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Contents

Index of acronyms and abbreviations. iii

Executive summary. iii

1          Introduction. 10

1.1       Background. 10

1.2       Nature and extent of the problem.. 10

1.3       Role of this IRIS. 11

1.4       Report outline. 11

2          Impact analysis. 12

2.1       Cost of regulation. 12

2.2       Benefits of regulation. 14

2.3       Rio Tinto - Improvements in thermal efficiency. 16

2.4       The impacts of carbon pricing. 16

2.5       Cost Benefit Analysis. 16

2.6       Sensitivity to the inclusion of Victorian generators. 22

2.7       Other impacts. 23

3          Industry consultations. 25

3.1       Main views of stakeholders. 25

3.2       Proposed amendments to the EEO program.. 26

4          Implementation and review.. 29

5          Conclusion and recommended option. 30

References. 31

Appendix A : Stakeholders participation. 33

Appendix B : Cleaner futures policy ALP press release. 35

Tables

Table 2.1 : Compliance costs for generators. 14

Table 2.2 : Observed efficiency improvements under the existing EEO program.. 15

Table 2.3 : Assumptions for central case. 17

Table 2.4 : Central case - energy consumption and production results. 18

Table 2.5 : Generator compliance costs, benefits and BCR, by fuel type. 18

Table 2.6 : Central, worst and best case results. 19

Table 2.7 : BCR outcomes: central, worst and best case scenarios. 20

Table 2.8 : Sensitivity results. 21

Table 2.9 : Alternate assessment profile outcomes. 22

Table 2.10 : Sensitivity results - Victorian generators included. 23

Table 5.1 : Comparison of options - net benefits. 30

 

 

Index of acronyms and abbreviations

ABARE	Australian Bureau of Agricultural and Resources Economics
AE-NEMM	Access Economics National Electricity Market Model
BCR	Benefit Cost Ratio
CBA	Cost Benefit Analysis
CPRS	Carbon Pollution Reduction Scheme
CO2-e	Carbon dioxide equivalent
DRET	Department of Resources, Energy and Tourism
EEO	Energy Efficiency Opportunities (program)
EREP	Environment and Resource Efficiency Planning
ETS	Emissions Trading Scheme
GES	Generator Efficiency Standards
GHG	Greenhouse gas
IEA	International Energy Agency
IRIS	Implementation Regulation Impact Statement
Kt	Kilotons
MWh	Megawatt hours
NEM	National Electricity Market
NGERS	National Greenhouse and Energy Reporting System
NPV	Net Present Value
PJ	Petajoules [= 1 million gigajoules (GJ) or 1,000 terajoules (TJ)]
RIS	Regulation Impact Statement

Executive summary

Current scheme

The Energy Efficiency Opportunities (EEO) program, announced in the 2004 Energy White Paper and established in 2006, was designed to encourage businesses using large amounts of energy to identify and implement energy efficiency opportunities that would lead to improved productivity, the security of energy supply, and a reduction in greenhouse gas (GHG) emissions.  With subsequent developments in climate change policy, it has been recognised that the program will ease the transition into an emissions trading scheme (ETS).

As the Wilkins Review (2008) observed:

...it is well established that there are market failures which may act as barriers to the take up of energy efficiency opportunities that would otherwise be cost effective forms of abatement.

The EEO program requires corporations using more than 0.5 petajoules (PJ) of energy per year to participate in the program by:

â–          undertaking detailed assessments of their energy consumption;

â–          identifying cost-effective energy savings opportunities with a financial payback of up to four years; and

â–          reporting (to the public and to government) on the results of the assessment and the proposed response. 

Implementation of identified opportunities is not mandated, although businesses must publicly report all identified opportunities, whether implemented or not.

Corporations engaged mainly in electricity generation, or electricity and gas transmission and distribution, are exempt from the obligations imposed by the EEO program until 30 June 2013.  This exemption was put in place as a temporary measure to allow the Carbon Pollution Reduction Scheme (CPRS) to be implemented and to subsequently confirm its expected encouragement of energy efficiency improvement in the energy supply industry. 

Evidence of success

Net financial benefits associated with reducing emissions were high overall, with $125.5 saved per tonne of CO2-e reduced. However, there are significant differences at the industry level.  The largest financial benefits per tonne of CO2-e were reported in the mining industry, with $186.8 saved for each tonne of CO2-e ...but were lower for metals manufacturing, with benefits of $45.5 per tonne of CO2-e.   (DRET 2010b)

Reporting of scheme results to date indicates that energy and cost savings are likely to be attributable to the EEO program.  By the end of 2008-09, 199 corporations registered under the program had assessed 82% of their energy use and identified energy savings opportunities amounting to 113.7 PJ of energy per year, or 8.3% of energy use assessed.  Although the EEO program does not mandate the implementation of identified opportunities, by June 2009 54% (or 61.5 PJ) were to be adopted, equivalent to $650 million per annum in financial benefits, and a reduction in GHG emissions of 5.4 million tonnes of CO₂-e per annum or 1% of Australia's total 2007-08 GHG emissions (DRET 2010).  Of these, 56 PJ (60.3%) of the 92.8 PJ of opportunities with four year, or better, paybacks were to be adopted.

Of course, it is difficult to assess which of these energy efficiency opportunities would have been adopted regardless of the EEO program.  That said, given the magnitude of the energy efficiency opportunities being reported (well in excess of the economy-wide growth in energy efficiency), and the evidence provided by individual firms, it is reasonable to attribute a significant proportion of the reported energy savings to the EEO program.

The consultation process undertaken by Department of Resources, Energy and Tourism (DRET) in relation to the proposed extension of the scheme revealed that there is broad support for the promotion of energy efficiency through policy initiatives.  Opposition to the extension was limited and based on the notion that it was "unnecessary".  This was a common view prior to the original implementation of the program.

Table i: Identified efficiency improvements under the existing EEO program

                Source: DRET  *Not accounting for energy efficiency improvements that would have occurred without EEO

Table i summarises the identified efficiency improvements, by broad economic sector, under the existing EEO program.  Of the five sectors shown, electricity generation is most closely linked in operating characteristics to the metals manufacturing sector.  Metal manufacturing requires significant amounts of energy during the processes of melting and refining the product.  Thus the two sectors are similarly highly energy intensive, even if particular processes differ.

 

Rationale for extension of the scheme

With uncertainty now surrounding the future of an Emission Trading Scheme (ETS) in Australia and the cessation of the Generator Efficiency Standards (GES) program, the Federal Government has committed to remove the EEO program exemption for electricity generators as part of its Cleaner Future for Power Stations election policy.  The policy, developed based on recommendations made by the Prime Minister's Task Group on Energy Efficiency in July 2010, also includes new emissions standards and reporting requirements for power stations.

Generators were initially excluded from the EEO program, as noted above, as an ETS - which  was to have been implemented well before the exemption deadline - was expected to drive significant improvement in the sector's energy efficiency.  The exemption was extended in 2009 to allow for completion of the first five year cycle program review for the EEO program and implementation of the Carbon Pollution Reduction Scheme (CPRS).

However, even with an imminent ETS, there are strong arguments to show that the EEO program - at least as a temporary measure - would be complementary.  The Wilkins Review identified information failure as one of a range of rationales that may justify government intervention in addition to an ETS (Wilkins 2008).

The success of the EEO program to date indicates that there are real barriers to businesses obtaining full information regarding energy efficiency opportunities, even among energy-intensive operations, as shown for example in the case study of Alcoa above.  Indeed, Alcoa has identified significant opportunities for cost and emissions savings at its generation facilities, which are already covered by the EEO program.

Roam Consulting (2008), in an assessment of barriers to energy efficiency implementation undertaken for DRET, notes that:

... for various cultural, technical or regulatory reasons, energy efficiency is often not implemented, even when it is economically viable.

