the use of cogeneration. Innovative energy efficiency measures that have been commercialised include a Swedish scheme that involved bulk procurement to stimulate the market penetration of high-efficiency appliances, windows and lighting products. This was complemented by social marketing, labelling and voluntary standards (Geller et al., 2006). B.3.2.2. Energy saving certificates An energy saving, or ‗white‘ certificate (ESC) scheme involves setting mandatory energy saving targets for energy distributors or suppliers that they are required to meet by implementing specific energy-efficiency measures over a set period (such as Victoria‘s ESI scheme – see Section C.4.1). The regulatory authority approves the technologies that qualify for inclusion and also sets the targets that obliged parties must meet (Mundaca, 2008). The energy savings are measured and verified using certificates that correspond to the absence of emissions, for example 1 tonne of CO2 (Passey et al., 2008), and which are periodically surrendered to the regulator to certify the energy saving. Each certificate is a traceable commodity carrying a property right over a certain amount of additional energy savings and guaranteeing that the benefit of these savings has not been accounted for elsewhere (Vine and Hamrin, 2008). Parties have the option of trading certificates to meet their targets and are penalised for non-compliance (Mundaca and Neij, 2009). The objective of ESC schemes is to achieve mandatory energy savings at the least possible cost. Theoretically this goal can be achieved effectively by granting the obliged parties flexibility in the selection of eligible measures, end-use sectors and also in banking and trading certificates. Flexibility is crucial because it allows parties to decide how to meet their targets cost-effectively based on their particular marginal compliance costs (Mundaca and Neij, 2009).The trading of certificates is not a necessary feature of schemes but enhances the efficiency of a scheme through the equalization of marginal compliance costs among obliged parties. Parties that can achieve significant energy savings inexpensively can generate and supply surplus certificates to the market that can then be saved for future periods or sold. Parties that find meeting their targets through direct action less cost effective

Page 23 can be better off buying certificates from other firms that may not have a target obligation but have the capacity to undertake prescribed activities effectively. The regulator authorises market agents such as ESCOs and retailers to implement measures that can generate certificates, which can then be on sold to regulated parties (Mundaca, 2008). In theory, a more ambitious saving target and greater variation in the costs of energy-saving measures will increase the scope of a tradable certificate scheme to outperform other energy policy instruments (Bertoldi et al., 2010). In Europe, an evaluation of a British certificate scheme found that the energy saving and cost effectiveness of the scheme was high, but this was in part because targets were relatively low. The British, as well as Italian, schemes supported the distribution of technology that was already commercially available and did not encourage the development of new technology; however, more ambitious saving targets could yield a different scenario (Mundaca and Neij, 2009). The most significant barrier to the use of ESCs is the problem of transaction costs, which are additional costs imposed on parties in fulfilling their regulated obligations. These include the costs of planning measures and then the costs of persuading customers to implement measures. These were demanding tasks and, according to the suppliers, it became increasingly difficult to find willing customers (Mundaca, 2007). Barriers underlying the need for high transaction costs were primarily in the preliminary stages of the scheme. These included a perception gap, where consumers believed the price of efficiency measures to be considerably higher than it actually was, and the split-incentive problem, where rental tenants were reluctant to implement measures because they would not realise the financial savings. Lower income households were also less willing to invest in energy efficiency measures because of a lack of readily available funds (Mundaca, 2007). Generally apathy and lack of awareness were identified as major barriers and this suggests that the performance of an ESC scheme depends on effective awareness-raising among end-users (Mundaca, 2007). While the transaction costs associated with awareness-raising and information provision can be high, these costs are considered necessary in increasing a program‘s credibility and trust and the benefits from ESCs can exceed any incremental transaction costs (Vine and Hamrin, 2008).

B.3.2.3. Green loans Green loans are low-interest loans provided to households, businesses or industry specifically for energy efficiency. Loans can address the high up-front costs of retrofits and other measures. In Germany, the government provided low-interest loans to business and industry in exchange for accepting voluntary targets to reduce CO2 emissions intensity. By

1998, a CO2 emissions reduction of 78 million tons, 9 percent of Germany‘s total CO2 emissions, was achieved and significant portion of this reduction was due to energy efficiency improvements. The Netherlands established a long-term agreements (LTA) program with industries that together comprised over 90 percent of industrial energy use. Participating companies developed and implemented energy efficiency plans and the government provided financial assistance for the plans. The industries improved their energy efficiency by an average of over 20 percent between 1989 and 2000, surpassing their targets in most cases. In 1999, the Dutch government launched a new set of agreements that commit companies to achieve ‗‗best practice‘‘ energy performance in their sector worldwide by 2012 (Geller et al., 2006).

Page 24 B.3.2.4. Peak-time rebates This is a mechanism that can be used as an alternative to critical-peak pricing. Consumers receive rebates on their bills for not using power during peak periods, measured in relation to a household-specific baseline. In an Ontario pilot study, a test group was subject to TOU rates and during CPP event hours they received a 30 cent/kWh rebate for energy that was not used and saw a 20% reduction during peak periods (Newsham and Bowker, 2010).

Page 25 B.4. Smart operating systems Smart operating systems include a variety of technologies that enable more efficient energy use. They include smart meters that can measures real-time energy consumption and provide one-way or two-way communications between the energy supplier and the meter, thereby enabling variable pricing mechanisms and In-Home Displays (IHDs) that provide consumers with direct feedback on their usage, which can aid in reducing consumption. Other technological initiatives include direct load control (DLC) technology that allows for the remote switching of energy intensive appliances by utilities and also power factor correction measures that improve the efficiency of energy provision to industrial users. B.4.1. Metering Traditional accumulation meters record energy consumption progressively over time and require physical readings at set intervals to obtain the quantity of energy used during a billing period. A technological advance on these are interval meters which record the quantity of energy consumed over set, frequent time intervals. This feature allows interval meters to provide time-varying energy pricing like TOU (see Section B.3.1). B.4.1.1. Real-time electricity metering Smart meters possess interval metering capability and also include one-way or two-way communications between the energy supplier and the meter (Energy Futures Australia Pty Ltd, 2008). This enables real time pricing, remote meter reading, connection and disconnection, outage and tamper detection and the use of load control devices and In-Home Displays (Energy Futures Australia Pty Ltd, 2008). The benefits of smart meters include energy efficiency savings from time-variable pricing and also business savings for distributors and retailers from automated metering and feedback, improved asset management and usage forecasting and capital cost savings (NERA Economic Consulting, 2008a). The costs of a widespread roll-out include the cost of purchasing and installing the meters as well as the cost of upgrading billing and management systems to process and store detailed usage data (NERA Economic Consulting, 2008a). One analysis suggests that in Australia, the cost of a smart meter rollout could be justified on the avoided meter reading costs and business efficiencies alone and that any network deferral benefits or greenhouse gas emissions reductions would be an additional benefit (NERA Economic Consulting, 2008a). This is consistent with North American case studies where avoided meter readings were up to 68 percent of total benefits (NERA Economic Consulting, 2008a). End-use consumers will benefit from the cost benefits of dynamic pricing, which can lead to lower average pricing as well as improved billing accuracy and payment arrangements (NERA Economic Consulting, 2008a). The major cost consumers‘ face is for the rollout of the smart meters. In Victoria, where the rollout has commenced, customers will face charges ranging from $158 to $271 to receive single-phase meters over the next two years, as determined by the Australian Energy Regulator (AER) (AER, 2009b). The costs have raised consumer protection concerns and it is important that existing hardship policies and assistance schemes are not eroded and assistance is provided where needed (NERA Economic Consulting, 2008a). Smart meters enable the provision of tariffs and products that can lead to greater demand management, but achieving the benefits of improved energy efficiency, cheaper energy and lower GHG emissions rely on more than just the rollout of the meters (Neenan and Hemphill, 2008). Effective demand management relies on consumers engaging with the products that Page 26 smart meters enable, which suggests that feedback mechanisms, like In-Home Displays, education programs and a broader behaviour change strategy, are essential in getting the most from smart meters (Neenan and Hemphill, 2008). B.4.1.2. In-Home displays In getting the most benefit from the roll-out of smart meters and the development of new tariffs, the ability to engage consumers actively in energy usage decision-making is important, as domestic energy consumption is largely invisible to users (Darby, 2006). It has been argued that energy consumption can be reduced by providing consumers with more information about their usage patterns (Wood and Newborough, 2003). This feedback can be direct, through In-Home Displays (IHDs) that give users real time information, or it can be indirect, most commonly through the use of informative billing (Darby, 2006). Savings have been shown in the region of 5-15 percent and 0-10 percent for direct and indirect feedback respectively (Darby, 2006). To be effective, displays must be accessible and provide clear and useful feedback based on actual consumption. Other possible features are an appliance- specific breakdown (enabled by smart home networks) and historical comparisons (Fischer, 2008). Important factors to consider in designing IHDs to be effective include how best to motivate users, how data should be presented and also where IHDs should be located within the home. Information can be presented in kilowatts, dollar costs or GHG emissions, all of which frame the problem in different ways and so appeal to different motives (Fischer, 2008). For example, a traffic-light IHD system could represent off-peak, shoulder and peak pricing periods with green, yellow and red lights respectively, which would result in different behaviour to a traffic-light system that represents low use, moderate use and high use with green, yellow and red respectively. The pricing-based traffic-light system could result in consumers using more electricity when the lights are green, whereas the demand-based system would encourage consumers to continue low demand when the lights are green. The ability of users to interact actively and change their displays is important in allowing individuals to focus on what motivates them. As a minimum, it has been proposed that IHDs should provide instantaneous usage, expenditure and historic feedback with the potential for displaying information on micro-generation, tariffs and carbon emissions (Darby, 2006). Australian trials by retailers have found mixed results from IHD trials. Trials by EnergyAustralia and Integral Energy found no significant difference between a group with IHDs on a CPP tariff and groups with only a CPP tariff (NERA Economic Consulting, 2008b). IHDs should also be compared to other channels such as web-based and bill-based information that could provide more cost effective means to achieve effective feedback and behaviour change. When the option of accessing similar information on the internet was presented to NERA focus groups, it was preferred given its lack of any additional costs (NERA Economic Consulting, 2008b). Trials by Country Energy in NSW also found that ongoing education was important regardless of whether consumers had IHDs (NERA Economic Consulting, 2008b), which suggests that the provision of technology through a smart meter and IHD rollout will not by itself lead to demand management outcomes and must be part of a wider strategy that addresses tariffs, regulation and public awareness. B.4.2. Direct load control Direct load control (DLC) is a technological measure to reduce peak use that does not rely on variable pricing, although it can be used in conjunction with it. Load control is initiated by utilities who either contact consumers and request that particular appliances are turned off during peak times or remotely switch off or adjust the setting of appliances through direct

Page 27 communication devices that are attached to appliances, such as air-conditioners and pool pumps (Energy Futures Australia Pty Ltd, 2008). Load control methods can include increasing thermostat set-points on air-conditioners, which gives an immediate large drop in cooling load, and also limiting cycling run-time where air-conditioners are turned off for incremental periods, which leads to a modest but more sustained decrease in demand (Newsham and Bowker, 2010). Such control is used on specific high usage days, such as hot summer days, determined in a similar way to CPP event days (Newsham and Bowker, 2010). Two-way communication between the utility and the controlled load is achieved through a control device attached to a particular appliance. Smart meters and IHDs are also useful for providing information on usage for DLC but are not essential (Energy Futures Australia Pty Ltd, 2008). Trials of DLC in Australia include a pilot study by ETSA Utilities in South Australia, which resulted in a 17 percent reduction in peak demand from air conditioners in certain suburbs (ETSA Utilities, 2008). Successive results from the ETSA trial concluded that outcomes were dependant on location, housing type and air-conditioner technology and therefore not necessarily effective. In Queensland, Energex found a 12 percent reduction in peak demand and a 13 percent reduction in overall consumption for residential customers who were provided with appliance timers that were set to switch appliances off during peak hours. Energex also saw a 34 percent reduction in peak demand for customers who combined DLC with a time of use tariff. The Californian State-wide Pilot Project resulted in a 43 percent reduction in demand on critical peak days and a 27 percent reduction on non-peak days. These results, for consumers who were on a combination of time of use tariffs and DLC, were twice the reduction achieved by consumers who did not have DLC technology (NERA Economic Consulting, 2008b). NERA‗s consumer focus groups canvassed participants‘ views on DLC as well as tariff structures like TOU and critical peak pricing. A consistent finding across the focus groups was that participants were much more willing to consider DLC as an alternative to critical peak pricing in specifically targeting peak summer days. Participants saw DLC as a means to reduce electricity consumption that did not require active and constant decision-making. The ‗set and forget‘ option that allowed utilities to control appliances meant DLC did not impact on their lifestyles (NERA Economic Consulting, 2008b). B.4.3. Power factor correction Electricity in an AC (mains) circuit consists of ‗Real power‘, which is measured in watts (W) and is the power that translates into energy and ‗does the work‘, and also ‗Reactive power‘ which is measured in volt-amperes reactive (VAr) and is power that does not transfer energy and so can be considered as wasted. While the current associated with reactive power does no work at the load, conductors, transformers and generators must be sized to carry it. Power factor measures the proportion of power that is being ‗wasted‘ as Reactive power. A load with low power factor draws more current than a load with a high power factor for the same amount of final energy transferred, which requires greater expenditure on wires and other equipment. Because of these costs, utilities will usually charge a higher price to industrial or commercial customers that have a low power factor. Power factor correction (PFC), which is used to increase power factor, can be either passive or active. Passive PFC uses a filter to improve load performance using capacitors or inductors. Because of their high reliability and high power handling capability, passive power factor correctors are normally used in high power line applications (Batarseh and Wei, 2007).

