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Focus: Energy – November 2007

Targets for efficient Victorian household energy use by 2009

In brief: The Victorian Government recently introduced legislation into Parliament designed to reduce greenhouse gas emissions, encourage the efficient use of electricity and gas and encourage investment in technology that reduces energy use. The proposed legislation does this by requiring large energy retailers to acquire energy efficiency certificates that are generated by specified greenhouse gas reduction activities. This measure is intended to contribute to the Victorian Government's target for a 10 per cent reduction, by 2010, in the greenhouse gas emissions that are attributable to households. Partner Grant Anderson (view CV) and Lawyer Ross Schloeffel outline the principal features of the proposed scheme.

How does it affect you?

  • The Victorian Government has set a target for reducing greenhouse gas emissions attributable to the household consumption of electricity and gas.
  • Large energy retailers will be required to obtain sufficient energy efficiency certificates to meet that part of the reduction target that is allocated to them or face a shortfall penalty.
  • Large energy retailers will also bear the cost of funding this scheme.
  • The scheme opens up opportunities for the development of energy efficiency initiatives that apply to Victorian households.
  • Victorian households may be able to obtain discounted energy prices in exchange for transferring certificates generated by their greenhouse gas reduction activities to their energy retailer.

Background

In 2007, the Victorian Government adopted a sustainability policy, which incorporated a target of reducing household greenhouse gas (GHG) emissions by 10 per cent by 2010. As part of its commitment to achieving this target, the Victorian Government has proposed the establishment of the Victorian Energy Efficiency Target (VEET) Scheme, which it expects will yield the following benefits over the period 2009-11:

  • approximately 1.3 million tonnes of GHG emissions reduction – this is expected to lead to approximately 8.1 million tonnes of GHG emissions reduction over the life of the scheme (2009-29), the equivalent of making 675,000 Victorian households carbon-neutral for one year;
  • the provision of up to $210 million toward energy efficiency activities across Victoria;
  • an average decrease in wholesale electricity prices of approximately 2.2 per cent; and
  • an average decrease in energy costs of $45 per household.

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How will the VEET Scheme work?
Greenhouse gas reduction target

The basis of the VEET Scheme is the setting of a GHG reduction target, determined by the Victorian Government. The target is based on various modelling scenarios and takes account of the marginal cost of both energy efficiency measures and compliance with the VEET Scheme. The Victorian Energy Efficiency Target Bill 2007 (the VEET Bill) sets the VEET Scheme target (ie the amount of GHG carbon dioxide equivalent that is to be reduced by GHG reduction activities) for each of the years in the period 2009 to 2011 at 2.7 million tonnes. Note that this target is not set on the basis of the GHG emissions reduction that is to occur in this three-year period, but on the basis of the GHG emissions reduction that is to occur over the life of the GHG reduction activities that are implemented in that three-year period. (See below for a further discussion of VEET certificates.) 

The VEET Scheme target for each subsequent three-year period is to be set out in regulations by no later than the 31 May which precedes the relevant three-year period.

The scheme covers all six categories of greenhouse gases the subject of the Kyoto Protocol and may extend to other gases prescribed by regulation.

Greenhouse gas reduction liability

The responsibility for meeting the GHG reduction target is imposed on large electricity and gas retailers that operate in the Victorian market – that is, electricity and gas retailers who have 5,000 or more (household) customers in Victoria and who purchase that electricity or gas in the national electricity market or the Victorian gas market.

Such retailers will be subject to a GHG 'reduction liability' based on the share of the GHG reduction target that is attributed to them, and must then surrender the number of energy efficiency certificates commensurate with their GHG reduction liability or pay a shortfall penalty.

VEET certificates

Under the VEET Scheme, persons who are accredited by the Victorian Essential Services Commission (the ESC) will be able to create energy efficiency certificates (VEET certificates) in relation to activities, to be prescribed by regulation, which result in a reduction in GHG emissions that would not have occurred in the absence of that activity.

Some examples of GHG reduction activities for which VEET certificates may be created include:

  • modifying or replacing appliances or equipment to reduce the consumption of electricity or gas without affecting their output (eg replacing incandescent lamps with compact fluorescent models or electric hot water systems with solar hot water systems);
  • replacing any equipment that uses electricity or gas and emits relatively high levels of GHG with an energy source that emits relatively low levels of GHG; and
  • purchasing or installing any appliance or equipment that has a relatively high efficiency rating.

Either the consumer of the electricity or gas (deemed to be the owner of the property in the case of rental premises) or an assignee of the consumer may become an accredited person and, therefore, eligible to create VEET certificates in respect of the relevant GHG reduction activity. Given that individual consumers are unlikely to undertake a significant number of GHG reduction activities (and so are unlikely to want to go through the accreditation process) it is probable that most consumers will assign their right to create VEET certificates to an already accredited person (such as an electricity or gas retailer or an appliance retailer). The quid pro quo is that the consumer is likely to obtain a discount equivalent to the value of the VEET certificates, ie the price at which the assignee can sell the VEET certificate to a retailer who wants to use it to acquit its GHG reduction liability or, if the assignee is such a retailer, the amount of the penalty that the retailer would otherwise incur if it did not have that certificate to acquit that liability.