Research by the Productivity Commission (PC, 2005) observed that:

Overseas research ... suggests that these organisational barriers to the adoption of cost-effective energy efficient technologies and processes are even more likely to occur in larger firms. 

The original EEO Regulation Impact Statement (RIS) identified the following organisational barriers to energy efficiency improvements, based on the PC's research.

â–          Risk aversion - managers may have an incentive to avoid risky projects and actions in areas like energy efficiency which are perceived as non-core to the organisation's operations, particularly if they are not rewarded for taking greater risk by the owners of a firm (De Canio 1993)

â–          Short time horizons - managers might operate with a shorter time horizon than the owners of the firms (Sorrell et al 2000, De Canio 1993)

â–          Lack of cooperation - managers in different parts of an organisation might not cooperate if their incentives have not been appropriately aligned by the owners (De Canio 1994)

â–          Decentralisation - organisations with decentralised management were shown to be poorly equipped and less likely to pursue large-scale projects spanning the entire organisation.  On the other hand, organisations with centralised management were constrained in adopting small-scale localised initiatives which required the active cooperation of their employees (Cebon 1992).

It is also argued by ClimateWorks (Climateworks 2010) that there is scope for improvements in thermal efficiency of coal and gas fired generators of 3% and 3.5% respectively.  While there is little data in the public domain on the potential for thermal efficiency improvements, this estimate is supported by the reported 3.5% efficiency gain identified and implemented under the EEO program at three Rio Tinto operated power stations (Rio Tinto 2009).

Importantly, early adoption of energy efficiency opportunities - often cited as the least-cost approach to climate change - can ease the transition to a world with a carbon price.  As the Wilkins Review observes:

Programs that seek to lower the cost of abatement by correcting for... information barriers, including ones that may prevent the up-take of cost effective energy efficiency opportunities, are generally considered to be complementary.

Indeed, the International Energy Agency (IEA) has observed that end-use energy efficiency will be the single biggest contributor to the abatement of emissions in coming years (IEA 2010).  A recent assessment by Schultz for the Australian Bureau of Agricultural and Resource Economics (ABARE) (Schultz 2009) supports this conclusion.

Quantifying the costs and benefits

To assess the merits of the EEO program extension, Access Economics has developed a model of generators for the current exercise based on the Access Economics National Electricity Market Model (AE-NEMM) which has been updated to reflect National Greenhouse and Energy Reporting System (NGERS) data on energy consumption and auxiliary consumption by generators.  The model provides a framework to assess the impact of extension of the EEO program to generators under a range of assumptions for implementation profiles, carbon prices, inclusion or exclusion of renewable generators, thermal and auxiliary energy efficiency improvements and capital costs.

In addition to the National Electricity Market (NEM), West Australian and Northern Territory generators have been modelled.  However Victorian generators have been excluded from the central case analysis due to the existence of the Victorian Environment and Resource Efficiency Plans (EREP) scheme.  The EREP scheme, introduced in 2008, mandates that companies using more than 100 TJ of energy per annum carry out assessment and implementation of opportunities with a three-year payback and includes generators.  EREP therefore, for Victorian generators, already potentially captures a large amount of opportunities - and imposes the bulk of the expected compliance cost - that would be implemented under an extended EEO program.

At the outset, it is important to note that the modelling undertaken is based on a range of assumptions about the potential impacts of extending the EEO program to include electricity generators based on evidence to date.  The impacts are, by their very nature, uncertain and hence sensitivity analysis is undertaken to test the robustness of the results.

The costs

The costs of the scheme are:

â–          those faced by generators in undertaking energy efficiency assessments and complying with the reporting requirements of the scheme;

â–          the costs to government of administering the scheme and providing training courses; and

â–          capital (or other) costs of implementing any improvements.

Any capital costs would be incurred by generators on a voluntary basis, while compliance and administration costs will be faced regardless of whether identified opportunities are implemented.

The primary data source for estimating the assessment and reporting costs to generators was data reported by entities liable under the existing EEO program.  These were adjusted at the individual generator level in proportion to generation capacity.

Estimates of the cost to government were provided by DRET and are based on the additional number and type of liable entities under the EEO program extension.

Estimates of capital costs are driven by the required spend to achieve a four-year payback period for a given level of thermal and auxiliary efficiency gains, which in turn are driven by observed results for companies already complying with the scheme.

Table ii: Compliance and capital costs for generators

                Source: Access Economics NPV (2010 $) estimates
                Excludes Victorian generators

Table ii summarises the estimated capital and compliance (assessment and report) costs to generators.  Given that the capital costs are driven by a four-year payback period and the estimated annual savings extend beyond this time, for the remaining life of the generator, there are significant and offsetting benefits to be gained by introducing such requirements.

The benefits

Extension of the EEO program presents potential benefits to both generators and the public.  At the most direct level, the scheme presents financial benefits to generators by ensuring that possible energy efficiency opportunities identified are communicated to boards and other decision makers, improving the likelihood that decisions to implement are made, or are made sooner than would happen otherwise.  The scheme also acts as a transitional measure ahead of the possible establishment of an ETS, by promoting the early identification of opportunities for abatement and establishing information pathways (such as energy measurement and management systems) that will be necessary in the event that a price is imposed on carbon emissions.  This is particularly important for electricity generators given the quantity of emissions that are attributable to the sector (202 Mt CO₂-e to the Australian total of 537 Mt CO₂-e in 2009 (DCCEE 2010)).

The mechanisms by which individual generators might improve thermal efficiency vary based on individual circumstance.  Examples include:

â–          the installation of plant to reduce water content of the fuel stock;

â–          changes to boiler design and maintenance schedules to maximise energy extracted per unit of fuel;

â–          improvements to lagging to reduce thermal losses; and

â–          refinement of policies balancing energy efficiency against other operational concerns such as maintenance and redundancy.

Significant retro-fitting of generator plant and equipment is unlikely to fall within the four-year payback period, but the experience to date of companies such as Alcoa indicate that substantial efficiency gains can still be achieved for relatively small outlays in capital expenditure coupled with operational changes.

The primary sources of data for the benefits of regulation include previously held data on generator structures from the AE-NEMM model, data from the NGERS database, and data reported by entities liable under the existing EEO program. 

Table iii: Savings to generators

                Source: Access Economics NPV (2010 $) estimates
                Excludes Victorian generators

Table iii summarises the estimated benefits to existing generators given the extension of the EEO program.  Total potential savings across all generation types - and for the useful lifetime of each generator - is estimated to exceed $600 million in today's dollars.

As reported, EEO program data directly applicable to generators were limited, conservative estimates for key assumptions have been adopted; that is, estimates err on the side of a reduction in, rather than inflation of, Benefit Cost Ratios (BCR). 

Costs benefit analysis

Access Economics undertook an investigation of the potential range of costs and benefits of the EEO program extension, including testing the sensitivity of model results to a range of assumptions.  Table iv below outlines the central case assumptions representing the collection of the best conservative estimates available for this analysis. 

The central case estimate for the BCR of the extension of the EEO program to include electricity generators was found to be 2.95 (refer to Table v below) - that is, under a conservative set of assumptions the benefits of the extension significantly outweigh the costs.

Table iv: Assumptions for the central case

Source: Access Economics estimates.  Other sources as outlined

Sensitivity analysis

Key sensitivities assessed were the introduction of a carbon price and the exclusion of renewables generators.

In relation to renewable generators, it was difficult to construct realistic scenarios under which the EEO program improved energy efficiency, as much of this technology is new and at - or close to - best practice.  Furthermore, even if small efficiency improvements could be achieved, these would have little or no impact on GHG emissions, which is one of the objectives of the EEO program.  Assuming similar compliance costs across all generator types, without concomitant efficiency gains, the inclusion of renewables generators in the program predictably results in a decreased BCR.