Page 28 An active power factor corrector uses high-frequency switching techniques to shape the waveform of the electricity current (Batarseh and Wei, 2007). Power factor correction programs have been run successfully in Australia, in South Australia ETSA introduced voluntary power factor dependant tariffs that improved system power factor by one percent in 2003 (ETSA Utilities, 2008). ETSA also identified a number of its largest customers that were not compliant with minimum power factor standards and introduced an Excess Incentive Charge from 1st July 2007 (ETSA Utilities, 2008). 120 customers underwent power factor correction and the power factor for this group improved from 80 percent to 93 percent with 24 MVA of saved demand (ETSA Utilities, 2008). It should be noted that there are no ongoing benefits from power factor correction and these savings can only be a one-off.

Page 29 B.5. Regulation B.5.1. Utility incentives In many jurisdictions, governments and regulatory commissions require utilities to engage in energy efficiency and demand management (DM) projects. In the United States, this approach has contributed significantly to successful energy efficiency outcomes and the scope for substantial outcomes in other places is high. Utility incentives seek to address the barriers that have, in the past, limited the implementation of DM, namely the financial incentive to encourage consumption and the costs involved with the implementing capital- intensive infrastructure projects. Three areas addressed by different techniques are: 1) allowing utilities to recover the costs of implementing DM programs; 2) dealing with the problem of decreased revenue from efficiency improvements; and 3) providing opportunities for shareholder earnings linked to the performance of energy efficiency programs to encourage management action. Cost recovery is most commonly achieved through including charges on consumer bills such as system benefit charges. The problem of lost sales revenue can be addressed through ‘rate decoupling‘ of profit from sales volume, while enabling the utility to recover agreed-upon fixed costs (Kushler et al., 2006). In Victoria‘s deregulated energy system, where there are no ‗utilities‘ but rather disaggregated generators, distributors and retailers, these methods apply specifically to distributors. As distributors do not deal directly with customers, their applicability may be limited under the current regime. B.5.1.1. Rate decoupling Rate decoupling addresses the incentive utilities have to maximise revenue through increasing consumption over promoting efficiency and the revenue ‗losses‘ experienced through implementing DM. By ‗decoupling‘ the profit a utility earns from its sales, the utility has greater incentive to pursue efficiency measures and DM. Decoupling is achieved through annual rate-making adjustments that ensure utilities collect an agreed-upon level of revenue independent of actual sales (Eto et al., 1997). Network economic regulation can broadly be divided into price cap and revenue cap forms: Under a price cap, network businesses (i.e. transmission and distribution) are subject to a maximum price per unit of electricity that is in place for a specified period. This means that the network business‘ revenue will increase where more units of electricity are sold. Businesses are encouraged to increase consumption and revenue for the reason that the costs incurred by network businesses are generally comprised of large capital costs and relatively low operating costs. This means that the marginal revenue from each additional unit of energy sold will be larger than the marginal cost of supplying it and so can deliver additional profit to the network businesses (Institute for Sustainable Futures and Regulatory Assistance Project, 2008). Under a revenue cap, the total revenue a utility is allowed to earn is fixed at the beginning of the regulatory period. With this form of regulation, selling more units of electricity does not lead to greater revenue, but can increase costs. To remain profitable and also stay within the revenue cap, the network business has the incentive to reduce the unit price of electricity by reducing costs. This has the effect of encouraging cost-effective efficiency measures, particularly as an alternative to supply side solutions and also breaks the connection between higher sales and higher profit that acts as a disincentive to DM (Institute for Sustainable Futures and Regulatory Assistance Project, 2008). Page 30 The Australian Energy Market Commission (AEMC) in a recent review of DM methodologies favoured price cap regulation over revenue cap regulation for distribution companies (AEMC, 2009a). The AEMC prefers the price cap as this method emulates the competitive market where prices reflect the marginal cost of production (AEMC, 2009a). The AEMC recognises that this ability to set the ―right‖ or market prices for efficient consumption through Time-of- use or Real-time pricing is dependent on the roll-out of appropriate infrastructure in the form of smart meters and In-Home Displays (Section B.4.1). To address the deficiency of the price cap in regards to discouraging demand management the Australian Energy Regulator (AER) has introduced a ‗foregone revenue component‘ to its Demand Management Incentive Scheme (DMIS). B.5.1.2. New South Wales D-Factor Another regulatory tool that can address the issue of lost revenue and which has recently been used in Australia is the NSW ―D-factor‖, which was introduced in 2004 after the revenue cap in NSW was replaced by a price cap. The D-Factor allows distributors to increase their prices to recover the cost of undertaking DM, up to the value of savings made in avoided network costs. Distributors can also recover revenue losses arising from any decrease in energy sales (Institute for Sustainable Futures and Regulatory Assistance Project, 2008). Table 3 below shows the DM projects undertaken by each distributor in NSW from 2004/05 to 2006/07 along with the implementation costs and avoided distribution costs from each project. Table 3 Demand management program costs and avoided distribution costs ($ million), source: (IPART, 2008) DNSP Number of Actual program Avoided Foregone programs cost distribution cost revenue (net present value) EnergyAustralia 2004/05 10 2.163 5.579 0.857 2005/06 17 2.369 6.045 1.177 2006/07 17 0.788 5.829 1.605 Integral Energy 2004/05 6 0.234 4.411 0.155 2005/06 7 0.304 8.072 0.287 2006/07 9 0.486 13.339 0.583 Country Energy 2004/05 - - - - 2005/06 1 0.108 0.118 0.014 2006/07 1 0.118 0.142 0.024 The DM projects undertaken since the introduction of the D-factor have allowed some planned capital investment to be deferred and so created cost savings in the form of avoided distribution costs. The avoided/deferred network costs averaged 6.5 times of the distributors‘ DM spending over the period. EnergyAustralia estimated that the DM measures implemented delivered a reduction in peak demand of 64 MegaVolt Amperes (MVA) in the three years to 2006/07. The annual peak demand reduction achieved by Integral Energy‘s DM programs were 31 MVA (IPART, 2008). B.5.1.3. Systems benefit charges A systems benefit charge (SBC) allows distribution companies to recover the costs of implementing DM projects. These charges are calculated per kilowatt-hour (kWh) of usage and are paid by ratepayers on their bills. They were developed after industry deregulation led Page 31 to the phasing out of regulation-based DM that was applicable to integrated utilities. SBCs are designed to fund energy efficiency programs and renewable energy programs, as well as programs to assist low-income families and other public benefit activities (Harrington et al., 2007). A SBC will not promote energy efficiency itself but provides a major source of funding for various DM programs. The recipient of the funds raised is typically the one who implemented DM activities. Where energy retailers or network businesses are the recipients, they are able to carry out energy efficiency activities in a way that ensures they are profitable, or at least revenue neutral (Energy Futures Australia Pty Ltd, 2000). The SBC rate is usually set based on historic utility DM energy efficiency spending. Studies from the United States have found that the funds collected by SBCs have been less per annum than what had been spent on efficiency by previously integrated utilities, which traditionally had a stronger regulatory mandate to pursue energy efficiency (Harrington et al., 2007). Public system benefits charges have attracted criticism as they increase the price of electricity for all customers. This has been considered as going against one of the purposes of industry and market reform and also raises equity concerns. A price increase could also impact on socially disadvantaged groups who may not benefit from programs funded by the public benefits charge, while still paying higher electricity prices. This can be addressed by specifically targeting programs to disadvantaged groups. For example, in Belgium, the government allocates funds raised by the SBC to social programs to ensure that disadvantaged groups are not disproportionately affected by increased electricity prices (Energy Futures Australia Pty Ltd, 2000). B.5.1.4. Shareholder incentives In addition to providing a means for cost recovery, it is important that regulation provides positive incentives for demand management. Even with decoupling in place, utilities may not necessarily place demand management on an equal footing with supply-side investment. Incentive schemes have become the preferred approach in the United States for addressing this barrier and have proved to be effective (Institute for Sustainable Futures and Regulatory Assistance Project, 2008). Shareholder incentives are a commonly used approach that goes beyond program cost recovery measures. They can be easier to implement than other lost revenue recovery mechanisms and can provide both revenue recovery and also performance incentives for utilities. Various approaches that have been used in the United States include (Kushler et al., 2006) & (Cappers et al., 2009):  Cost Capitalisation: The utility is provided with an opportunity to earn a rate of return on DM investment equal to other capital investments. Authorised expenditures are capitalised and the utility earns a return from them. Several states in the US that allowed capitalisation for energy efficiency have offered a bonus or premium rate of return on these investments.  Performance Target Incentive Mechanism: For meeting efficiency related performance goals such as a savings target, the utility receives specific financial rewards and may be financially penalised for not meeting targets. The utility may only qualify to receive the incentive if it achieves a minimum level of the proposed savings target and further payments may be linked to specific levels of performance. This incentive could be applied to energy retailers in a disaggregated energy system.  Utilities can also be rewarded through receiving a proportionate share of the forecasted net resource benefits that their DM programs generate. Shareholder incentives provide senior management at utilities a strong signal to support energy efficiency. For DM programs to succeed, a high degree of management commitment Page 32 is considered a key component. Research from the United States has found that objectives and rewards should be simple, transparent and well-defined and also reward outcomes that are within the control or influence of the business (Kushler et al., 2006). B.5.1.5. Demand Bidding In electricity markets with a wholesale ‗pool‘, electricity generators operate by nominating or ‗bidding‘ price levels at which it is profitable for them to sell electricity into the pool. Demand- side bidding occurs when a consumer nominates a price level above which they are prepared to reduce their demand for electricity, as their profit margins will decrease because of the increased price. The demand-side bidder could be an energy retailer or a large energy consumer buying straight from the pool (Energy Futures Australia Pty Ltd, 2000). In return for making this reduction, the demand-side bidder would receive a financial benefit from their energy retailer. They may also receive payment for being put on standby or shedding load. Other customers also benefit from their actions, as the decrease in demand will mean the wholesale price will not rise as much as it would have (Energy Futures Australia Pty Ltd, 2000). Demand-side bidding does not necessarily promote energy efficiency and the most common outcome is likely to be load shifting. Depending on the strategies adopted by customers, the mechanism could increase or decrease consumer energy efficiency as prices drop. Demand-side bidding has some drawbacks as it adds complexity to trading arrangements and potential bidders could incur high transaction costs associated with managing their bids. Demand reduction is also difficult to meter and it may not be possible to establish a baseline amount against which reductions can be compared (Energy Futures Australia Pty Ltd, 2000). B.5.1.6. Loading Order A regulatory loading order is a tool that can provide a clear signal to the electricity sector that all environmentally beneficial, cost-effective demand-side resources should be deployed before the use of supply-side resources (Institute for Sustainable Futures and Regulatory Assistance Project, 2008). The Energy Action Plan (EAP) adopted in 2003 by the California Public Utilities Commission (CPUC), the California Energy Commission (CEC), and the Consumer Power and Conservation Financing Authority (CPA) envisions a ―loading order‖ of energy resources that will guide decisions made by the agencies jointly and singly. The loading order rules that: 1. Firstly all strategies for increasing conservation and energy efficiency to minimise increases in electricity and natural gas demand should be optimised. 2. The second priority for meeting demand is developing new generation capacity using renewable energy resources and distributed generation. 3. The third priority is meeting demand through support for additional clean, fossil fuel generation. In California these are benchmarked against modern gas-fired plants (Harrington et al., 2007).

The Australian energy industry has been disaggregated and so in Victoria there are no utilities as in California. The separation of generators, distributors and retailers means that there are no entities to who all stages of the loading order could apply. It would be difficult to implement a loading order and its introduction in Australia is unlikely, however the principle of pursuing energy efficiency and demand management, followed by investment in renewable energy before fossil fuel based supply side solutions are pursued, can provide a useful policy guidance tool for government in moving towards a low-carbon society.

