The Economics of Energy Efficiency & the Efficient Gap - the NSW experience

1. The Economics of Energy Efficiency & the Efficient Gap- the NSW experience Robert Smith Manager – Demand Management Policy & Strategy EnergyAustralia 14 June 2006

2. The rebirth of interest in Demand Management

3. The rebirth of interest in Demand Management

4. The rebirth of interest in Demand Management

5. The rebirth of interest in Demand Management

6. The rebirth of interest in Demand Management Energy Crisis

7. Demand changes Lifestyle changes & growth • New appliances and increased uptake • 7kVA per house from 3.5kVA in 1990’s • Over a decade of economic growth • Growth in air conditioning loads • Peak growth - 3.5% peak cw 2.1% usage • Shift to summer peaking

8. Demand Management in NSW “It is the Tribunal’s strong view that there is significant untapped potential for efficient demand management. To a large extent, one of the major obstacles continues to be a culture which favours traditional “build” engineering solutions and which pays little more than lip service to alternative options” DrTom Parry, Chairman, Independent Pricing & Regulatory Tribunal, Inquiry into the role of Demand management and Other Options in the provision of Energy Services, Final Report, October, 2002

9. The Four Drivers of Demand Management • Environmentally driven • reducing greenhouse gas emissions • Wholesale market driven • reducing wholesale pool prices • Network driven • deferring network investment • Customer driven • changing usage, patterns or fuel

10. The Four Drivers of Demand Management • Environmentally driven • reducing greenhouse gas emissions • Wholesale market driven • reducing wholesale pool prices • Network driven • deferring network investment • Customer driven • changing usage, patterns or fuel Externality Lumpy capital End use efficiency

11. Missing electricity value NEM VOLL = $10,000 MWh cw Customers 13¢ kWh

12. NSWGreenhouse Plan - costs • Energy efficiency in existing homes identified as cost-effective • Barriers - expectations of short payback periods, lack of information and materiality of electricity costs in household expenses Source: NSW Greenhouse Plan, NSW Greenhouse Office, 2005

13. NSWGreenhouse Plan - Opportunities • Energy efficiency in existing homes identified as cost-effective • Barriers - expectations of short payback periods, lack of information and materiality of electricity costs in household expenses 0 Observed market costs Source: NSW Greenhouse Plan, NSW Greenhouse Office, 2005

14. 0 Observed market costs NSWGreenhouse Plan - Opportunities • Energy efficiency in existing homes identified as cost-effective • Barriers - expectations of short payback periods, lack of information and materiality of electricity costs in household expenses SolarCities Source: NSW Greenhouse Plan, NSW Greenhouse Office, 2005

15. Productivity Commission Report - 2005 “Examine why measures that appear to be privately cost effective are not being adopted” Market Failure • Asymmetric information - Public good information • Split incentives - Positive externalities Behavioural & Cultural • Bounded rationality - Organisational barriers Other Barriers & Impediments • Implementation costs - Risk & uncertainty • Capital constraints - Asset replacement costs

16. Productivity Commission Report - tone “Contentious” to argue for mandatory measures or intervention • “preparedness of governments to force firms to supposedly “help themselves” “opportunities ostensibly in their own interest” • “override consumer and producer sovereignty” • “perception that there can be win-win options” • MEPS used “quite aggressively to remove whole swathes of product” • ‘Seems counterintuitive that a measure that denies customer choice and can increase purchase prices could be in their interests’

17. Productivity Commission Report - conclusions “Scope for government to efficiently intervene to address barriers and impediments ..appears to be modest” “None of this is to deny that firms and individuals are sometimes not acting as rationally as they might. There is nothing intrinsically different about energy in this regard: nor does failure to take up such opportunities necessarily warrant policy intervention” “Temptation has been to overstate the private cost-effectiveness aspects of energy efficacy programs when public benefits from greenhouse gas abatement oftenseems the real policy target”

18. Productivity Commission Report - observations • TOR create Hamlet without the greenhouse prince • Scepticism of zealots shaped the report • Strict private cost effectives only - no margin • Simplified rational competitive market model underpins assumptions and conclusions particularly in uncertainty, Office of Regulation Review 1998 repackaged– Good economics or Galbraith’s “innocent fraud”? • Compare with the Indonesia free market model