As might be expected, BCRs for comparable levels of energy efficiency improvement (and therefore abatement) improve under a carbon price scenario, as the cost savings generated by a given volume reduction in emissions will be even greater.  In addition, the majority of the compliance burden that the extension of the EEO program imposes would become part of normal business practices.  Introduction of a carbon price therefore provides stronger incentives to implement energy efficiency improvements and reduces the need for an EEO program.

Table v: Central case and sensitivity results

Source: Access Economics estimates
Excludes Victorian generators
* Includes cost to government

Other impacts

Flow-on benefits of the scheme extension to the national and regional economies will be limited.  Detailed modelling of these effects has not been possible in the timeframe allocated, but qualitatively we would expect to see a small improvement in employment as a result of assessment and implementation (based on the estimated increase in capital expenditure).

The scheme also acts to place some small downward pressure on electricity prices nonetheless, given the relatively small percentage improvements expected in energy efficiency and relatively horizontal supply curve over that range, this pressure is considered small enough to not warrant quantification for the existing report when compared to other effects in national electricity markets.

Improvements in energy efficiency which reduce fossil fuel consumption, or increase generation capacity for the same level of input, will also have cost-effective (no regrets) environmental benefits and, in particular, a reduction in greenhouse gas emissions.  Determining the appropriate dollar value to place on these positive environmental impacts is a "complex and controversial task" (DRET 2005), and is not included in this analysis.  The ongoing reduction in emissions is estimated to be approximately 1 Mt CO₂-e per annum, with reductions starting in 2014.

Conclusions and recommendations

Under a central case scenario, extending the EEO program to include electricity generators will result in substantial net benefits.  It is acknowledged that the structure of the NEM provides a strong incentive for generators to deliver the highest energy efficiency consistent with other economic tradeoffs, and for this reason outcomes achieved under the EEO program extension may be even smaller than the conservative assumptions employed in the central case analysis of this report.  Critically, however, for the scheme to be cost-neutral in a no-carbon price scenario with timeframes for assessment and implementation rates similar to those already observed under the EEO program, a thermal efficiency improvement of just 0.18% (coupled with auxiliary improvements of 2%) is required.

Within the analysis there are a significant number of assumptions that have been made against considerable uncertainty.  The major drivers of BCR outcomes are the compliance cost, the thermal efficiency gain, and the inclusion or exclusion of carbon prices.  To derive low BCRs, a combination of high compliance cost and low efficiency gains is required, which translates in the real world to a scenario where generators are actively monitoring and implementing efficiency improvements, yet counter intuitively still experience additional high compliance costs under the program extension.  We consider this to be an unlikely scenario.

The extension of the EEO program to include non-renewable generators will bring significant benefits both to generators themselves, in the form of cost savings and improved efficiencies, and to all Australians in the form of a reduction in GHG emissions.  Based on the analysis undertaken there seems to be no strong case for the inclusion of renewable generators in the extension of the EEO program, due to the relatively recent commissioning of these generators and the lack of efficiency gains likely to be derived.

Access Economics

Introduction

Background

The Energy Efficiency Opportunities (EEO) program was implemented under the Energy Efficiency Opportunities (EEO) Act 2006 with the objectives of:

â–          stimulating the business sector to overcome information failures and organisational barriers to ensure a more rigorous approach to energy management and the identification of cost-effective improvements in energy efficiency to improve business productivity; and

â–          improving the security of energy supply and promoting a reduction in GHG emissions and associated environmental externalities.

The first two rounds of reporting for the EEO program (DRET 2010b and 2010c) provide evidence that the scheme has been able to deliver benefits.  It is acknowledged that some of the actions taken may have been delivered on a voluntary basis over time without the EEO program; however, the initial reservations presented by industry during the consultation process for the Regulation Impact Statement (RIS) undertaken in 2005 prior to the introduction of the EEO program suggest that at least some part of reported improvements in energy efficiency can be attributed directly to the EEO program requirements.

Despite their position as intense users of energy, electricity generators were granted temporary exemption (to 2009) from the EEO program on its inception on the basis that an Emissions Trading Scheme (ETS) would be introduced before the first cycle of the EEO program would be completed.

The 2009 decision to extend the exemption of generators to 2013 was justified on the grounds of developments relevant to the energy supply sector, and particularly:

â–          the proposed introduction of an emissions trading scheme, the Carbon Pollution Reduction Scheme (CPRS);

â–          the streamlining and reform of complementary measures to the CPRS, as recommended by the Wilkins Review; and

â–          streamlining of  the National Greenhouse and Energy Reporting System (NGERS), to improve the transparency of data and reporting on energy production and use.

Nature and extent of the problem

With uncertainty now surrounding the future of an ETS in Australia and the cessation of the Generator Efficiency Standards (GES) program, the Federal Government has committed to remove the EEO program exemption for electricity generators as part of its Cleaner Future for Power Stations election policy.  This policy, developed as a result of recommendations made by the Prime Minister's Task Group on Energy Efficiency in July 2010, also includes new emissions standards and reporting requirements for power stations.

Australia faces a major challenge to its economic growth and living standards in meeting the increased energy demand while at the same time moving to a low emissions future.  The EEO program aims to address the problem of reducing greenhouse gas emissions particularly in the context of uncertainty surrounding the future of climate change policies.  Through the implementation of energy efficiency opportunities, the EEO program would lead to improved productivity and a reduction in greenhouse gas emissions ahead of - and to ease the transition into - an emissions trading scheme.  Generators were originally excluded from the EEO program as there were other measures to encourage energy efficiency, such as the Generator Efficiency Standards (GES) program.  These measures are no longer in place.  In 2009, the exemption was extended to 2013 in anticipation of the expected introduction of emissions trading and subsequently evidence to become available on its effectiveness in encouraging energy efficiency improvements in the energy supply industry. 

However, even with an imminent ETS, there are strong arguments to show that the EEO program - at least as a temporary measure - would be complementary.  The Wilkins Review identified information failure as one of a range of rationales that may justify government intervention in addition to an ETS (Wilkins 2008).

The level of energy efficiency in Australia, as well as the rate of improvement, is lower than other major industrialised countries even compared to other countries with comparable energy prices.  Australia has a higher level of energy intensity than the OECD average.  Over the period 1990 to 2006, energy efficiency reduced final energy intensity by around 0.2% while Canada, Germany, the Netherlands, New Zealand and the United States all improved their energy intensity through more efficiency use of energy by 1% or more per year on average (Prime Minister's Task Group on Energy Efficiency 2010).  There is also a gap between best practice energy efficiency and actual practice.  The gap may be explained by market failures, including imperfect information, split incentives and externalities; organisational failure and behavioural norms; and other reasons such as hidden costs.  Organisational barriers to energy efficiency improvements include risk aversion for projects that are perceived as non-core to their operations; short term horizons; lack or cooperation; and decentralisation.

The success of the EEO program to date indicates that there are real barriers to businesses obtaining full information regarding energy efficiency opportunities, even among energy-intensive operations, as shown for example in the case study of Alcoa above.  Indeed, Alcoa has identified significant opportunities for cost and emissions savings at its generation facilities, which are already covered by the EEO program.

Role of this IRIS

This Implementation Regulation Impact Statement (IRIS) sets out the Government's options for extending the existing Energy Efficiency Opportunities program and regulations to include electricity generators, given that the decision for that extension has already been taken under the Government's Cleaner Future for Power Stations election policy.

In this context, Access Economics was asked to consider for this IRIS, the option of whether renewable generators should continue to be excluded, given their technology may already be considered to employ best practice efficiency, but not alternative policies to the extension itself.

Similarly, this IRIS does not revisit the arguments raised in the original RIS (DRET 2005) on which the decision to implement the current EEO program is based.

Report outline

This report is structured as follows:

Chapter 0      Impact assessment including identification of costs and benefits and CBA analysis.  Issues such as transfer pricing and competition are also addressed.