Page 33 B.5.2. Efficiency Energy-efficiency standards are regulations that prescribe the energy performance of products (i.e. appliances, fittings, etc…), and can also prohibit the sale of certain products that are considered too inefficient (Wiel and McMahon, 2003). Well designed standards can lead to large energy savings in a cost effective manner and the resulting energy savings are comparatively simple to quantify, and readily verified. One advantage of standards is that they require a change in the behaviour of a manageable number of manufacturers instead of the entire public (Wiel and McMahon, 2003). Standards can eliminate the least efficient models on the market and also provide incentives for manufacturers to exceed standards to gain competitive advantage. Labels that provide information to consumers and also stimulate manufacturer innovation are integral to a standards scheme (Wiel and McMahon, 2003). There are three types of energy-efficiency standards:  Prescriptive standards— these require that a particular feature or device is installed in all new products;  Minimum energy-performance standards (MEPS)— prescribe minimum efficiencies or maximum energy consumption that manufacturers must achieve in individual products; and  Class-average standards—specify the average efficiency of a manufactured product which allows manufacturers to achieve an overall target with a mix of higher and lower efficiency products. Deciding whether labels or standards should be legally binding is one aspect of designing a scheme. Regulated energy efficiency is able to capture efficiency benefits that cannot be provided by the market alone (Vine et al., 2003). Enforcing efficiency means all parties are aware of the requirements and also ensures that a minimum level of performance is achieved. However, this regulatory approach can only lead to moderate results as compliance levels need to be relatively easy to achieve to gain widespread industry support (Lee and Yik, 2004). For this reason, a regulatory approach is most effective for setting MEPS that eliminate the least efficient models from the market (Wiel and McMahon, 2003). Voluntary agreements can provide flexibility to industry in choosing how they reach targets and also allow a more effective dialogue between industry and policy makers (Lee and Yik, 2004). Where manufacturers have information about technologies and costs that the regulating authority lacks, it can be difficult to impose mandated standards on the industry that are efficient. This scenario of information asymmetry can be better addressed by a voluntary scheme (Menanteau, 2003). The voluntary approach also reduces enforcement costs and can avoid duplicated private effort (Wu and Babcock, 1999). Firms have an incentive to negotiate voluntary agreements to avoid the imposition of regulatory measures. This means that for the agreements to be successful, the possibility of regulatory measures should remain a realistic threat (Menanteau, 2003). To be successful, voluntary programs need this strong statutory base and also measurable environmental objective and substantial financial incentives (Wu and Babcock, 1999). An analysis by the Allen Consulting Group illustrates the relationship between mandatory and voluntary standards (Allen Consulting Group, 2008). A combination of regulatory and voluntary instruments is seen as the most effective strategy. Regulation is used to create a baseline level and then a voluntary scheme, using eco-labelling, providing incentives to achieve levels above the minimum (Wiel and McMahon, 2003). The use of rebates to encourage consumer take-up can also play a part in moving the market towards higher efficiency by lowering the implementation costs of new technology (Lee and Yik, 2004).

Page 34 B.5.2.1. Mandated minimum efficiency standards Minimum energy performance standards (MEPS) were introduced in Japan for refrigerators and room air-conditioners and then subsequently expanded to include fluorescent lamps, televisions, copying machines, computers and magnetic disk units. In 1998, the ‗Top Runner Programme‘ required all new products (including imports) to meet the efficiency level of most efficient product in the class (Geller et al., 2006). In the United States, negotiations between manufacturers and efficiency advocates led to laws for refrigerators, air conditioners, clothes washers, and other appliances which were then extended to motors, heating and cooling equipment used in commercial buildings and some types of lighting products. By 2000 these standards had cut national electricity use by 88 TWh or 2.5 percent (Geller et al., 2006). B.5.2.2. Voluntary efficiency standards In the United States, the EPA's ‗Green Lights‘ and ‗Energy Star Office Products‘ programs encourage the adoption of cost-effective energy-efficient technologies that have low rates of market adoption. The Energy Stars product labelling program informs US consumers of appliances that are energy efficient. The label exists for a wide range of products, including personal computers and other types of office equipment, kitchen and laundry appliances, air conditioners and furnaces, windows, and lighting devices. It is estimated that the program in aggregate has resulted in about 104 TWh of electricity savings as of 2002 (Geller et al., 2006). Under Green Lights, EPA enters into voluntary memoranda of understanding (MOUs) with for-profit firms and not-for-profit organisations for the implementation of energy-saving lighting improvements. The program addresses the problem of market failure due to limited information that impairs organisational decision making (Howarth et al., 2000).

Page 35 B.6. Behaviour change Regulatory and pricing mechanisms form part of wider behaviour change strategies that incorporate public awareness and engagement campaigns. The behavioural assumption that underlies many different mechanisms, such as pricing, is the rational economic model that suggests individuals look to maximise expected benefits to themselves from their actions. The use of financial incentives therefore provides a way to motivate individuals driven by this self-interest. Psychological and sociological research points out that behaviour is influenced by a variety of social, political and cultural factors such as norms, habits and technology, which add complexity to decision-making and requires the need for more sophisticated behaviour change mechanisms. Mechanisms to encourage the uptake of new behaviour include persuasion and information provision through labelling and advertising, as well as more sophisticated trial and error based means such as participatory problem-solving and community based social marketing. B.6.1. Influences on behaviour B.6.1.1. The rational economic model of behaviour The basic tenet of the rational economic model is that individuals act to maximise the expected benefits to themselves (Jackson, 2005). Behaviour therefore consists of making deliberate choices based on factors such as income, personal tastes and available products. When applied to energy efficiency, the rational-economic model attempts to persuade the public to perform energy conservation where it is in their interests financially (Costanzo et al., 1986). For example, long-life energy-saving lights can be more cost-effective over their life than multiple incandescent bulbs. This is often coupled with government rebates or product- swap schemes to cut the upfront cost, thus reducing a barrier to uptake. To make decisions to maximise utility, consumers require market information. Energy conservation has traditionally been framed as being of ‗information deficit‘, with the belief that more information is the key to public involvement and action and the assumption that a better-informed public will naturally change their behaviour (Owens, 2000). The rational- economic model is considered intuitively reasonable, but information campaigns have not always been successful in bringing about behaviour change. This outcome indicates that the model does not address all the barriers to action (Owens, 2000). The rational-economic model has been critiqued on the grounds that the assumption of rationality oversimplifies the complexity of individual decision making (Costanzo et al., 1986). Individuals do not make decisions in isolation and social interaction and norms play a part in how individuals create identity and make decisions. Problems are framed in particular contexts, which impose personal and institutional constraints on decisions (Owens, 2000). It has also been argued that people are simply not capable of processing all the cognitive information required for rational choices and so fall back on habitual behaviour, often guided by emotional biases (Jackson, 2005). Energy consumption decisions are relatively low in complexity and involvement and so do not require a lot of cognitive effort, which encourages automated behaviour (Marechal, 2009). It has been found that even where new behaviour carries substantial benefits to individuals, consumers are so ‗locked in‘ to consumption that even after forming the intention to change behaviour, this will not occur because it contradicts an existing habit (Marechal, 2009). Habits develop where there is repetition of action and also stability of context or environment. Disrupting unsustainable habits is an important initial step in behaviour change and it requires change in contextual cues and also

Page 36 time and repetition. Incentives must specifically address the short term rewards and the social and structural influences that shape and maintain habits (Marechal, 2009). B.6.1.2. Social-psychological factors and models Behaviour is influenced by a variety of social, political and cultural factors such as norms, habits and technology which shape and constrain individual choices. These are influenced by the price of products, awareness of issues, trust in the provider of information and commitment to change (Owens and Driffill, 2008). Using a psychological framework to understand environmental behaviour within a social context, researchers have identified three key factors that can be categorised as: the situational circumstances in which individuals are placed (including socio-demographic situation), the socio-environmental values individuals hold, and attitudes towards specific behaviours (Barr and Gilg, 2006). Situational circumstances refer to the social composition of groups, defined by demographics, disposable income, home ownership, structural characteristics such as recycling provision in the community and situational factors such as knowledge of environmental issues, and relevant technologies within the home (Barr and Gilg, 2006). Models suggest that pro-environmental behaviour arises from quite specific value orientations. Values regarding nature, such as biocentrism (viewing humans and nature as equal) and anthropocentrism (viewing humans as dominant over nature), were found to be clear indicators of behaviour, with bio-centric values being held by those who identified as committed environmentalists and anthropocentric and techno-centric values held by non- environmentalists (Barr and Gilg, 2006). As well as values regarding nature, wider social values can play a role in distinguishing between groups of environmental actors. Using a spectrum that ranged from ‗altruism–egoism‘ and ‗openness to change–conservatism‘, it was found that those most likely to undertake environmental actions were ‗altruists‘ and ‗open to change‘ (Barr and Gilg, 2006). While ecological values can have a significant impact on environmental behaviour, they too must be put into a wider context. It is difficult to distinguish values or attitude from contextual factors (such as social exclusion), which are an important antecedent to attitudes (Jackson, 2005). Values will also vary within an individual according to different contexts and situations. There has also been an observed attitude-behaviour gap in studies of environmental actions, with reasons ranging from social context to the influence of habitual behaviour (Jackson, 2005). In regards to attitudes regarding specific environmental behaviour, intrinsic motivation and personal satisfaction are considered important in achieving positive outcomes. Successful outcomes have been found where individuals obtain a sense of inner satisfaction from their actions and also where they believe their actions will result in tangible positive impacts on society and the environment. Individuals who believe they can make a difference, and also that they bear some responsibility for environmental problems, are more likely to be engaged in environmental practices (Barr and Gilg, 2006). B.6.2. Strategies for behaviour change While consumer choices are influenced by a vast variety of factors, it has been found that there are only a relatively limited number of avenues to influence behaviour change. Kaplan (2000) makes a distinction between three different understandings of behavioural change: 1) telling people what to do, 2) asking them what they want to do and 3) helping people understand the issues and inviting them to explore possible solutions. These concepts are not dissimilar to Arnstein‘s ‗ladder of participation‘, which considers eight rungs of participation, grouped as non-participation, tokenism and citizen power (Arnstein, 1969). Collins and Ison (2006) urge us to ‗jump off Arnstein‘s ladder‘ and place more emphasis on Page 37 social learning. In the following sub-sections, we consider four models of participation: information, consultation, participation and social learning. B.6.2.1. Information Many public conservation programs have taken the form of large-scale information campaigns that are directed towards the voluntary conservation of energy by the general public (Crossley, 1979). These actions are designed to increase awareness of energy use, promote the need to reduce energy use and demonstrate ways that energy can be saved (Crossley, 1979). These programs have relied on the rational-economic model and the attitude model, which assumes that conservation behaviour will follow automatically from favourable attitudes toward conservation (Costanzo et al., 1986). In the past, conservation programs have focused on the attitude model, using costly advertising campaigns designed to create favourable attitudes toward conservation (Costanzo et al., 1986). The success of persuasion campaigns depend on the credibility of the source, the persuasiveness of the message and also the responsiveness of the audience (Jackson, 2005). Campaigns have been found to be successful where the message is direct and relevant to the audience and also emotional and imaginative appeal. Good campaigns also feature identifying ‗retrieval cues‘ that can help people recollect the message, and also use visible commitment mechanisms, such as bumper stickers, badges or loyalty schemes (Jackson, 2005). Successful public awareness campaigns that have run in Australia include the ‗Quit Smoking‘ campaign, and for water efficiency, the ‗Don‘t be a Wally with Water‘ program. In the field of energy efficiency, the ‗Black Balloons‘ campaign is a recent Victorian example (Langford et al., 2008). Awareness campaigns focus on establishing ‗responsible‘ behaviour among the public. It has been found that the ‗top-down‘ provision of information commonly used is not always capable of addressing the attitudes and values underlying behaviour and the imposition of more information on consumers, particularly in a modern information intensive society, may simply reinforce a sense of helplessness about the situation (Jackson, 2005). Approaches that seek to encourage ‗responsible‘ behaviour need to be complemented by programs that create the circumstances for ‗response-ability‘ (Fisher, 2006), or policies and programs that engage the public to put new behaviours into action, such as incentive and rebate schemes. Information persuasion campaigns are useful but that they should be part of a wider strategy (Owens and Driffill, 2008). B.6.2.2. Consultation and participation Community-based social marketing has emerged as an alternative to information-intensive campaigns, with the recognition that while information campaigns can be effective in creating public awareness, they are limited in their ability to foster behaviour change (McKenzie-Mohr, 2000b). Community-based social marketing aims to bring people in a community together and can be a powerful tool for policy makers to use to encourage pro-environmental behaviours (Martiskainen, 2007). Community-based social marketing is composed of four steps: uncovering barriers to behaviours and then, based upon this information, selecting which behaviour to promote; designing a program to overcome the barriers to the selected behaviour; piloting the program; and then evaluating it once it is broadly implemented. The first step is to identify a specific behaviour and the various barriers it faces. Barriers can be either internal, such as knowledge, skill or attitude, or external, such as a technology or institutional barriers (McKenzie-Mohr, 2000b). One specific behaviour is targeted often within a specific social group (McKenzie-Mohr, 2000b). The method allows for a cost benefit analysis to consider and compare different strategies and identify the most efficient barrier to Page 38 target (Jackson, 2005). At the design stage, a program is developed which removes as many of the barriers to the selected behaviour as possible (McKenzie-Mohr, 2000a). Possible programs include commitment strategies or incentives which can reinforce people‘s intentions to engage in pro-environmental behaviour, and prompts, visual or an auditory aid that remind people to carry out activities they are usually already receptive to (McKenzie- Mohr, 2000a). Piloting at a small-scale is important, as it allows program designers to test various strategies against one another and to refine strategies before implementation (McKenzie-Mohr, 2000a). Community-based social marketing also stresses the evaluation of implemented program as valuable for improving the strategy and gaining support for future projects (McKenzie-Mohr, 2000a). The participatory problem solving approach can be effective in addressing habitual barriers that stem from social norms and as a result of social expectations. This is because the process takes place in a group environment with communication among those involved in negotiating the change, which can lead to the development of new social norms that can impact habits (Kaplan, 2000). B.6.2.3. Social learning Information and consultation remain two of the most widely used ways of trying to influence attitudes or behaviours, but they are among the least effective (Jackson, 2005). Such methods focus on a transfer of knowledge from those who considered themselves informed to those considered to be uninformed. Under these models, the ‗best‘ strategies are those that are easily generalised and are therefore applicable to the widest audience. Thus, some factors that may lead to the failure of these strategies include a lack of consideration of social contextual factors, as well as a lack of engagement with, and even alienation of, groups being targeted for behaviour change. Alternative models of ‗behaviour change‘ focus on changes in understanding (learning) and changes in practice that result from group (social) processes. ‗Social learning‘ can be considered as a process of concerted action (or performance) that requires a convergence of ideas, agreement on a way to progress among multiple stakeholders and conducive institutional settings (Bommel et al., 2009, Pahl-Wostl et al., 2007). B.6.3. Consumer information B.6.3.1. Appliance Labelling Appliance labelling provides information to consumers about the energy-using performance of products (see also Section B.5.2 on efficiency standards). Traditionally, labelling programs have been developed for products such as refrigerators, freezers, dishwashers and clothes dryers, but are now being used on a wider variety of products and also to provide home energy ratings (Energy Futures Australia Pty Ltd, 2000). Designing an effective and independent energy labelling scheme involves considering a range of technical, social and cultural issues, including how information is presented to consumers, the format of the label and also the credibility of the labelling program sponsor (Wiel and McMahon, 2003). It is important to consider all the stakeholders involved, including manufacturers, retailers and consumers, and endeavouring to motivate all of them into action (Energy Futures Australia Pty Ltd, 2000). A label can provide a single rating or multiple measures of efficiency (Wiel and McMahon, 2003). There are two basic types of energy performance labels: Endorsement labels – these provide an assurance from a reputable body that the product conforms to or exceeds a minimum standard of energy efficiency; Comparison labels – these provide an indication of Page 39 the level of energy efficiency of the product compared with similar products. This can be indicated through an increasing number of ‗stars‘ or through the actual quantity of energy used. Labelling can address barriers to energy efficient behaviour through providing information to consumers in a simple and consistent manner and their visibility encourages consumers to consider energy use as a measure to compare products (Menanteau, 2003). A study conducted in Shanghai found that consumers were prepared to pay more for energy efficiency in products that are used more frequently, which suggests that the effect of the energy label on consumers‘ choice may differ depending on the frequency of product usage (Shen and Saijo, 2009). Energy performance labelling programs also put market pressure on manufacturers to improve the energy efficiency of their products by providing incentives to discontinue poor performing products and can promote differentiation and innovation among manufacturers who wish to gain an edge in new market niches (Menanteau, 2003). Europe‘s appliance labelling scheme was among the first and most successful of its collective efficiency policies. The combination of labelling and the standards that took effect in 1999 reduced the average electricity consumption of new refrigerators and freezers sold in the EU by 27 percent between the early 1990s and 1999. Energy labelling led to a change of the cold appliance market; it has been suggested that this stemmed less from a change in consumer preferences and more from changes in manufacturer marketing strategies and in resulting structure of sales (Menanteau, 2003). The Australian Energy Rating Scheme was launched in 1986 for refrigerators and freezers, and then later included dishwashers, air conditioners, clothes dryers and other appliances (Energy Futures Australia Pty Ltd, 2000). The labels provide comparative information, with an energy efficiency rating from 1 to 6 stars. In 1993, nearly 90 percent of appliance purchasers said they were aware of the energy label and 45 percent said they used the information to compare appliances prior to purchasing. About 42 percent of customers reported energy efficiency or related factors as being the most important consideration in appliance purchasing (Energy Futures Australia Pty Ltd, 2000). B.6.3.2. Consumption information at billing Providing information on energy usage on consumer bills or on the internet can be an alternative to the rollout of In-Home Displays that can provide information and thereby encourage behaviour change among consumers. The use of the bill as the information medium is considered effective, as consumers must read it. The bill also provides the opportunity to translate electricity usage into financial costs, making it more relevant to consumers. Studies find that bill feedback is effective where feedback periods are relatively short and where feedback is comparable to usage in a previous similar period or usage by similar households (Energy Futures Australia Pty Ltd, 2000). Where forms of informative billing have been implemented the indications are that consumers do think about their electricity consumption and behaviour change has been observed, particularly in the areas of space heating, lighting and water use. However, consumption information on bills by itself will not address many of the barriers to energy efficiency and behavioural change is only likely if the amount of the bill becomes an issue for the customer. To achieve the broader goal of behaviour change, billing can be part of a wider strategy including awareness and information programs and other social strategies (Energy Futures Australia Pty Ltd, 2000).