A VEET certificate may be created in respect of each whole one tonne of GHG emissions carbon dioxide equivalent that is considered will be reduced by the relevant GHG reduction activity. For these purposes, the level of GHG emissions abatement attributable to a GHG reduction activity will be the lifetime abatement benefit of that activity. For example, an activity that will have the effect of reducing GHG emissions by 0.5 tonnes of carbon dioxide equivalent per year for four years will generate a right to create two VEET certificates at the time the activity is undertaken. 

VEET certificates will be created electronically, and must be registered with the ESC through an electronic interface. The certificate will then be entered into a publicly accessible register on the ESC's Internet site, which is intended to record the owner of such certificates and any subsequent transfer, surrender or expiry.

A VEET certificate can only be created in respect of GHG reduction activities that have been undertaken during the period of the VEET Scheme (1 January 2009 to 31 December 2029) and must be created no later than six months after the end of the year in which the GHG reduction activity is undertaken. The certificate expires six years after the date on which the GHG reduction activity is undertaken.

The VEET Bill will enable the ESC to preclude an accredited person who creates a VEET certificate from obtaining a benefit under another GHG reduction scheme (eg the NSW Greenhouse Gas Abatement Scheme or the AGO Greenhouse Friendly Program).

Trading

A VEET certificate may be transferred to any person, whereupon the ESC must be notified so that it can update the VEET certificate register. So, for example, if a retailer obtains more VEET certificates than it needs to meet its GHG reduction liability in any year, it is able to sell that excess to other retailers that are facing a shortfall. Alternatively, the retailer may 'bank' (ie carry forward) its excess certificates for up to six years after their creation. The maximum market price for a VEET certificate will be the shortfall penalty (see below).

Shortfall penalties

If a retailer fails to surrender sufficient VEET certificates to meet its GHG reduction liability for any year, it must pay a penalty equal to the VEET certificate shortfall (calculated by reference to the number of tonnes of GHG emissions carbon dioxide equivalent which are attributed to the retailer's liable electricity and gas sales and which are not covered by VEET certificates) multiplied by a penalty rate that is to be prescribed in regulations. For these purposes, the number of tonnes of GHG emissions carbon dioxide equivalent will be calculated on the basis of a conversion rate, to be prescribed in regulations, that will presumably differ as between electricity and gas. It seems that this conversion rate is intended to be the mechanism for effecting a sharing of the GHG reduction target between retailers. In his Second Reading Speech to Parliament, the Minister for Energy and Resources stated that the penalty rate would be set at a level that would both support compliance with the VEET Scheme and impose reasonable limits on the costs faced by retailers.

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Households emissions only

It is proposed that the VEET Scheme will initially apply only to households (ie VEET certificates may only be created in respect of household GHG reduction activities). The Victorian Government has indicated that this decision is based on evidence which shows that, for small users of electricity such as households, energy price increases alone will not be sufficient to encourage the uptake of an extensive range of energy efficiency opportunities. Barriers to the uptake of energy efficiency opportunities within households include a lack of awareness of the link between energy use and its environmental impacts, split incentives between landlords and tenants for the installation of energy efficient appliances, a focus on up-front costs, and the limited availability of energy efficient technology. The Victorian Government has not indicated whether the VEET Scheme will be extended to larger scale users of energy in the future.

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VEET Scheme administration and costs

The VEET Scheme will be administered by the ESC. In particular, the ESC will be responsible for monitoring and administering the creation, registration, transfer and surrender of VEET certificates, accrediting persons who may create VEET certificates, enforcing the imposition of shortfall penalties, and monitoring compliance with the scheme (including through audits of the creation of VEET certificates by accredited persons).

For these purposes, the ESC has extensive powers that allow it to require the provision of information or documents, to enter premises and (with a warrant) to search premises, examine activities or items on the premises, take photographs, inspect documents, copy documents, seize items, and require questions to be answered and documents to be produced.

Affected retailers are also required to report annually to the ESC (by way of an energy acquisition statement) that sets out the amount of their liable electricity and gas purchases for the previous year, the value (in tonnes of carbon dioxide equivalent of GHG emissions) of VEET certificates being surrendered and any carry-forward surplus of VEET certificates. This statement must be lodged by 30 April following the year to which it relates and must have been audited by an independent third party engaged by the retailer. In addition, affected retailers and accredited persons are required to keep records for up to six years that, for example, detail the amount of electricity and gas consumed.

In order to meet the cost to government of administering the scheme, certain fees will apply at various stages of the VEET Scheme process, including for the accreditation of persons who can create VEET certificates, for the creation, transfer and surrender of VEET certificates, and for the lodgement of annual energy acquisition statements.

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Retailer submissions

Prior to introducing the VEET Bill, the Victorian Government received a number of submissions, including from Victorian retailers, regarding the content and implementation of the VEET Scheme. Although the retailers were broadly supportive of long-term GHG reduction policies they have expressed concern that:

  • the VEET Scheme places the entire cost of the scheme on retailers;
  • the GHG reduction target seems to be a rather arbitrary target;
  • it will be difficult to verify the measures that are taken to reduce energy consumption under the VEET Scheme; and
  • the VEET trading scheme might be too small for VEET certificates to be effectively tradeable, leading to a lack of liquidity in the secondary market for such certificates.

A number of alternatives to the VEET Scheme were suggested by retailers, including deregulated and cost-reflective electricity pricing, minimum efficiency standards for appliances, and a government-funded grants program designed to assist large-scale electricity users implement energy efficiency initiatives.

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For further information, please contact:

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