Chapter 0      A synthesis of consultations undertaken by DRET in December 2010 in response to the November 2010 consultation paper.

Chapter 0            Implementation and review

Chapter 5            Conclusion and recommended option

Impact analysis

Cost of regulation

The costs of the proposed regulation may be split into three categories - the cost to the government of administration and training, the cost of assessment and compliance to liable entities, which for brevity we refer to only as "compliance costs", and the capital cost of implementing the identified efficiency measures.  Sources for the estimation of compliance costs include estimates from DRET, reported compliance costs from entities liable under the existing EEO program, and estimates by Access Economics.  We note that the reporting of compliance costs under the existing EEO program is on a voluntary basis, and as such these estimates are based on a relatively small data set.

Requirements imposed by the EEO program

Under the EEO program, electricity generators will have to comply with the following requirements:

â–          Determine whether the corporation has to participate in the EEO program:

¬    Corporations will first have to determine whether they have to participate in the program.  Corporations using more than 0.5 PJ of energy are required to register and it is expected that most electricity generators will have to register.  They will have until 31 March 2012 to register;

â–          Register with DRET;

â–          Prepare and submit an assessment and reporting schedule;

¬    Eligible electricity generators will have to submit an assessment plan by 31 December 2012.  The assessment plan will outline how they intend to carry out the required assessments and comply with the reporting requirements;

â–          Conduct assessments:

¬    There is a seven stage assessment process that involves preparing a project plan, preparing a communication plan, understanding energy use, identifying potential opportunities, conducting detailed investigations with defined costs/benefits and business case for each opportunity, undertaking business decisions and implementation and tracking and communication;

¬    Assessments have to be carried out over a five year assessment cycle, specifically by 30 June 2016.  Within this period, electricity generators will have to assess 80% of their energy use.  In subsequent cycles, this rises to 90%.  They have to include all subsidiaries, business units, key activities or processes that individually use over 0.5 PJ in the assessments;

â–          Report on assessment outcomes and business response:

¬    reporting obligations will arise from December 2013;

¬    electricity generators will have to publish public reports annually which are cumulative reports on the assessments undertaken and the outcomes of the assessments.  This includes the identified opportunities for energy efficiency, the potential energy savings from these opportunities, and the business response in terms of the decision of whether to implement, further investigate the opportunities or not to implement;

¬    they will also have to prepare two government reports for the five year cycle - the first by 31 December 2013 and the second by 31 December 2016.  The government reports require greater detail and will have to include the energy use and energy assessed by type of fuel input, the aggregated annual net financial benefits, and a description and classification of opportunities identified through assessments;

¬    prior to submitting these reports, they will have to be tabled at a directors' meeting to allow company directors to review and note the report, in order to raise awareness of the corporation's obligations on energy efficiency.

0 demonstrates the timeline for electricity generators for a trigger year of 2010-11.

:  Five year assessment cycle for electricity generators

Source: DRET.

DRET also undertakes verification audits to ensure compliance with EEO program requirements.  These involve desktop checks of samples of documentary evidence, as well as formal visits to sites to audit evidence and interview staff.

While corporations are required to undertake the energy efficiency assessments under the program, implementation of the identified opportunities is not mandated.  The decision to implement is a business decision undertaken by the corporation but all identified opportunities - whether implemented or not - have to be reported both to Government and to the public.

DRET expects that electricity generators would already have most of the skills and knowledge required to undertake required assessments under the EEO program.  However, they may need to install additional metering to quantify energy and mass flows around the sites to determine where energy is consumed, lost or wasted.  Existing metering may be insufficient as they would be installed to monitor energy output and maintain reliability rather than identify areas of losses in the system.  Nevertheless, the compliance costs for generators are assumed to be broadly in line with existing participants under the EEO program. 

The cost to the Government

A capacity-building program is already in place for the training of companies that trigger existing EEO program thresholds, at a total cost of approximately $3.5 million.  DRET estimates that the inclusion of electricity generators will impose an additional $1.2 million per annum to scheme operating expenses, with the cost likely to decrease over time.  For the sake of conservatism we assume that the cost to government is $1.2m per annum from 2011 to 2030, in today's dollars (all figures in this report exclude inflation).

The cost to generators

The compliance costs of the scheme are borne by all eligible generators in Australia with the exception of those already covered under the Victorian EREP scheme.  The EREP scheme mandates the implementation of identified opportunities with a three-year or less payback period, and as such the additional compliance cost of the EEO program extension is assumed to be negligible.  As a consequence of this assumption the majority of Australian brown coal facilities, which are located in Victoria, are not considered in the central case scenario.  However, acknowledging some uncertainty around the actual outcomes under the more recently implemented EREP, sensitivity testing that assumes increased compliance and implementation has also been undertaken.

Compliance costs for the EEO program extension have been based on data that has been voluntarily reported under the existing EEO program, at an average cost of $73,000. 

Extrapolation of compliance costs to generators needs to take into account their use of a large amount of energy at a small number of facilities containing relatively homogenous units, compared to currently liable entities where large energy usage is typically associated with a large number of facilities.  Moderating the largest reported figure under the current program of $400,000 accordingly, we assume that the largest generator faces an annual compliance cost in the central case of $200,000.  Estimates for compliance costs by generator type in the central case scenario are presented in 0.

2.1: Compliance costs for generators

                     Source: Access Economics estimates
                     Excludes Victorian generators

Benefits of regulation

Evidence from the existing EEO program demonstrates significant improvements in energy efficiency among participating companies.  The intuitive expectation is that the greatest improvements would be found in companies where energy costs are less significant in their cost structure.  However, improvements in companies that traditionally have been actively managing their energy usage have been observed, including generation facilities owned by Rio Tinto as well as blast furnaces.

In the case of households, a lack of investment in cost-saving energy efficient devices is often attributed to myopic behaviour, liquidity constraints or lack of knowledge.  Some of these factors may also be at play in large corporations (though in most cases, access to finance and knowledge is less likely to be a problem), but other factors could include:

â–          changing technologies - a power plant that was state-of-the-art a decade ago may now have the potential for cost-saving upgrades;

â–          inefficiencies in plant maintenance processes.  For instance, it is perhaps more energy efficient to check plant operations at more regular intervals using enhanced monitoring systems;

â–          inefficiencies in waste disposal and storage processes, again new technologies may provide costs savings - economic and environmental - in waste management;

â–          changes in the relative price of electricity versus equipment (in turn, due to the strong $A and commodity prices) may have made investments that were not cost-effective a decade ago now become a cost saving; and

â–          new technologies that were not available a decade ago may now be available. 

As such, it is not a simple matter of a myopic corporation not noticing a potential cost saving, but rather those cost savings are not always straightforward to identify.  These observations lend credibility to the argument for extension of the EEO program to generators.

For the purposes of this study we have differentiated energy usage by generators into primary and auxiliary usage - the primary energy usage being the fuel that is burned to produce electricity, and the auxiliary usage being the component of the produced electricity that is used to power auxiliary systems.  The primary energy usage is related to the thermal efficiency of the generation units, and is in general one to two orders of magnitude larger than the auxiliary energy usage in a power plant.  We expect that it is in primary energy usage that efficiency has been most actively monitored, while the auxiliary energy usage is the component where the largest percentage improvements might be made.

Based on our review of the evidence and available data we make the following assumptions:

â–          The available improvement in auxiliary power usage is set to 2% in the central case, with sensitivities at 1% and 6%. This assumption reflects the following points.

¬    Efficiency improvements have been observed in the existing scheme, which range from 3.9% for metals manufacturing to 12.0% for other manufacturing, as shown in 0. 