Page 40 B.7. Conclusion The fundamental objective of policies and regulation regarding demand management of electricity is to positively influence consumer behaviour in regard to their energy usage. The four general strategies of pricing, smart operating systems, regulation and behaviour change should be seen as complementary in this objective. An effective program to engage the public will incorporate methods and techniques from all four strategies which depend on each other; for example, time-of-use pricing depends on the rollout of smart meters and to achieve favourable outcomes this needs to be complemented by effective social marketing. From the perspective of policy makers, there are three avenues for action that can be identified from the techniques reviewed: 1) programs targeted at the electricity industry, including generators and distributors; 2) programs targeted at manufacturers of energy using products; and 3) programs that are targeted at the public, including industry, businesses and households as energy consumers. The major purpose behind the utility incentives assessed is to encourage electricity distributors to pursue DM programs as an alternative to supply-side solutions. The principle behind techniques such as decoupling, benefits charges and shareholder incentives is to address the major financial barriers inhibiting DM, namely cost recovery of the costs of DM programs, compensating for ‗lost revenue‘ resulting from efficiency improvements and providing an opportunity for shareholder earnings from DM. The selection of particular techniques will depend on context, but the basic principles of cost recovery and an incentive structure which puts demand management on an equal footing with supply-side investment are necessary to encourage industry action. Strategies that address the financial barriers to DM should be complemented by conclusions from behaviour change literature to address barriers related to bounded rationality and habitual behaviour among management. The use of a strong regulatory tool, such as a loading order, can provide a clear signal to industry that targets some of these behavioural barriers. Manufacturers should be specifically targeted through energy-efficiency standards and regulations. A well articulated mix of regulatory and voluntary instruments can remove cost- ineffective, energy-wasting products from the marketplace and stimulate the development of cost-effective, energy efficient technology. Regulation is used to create a baseline or minimum performance level, and then a voluntary scheme, using eco-labelling, provides an incentive to achieve a standard above the minimum and shift the market toward higher energy efficiency. Successful voluntary programs must also have a statutory base, a clear and measurable environmental objective, and substantial financial incentive. The regulatory threat must be permanent and credible to encourage companies to stimulate improvements in energy efficiency. An efficiency standards policy should also be partnered with an effective labelling scheme and also some form of rebate or energy saving certificate scheme. Labelling addresses the barrier of information deficit in choosing appliances and an effective rebate scheme can address the financial barriers to changing appliances as well as be part of a wider social marketing push to address behaviour change. A pricing structure that reflects the wholesale cost of electricity more accurately is a key element in encouraging demand management among consumers. Time of use and real-time pricing can reduce load spikes and peak usage, which can reduce the average wholesale price of electricity. While the cost of implementing real-time pricing, through the roll out of smart meters, is significant, the potential gains are considered to be many times the costs. It has been estimated that one-half of the possible total surplus gain could result from putting only one-third of all users on real-time pricing. The implementation of a voluntary and relatively simplified TOU for householders and small business as an option in a suite of Page 41 market offerings that retailers can offer means consumers who could benefit from TOU can do so. A broad range of market offerings can also include voluntary tariffs that encourage power factor correction and demand side bidding for industry as well as CPP tariffs. For distribution companies, remote direct load control of air-conditioners and other energy intensive equipment can be a relatively easy and ‗painless‘ way to reduce household consumption that can even be done independently of a smart meter rollout. In the introduction of time-variable pricing, regulators should ensure that issues of social equity are addressed through providing options for low-income households to obtain tariffs that do not disadvantage them further. The implementation of time-variable pricing is dependent on the rollout of smart meters, the cost of which could be justified on the avoided meter costs and business efficiencies alone. The benefit of smart meters to consumers in providing different tariff products, and also as a conduit for more detailed feedback on consumption, which can both lead to lower electricity costs, means that in principle the short term cost associated with smart meters can be justified. While time-varying pricing programs have been effective in load shifting, which can reduce costs, they are not very effective at reducing overall energy use. Smart meters can enable greater reductions in energy use through their ability to allow more detailed feedback on consumption. This can be achieved through In-Home Displays, and where these prove costly, through information provided on bills and also via the internet. While feedback is essential in getting the most out of a smart meter rollout, In-Home Displays may not be, if similar results can be achieved more cost effectively. The analysis of socio-psychological models of behaviour indicate that pricing and also consumer incentives schemes like rebates and energy saving certificate (ESC) schemes, while effective, are limited to the degree that consumption behaviour is not necessarily always driven by rational decision-making. These techniques can be improved by incorporating the lessons from more sophisticated behaviour models that consider the variety of social, political and cultural factors and contexts such as cultural norms, routine habits and technology, which shape and constrain people‘s choices and options. Effective schemes must combine information provision with techniques that address specific contextual barriers and also seek to break habitual behaviour through social and participatory learning.

Page 42 PART C. THE VICTORIAN CONTEXT

C.1. Summary In implementing demand management in the State of Victoria, it is important to understand the structure of the electricity industry, the regulation of this industry and the institutional arrangements that enhance or constrain demand management and energy efficiency. These factors are paramount in determining whether demand management and efficiency measures that have been successful overseas would succeed in the local context. There is a high degree of institutional complexity in the ‗Victorian electricity managing system‘ that is partly due to the disaggregation of electricity industry, and also the formation of the National Electricity Market. This means that demand-side regulation that has worked in vertically integrated electricity markets would not work in this environment, as each component of the market does not have the incentive to reduce demand. The complexity of the situation is exacerbated by the lack of political will regarding a comprehensive response to climate change and the need to establish a transition pathway to a post-carbon society that encompasses demand management. This political will can be identified as a key factor in the success of jurisdictions such as California, but is sorely lacking in Australia. The current electricity managing system is not fit for the purpose of dealing with climate change by reducing electricity use, and with the postponement of an Emissions Trading Scheme, there is little to drive a reduction in greenhouse gas emissions. This has meant that Victoria is left with a piecemeal approach, comprised of isolated programs at State and Federal level that look to overcome barriers and market failures; however, the Victorian Government‘s Climate Change White Paper is a step in the right direction.

Page 43 C.2. The Victorian electricity situation Considering the Victorian electricity situation systemically (i.e. looking at the whole system) improves understanding of some of the diverse stakeholder interests relating to the economic, social and environmental aspects of electricity supply. This approach recognises that each stakeholder holds a partial perspective on the situation and that by piecing these together, a systemic understanding of the situation can be built (Ison, 2008). This is useful for identifying unintended consequences and counterintuitive effects, which result from interconnectedness between different parts of the system. Piecing together a systemic understanding of the Victorian electricity situation requires a review of the history of the situation, including industry reform and critical events, as well as an assessment of institutional arrangements at the local, regional, state, national and international levels. These range from international efforts to curb the emission of greenhouse gases, to local initiatives to reduce the carbon footprint of local communities. C.2.1. History of economic reform in the Victorian electricity sector The generation and supply of electricity in Victoria was under the control of the State Electricity Commission of Victoria (SECV) since 1921 until it was disaggregated in 1993. A brief overview of these reforms is presented in Table 4.