19. Java comparison – proposed lighting program Peak demand and oil prices • 70% of fuel cost for electricity generation for 30 % of time • Electricity cost 600Rph/KWh - oil cost PLN 1,500Rph/KWh • 6.00pm-10.00pm evening peaks from households lighting Issues • No standards or stars for appliances or CFLs • Counterfeit Phillips 15W incandescent globes on sale • Increasing CFL imports and sales • CFLs 60% bad (cheap poor quality), 40% good • Household electricity bills of $8.00 a quarter • CFL cost of $2.50 creates real cash flow problems • No greenhouse gas programs or trading • CDM - Clean Development Mechanism untested

20. NSW situation Low prices Favourableregulation • NGACs – CO2 $15.71 a tonne • D-factor – Network deferral X 2 • Energy Savings Fund – $61m, 2006-07 • NEM VOLL – $10,000 MWh • Solar Cities – $75m for 4 • MEPS - Minimum appliance standards • Stars - Energy appliance ratings • NEM Rules - DM investigation • BASIX & ABGR – Building ratings • RECs - greenhouse incentives • Audits & Action Plans - NSW & Fed

21. NSW Incentives for Demand Management

22. EA developments in managing demand Network D- factor • $5.5M in deferrals in 2004-05 • Power Factor success • 26 investigations underway Energy efficiency & Greenhouse • CFL’S 500K in 2004, 2M in 2006 • Spare Fridge retirement of 1,000 • On–Line Shop • Refit – home installation • Insulation offers • On-line education – calculators • www.energy.com.au

23. Residential energy efficiency cost effectiveness Source: Moreland Energy Foundation via Productivity Commission, 2005

24. Compact Fluorescent light (CFLs) example

25. CFL economics - 15,000hr 15W bulb

26. CFL economics - responses Market share • energy saving lights in 37.2% of households in NSW 2005 Free giveaway programs • LESS – libraries and newspaper coupons • ORIGAN – energy sales promotion • FeildForce – streets and Easter Show • NECO – streets and on-line shop (postage) • Easy Being Green – streets Retail outlets • Still $7.00 and limited shelf space

27. Barriers to behavioural change Nous - knowledge of the issue and what to do Squint - financial myopia to investing in long term savings Noise - competing messages and priorities Clout - split incentives and ability to contract for savings Grunt – low energy cost & low on customers priorities Nimby – externalities unrecognised Sloth - inertia even among the willing

28. Demand Management in NSW – future “Economists love incentive. They love to dream them up and enact them, study them and tinker with them. The typical economist believes the world has not yet invented a problem he cannot fix given a free hand to design a proper incentive scheme.” Steven Levitt & Stephen Dubner

29. Demand Management in NSW – future Questions Observations Gripes

30. Developments in the metering & pricing Time of Use pricing • First utility in the world to mandate ToU for all new connections/meters • Voluntary TOU pool offer • Strategic pricing trial 1,300 Smart Meters and ToU progress • 160,000 meters installed • Mandatory for >40MWh • 22,000 customers paying ToU • “Smarter” meters 10,000 trial 2007 ToU Target • 220,000 customers by 2008

31. Regulation and energy efficiency initiatives

32. Local constraints reviewed for DM

33. 2.5 AC, hot workday 2.0 AC, avg workday 1.5 Air conditioning usage 1.0 Demand (kW) 0.5 No AC, hot workday No AC, avg workday 0.0 Midnight 6 a.m. Midday 6 p.m. Midnight Time of day Trends in Demand – Air conditioner impacts Each air conditioned customer is subsidised c.$70 p.a. by each non air conditioned customer

34. NGAC Forecast Shortfall • One of the world’s first mandatory greenhouse gas emissions trading schemes in (Jan 2003) • Aggressive “beyond Kyoto” commitment for NSW creating an imbalance between supply of and demand for abatement certificates Greenhouse Gas Abatement Scheme Introduction, March 2006