¬    Gains in the electricity sector are likely to be smaller than those observed more widely, as the sector is a sophisticated consumer of its own product and has already faced a number of years responding to the Generator Efficiency Standards (GES) scheme and of being pressured, for example by boards, to improve efficiency in anticipation of a price on carbon so that readily available gains can be expected to have already been delivered. 

¬    Furthermore, some investments identified and implemented through the EEO program extension might have still happened in the absence of the EEO program extension, but at a later date.  That is, the EEO program extension might 'bring forward' investments that might have still happened a few years later.  There is still a benefit from the bringing forward of beneficial investment, but only those years of energy reductions brought forward can be credited towards the EEO program extension.

â–          The available improvement in generation thermal efficiency is set to 1% in the central case, with sensitivities at 0% and 2%. 

¬    There is only a single data point on improvements made to thermal efficiency of generation units under the existing EEO program.  In this case Rio Tinto was able to improve generator efficiency by 3.5% through enhanced maintenance programs and operational strategies.  We employed a 1% assumption in the central case to reflect the same factors underpinning expected auxiliary improvements.

2.2: Observed efficiency improvements under the existing EEO program

                Source: DRET

Rio Tinto - Improvements in thermal efficiency

Under existing EEO program requirements, companies are not required to report energy savings to a level that allows generator efficiency improvements to be determined however, they may do so voluntarily.  As a result, there is little data to estimate potential improvements in generators' thermal efficiency as a result of the extension of the EEO program.

In their 2009 Energy Efficiency Opportunities Public Report, Rio Tinto voluntarily gave detailed information on the impact of the existing EEO program on electricity generation for their Dampier, Paraburdoo and Cape Lambert power stations.  The report indicates that Rio Tinto, in conjunction with equipment suppliers, found efficiency improvements totalling 3.5% from repairs and revised maintenance and operational strategies.

The impacts of carbon pricing

Carbon pricing will have a significant impact on cost structures for electricity generators, and will contribute to significant adjustment within the sector.  With a price on carbon, large users of emissions-intensive fossil fuels will have a greater incentive to actively monitor energy usage and to implement efficiency improvements wherever possible, as the savings derived will be substantially greater for any given action (increasing as the price of carbon increases) leading to an improvement in the BCR (see results in Section 0). 

Indeed, under a carbon price:

â–          the vast majority of the compliance burden that the extension of the EEO program imposes would become part of normal business practices; and

â–          the increase in the cost of energy will put the same incentives in place as the EEO program extension for boards to measure and manage energy and actively review and implement improvements in energy efficiency.

In effect, the EEO program brings forward actions that would be likely to occur under a carbon price scenario and as such represents a transitional policy. 

Cost Benefit Analysis

This chapter details the quantitative analysis of the proposed extension of the energy efficiency opportunities program undertaken by Access Economics, assessing the merits of the extension using a cost benefit analysis (CBA).  An analysis of the impacts for the energy market as a whole has been provided, with a break down by fuel type included where applicable.

The key analysis is the central case presented in Section 0, which represents the collection of best conservative estimates available for this analysis.  Further, the estimates are not only selected to be individually the best available, but also to represent an internally consistent set of assumptions. 

That the assumptions in the central case are internally consistent is an important point - some of the sensitivity analyses undertaken are intended to test the consequences of combining the "best" and "worst" reasonable assumptions. These scenarios are intended to explore the consequences of perverse combinations of assumptions, and should be considered highly and equally unlikely to play out in the real world - in particular, they violate the internal consistency that is present in the central case.

In addition to testing the outcome of perverse combinations of assumptions, we test the consequences of some more reasonable real world and policy assumptions, being the inclusion of renewable generators in the extension of the EEO program, the imposition of carbon pricing, and of alterations in the rate at which generators are able to assess and thus implement energy efficiency opportunities.

The central case

The central case uses the best estimate available for each input assumption, guided where possible by data collected under the existing EEO program, and using the best available source otherwise.  The assumptions used for this analysis are outlined in 0 .

2.3: Assumptions for central case

Source: Access Economics estimates.  Other sources as outlined

The model used to estimate costs and benefits considers each generation facility separately, including separate data on fuel costs, existing thermal efficiency and estimated auxiliary power usage.  Detailed results from the model are presented in 0.  The results may also be aggregated by fuel type, as presented in 0. 

 

2.4: Central case - energy consumption and production results

Source: Access Economics estimates, AEMO data
Capacity figures represent potential output and fuel use if operating at full capacity, so the expected fuel use would be the dispatch figure

Excludes Victorian generators

As shown in 0 below, the benefits of the scheme outweigh the costs imposed across all fuel types, driven by the large fuel costs to generators.  The significant fuel costs for most generators in turn means that small efficiency improvements translate into significant financial savings. 

2.5: Generator compliance costs, benefits and BCR, by fuel type

Generator Type	Compliance cost	Capital cost	savings	BCR
Black Coal	$56.7m	$70.1m	$374.3m	2.95
Brown Coal	$0.4m	$1.7m	$6.2m	2.99
Gas	$33.3m	$38.2m	$259.7m	3.64
Total	$107.1m	$110.0m	$640.1m	2.95

Excludes Victorian generators
Compliance cost include cost to government of $1.2m p.a. as outlined in Section 0 from 2011 to 2030

Source: Access Economics estimates, AEMO data

Sensitivities - worst and best case scenarios

The two sensitivity scenarios presented here explore the implications of uncertainty in compliance costs and the availability of energy efficiency improvements.  These sensitivities act as "book ends" in that they combine assumptions to give best (low costs, high savings) and worst case (high costs, low improvements) outcomes.

As indicated above, these scenarios should be considered highly unlikely to represent real world conditions - if a generator is already actively monitoring and implementing energy efficiency improvements and has little scope for improvement then they will already have sophisticated monitoring and reporting systems in place, which should minimise the cost of compliance.  Conversely, an organisation that has significant unrealised benefits is unlikely to have undertaken rigorous assessment and will therefore face higher compliance (assessment) costs but also achieve greater savings.

Modelling results are presented in 0, with summary benefit cost data presented in 0.  The assumptions underlying the best and worst case scenarios are as per the central analysis with the exception of maximum annual compliance costs of $20,000 and $400,000, thermal efficiency improvements of 2% and 0%, auxiliary efficiency improvements of 6% and 1%, and percentage of identified savings implemented of 80% and 30% respectively.

2.6: Central, worst and best case results

Source: Access Economics estimates, AEMO data
Excludes Victorian generators

Capacity figures represent potential output and fuel use if operating at full capacity, so the expected fuel use would be the dispatch figure

2.7: BCR outcomes: central, worst and best case scenarios

Source: Access Economics estimates, AEMO data
Excludes Victorian generators
* Includes cost to government of $1.2m p.a. as outlined in Section 0 from 2011 to 2030

Sensitivities - carbon pricing and the inclusion of renewable generators

This section assesses the impact of introducing a carbon price under an ETS and including renewables generators in the extension of the EEO program.  For completeness we test the effects of each of these assumptions separately and together, and again against each of the best, central and worst case assumptions for costs and benefits.  This results in 12 individual scenarios.

Renewable generator assumptions

Renewable generators are assumed to face the same compliance costs structures as non-renewable generator.  It is difficult to develop any realistic scenario under which renewables find additional efficiency when included in the EEO program extension.  We thus assume that renewable generators experience no benefits when included in the EEO program extension.  Driving this assumption are the following observations:

â–          The capital stock of renewable generators is in general much younger than that for non-renewables.  As a result the efficiency of renewable generators is much more likely to be close to industry best practice.

â–          The auxiliary load for renewable generators is far lower than the auxiliary load for non-renewables, muting the potential benefits of improvements in auxiliary energy efficiency.

â–          The bulk of renewable generators do not include combustion or major heat transfers in any part of their process, removing the component of generation that is most likely to be open to efficiency improvements.