Table 4 Timeline of electricity operation and reforms in Victoria

1921 State Electricity 1982 Reforms 1990 Partial privatisation Commission of Victoria SEC(Amendment) Act, 1982 (SECV) established  State-owned monopoly  Objectives of efficiency,  Loy Yang B partially sold  Supply-driven economy, safety and  4500 jobs cut engineering approach reliability  SECV in debt  Transition to commercially-driven approach

1992 Kennett economic 1994 Further 1998 National Electricity reform disaggregation Market (NEM)  Formation of openly  Market split into five  Wholesale market, competitive market generators, five joining VIC, QLD, NSW,  Disaggregation of SECV distribution / retail ACT and SA. into 3 companies: 1) companies and two generation; 2) transmission companies transmission; and 3)  Incorporated in distribution/retail anticipation of private sale

2002 Full Retail Competition (FRC)  Introduced to residential customers

Page 44 C.2.2. The current Victorian electricity situation A ‗system map‘ of the electricity system in Victoria was produced (Figure 6), showing the organisations that control or influence the system (including industry, government and interest groups), as well as the ‗non-organisations‘ (including policies, programs, projects)

which provide a perspective on the basis by which electricity is managed in Victoria.

Rebate

Appliance Appliance

Whitegoods

Solar Hot Solar

Water Rebate Water

ResourceSmart

Victorian

Gas Hot Gas

Renewable Renewable

and Energyand

Energy Target Energy

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Water Rebate Water

Reporting Act 2007Reporting Act

VEET

Scheme

National GreenhouseNational

Energy

FederalEnergy

Regulation2006

National Framework forNational

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Energy MeterEnergy

Climate

Efficiency OpportunitiesEfficiency

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Federal

Act 2000 Act

Act 1998 Act

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Act 2005 Act

Energy Safe Energy

PROGRAMS PROGRAMS & PROJECTS

Electricity Safety Electricity

Electricity Industry Electricity

Loans

Green

NEM

Market Act 2004 Market Act

Australian EnergyAustralian

(Electricity) Acts (Electricity)

Federal

Renewable EnergyRenewable

Victorian

GreenPaper

Australian Australian

Renewable

Action

Sustainability

Victoria

Carbon Trust Carbon

Climate Change Climate

Northern

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Energy Act 2006 Act Energy

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Alliance forAlliance

Greenhouse

Environment

Equipment Energy Equipment

National National

Strategy on Strategy

Homes Package Homes

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Reduction Scheme Reduction

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Protection

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Act 2007 Act

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Victoria

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Click Click

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Figure 6 the Victorian electricity situation – system map

Page 45 C.3. Stakeholder analysis Participants in the electricity situation in Victoria broadly include industry, government, businesses, individuals and interest groups (as shown in Figure 6). C.3.1. Industry The structure of the Victorian electricity industry is divided into four roles: 1) generation; 2) transmission; 3) distribution; and 4) retail. Figure 7 shows the structure of the industry, as of October 2009. Generators form part of the National Electricity Market (NEM), which connects Victoria, New South Wales, Queensland, South Australia and Tasmania into one electricity grid (Figure 8). Tasmania is connected by BassLink; a submarine cable from Tasmania to Victoria. The NEM is managed by the Australian Energy Market Operator (AEMO).

Loy Yang Snowy Hazelwood TRUenergy IPM Mgt. Co. Hydro Power Australia 2120 MW 1812 MW 1600 MW 1512 MW 1000 MW

Generators Ecogen AGL Valley Pacific Energy Energy Power Hydro Brix Aust. in Victoria* 932 MW 855 MW 300 MW 216 MW 195 MW

Pyrenees SECV Aurora Energy EDL Group Wind Energy Pacific 192 MW 150 MW 94 MW 48 MW 30 MW

Transmission SP AusNet AEMO (Network (Network businesses owner) services)

Distribution SPI United Powercor Jemena Citipower businesses Electricity Energy

Australian Country Energy AGL Power and Click Energy Energy Australia Gas

Momentum Neighbour- Origin Retailers Powerdirect Red Energy Energy hood Energy Energy

Simply Victoria TRUenergy Energy Electricity

Figure 7 Electricity industry structure in Victoria. * Includes generators with a registered Capacity 30 MW or greater by company (Sources: AEMO, 2009, ESC, 2009).

Page 46

Figure 8 the National Electricity Market (NEM)7, (Source: AEMC Annual Report 2009)

A wholesale electricity market, such as that in Australia‘s National Electricity Market (NEM), operates by generators selling electricity to electricity retailers or large commercial customers directly. A feature of wholesale electricity markets is the ‗spot market‘, which relates to the cost of providing an amount of electricity at a particular instant, as electricity cannot be stored in meaningful quantities. This means that when there is high demand for electricity, extra sources of generation need to be brought online. Spot pricing, which depends on the level of electricity demand across the NEM, averaged (median) $25.59 per MW per half-hour period (Figure 9), and $27.30 per MW during peak and $21.57 per MW during off-peak (Figure 10).

7 This map represents the general geographic coverage of the NEM; the NEM actually makes up approximately 80 percent of Australia‘s electricity network infrastructure.

Page 47 60000 33.72%

50000 27.08%

40000

30000 17.42%

20000 8.80%

Number Number of half hours 6.74% 10000 1.97% 2.45% 0.94% 0.29% 0.31% 0.29% 0 $0 to $10 to $20 to $30 to $40 to $50 to $75 to $100 to $150 to $200 to $300+ $10 $20 $30 $40 $50 $75 $100 $ 150 $200 $300 Spot Price Range ($/MWH)

Figure 9 Aggregated electricity market data for Victoria; 2001-2009 (Source: AEMO, 2010).

40000 Off-peak 35000 Peak 30000

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0 $0 to $10 to $20 to $30 to $40 to $50 to $75 to $100 to $150 to $200 to $300+ $10 $20 $30 $40 $50 $75 $100 $ 150 $200 $300 Spot Price Range ($/MWH)

Figure 10 Spot pricing classes for peak (7am to 10pm weekdays) and off-peak (all other times and public holidays); 2001-2009 (Source: AEMO, 2010).

Page 48

However, a very small amount of electricity demand (0.29 percent – about 25 hours of the year) accounts for nearly 18 percent of the total wholesale cost of electricity annually, averaged over 2001 - 2009 (Figure 11).

$0 to $10 0.2%

$200 to $300 $10 to $20 2.4% $300+ 17.5% 10.1% $150 to $200 1.5% $100 to $ 150 $20 to $30 3.3% 21.1%

$75 to $100 6.1% $50 to $75 11.2% $30 to $40 $40 to 15.8% $50 10.7%

Figure 11 Total value of wholesale electricity for each price class; 2001-2009 (Source: AEMO, 2010).

C.3.1.1. Generators The registered capacity of power generation assets in Victoria predominantly comes from thermal-coal generators (6545 MW), followed by gas (1861 MW), hydro (1774 MW), wind (489 MW) and waste gas/biomass (~16 MW) (AEMO, 2009). Of the thermal-coal generators, the four major suppliers are Loy Yang A power station (2120 MW), Hazelwood (1600 MW), Yallourn (1480 MW) and Loy Yang B (1000 MW). While located in New South Wales, the Murray 1 & 2 power stations (1500 MW) that are part of the Snowy Mountains Scheme are allocated to Victoria on the NEM. Snowy Hydro also operates a gas turbine generator in Victoria (312 MW). C.3.1.2. Transmission businesses Electricity transmission involves movement of electricity along high-voltage lines from power stations to distribution networks. Transformers reduce the transmission voltage to allow it to be transmitted to consumers via lower voltage distribution networks (DPI, 2010). In Victoria, the 6,000 kilometre high-voltage transmission network is owned and maintained by SP AusNet and is operated (as part of the National Electricity Market) by the Australian Energy Market Operator (AEMO). Victoria‘s electricity transmission network is interconnected with the other Eastern states through the NEM and electricity can be transported interstate via transmission inter-connectors depending on demand (DPI, 2010). C.3.1.3. Distribution businesses Victoria‘s electricity distribution infrastructure consists of approximately 200,000 kilometres of overhead power lines and underground cables (DPI, 2010). These lower voltage distribution lines are fed by the high voltage transmission network (DPI, 2010). There are five electricity

Page 49 distribution areas in Victoria, three areas encompass Melbourne and the inner suburbs, and two cover the outer suburban areas and regional Victoria (DPI, 2010). CitiPower own and maintain a network in Melbourne's CBD and inner suburbs that covers approximately 157 square kilometres. SP AusNet is responsible for the eastern metropolitan area of Melbourne and eastern Victoria. United Energy Distribution is responsible for homes and businesses in the south-east Melbourne metropolitan area and the Mornington Peninsula. Jemena Electricity Networks supplies electricity to the north-west greater metropolitan region of Melbourne. Powercor Australia is the largest electricity distributor in Victoria and supplies electricity to Melbourne's outer western suburbs and also regional and rural centres in the central and western areas of the state such as Ballarat, Bendigo and Geelong (Switchwise, 2010). Services provided by distribution businesses account for approximately 40 percent of the total bill for electricity customers (ESC, 2006). In the Australia Energy Regulator‘s draft determination for Victorian distributors for the period 2011-2015, there are several findings that are pertinent in understanding the distributors‘ actions specifically regarding demand management. The AER noted that when it came to capital expenditure for reinforcement, distributors over-estimated and underspent in the previous regulatory period, and the estimates for the forthcoming 2011-2015 period were also considerably higher than what had been previously spent. The AER, in its assessment, rejected the distributors‘ estimates as not reasonable and instead relied on historical spending as a guide (AER, 2010). The distributors‘ over-estimation of capital expenditure and historically low spending on demand management and non-network alternatives suggests that there is scope for the implementation of demand management programs and also that institutional barriers exist regarding demand management. In forecasting energy consumption for the forthcoming period, the distributors‘ estimates depict a significant reduction from the long term trend. This forecast reduction in consumption comes despite an estimated increase in peak demand and was also rejected by the AER and the findings of VENCorp (now AEMO) (AER, 2010). The AER finds that the distributors‘ also under-estimated demand in the previous regulatory period and its explanation has bearing on the success of demand management programs. Under a price cap form of regulation, the price of electricity that the distributor can charge is fixed. By under-estimating sales the distributor is able to obtain a regulated price per unit to meet its revenue requirements that is relatively high. Subsequently, when actual sales are made above the estimate, the distributor is able to increase its overall revenue (AER, 2010). This disincentive for demand management under the price cap has been highlighted by the AER and is targeted by demand management techniques such as revenue decoupling which replaces the price cap with a revenue cap (not supported by the AEMC) and where a price cap is in place through revenue recovery mechanisms, such as the ‗foregone revenue component‘ in the AER‘s DMIS for the forthcoming period. Prior to 2009, the Essential Service Commission of Victoria (ESCV) was responsible for price regulation of the distributors and for the 2006-2010 period provided a number of demand management incentives for Victorian distributors. These included an allowance to fund trials of demand management initiatives, as well as permitting funding of non-network alternatives using cost savings from deferred capital expenditure (AER, 2009a). In 2009, the AER took over the role of regulating distributors from the ESCV and it provides incentives for electricity distributors to implement demand management through the Demand Management Incentive Scheme (DMIS) (AER, 2009a). In December 2008, the AER published a proposed DMIS to apply to Victorian distributors for the regulatory control period commencing 1 January 2011 (AER, 2009a).

