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

Page i

OUR DEMAND: REDUCING

ELECTRICITY USE IN VICTORIA

THROUGH DEMAND MANAGEMENT

Akaash Sachdeva and Philip Wallis

Page ii

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.

Monash Sustainability Institute

Building 74, Clayton Campus

Wellington Road, Clayton

Monash University

VIC 3800 Australia

Tel: +61 3 990 58709

Fax number +61 3 990 59348

Email: [email protected]

www.monash.edu/research/sustainability-institute

DISCLAIMER:

Monash University disclaims all liability for any error, loss or consequence which may arise

from you relying on any information in this publication.

Page iii

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 iv

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 v

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.

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).

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

A.2. Recommendations and targets

Recommendation Actions to be taken Relevant parties

1. Pricing/Smart meters. Implement electricity pricing that captures time-dependent costs using smart meters for households and small business. 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.

Rollout smart meters and compensate low-income households for costs

Introduce time-dependent

pricing and give low-income

households ‗opt-in‘ ability

Provide the means for direct/indirect feedback on consumption.

Victorian Government

Electricity retailers

Individuals and households

Small and medium businesses

2. Behaviour change. Build on the planned behaviour change strategy for electricity use in the Victorian Climate Change White Paper. 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.

Implement a comprehensive behaviour change strategy to reduce energy consumption in Victoria that involves persuasion campaigns backed up by participatory decision-making and community programs.

Victorian Government

Sustainability Victoria

Community NGOs

Environment Victoria

3. Efficiency 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‘ are also created; that is, a framework that enables the community to translate their intentions into actions.

We recommend strengthening and expanding the Victorian Energy Saver Incentive scheme, making it more accessible and broad-ranging, to support consumer behaviour change.

Essential Services Commission

Appliance Retailers (Harvey Norman, Bunnings, etc.)

4. DM Incentives To effectively reduce electricity use in Victoria, the industries involved in electricity distribution and retail need to be provided with strong incentives to implement demand management programs.

Provide the energy industry with incentives for undertaking Demand Management and address current barriers to action. Regulatory incentives that have been implemented internationally provide guidance.

Australian Energy Regulator

Australian Electricity Market Commission

Energy industry

5. Sustainability 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.

Australian Electricity Market Commission

Australian Energy Regulator

Ministerial Council on Energy - COAG

Reducing Electricity

Use

CONSUMERS:

Responsibility and response-ability

Pricing

TIME-DEPENDENT

PRICING USING SMART METERS

Consumer attitudes and

awareness

COMPREHENSIVE BEHAVIOUR

CHANGE STRATEGY

Consumer access and knowledge

BUSINESS:

Efficiency of equipment and

appliances

Consumer access

ENABLING FRAMEWORK

FOR REDUCING ELECTRICITY

DEMAND (EFFICIENCY SCHEMES)

Regulation & standards

ELECTRICITY INDUSTRY:

Investment in demand

management

Organisational attitudes and

incentives

INCENTIVES FOR ELECTRICITY INDUSTRY TO

PURSUE DEMAND MANAGEMENT

Regulatory policy

EMBED SUSTAINABILITY IN REGULATORY

FRAMEWORK

RecommendationMechanismPurpose Target

1

2

3

4

5

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.

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.

Stationary Energy

51%

Transport14%

Fugitive Emissions

7%

Industrial Processes

5%

Agriculture15%

Land use, Land-use

change and

forestry5%

Waste3%

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

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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.

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.

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.

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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.

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.

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.

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.

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.

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).

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.

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.

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

systems

Metering Real-time electricity metering

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

change

Influences on behaviour The rational economic model of behaviour

Social-psychological factors and models

Strategies for behaviour

change

Information

Consultation and participation

Social learning

Consumer information Appliance Labelling

Consumption information at billing

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).

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

Trial Reduction in consumption

California State-wide Pricing Pilot

(TOU)

4.71 percent reduction in peak demand

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

and EnergyAustralia

No statistically significant result with TOU

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).

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).

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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.

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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

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

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

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).

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).

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

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 on-

going 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

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).