Carbon price assumptions

Access Economics was asked to consider the impact of a carbon price on the extension to the EEO program.  As discussed above, the EEO program is considered a transitional policy, the need for which is mitigated by the imposition of a price on carbon.  To demonstrate this effect, BCRs were recalculated based on similar efficiency actions being made by companies, and the results, predictably, were substantially higher.

There is significant uncertainty about the future of carbon price profiles in Australia.  The most recent estimate for a carbon price published by the Australian Government appears in the 2009-10 Mid-year Economic and Financial Outlook, at $26 per tonne of CO₂-e in 2013.  To obtain a path through time this figure is augmented by the most recently published growth rate of 4% per annum, as used in the Australia's Low Pollution Future report.

Results

0 presents the results of modelling under the assumptions outlined above.  Notably, the establishment of a carbon price serves to improve BCRs for any given action in all cases, while the inclusion of renewable generators in the scheme acts to depress the BCRs.

Sensitivity to implementation rates

The rate at which generators are able to implement identified energy efficiency improvements over time will affect the net present value (NPV) of any savings derived.  For example, selection of a profile that favours later implementation will tend to reduce the NPV of the deferred benefits, hence reducing the BCR.  0 demonstrates the effect of variations in the implementation profile to 25%, 50%, and 75%, with relatively little impact on BCRs. 

2.8: Sensitivity results

Source: Access Economics estimates
Excludes Victorian generators
* Includes cost to government of $1.2m p.a. as outlined in Section 2.2 from 2011 to 2030

2.9: Alternate assessment profile outcomes

Generator Type		Outcome
Central Profile	Compliance cost ($m NPV)	107.1
	Capital Cost ($m NPV)	110.0
	Savings ($m NPV)	640.1
	BCR	2.95
Alternate Profile	Compliance cost ($m NPV)	107.1
	Capital Cost ($m NPV)	110.0
	Savings ($m NPV)	632.6
	BCR	2.91

Source: Access Economics estimates, AEMO data
Excludes Victorian generators
* Includes cost to government of $1.2m p.a. as outlined in Section 2.2 from 2011 to 2030

Sensitivity to the inclusion of Victorian generators

In the central case scenario modelled above, the Victorian EREP program is assumed to replicate the essential features of the EEO program such that Victorian generators would experience little or no additional compliance burden and experience little to no additional benefit from the EEO program extension.

While this assumption is reasonable for the central case, there are differences between the two schemes.  In particular, the mandatory implementation and three-year payback periods for EREP, which suggest that assessment and implementation outcomes may be different under the two schemes and some sensitivity testing around outcomes is therefore warranted.  The degree to which behavioural changes and internal compliance structures would be replicated under the EEO program is difficult to assess as EREP outcomes are yet to be reported publicly; for the purposes of this sensitivity we assume that Victorian generators face 50% of the compliance cost structures and experience 50% of the efficiency improvements of non-Victorian generators.

0 provides the results of the Victorian generator sensitivity test against the four scenarios shown in 0.  Under these sensitivity tests, the BCRs are depressed only slightly by the limited inclusion of Victorian generators in the central case, while those scenarios that include a price on carbon result in a slight improvement in BCRs.

2.10: Sensitivity results - Victorian generators included

Includes cost to government of $1.2m p.a. as outlined in Section 2.2 from 2011 to 2030

50% of compliance cost and efficiency improvements for Victorian generators
* Source: Access Economics estimates

Other impacts

Complementarity with Cleaner Future for Power Stations package

The other measures in the Cleaner Future for Power Stations election commitment include:

â–          Best practices emissions standards for new coal-fired power stations;

â–          Carbon capture and storage ready standards; and

â–          Publication of NGER data.

The extension of the EEO program to electricity generation will be complementary to these other measures.  The best practice emissions standards will apply to all new coal-fired generators.  The standards will provide new electricity generators with further incentives to maximise their energy efficiency by imposing a threshold for their emissions intensity.  The extension of the EEO program will complement this by encouraging the electricity generators to further investigate energy efficiency opportunities and providing the scope for identifying and evaluating these opportunities.  It will also assist with improving the performance of existing electricity generators to whom the proposed emissions standard does not apply.

The NGER Act requires electricity generators with emissions over 25 kt or energy production over 100 TJ per year, to report information regarding their greenhouse gas emissions, energy production and energy consumption.  Under the proposed amendment, the facility-level emissions and electricity production data would be published and this will better inform the markets and the public about the performance of electricity generators.  There is overlap between the collection of data under the NGER Act and the EEO program which reduces compliance costs in terms of assessing energy consumption.  Furthermore, greater public scrutiny of energy use by electricity generators through publication of emissions, energy production and consumption data will act as further incentive for generators to minimise energy loss and the EEO program will serve to highlight these opportunities.

Potential effects on competition

There is expected to be minimal effect on the level of competition in the sector as a result of the extension of the EEO program to include electricity generators.  If compliance costs were significantly high, then arguably the larger generators may benefit through economies of scale.  It is estimated that the compliance costs will not be large enough to increase total costs considerably.  Rather, the removal of the exemption for electricity generators removes the discriminatory competitive advantage that they received compared to those electricity generators whose controlling corporation were engaged in other activities other activities such as coal mining or gas production and are therefore currently obliged to meet the requirements of the EEO program. 

Transfer pricing

The benefits assessed in this IRIS are achieved through improved efficiency of generation - that is, increased output for the same volume of input - and therefore transfer pricing of inputs will not alter the benefits received.

Industry consultations

On 30 November 2010 DRET released an Interdepartmental Task Group Discussion Paper titled 'A Cleaner Future for Power Stations' for comment from interested stakeholders.  In response to the Discussion Paper, 42 written submissions were received.  Stakeholder consultation forums were also held in Melbourne (attended by 65 of 131 entities invited) and Perth (attended by 18 of 35 entities invited) in December.  Participants included businesses, state governments, electricity generation companies, industry associations and non-government organisations.  Prior to releasing the Discussion Paper, DRET met with the National Generators Forum in October 2010 to present information on the extension of the EEO program and to discuss implementation issues.  A number of electricity generation companies also attended national EEO program workshops held throughout November.

The Discussion Paper was intended to facilitate initial conversation with stakeholders on the Cleaner Future for Power Stations election commitments and outlined proposals on defining and implementing the measures contained in the commitment.  The measures included:

â–          best practice emissions standards for new coal-fired power stations;

â–          carbon capture and storage ready standards;

â–          extension of the EEO program to cover all existing generators, including coal-fired power stations; and

â–          publication of National Energy and Greenhouse Reporting data.

In relation to the extension of the EEO program, the Discussion Paper sought feedback on the following key issues:

â–          particular EEO program requirements that would be very difficult to apply to electricity generators;

â–          particular areas of the requirements where specific guidance for electricity generators is needed;

â–          any further changes needed to ensure the requirements deliver on the intent of the EEO Act with regard to generators, such as:

¬    lessons from participation in the GES program; and

¬    issues regarding internal cost accounting for energy sources such as coal/gas/diesel sourced internally that may affect project payback calculations; and

â–          any potential considerations for specific requirements or exclusion of certain energy sources, specifically solar, wind, water and geothermal energy use for electricity generation.

Main views of stakeholders

Consultation with stakeholders indicated widespread support for energy efficiency as a policy to promote abatement of GHG emissions and improve productivity.  However, views were divided as to the desirability of extending the EEO program to electricity generators.  Just over half of the submissions received  commented specifically on the extension of the EEO program to electricity.  Amongst the submissions that did comment, 14 supported and 10 opposed the scheme.  Some submissions were confidential, and these are not identified in the following paragraphs.