Page 50

The DMIS comprised two components: 1. A demand management innovation allowance (DMIA), provided as a fixed amount of revenue annually, which allows distributors to recover the costs of demand management initiatives on a use-it-or-lose-it basis (AER, 2009a). 2. A forgone revenue component, which allows the distributor to recover forgone revenue as a result of successful demand management initiatives. The forgone revenue component was designed to mitigate the disincentive to undertake demand management created by a price cap form of control. C.3.1.4. Retailers Thirteen retailers operate in the Victorian market, providing residential and small-business customers with contracts for electricity supply. Electricity retailers are the main point-of- contact for customers. The rate for electricity charged by the retailers includes the wholesale cost of electricity generation, network costs (transmission and distribution), retailing costs and mark-up. In its review of the effectiveness of competition in the Victorian retail electricity market, the AEMC found that there is effective competition and rivalry between retailers, and that entry conditions do not inhibit competition (AEMC, 2007). The AEMC is required to review the effectiveness of competition in the retail supply of electricity in each state and where competition is found to be effective, the jurisdictions are to phase out retail price regulation. The Victorian Government removed retail price regulation on 1 January 2009 and also implemented other recommendations, including the monitoring and publishing of all standing offers on the regulator‘s website (Johnston, 2010). The AEMC report found that customers were far more willing to switch retailers if approached through direct marketing than through individual investigation. This is a result of customer‘s relative lack of interest in energy products, which gives a strong incentive to retailers to actively market their products. This results in ―vigorous‖ marketing campaigns from retailers; and given that there are a dozen or so retailers, could be perceived by customers as intrusive (AEMC, 2008). In a submission to the AEMC Victorian retail competition review, the Consumer Utilities Advocacy Centre (CUAC) highlighted the trend of integration of retailers and generators (termed ―gentailers‖ – examples include AGL or TRU) and the impact this might have on retail competition (CUAC, 2007). C.3.2. Victorian Government With the reform of the Victorian electricity industry, the Victorian Government‘s role has shifted from running the system (in the SECV days), to unbundling and privatising the system. The Victorian Department of Primary Industries (DPI) is responsible for Victoria‘s energy policy, the goals of which are to ensure that the electricity system is safe, reliable, affordable and sustainable (DNRE, 2002). The control that DPI has over electricity policy is somewhat moderated by the disaggregated structure of the electricity industry, as well as the emergence of the Australian Energy Regulator (AER), which operates at a national level. The Essential Services Commission of Victoria (ESCV, www.esc.vic.gov.au) is responsible for administering the Victorian Energy Efficiency Target (VEET) Scheme and the Victorian Renewable Energy Target. Energy Safe Victoria‘s (www.esv.vic.gov.au) role in the electricity Page 51 system is to deal with safety standards and compliance. The Victorian Environmental Protection Agency (www.epa.vic.gov.au) regulates environmental pollution in Victoria. Sustainability Victoria (www.sustainability.vic.gov.au) leads the implementation of energy conservation measures in Victoria. Consumer complaints regarding the electricity system are directed to the Energy and Water Ombudsman of Victoria (EWOV, www.ewov.com.au). C.3.3. Federal Government C.3.3.1. Ministerial Council on Energy The Ministerial Council on Energy (MCE, www.mce.gov.au) was established by the Council of Australian Governments (COAG) in 2001 to implement national energy policy. The MCE comprises one member (typically the energy minister) from each State and Territory, and one Commonwealth member. The MCE developed the policy for the reform of the National Energy Market in December 2003 and set in motion the establishment of the Australian Energy Regulator and the Australian Energy Market Commission (MCE, 2003). The MCE is also directing the national roll-out of smart meters, including brokering an agreement on ‗National Minimum Functionality‘ for smart meters and a consistent national framework. The MCE hosts an energy efficiency working group that is tasked with implementing the National Framework for Energy Efficiency, part of which is the National Partnership Agreement on Energy Efficiency that was signed by COAG in July 2009. C.3.3.2. Australian Energy Regulator The Australian Energy Regulator (AER, www.aer.gov.au), established in 2005, is responsible for regulating the wholesale electricity market (of the NEM) and regulates the economic aspects of electricity transmission and distribution. The AER is part of the Australian Competition and Consumer Commission (ACCC) and is established under the Trade Practices Act 1974 (Cth). The AER enforces the ‗national electricity law‘ and ‗national electricity rules‘ by monitoring the wholesale market and regulating the ‗natural monopoly‘ sectors, including transmission and distribution networks. C.3.3.3. Australian Energy Market Commission The Australian Energy Market Commission (AEMC, www.aemc.gov.au) was established in July 2005 and makes the rules by which the National Electricity Market operates. The AEMC also advises the MCE on strategic and operational matters. The AEMC hosts two advisory panels: 1) the Reliability Panel, which deals with the reliability, safety and security of the electricity system; and 2) the Consumer Advocacy Panel, which provides grants to consumer advocacy groups (see section C.3.4.2 of this report) to conduct research and support policy and decision-making. Under the direction of the MCE, the AEMC conducts regular reviews into competition effectiveness, the setting of price caps, market performance, and system reliability. Special reviews have dealt with such relevant topics as the effectiveness of market frameworks in light of climate change (AEMC, 2009c) and demand-side participation (AEMC, 2009b). From reading the final conclusions of the AEMC in the climate change review (and of other reviews), it is apparent that the agenda of the AEMC is to protect the existing energy market framework and to push for full retail competition across all States participating in the NEM. C.3.3.4. Australian Energy Market Operator

Page 52 The Australian Energy Market Operator (AEMO, www.aemo.com.au), established on 1 July 2009, is 60 percent government and 40 percent industry owned and is responsible for operating the NEM. This includes system operation (i.e. maintaining reliability and security of supply) and operation of the wholesale spot market. AEMO also undertakes infrastructure planning to ensure existing and expected demand is met (DPI, 2010). C.3.4. Supporting and interest groups Groups, networks and associations that support or have interest in the Victoria‘s electricity system can be classified as industry associations, consumer rights groups or environmental groups. The role of these groups is typically to support the rights of those who have a stake in the electricity system and who are affected by decisions made by others in the system. This includes industry representation, in order to reduce the number of contact points for representations to those in charge of the system. This category also includes those affected by decisions, that otherwise have no (or little) voice: including ‗the environment‘ and individual consumers, particularly those with low socio-economic status. C.3.4.1. Industry associations Industry associations represent sectors of industry and try to influence government policy in the interests of their members. It is notable that ‗energy‘ associations typically represent both gas and electricity sectors, which could have consequences for issues that benefit one sector to the detriment of the other (e.g. policies to shift electrical water heating to gas water heating). The Energy Retailers Association of Australia (ERAA) represents gas and electricity retailers in the NEM (www.eraa.com.au). The Energy Supply Association of Australia (ESAA) represents the stationary energy sector (i.e. gas and electricity) across Australia, inclusive of renewable and fossil fuel sources (www.esaa.com.au). The Energy Networks Association (ENA) represents gas and electricity distribution businesses across Australia (www.ena.asn.au). The ENA have an interest in the development of ‗Smart Networks‘. The Electrical Energy Society of Australia (EESA) is a subset of Engineering Australia that encompasses practitioners in generation, transmission, distribution, and retail sectors of the electricity industry across Australia. The EESA conducts professional development activities and lobbying (www.eesa.asn.au). The Energy Users Association of Australia (EUAA) represents larger electricity and gas users across Australia (www.euaa.com.au). The EUAA are interested in climate change and energy efficiency issues, as their members are large consumers of energy. The Energy Efficiency Council (www.eec.org.au) represents the non- residential energy efficiency products and services industry. C.3.4.2. Consumer rights groups The role of consumer rights groups in the Victorian electricity system is to provide legal advice to consumers, as well as to make submissions on electricity policy, especially policies that will have an impact on low-income households. Some of the major consumer rights groups active in electricity policy in Victoria are listed as follows. The Consumer Utilities Action Centre (CUAC) specifically represents Victorian consumers on issues of electricity, gas and water policy and regulation (www.cuac.org.au). The CUAC has made a significant contribution to energy policy in Victoria since 2002, corresponding to the period of full retail competition in electricity. The Consumer Action Law Centre (CALC) provides free legal advice on a range of issues, including electricity, particularly to low- income consumers (www.consumeraction.org.au). The Financial and Consumer Rights Council (FCRC) represents practitioners in consumer rights and financial counselling

Page 53 (www.fcrc.org.au). The Victorian Council of Social Service (VCOSS) is the peak body representing independent (non-government) social services in Victoria (www.vcoss.org.au). C.3.4.3. Environmental groups There are numerous environmental groups with an interest in energy policy, mostly focusing on reducing greenhouse gas emissions through renewable energy and energy efficiency. A selection of Victorian-based environmental groups with a significant presence in this field is listed as follows. The Central Victorian Greenhouse Alliance includes local councils, businesses and community groups in Central Victoria and is striving for ‗Zero net emissions by 2020‘ through renewable energy and energy efficiency (www.cvga.org.au). The group Beyond Zero Emissions is an environmental organisation with the goal of 100 percent renewable energy for Australia by 2020, focusing on the social change required to achieve this (beyondzeroemissions.org). Beyond Zero Emissions is also a member of the Zero Emission Network (www.zeroemissionnetwork.org), which is an independent alliance of similar groups. The Environmental Defenders Office (Victoria) is a community legal service that is interested in environmental issues (www.edo.org.au/edovic/). Environment Victoria (www.environmentvictoria.org.au) is running a campaign on ‗Halving Our Emissions‘, which includes a significant push for energy efficiency. EV also released a report in May 2010 that described how Hazelwood power station could be replaced by a combination of new gas turbine power generation and energy efficiency (Environment Victoria, 2010).The Alternative Technology Association are advocates for renewable energy and have campaigns for renewable energy feed-in tariffs, and are interested in the use of smart meters, especially for micro-generation (www.ata.org.au). The Moreland Energy Foundation (www.mefl.com.au) was established by Moreland City Council to continue the work of the Brunswick Electricity Supply Department after the privatisation of electricity meant local council could no longer provide energy supply services. The MEFL is also incorporated in the Northern Alliance for Greenhouse Action (www.naga.org.au), which is a network of northern Melbourne councils that coordinates action on greenhouse gas reduction. Local councils also contribute to energy policy in Victoria. The Municipal Association of Victoria (MAV) represents 70 Victorian councils and is interested in energy efficiency, particularly more efficient street-lighting (www.mav.asn.au). The Victorian Local Government Associate (www.vlga.org.au) also represents 58 councils in this space. Both organisations are part of the ‗Public Lighting Taskforce‘ convened by the Department of Sustainability and Environment.

Page 54 C.4. Policies, Programs and Projects to reduce electricity use C.4.1. The Victorian Energy Saver Incentive Scheme The Victorian Energy Efficiency Targets Act 2007 sets out the Victorian Energy Efficiency Target (VEET), the purpose of which is to ‗promote‘ the reduction of greenhouse gas emissions, encourage the efficient use of electricity and gas and to encourage investment to achieve these purposes. The scheme is administered by the Essential Services Commission of Victoria (ESCV) and is promoted as the ‗Energy Saving Incentive‘. The functions of the ESCV under the Act are to accredit persons to create certificates; monitor and administer the creation, registration, transfer and surrender of certificates; enforce the imposition of energy efficiency shortfall penalties; undertake audits of the creation of certificates by accredited persons and monitor compliance with the Act. The Act ‗provides for the creation and acquisition of energy efficiency certificates‘ and ‗requires surrender of energy efficiency certificates‘. Victorian Energy Efficiency Certificates

(VEECs) are equal to one tonne of abated carbon dioxide equivalent (CO2-e). The certificate is created by the consumer of electricity or gas in respect of whom a prescribed activity is undertaken or an Accredited Person who the consumer has assigned the right to create a certificate. A certificate must be created within 6 months after the end of the year in which the prescribed activity has been undertaken. A certificate must be created in an electronic form specified in the ESCV guidelines and must include a unique identification code, the name of the consumer, the date and details of the prescribed activity and the date on which the certificate was created. A certificate is not valid until it has been registered by the ESCV and the relevant registration fee of $1 per VEEC has been paid. If the ESCV decides that a certificate is eligible for registration it creates an entry for the certificate in the register of energy efficiency certificates and records the person who created the certificate as the owner of the certificate. A relevant entity is an energy retailer that purchases electricity or gas from NEMMCO or a gas producer and on sells it to retail customers. A retailer is classified as a relevant entity if it has 5000 or more customers in Victoria. Relevant entities can perform prescribed actions and generate VEECs themselves or they can transfer them from accredited persons through the Commission. While the Commission regulates and verifies transfers it does not regulate any consideration paid for VEECs. A relevant entity has a liability to surrender a number of VEECs each year. The number is calculated using the greenhouse gas reduction rate for electricity (RE) and a greenhouse gas reduction rate for gas (RG) that is provided by the VEET Act. To determine their VEET liability relevant entities determine their total electricity and or gas acquisitions for the year and multiply it by the relevant RE or RG. Relevant entities must surrender Victorian energy efficiency certificates (VEECs) to the Commission annually between 1 January and 30 April for the previous calendar year in proportion to their energy purchases. Where a relevant entity surrenders insufficient VEECs to meet its liability the Commission may issue an energy efficiency shortfall penalty. The shortfall penalty rate for 2009 is $40. An accredited person is an individual or organisation who is able to create eligible Victorian energy efficiency certificates (VEECs) through the undertaking of the prescribed activities listed. At the time of the activity the consumer assigns their right to create VEECs to the accredited person.

Page 55 An accredited person must ensure that prescribed activities are undertaken in accordance with the requirements of the ESI scheme and that the VEECs created are in accordance with the VEET legislation. They must also explain to consumers the implications of assigning their right to create VEECs, collect and retain all necessary information to support their VEEC claims. Any person or organisation can apply to be an accredited person under the scheme. Examples of typical accredited persons are appliance retailers and installers or energy service providers. To become an accredited person, the person or organisation must submit an application with the Commission together with an accreditation fee of $500. Successful applicants are listed in the Commission‘s register published on the website. Accredited persons are also subject to periodic audits by the Commission to provide assurance that VEECs have been created in accordance with the VEET legislation and all obligations have been met. An activity can be designated a prescribed activity if the activity will result in a reduction in greenhouse gas emissions that would not otherwise have occurred through modifying or replacing an appliance or any equipment to reduce consumption of electricity or gas, emit relatively lower The Commission maintains a Register of products that are eligible for the ESI including such as water and space heating products, thermally efficient windows and high efficiency refrigerators and freezers. To claim VEECs for the installation of a product it must be listed in the ESCV register. Accredited persons are required to apply to the Commission for approval before installing insulation products, window retrofit products, weather sealing products, lighting products or low flow shower roses to generate VEECs. In the first phase of the VEET scheme, running from 1 January 2009 to 31 December 2011, there are six activities that are ‗prescribed‘, that is; they are recognised as suitable measures for meeting the VEET target. They include: 1. Replacement of low efficiency water heaters with high efficiency models 2. Replacement of low efficiency ducted heating with high efficiency products 3. Installation of insulation, window seals and energy-saving windows 4. Replacement of low efficiency lighting with high efficiency products 5. Upgrades to low-flow shower roses 6. Purchase of high efficiency refrigerators and/or destruction of pre-1996 models

The monthly registration of VEECs has appeared to have peaked in October 2009, although ‗spikes‘ of activity can be observed in June, September, December and March, probably correlated with lodgement dates for quarterly business activity statements (Figure 12). The scheme is well on-track to meet the 2011 target (Figure 13).