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.

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).

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 programs

Actual program cost

Avoided distribution cost

(net present value)

Foregone revenue

EnergyAustralia 2004/05 2005/06 2006/07

10 17 17

2.163 2.369 0.788

5.579 6.045 5.829

0.857 1.177 1.605

Integral Energy 2004/05 2005/06 2006/07

6 7 9

0.234 0.304 0.486

4.411 8.072 13.339

0.155 0.287 0.583

Country Energy 2004/05 2005/06 2006/07

- 1 1

- 0.108 0.118

- 0.118 0.142

- 0.014 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

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

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.

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).

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).

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

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

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

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

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).

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

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.

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.

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

Commission of Victoria

(SECV) established

1982 Reforms

SEC(Amendment) Act, 1982

1990 Partial privatisation

State-owned monopoly

Supply-driven

engineering approach

Objectives of efficiency,

economy, safety and

reliability

Transition to

commercially-driven

approach

Loy Yang B partially sold

4500 jobs cut

SECV in debt

1992 Kennett economic

reform

1994 Further

disaggregation

1998 National Electricity

Market (NEM)

Formation of openly

competitive market

Disaggregation of SECV

into 3 companies: 1)

generation; 2)

transmission; and 3)

distribution/retail

Market split into five

generators, five

distribution / retail

companies and two

transmission companies

Incorporated in

anticipation of private

sale

Wholesale market,

joining VIC, QLD, NSW,

ACT and SA.

2002 Full Retail Competition

(FRC)

Introduced to residential

customers

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.

Figure 6 the Victorian electricity situation – system map

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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).

AGL

855 MW

Energy

Brix Aust.195 MW

PowercorSPI

Electricity

United

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SP AusNet

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Power 1600 MW

Loy Yang

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Ecogen

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IPM

Australia 1000 MW

Valley

Power 300 MW

Pyrenees

Wind 192 MW

Pacific

Hydro 216 MW

SECV

150 MW

Aurora

Energy 94 MW

Energy

Pacific 48 MW

EDL Group

30 MW

Figure 7 Electricity industry structure in Victoria. * Includes generators with a

registered Capacity 30 MW or greater by company (Sources: AEMO, 2009, ESC, 2009).

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.

1.97%

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$100 to $ 150

$150 to $200

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

2010).

0

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$0 to $10

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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).

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 $100.2%

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$5010.7%

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$150 to $2001.5%

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17.5%

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

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).

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

http://www.esc.vic.gov.au/

http://www.esv.vic.gov.au/

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

http://www.epa.vic.gov.au/

http://www.sustainability.vic.gov.au/

http://www.ewov.com.au/

http://www.mce.gov.au/

http://www.aer.gov.au/

http://www.aemc.gov.au/

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

http://www.aemo.com.au/

http://www.eraa.com.au/

http://www.esaa.com.au/

http://www.ena.asn.au/

http://www.eesa.asn.au/

http://www.euaa.com.au/

http://www.eec.org.au/

http://www.cuac.org.au/

http://www.consumeraction.org.au/

(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.

http://www.fcrc.org.au/

http://www.vcoss.org.au/

http://www.cvga.org.au/

http://beyondzeroemissions.org/

http://www.zeroemissionnetwork.org/

http://www.edo.org.au/edovic/

http://www.environmentvictoria.org.au/

http://www.ata.org.au/

http://www.mefl.com.au/

http://www.naga.org.au/

http://www.mav.asn.au/

http://www.vlga.org.au/

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.

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).

http://www.esc.vic.gov.au/public/VEET/Registers.htm

0

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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).

2009 Target

2010 Target

2011 Target

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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).



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

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.

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

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).

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

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.

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).

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.

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.

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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

http://www.sd-commission.org.uk/pages/ofgem-and-the-energy-system.html

http://www.switchwise.com.au/electricity/distributors/vic/

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

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

our demand: reducing electricity use in victoria through demand management

Documents

sustainability research

demand management strategies

demand management measures

key sustainability challenges

clayton monash university

electricity use

philip wallis page

philip wallis report