Stakeholders who supported, or appeared to support, the removal of the exemption from the EEO program for existing and future electricity generators included non-government organisations (including Australian Conservation Foundation, Australian Network of Environmental Defender's Offices, Mount Alexander Sustainability Group), state departments (Victorian Department of Primary Industries), industry associations (Construction, Forestry, Mining & Energy Union, Copper Development Centre, Engineers Australia) as well as energy companies (including TRUenergy, Origin Energy, Alstom Limited, Verve Energy).  They noted that electricity generation accounted for almost 40% of Australia's greenhouse gas emissions and the success of the EEO program to date in identifying significant energy and emissions savings, much of which has been implemented.  This occurred despite expectations that the large corporations were already efficient energy users.  Inclusion in the EEO program would highlight opportunities for improving performance and encourage generators to minimise electricity consumption.  Furthermore, some electricity generators are already included in the EEO program as part of a corporate group undertaking other activities.  Some viewed energy efficiency as an integral part of effective corporate management practice.

Stakeholders who were not in favour of the extension of the EEO program to cover electricity generators include Geodynamics, AGL Energy, Energy Supply Association of Australia, Alinta Energy, International Power Australia, Griffin Energy, Chamber of Minerals and Energy of Western Australia.  These stakeholders mostly viewed the policy as 'unnecessary' as they considered that the electricity generation industry was already strictly regulated by various Federal and State programs and that energy efficiency is already a priority for the energy intensive generators.  There is a high opportunity cost associated with electricity consumption in terms of the ability to sell that electricity to the market and this serves as an inherent driver for generator efficiency in the market.  The market for electricity generation is competitive and transparent forcing generators to optimise their cost structures to maximise profit.  As primary energy costs are generally one of the largest costs, economic optimisation of energy efficiency is a business priority.  Plants are also long lived assets engineered precisely to maximise efficiency such that identifying equipment or processes that can be upgraded with a maximum four year payback period may be difficult.

These stakeholders also stated that assessment and reporting requirements mandated by the EEO program would only add to administrative and compliance time and costs without achieving additional benefits.  There would be the risk of inconsistency with similar state programs and place an inefficient reporting burden on affected organisations.  The transparent and public reporting requirements on energy use, production and emissions established under the NGER provides further incentive to scrutinise energy efficiency opportunities.

A further concern was that the current program requires assessment of activities using over 0.01 PJ/year and within a major generating facility, this would capture many minor marginal activities, especially relative to participants in other industries that typically use much less energy than major electricity generators.  Measuring energy consumption of minor activities would be difficult and would not yield meaningful potential energy savings.

Proposed amendments to the EEO program

Some stakeholders provided recommendations on the operation of the EEO program should it be extended to include electricity generators. 

Some noted the onerous compliance and reporting burdens that would be imposed given the size and energy intensity of electricity generators and suggested allowing flexibility.  Additional flexibility in the development of baselines for reporting may include the option of providing data for three or four years, as well as the current two years (National Generators Forum).

There was strong support for the development of industry specific guidelines in consultation with electricity generators to assist in implementing the EEO program (AGL Energy, National Generators Forum).  The guidelines could take into account lessons and information from other past and existing schemes and possibly use case studies.  The guidelines could cover issues including clarification of energy use definitions and implementation issues such as the risk of double counting of energy used in the production of energy.

One of the key suggested amendments related to the threshold for the amount of energy use at a site which may be omitted from assessments, of less than 0.01 PJ/year.  If the EEO program is mandated for generators, some stakeholders held the view that the threshold level should be reviewed.  A stakeholder recommended that a higher more appropriate threshold would be around 0.1 PJ/year for electricity generators (TRUenergy).  Some stakeholders also recommended increasing the payback period for energy efficiency opportunities (Verve Energy).

While supporting the removal of the exemption for electricity generators, some stakeholders considered that it may be redundant once a carbon price is introduced as that would drive energy efficiency improvements and so the EEO program requirements for the electricity generators should be reviewed at this stage and potentially phased out (Origin Energy).  However, one also viewed the EEO program as a complementary policy to a carbon price (Mount Alexander Sustainability Group). 

Some stakeholders recommended extending the EEO program by including electricity and gas transmission and distribution companies, with one recommending lowering the threshold for participation from 0.5 PJ/year to 0.2 PJ/year, requiring implementation of identified cost-effective energy efficiency opportunities with a payback period of 10 years or less (Australian Network of Environmental Defender's Offices).

Stakeholders also noted that duplication with State programs should be avoided (Victoria Department of Primary Industries) and recommended taking the opportunity of extending the EEO program to electricity generators to streamline regulatory reporting requirements under the NGER framework (TRUenergy).

Only one stakeholder considered the extension to renewable energy generators but viewed that it would offer only limited energy efficiency opportunities as there is no 'fuel cycle' or fuel delivery systems for renewable generators (Griffin Energy).

A list of organisations that made submissions in response to the Discussion Paper is provided in Appendix A.

DRET is currently undertaking a review of the current EEO program requirements in consultation with industry.  The process has been initiated as a result of the 2010 Mid-Cycle review of the EEO program and to ensure clarity for participants entering the second cycle.  The review is intended to ensure that participants are aware of the ongoing requirements of the EEO program as it moves into the second program cycle, as well as to:

â–          provide increased clarity to EEO program participants on the meaning of requirements;

â–          provide more appropriate requirements to achieve the intent of the legislation across all industrial sectors, including amendments to some regulations to ensure they more clearly reflect the intent of the program; and

â–          improve program operations to reduce unnecessary burden identified by participants to date.

The Government will consider the specific design issues raised by generators in the consultation process as part of this broader review of EEO, which intends to put in place any regulatory and administrative amendments by 1 July 2011.  As an example, DRET is assessing the maximum exclusion amount for assessment (currently 0.01 PJ may be excluded from the assessment of any site) that meets the intent of the legislation and can be met by companies without undue burden.  Ways to streamline reporting for NGERS and EEO are also under consideration.

DRET considers this timing is appropriate because the items under review are regarded as important issues for all large energy users in the EEO program, not just generators.  As generators will have until March 2012 to apply to register for the program, and until July 2016 to undertake assessments, DRET considers that resolving these issues in a whole of program review in this timeframe is appropriate.

DRET published a consultation discussion paper on 28 January 2011 on its website that outlines the areas under review and seeks comments on specific proposals.  EEO stakeholders including individual generators and their industry associations were directly advised of the review which has also been published on the Government's business consultation portal[1].  Advertisements for the consultation were also placed in national newspapers.

DRET has advised that it is working to develop assessment guidance specifically for electricity generators that would address some of the concerns raised in the submissions.  Further consultation meetings with electricity generators will occur throughout 2011, to explain the operation of the EEO program and its requirements. 

 

 

 

Implementation and review

Extension of the existing Energy Efficiency Opportunities Act 2006 to include generators will not require any additional implementation arrangements.  A removal of the current exemption is required and this can be achieved by changing the meaning of 'controlling corporation' and 'group and members of a group' in the Regulations.  They are currently defined to cover corporations and subsidiaries unless their activities are mainly in electricity generation and so the current exemption can be removed through legislative amendment.

Review would be undertaken as part of the program already implemented for other corporations subject to the Act.

Conclusion and recommended option

The costs and benefits of an extension of the EEO program, both including and excluding renewables generators, are summarised in the table below.

5.1: Comparison of options - net benefits

Source: Access Economics, central case results (i.e. excluding Victorian generators)

As discussed in Section 0, the financial benefit from extending the scheme to either all generators or solely to non-renewable generators is $640.1 million.  However, the costs increase substantially if renewables are included, substantially reducing the benefit cost ratio.   Based on the analysis undertaken there seems to be no strong case for the inclusion of renewable generators in the extension of the EEO program.

Sensitivity testing using "worst case" and "best case" parameters indicates that the uncertainty in assumptions feeds through strongly to uncertainty in the benefit cost ratio of the proposed regulation, with the worst case parameters yielding a benefit cost ratio significantly lower than one.  While this combination of parameters is illustrative in exploring risk, the particular combination lacks internal consistency when one considers the real world consequences, and as such we consider this combination - while possible - highly unlikely.  The same caveats apply to the best case scenario.