Page 56 900

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0 Certificates Certificates Registered Monthly (thousands)

Figure 12 Victorian Energy Efficiency Certificates (VEECs) registered per month (Source: www.esc.vic.gov.au/public/VEET/Registers.htm, without owner history; accessed 13 August 2010).

2011 Target 8

6 2010 Target 5

Certificates Registered 4 or surrendered

3 2009 Target 2

Cumulative Certificates Cumulative Certificates Registered (millions) 1

09 10 10 11 11 11 09 09 09 10 10 11

09 10 11 09 10 11

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Feb Feb Feb

Dec Aug Nov Aug Sep Nov Aug Sep Nov Sep Dec Dec

May May May

Figure 13 Cumulative VEECs registered and cumulative annual targets (Source: www.esc.vic.gov.au/public/VEET/Registers.htm, without owner history; accessed 13 August 2010).

Page 57 C.4.2. Advanced metering infrastructure rollout Victoria is staging a rollout of Advanced Metering Infrastructure (AMI), which includes interval meters that are capable of providing real-time electricity demand data to consumers and providers (ESC, 2008). In July 2004, the ESCV directed that manually-read interval electricity meters should be installed across the state. In 2005 a DOI and energy industry cost-benefit study considered the addition of two-way communications and other functionalities to the ESCV-mandated interval meters. As a result of this analysis the state government decided that these smart meters would be installed in all residential and small business premises over four years, starting in 2009 (Victorian Auditor-General, 2009). In April 2007 COAG, through the MCE, committed to a national roll-out of electricity smart meters and national cost-benefit report was released in mid-2008 (Victorian Auditor-General, 2009). The Victorian Government had committed to rolling out smart meters prior to the national cost-benefit study (Johnston, 2010) and despite COAG‘s commitment to the development of a national smart meter regulatory framework, other jurisdictions have been more cautious than Victoria with its implementation (Victorian Auditor-General, 2009). In March 2010, the Victorian Energy Minister announced a moratorium on the introduction of time-variable pricing, although the smart meter rollout was to continue as planned. The moratorium was based on equity concerns that the introduction of time-variable pricing and the rollout of smart meters could financially disadvantage low-income households who would bear costs for the rollout of smart meters that are disproportionately high relative to their energy use and also through facing higher prices under time-variable pricing. C.4.3. Victorian Climate Change White Paper The Victorian Government‘s recently released White Paper features several strategies to improve energy efficiency in Victoria. For households, the Government aims to improve the energy efficiency of Victoria‘s existing housing stock to an average 5 Star equivalent energy rating by 2020 through programs such as doubling the target of the Victorian Energy Saver Incentive and expanding the list of eligible energy efficiency activities, the delivery of a retrofit program for energy efficiency upgrades, including support for low-income households and the launch a new website to give households detailed information on opportunities to save energy and obtain Government rebates. The Energy Saver Incentive will also be expanded to allow small businesses to participate. The White Paper also includes a state-wide behaviour change program that will build on the ‗Black Balloons‘ campaign. The behaviour change campaign will encourage individuals to adopt a personal energy savings target, similar to the Target 155 water campaign. C.4.4. Emissions trading The Carbon Pollution Reduction Scheme (CPRS) was the Australian Federal Government‘s proposed strategy to reduce greenhouse gas emissions through economic reform. The CPRS was to introduce a cost on carbon, which is targeted at industries that produce the largest proportion of Australia‘s greenhouse gas emissions, in order to reduce the nation‘s emissions overall. The CPRS Bill was withdrawn and will not be enacted until 2013 at the earliest (Arup, 2010). The proposed CPRS was to cover approximately 75 percent of Australia‘s emissions. The accounting framework was congruent with the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which details the emission sources and sinks, including four gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6); and two classes of gases: hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs) (DCC, 2008). These are quantified based on their global warming Page 58 potential, as some gases produce a stronger greenhouse effect, expressed as carbon dioxide equivalents (CO2-e). Carbon dioxide has a global warming potential of 1 CO2-e, whereas methane has a potential of 21 CO2-e and SF6 has a potential of 23,900 CO2-e. The government proposed a medium-term target of emission reductions of at least 5 percent below 2000 levels by 2020 (DCC, 2008). The CPRS was to utilise a permit system, where emitters would have been required to purchase one permit for every tonne of CO2-e that they produced annually. Emitters that produce more than 25,000 tonnes or more of CO2-e would have had obligations under the CRPS. The amount of permits released would have been defined by the cap on emissions that formed part of the trajectory to the emission reductions, with the caps specified by the government at least five years in advance, extended one year at a time. Permits were to be auctioned; however, some were to be administratively allocated to emissions-intensive trade- exposed (EITE) industries during a ‗transitional phase‘, eventually moving to 100 percent auctioning. Sources of emissions to have been included under the scheme were those that produce ‗scope 1‘ emissions; that is, direct emissions of greenhouse gases. For example, the direct combustion of fossil fuels within the ‗boundary‘ of a ‗facility‘ is a scope 1 emission. Indirect emissions, which were not to be included in the CPRS, are those caused by one organisation, but generated from a source controlled by another company; also referred to as ‗scope 2‘ emissions. For example, car tail-pipe emissions, which are covered under obligations by the fuel supply industry, or purchased electricity, which is covered under obligations by the power supply industry. Scope 3 emissions, not to be included under the CPRS, include any other indirect emissions from external sources. For example, the printing/copier paper that a company purchases has a carbon footprint associated with it, but is not directly attributed to the company‘s use of paper. Fugitive emissions are released during the transport and processing of fossil fuels, as well as from methane from coal beds. Waste emissions arise from solid-waste landfill sites, water waste and incineration of hazardous wastes. These are mostly in the form of methane releases from decaying plant and food matter in solid-waste landfills, which account for approximately 80 percent of emissions in this category (DCC, 2008). The scheme was to provide substantial assistance to households, businesses and polluting industries in the form of tax incentives and free permits. In the transport sector, this was to include a three-year fuel-tax reduction, where for every price increase in fuel due to the CPRS, the government would have reduced fuel-tax on a cent-by-cent basis Initially, EITE industries were to receive assistance in the form of an ‗administrative allocation‘ of free permits. 8 Although the rate of assistance was set to decline at an annual rate, the free permits allocated to EITE industries would have actually increased over the first ten years of the CPRS. In addition, ―strongly affected industries‖ were also to receive support, despite not being trade-exposed. The only ―strongly affected industry‖ is the coal- fired electricity generators, who were to receive a lump-sum of around $3.9 billion from the government prior to commencement of the CPRS in order to maintain energy security.

8 Eligibility extends to EITE industries with at least 2000 t CO2-e per million dollars of revenue receive

90 percent assistance; those with at least 1000 t CO2-e per million dollars of revenue receive 60 percent assistance; or other qualifying routes outlined in the CPRS White Paper.

Page 59 C.4.5. National Strategy on Energy Efficiency The National Strategy on Energy Efficiency was developed by COAG to encourage action on energy efficiency through addressing barriers, improving regulation, promoting technologies and providing households and businesses with incentives, information and skills. The strategy aims to prepare the community for a low carbon economy and the expected introduction of the Carbon Pollution Reduction Scheme (COAG, 2009). For industry and business this includes assisting businesses in making informed choices that improve efficiency through addressing barriers to action, providing businesses with the knowledge, skills and capacity needed for a low carbon economy and encouraging the uptake of distributed generation. Industry is also targeted through the aim of providing skills and training for the transition to a low carbon economy through the development of the National Energy Efficiency Skills Initiative (NEESI) and specifically strengthening national capability in energy auditing and assessment. The strategy also aims to improve the availability of consistent date on energy efficiency and consumption for sectors such as commercial buildings to improve policy, reporting and benchmarking. For consumers the strategy aims to provide advice and education to ensure access to clear and consistent information on products and services that can improve efficiency and through means such as nationally consistent communication campaigns and the promotion of technologies and measures (COAG, 2009). The second theme addresses barriers in three areas. The first is electricity markets where the focus is on encouraging the use of demand side measures such as peak load shifting and cost-reflective pricing and also the use of distributed generation. The second area is appliances and equipment where the strategy will establish national legislation to expand the current Minimum Energy Performance Standards (MEPS) and labelling program and also introduce Greenhouse and Energy Minimum Standards (GEMS). Other specific measures are the phase-out of lighting products like incandescent globes and also the phase-out of inefficient hot water systems. The third is transport where the strategy includes measures to improve the fuel efficiency of cars on the road and also to encourage local manufacturers to develop more efficient cars (COAG, 2009). The strategy aims for a consistent national standard and performance assessment that will drive improvements in the energy efficiency of both commercial and residential buildings. For commercial buildings this includes increasing the stringency of energy efficiency provisions in the Building Code of Australia (BCA) and also introducing mandatory disclosure of efficiency for buildings. For residential buildings energy efficiency standards will be upgraded and also broadened to include hot water systems and lighting, disclosure of energy, greenhouse and water performance at the time of sale or lease will be introduced and owners will be encouraged to perform efficiency improvements through information provision and incentives (COAG, 2009). Government will be targeted for energy efficiency improvements as significant users of energy and also to demonstrate leadership in the community. Aims include improving the performance of government buildings, reducing travel through the use of electronic communication, encouraging sustainable procurement practices within government and also increasing the efficiency of street lighting (COAG, 2009). C.4.6. The National Framework for Energy Efficiency (NFEE) The National Framework for Energy Efficiency (NFEE) by the Ministerial Council on Energy (MCE) aims to enhance energy efficiency and increase the uptake of energy efficient

Page 60 technologies and practises in Australia. The NFEE includes a variety of demand-side policy measures that target the barriers and challenges to energy efficiency achieving its economic potential. Stage one of the NFEE commenced in August 2004 with foundation policies that would extend or develop pre-existing state and national policies through encouraging national coordination (Ministerial Council on Energy). There are nine policy packages that cover:

 Residential buildings

 Commercial buildings

 Commercial/industrial energy efficiency

 Government energy efficiency

 Appliance & equipment energy efficiency

 Trade and professional training & accreditation

 Commercial/industrial sector capacity building

 General consumer awareness

 Finance sector awareness Implementation Committees or working groups deliver the Stage One plans. The groups are: Appliances and Equipment, Buildings, Commercial and Industrial, Consumer Information, Energy Efficiency Data Gathering and Analysis Project, Government Leadership through Green Leases, HVAC High Efficiency Systems Strategy, National Hot Water Strategy, Phase-out of Inefficient Lighting and Trade and Professional Training and Accreditation (Ministerial Council on Energy). In December 2007 Stage two of the NFEE was agreed upon by the MCE. It adds the following five measures:

 Expending and enhancing the Minimum Energy Performance Standards (MEPS) program

 Heating, ventilation and air conditioning (HVAC) high efficiency systems strategy

 Phase-out of inefficient incandescent lighting

 Government leadership though green leases

 Development of measures for a national hot water strategy, for later consideration. Measures developed during Stage One that are still running include the Energy Efficiency Opportunities (EEO) program, the Energy Efficiency Exchange (EEX), and the National House Energy Rating Scheme (NatHERS). Further measures that were introduced include provision of energy use benchmarks on energy bills and mandatory disclosure of energy performance of residential and commercial buildings (Ministerial Council on Energy). C.4.7. Energy Efficient Homes Package The $4 billion Energy Efficient Homes Package was part of the government‘s economic stimulus package introduced in 2009 to encourage the installation of ceiling insulation and solar hot water systems in homes. There were three elements to the package: A rebate of up to $1,600 for home owner/occupiers to install ceiling insulation, up to $1,000 for landlords or tenants to install ceiling insulation in rental properties and a $1,600 rebate for the replacement of electric storage hot water systems with solar or heat pump hot water systems (Australian Government, 2009). Page 61 In February 2010, the measures under the package were discontinued and replaced by the Renewable Energy Bonus Scheme, which provided the same incentives but with changes to the delivery such as a strengthened compliance regime and a new registration scheme for installers to prove that training and skills requirements had been met. For householders the biggest change was to be that they would claim the insulation rebate directly through the Medicare system instead of installers claiming it (Minister for the Environment Heritage and the Arts, 2010). The insulation component of the Renewable Energy Bonus scheme was supposed to begin by 1 June 2010 but following the review of the home insulation scheme by Dr Allan Hawke, the government decided not to proceed with the insulation component (Minister Assisting the Minister for Climate Change and Energy Efficiency, 2010). In the windup of the insulation program the government‘s priority is on ensuring the safety of households that have had insulation installed and have set up a safety program to inspect homes with non-foil insulation and in homes with foil insulation either have it removed or on the advice of a licensed electrician, having safety switches installed (Minister Assisting the Minister for Climate Change and Energy Efficiency, 2010). The Renewable Energy Bonus Scheme will continue with a solar hot water rebate for homeowners, landlords and tenants replacing electric storage hot water systems with solar or heat pump hot water systems with rebates of $1,000 for a solar hot water system or $600 for a heat pump hot water system (Minister for the Environment Heritage and the Arts, 2010). C.4.8. Green Loans Program (Green Start) The Green Loans Program was originally launched in 2009 with three components: free home sustainability assessments for eligible households, a $50 reward card for participants and access to an interest free loan for implementing sustainable measures in the home (Minister for Climate Change Energy Efficiency and Water, 2010d). The assessment involved a visit from a registered assessor who would consider the major energy and water systems in the home and provide a tailored report recommending energy and water saving changes (DCCEE, 2010c). This could include small actions like switching light bulbs and replacing shower heads and also larger projects like solar hot water or a grey water systems (DCCEE, 2010a). In February 2010 that program was amended based on the first six months of operation and responsibility for it was shifted from the DEWHA to DCCEE. The major change to the program was that the loan component was discontinued and funds allocated for that purpose were put towards the provision of an extra 600,000 assessments (Minister for Climate Change Energy Efficiency and Water, 2010d). The changes were made to address identified flaws in the process of assessors submitting reports and delays in the receipt of reports by householders. The low uptake of loans was blamed for the cancellation of that part of the program (Minister for Climate Change Energy Efficiency and Water, 2010d). Other changes to address issues with assessors were an increase in the number of assessors registered to 5,000 and a weekly cap on total and individual assessor bookings (Minister for the Environment Heritage and the Arts, 2010). In July 2010 the Minister for Climate Change and Energy Efficiency announced that the Green Loans program would be phased out and replaced with a new Green Start program that will be delivered through a system of grants instead of through demand-driven loans. The first round of grants will be awarded to accredited assessors, who will compete for funds, to deliver energy assessments to households. The second round is for community NGOs and other organisations to run programs that provide practical help to low-income and disadvantaged Australians to improve their energy efficiency. Applications for funding under

Page 62 both of these rounds will open later in 2010. The changes are in response to the reviews of the Green Loans program that identified flaws in the way the program was initially run (Minister for Climate Change Energy Efficiency and Water, 2010c). C.4.9. Australian Carbon Trust The Australian Carbon Trust comprises two elements, the Energy Efficiency Trust and the Energy Efficiency Savings Pledge Fund (Minister for Climate Change & Water, 2009). The Australian Carbon Trust will be developed in collaboration with the Carbon Trust in the United Kingdom which has run similar programs (Minister for Climate Change & Water, 2009). The Energy Efficiency Trust which will provide information and tools for businesses to increase awareness of the benefits of energy efficiency. It aims to showcase commercially viable opportunities for efficiency and make innovative products and mechanisms mainstream for use in commercial buildings and operations (DCCEE, 2010b). The Government was to provide $50 million in seed funding for the Energy Efficiency Trust and this has been increased to $100 million (DCCEE, 2010b). The Trust will operate by identifying and proposing cost effective energy efficiency measures to businesses. The capital costs of the measure would be funded by the trust which the business would then repay, at a commercial rate, as they reap the energy cost savings benefits from the measure (Minister for Climate Change & Water, 2009). This approach addresses the barrier of capital investment for businesses investing in energy efficiency and also demonstrates the profitability of efficiency to the commercial sector (Minister for Climate Change & Water, 2009). The Energy Efficiency Savings Pledge Fund is targeted at householders. A website will provide householders with tools to calculate energy use and also identify ways to become more efficient. Based on their savings they can then make donations towards the Pledge Fund which will go towards the purchase and retirement of Australian Emissions Units under the CPRS or approved offsets (Minister for Climate Change Energy Efficiency and Water, 2010b). Pledges made will be pooled across individuals and households, are voluntary and will be tax deductible (Minister for Climate Change & Water, 2009). As of May 2010 the Australian Carbon Trust is still in the process of being setup with management being appointed and programs being transferred from the government (Herbert, 2010). The future of the Pledge Fund is unclear given the postponement of the CPRS and it no longer features on the Carbon Trust‘s website (DCCEE, 2010b). In July 2010 the Minister announced that the Australian Carbon Trust will also administer a new Carbon Neutral Program, an initiative of the National Carbon Offset Standard (NCOS), which commenced on 1 July 2010, and which aims to provide national consistency in the voluntary carbon market. This replaces the carbon neutral component of the Greenhouse Friendly program, which ended on 30 June 2010. The Carbon Neutral Program will allow businesses to certify their products, services or operations as carbon neutral by applying to the Carbon Trust for use of the NCOS logo (Minister for Climate Change Energy Efficiency and Water, 2010a). C.4.10. COAG Agreements COAG agreed to develop a ‗National Strategy on Energy Efficiency‘ in October 2008. A Memorandum of Understanding (MoU) was agreed to by COAG on 30 April 2009 relating to the ‗National Strategy on Energy Efficiency‘, which was to run from 2009-2020.

Page 63 The most recent agreement between the Commonwealth, State and Territory Governments was signed in July 2009 and sets out a ‗National Partnership Agreement on Energy Efficiency‘, which gave effect to the ‗National Strategy on Energy Efficiency‘ previously agreed to under the MoU. The agreement recognises that even with a price on carbon, as provided by the Carbon Pollution Reduction Scheme (CPRS), investment in many of the cost-effective energy efficiency opportunities will not occur because of market impediments. The National Strategy seeks to provide an approach to overcome these barriers. The Total Environment Centre (TEC) identified that while demand management has been supported strongly by COAG, it continues to be neglected by the National Electricity Rules that govern the national market (TEC, 2007).

Page 64 C.5. Institutional barriers C.5.1. Market failures limiting energy efficiency investment The following markets failures that act as barriers to investment in cost-effective energy efficiency opportunities have been identified (MMA, 2008, The Climate Institute, 2008, Vine et al., 2003). C.5.1.1. Information failures A general lack of information availability regarding the energy efficiency of products and buildings can cause missed energy efficiency opportunities. This can be reduced through energy rating and labelling of appliances and mandatory efficiency standards for new buildings and renovations. C.5.1.2. Split incentives (or incentive misalignments) Cost-effective energy efficiency opportunities exist where the person making the investment, the most commonly cited example being landlords of rental accommodation, does not directly experience the benefits of their investment. C.5.1.3. Capital constraints The up-front cost of energy efficiency opportunities can be a barrier to investment, even though the long-term cost savings more than make up for the initial investment. This barrier can be overcome, to some degree, by no-interest loan schemes. C.5.1.4. Jevons Paradox In modelling studies, a ‗rebound effect‘ occurs, known as the Jevons Paradox, where increasing energy efficiency stimulates other parts of an economy, thereby increasing overall emissions (Foran, 2009). C.5.1.5. Behavioural barriers Cost-effective energy efficiency opportunities may be passed up by consumers as other factors may be more important in choosing products. Consumers do not behave as rational economic agents and might not be motivated to pursue all cost-effective energy efficiency opportunities. C.5.2. Barriers to installation of energy-saving devices in households Householders are not always capable of adapting energy-conserving devices if psychological and positional barriers are insurmountable (Costanzo et al., 1986). Psychological barriers include the degree to which a householder perceives, understands and favours a particular conservation measure, and their motivation in remembering and pursuing the measure (Costanzo et al., 1986). Attitudes, values and beliefs also play a role, as do contextual forces, such as institutional factors (Whitmarsh, 2009). Positional barriers include permissions (e.g. rental tenants are not always permitted to make modifications), price of purchase and/or installation, ability to install one‘s own devices and their compatibility with existing fittings.

Page 65 C.6. Conclusions A review of regulations, organisations and stakeholders in the ‗Victorian electricity managing system‘ revealed a high degree of institutional complexity. This is partly due to the disaggregation of electricity industry, previously integrated under one state-owned utility, and also the formation of the National Electricity Market and the regulations and organisations to manage it. The interplay between Federal and State organisations and schemes can also be seen as adding to this complexity. It can be concluded that in accomplishing the goals of reducing electricity use and transitioning to a post-carbon society, the solution cannot merely be to establish new or more institutions and schemes that will find themselves negated by existing institutions. Compared to California, where regulation and efficiency standards have successfully reduced per capita electricity demand, local contextual factors in Victoria continue to act as a barrier to the uptake of demand management. In California, the strength of the regulator and the influence of the Clean Air Act provided the impetus for innovative actions. In both California and the United Kingdom, the ‗landscape‘ has shifted from a focus on deregulation and the efficient operation of the market to an increasing awareness of environmental and sustainability concerns within the context of a response to climate change. A lack of political vision on the need for a comprehensive response to climate change fails to recognise the need to establish a transition pathway to a post-carbon society. This goal is not currently reflected in the structure and aims of the institutional actors that control the national electricity system. The strategic purpose of both the Australian Energy Market Commission and the Australian Energy Regulator are derived from the doctrine that led to market deregulation, which was enacted for reasons of market efficiency, not energy efficiency. The expectation that market mechanisms alone will be able to reduce electricity use will lead to systemic failure. The current electricity managing system is not fit for the purpose of dealing with climate change by reducing electricity use. The postponement of an emissions trading scheme, which was expected to drive a reduction in greenhouse gas emissions, has meant that Victoria is left with a piecemeal approach, comprised of isolated programs at State and Federal level that look to overcome barriers and market failures. This has lead to problems of inconsistency and mixed messages from different institutions and information overload. However, out of this complexity, the Victorian Energy Efficiency Target (VEET) scheme provides an effective and long-term model for a broader and more consistent approach that addresses some of the institutional barriers to reducing electricity use. Addressing energy use and efficiency through demand management is part of three pronged approach to transitioning to a post-carbon society. This includes developing renewable energy technology to lower the carbon intensity of electricity, implementing greater systematic energy efficiency through technological innovation and addressing end-use efficiency more systemically.

Page 66 PART D. REFERENCES AND GLOSSARY

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D.2. Glossary AEMC Australian Energy Market Commission AEMO Australian Energy Market Operator AER Australian Energy Regulator AMI Advanced Metering Infrastructure ATA Alternative Technology Association CALC Consumer Action Law Centre

CO2-e Carbon Dioxide equivalents COAG Council of Australian Governments CPP Critical Peak Pricing CPRS Carbon Pollution Reduction Scheme CPUC California Public Utilities Commission CUAC Consumer Utilities Advocacy Centre

Page 71 CVGA Central Victorian Greenhouse Alliance DCCEE Department of Climate Change and Energy Efficiency DEWHA Department of the Environment, Water, Heritage and the Arts DLC Direct Load Control DM Demand Management DMIA Demand Management Innovation Allowance DMIS Demand Management Incentive Scheme DPI Department of Primary Industries (Victorian) DSM Demand-Side Management EDF Environmental Defenders Office (Victoria) EESA Electrical Energy Society of Australia EITE Emissions-Intensive Trade-Exposed industries ENA Energy Networks Association ERAA Energy Retailers Association of Australia ESAA Energy Supply Association of Australia ESC Energy Saving Certificate ESCO Energy Service Companies ESCV Essential Service Commission of Victoria ETS Emissions Trading Scheme EUAA Energy Users Association of Australia EV Environment Victoria FCRC Financial and Consumer Rights Council GEMS Greenhouse and Energy Minimum Standards IHD In-Home Display kVA Kilo Volt-amperes kVAr Kilo Volt-amperes reactive MAV Municipal Association of Victoria MCE Ministerial Council on Energy MEFL Moreland Energy Foundation MEPS Minimum energy-performance standards

Mt CO2-e Metric Tonne Carbon Dioxide equivalents MVA Mega Volt-amperes MW Megawatt MWh Megawatt hour NAGA Northern Alliance for Greenhouse Action

Page 72 NCOS National Carbon Offset Standard NEESI National Energy Efficiency Skills Initiative NEL National Electricity Law NEM National Electricity Market NFEE National Framework for Energy Efficiency PFC Power factor correction RTP Real Time Pricing SBC Systems Benefit Charge SECV State Electricity Commission of Victoria TEC Total Environment Centre TOU Time of Use pricing TWh Terawatt hour VCOSS Victorian Council of Social Service VEEC Victorian Energy Efficiency Certificate VEET Victorian Energy Efficiency Target VLGA Victorian Local Government Associate

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