 References

ALP 2010, Tough emissions standards for new coal-fired power stations,  http://www.alp.org.au/federal-government/news/tough-emissions-standards-for-new-coal-fired-power/, accessed 10 January 2010.

ClimateWorks 2010, Low Carbon Growth Plan for Australia.

Department of Climate Change and Energy Efficiency (DCCEE) 2010, National Greenhouse Gas Inventory accounting for the KYOTO target, May 2010.

Department of Resources, Energy and Tourism (DRET) 2005, Energy Efficiency Opportunities Program: Regulation Impact Statement.

- 2007, Industry Case Study: Midland Brick, http://www.ret.gov.au/energy/Documents/energyefficiencyopps/Midlandbrick_casestudy_web20070508134252.pdf, accessed 10 January 2010.

- 2008, Industry Leader Case Study: Alcoa Pinjarra, http://www.ret.gov.au/energy/Documents/energyefficiencyopps/Alcoa%20Case%20Study%20web-low%20res20080829113717.pdf, accessed 10 January 2010.

- 2009, Case Study Update: Midland Brick, http://www.ret.gov.au/energy/Documents/energyefficiencyopps/PDF/Industry%20Case%20Study%20Midland%20Brick%20update.pdf, accessed 10 January 2010.

- 2009, Energy Efficiency Opportunities Assessment Handbook.

- 2010a, A Cleaner Future for Power Stations: Interdepartmental Task Group Discussion Paper.

- 2010b, First Opportunities: A Look at Results from 2006 - 2008 for the Energy Efficiency Opportunities Program, http://www.ret.gov.au/energy/Documents/energyefficiencyopps/PDF/EEO_FirstOpportunitiesReport_2010_FINAL.pdf, accessed 10 January 2010.

- 2010c, Continuing Opportunities: A Look at Results for the Energy Efficiency Opportunities Program 2006 - 2009, http://www.ret.gov.au/energy/Documents/energyefficiencyopps/44068%20DRET%20EEO%20Continuing%20Opportunities_web.pdf, accessed 10 January 2010.

International Energy Agency 2010, World Energy Outlook 2010.

Prime Minister's Task Group on Energy Efficiency 2010, Report of the Prime Minister's Task Group on Energy Efficiency, Canberra, July.

Productivity Commission 2005, Energy Efficiency, Draft Report, Melbourne, May.

Rio Tinto, 2009 Energy Efficiency Opportunities Public Report 2009.

Roam Consulting 2008, Barriers to the implementation of energy efficiency improvements in the Australian energy industry, June.

Schultz, A 2009, Energy update 2009, Canberra, August.

Victorian Environmental Protection Agency website, http://www.epa.vic.gov.au/bus/erep/EREP_delivers_savings.asp, accessed 21 January 2011.

Wilkins, R 2008, Strategic Review of Australian Government Climate Change Programs (Wilkins Review).

Appendix A: Stakeholders participation

The Following organisations made submissions and/or attended forums.

â–          Australian Conservation Foundation

â–          Renewables SA

â–          Geodynamics

â–          NSW Minerals Council

â–          Copper Development Centre

â–          Environment Victoria

â–          Greenpeace Australia Pacific

â–          Origin Energy

â–          Construction, Forestry, Mining & Energy Union

â–          Clean Energy Council

â–          MBD Energy & Ignite Energy Resources

â–          Engineer Australia

â–          Mount Alexander Sustainability Group

â–          Verve Energy

â–          AGL Energy

â–          Xstrata Coal (Commercial in Confidence)

â–          Australian Network of Environmental Defender's Offices

â–          Energy Supply Association of Australia

â–          Schlumberger Carbon Services

â–          Macquarie Generation

â–          Hydro Tasmania

â–          Australian Coal Association

â–          TRUenergy

â–          Alinta Energy

â–          International Power Australia

â–          Griffin Energy

â–          HRL Limited (Commercial in Confidence)

â–          National Generators Forum

â–          Centre for Resources, Energy and Environmental Law

â–          WWF and the Climate Institute

â–          Sustainable Energy Association of Australia

â–          Victorian Department of Primary Industries

â–          Aviva Corporation (Confidential)

â–          Rio Tinto

â–          Investor Group of Climate Change

â–          Environmental Clean Technologies

â–          BHP Billiton (Confidential)

â–          Australian Petroleum Production & Exploration Association Ltd

â–          Peabody Energy

â–          Alstom

â–          General Electric

â–          Stanwell Corporation

â–          Tarong Energy

â–          Horizon Power

â–          WA Department of Mines and Petroleum

â–          Western Power

â–          Chamber of Minerals and Energy of Western Australia

Appendix B: Cleaner futures policy ALP press release

Tough emissions standards for new coal-fired power stations

All new coal-fired power stations will be subject to tough emissions standards to ensure that future energy generation in Australia is cleaner and greener, under a Gillard Labor Government.

Around 77 per cent of Australia's electricity supply is generated by black and brown coal fired power stations.  

The power stations we build in coming years will be with us for decades to come.  It is important that we take action now to ensure that we do not lock in high-emissions power stations that damage the environment and impose higher environmental costs for future generations.  

These reforms would ensure all new coal-fired power stations:
                                                                    
-    Meet new best practice coal emissions standards.
-    Are Carbon Capture and Storage ready.

In addition, existing coal-fired power stations will be subject to new obligations to find opportunities to reduce their emissions.  

The new best practice coal emissions standard will be set by the Government in consultation with stakeholders, including State and Territory Governments, energy market institutions, industry and environmental groups.  

Our starting point would be below the level at which assistance was proposed by the Government under the Carbon Pollution Reduction Scheme (CPRS).  Under the CPRS the Government proposed providing transitional assistance to generators that are producing above 0.86 tons of CO2 per megawatt hour of electricity produced.  

The standards would deliver a strong signal to investors to factor future carbon constraints into their decision making.  The standards will help move our energy sector towards cleaner forms of generation such as best-practice coal technology, gas and renewables.  They will encourage investment in low emissions electricity infrastructure and support green jobs and continued economic growth.

This approach will help resolve the uncertainty that has been deterring investment in generating capacity.  A recent survey by the Electricity Supply Association of Australia found that the anticipated capital expenditure on electricity generation plant over the next five years fell from $18 billion in 2009 to $8 billion in 2010.  A statement issued by the Climate Institute and its climate partners, including major banks and energy companies, estimated that regulatory uncertainty would cost the economy and consumers around $2 billion each year.   

The Government will consider phasing out the new requirements upon the introduction of an economy-wide carbon price.

The new requirements will not impact upon existing plants. Planned investments which already have environmental approvals, and are determined by the energy market institutions as being sufficiently advanced in their regulatory approvals at the commencement of these standards, will also be exempt from them.

A Gillard Labor Government will also place additional obligations on existing coal-fired power stations to find opportunities to reduce their emissions by expanding the Energy Efficiency Opportunities program.

For the first time, the expanded Energy Efficiency Opportunities program will require all existing generators, including all coal-fired power stations, to undertake regular assessments of their potential to save energy and report publicly on assessment outcomes.

Under the Energy Efficiency Opportunities program, Australia's 200 biggest energy users have already committed to measures that will reduce Australia's emissions by 0.8 per cent on 2000 levels, with measures for a further 0.4 per cent reduction in the pipeline.  In total, that's equivalent to taking more than one million cars off the road.

The Government will also publish annual facility-level greenhouse gas emissions and electricity production data supplied under the National Greenhouse and Energy Reporting Act.  

This package will ensure that Australia moves forward on tackling climate change and begins the transition to a low pollution economy, both by reducing emissions from the electricity generation sector.

These initiatives do not involve any budgetary costs.