Issue 5 May 2005

Just communicate

Lack of information may be the simple reason that many energy efficiency opportunities, including some that would be cost effective, are being foregone in Australia, says the Productivity Commission in its much-awaited draft report that follows consideration of some 400 submissions and Commission public hearings across the country -- and which will be turned in to a final set of recommendations to the Federal Government in August.

The PC says the most important barriers to improving energy efficiency appear to be a failure in the provision of information and the differing incentives facing those who take decisions about installing products such as heaters and air-conditioners and those who use them. It argues that the case for government intervention in these areas is strongest in consumer markets and weakest where private business is concerned.

The Commission says the best approach to improving energy efficiency lies in providing information and in light-handed regulation rather than prescriptive and intrusive government measures.

The Commission has declined to support the recently announced Energy Efficiency Opportunity Assessment (EEOA) program -- that will make it mandatory for the 200 largest energy using companies to undertake audits and publicly report the results -- arguing that the Federal Government will achieve more by continuing to promote a competitive economy in which firms focus on cost control. The PC says the program's benefits are likely to be "modest" while its costs "could be significant." The EEOA program was announced in last year's energy white paper and the regulations are expected to be brought in to operation next year.

It has also warned the COAG Ministerial Council on Energy not to implement its nine point plan for promoting the uptake of cost-effective energy efficiency improvements until the effectiveness and efficiency of existing programs has been undertaken.

The Commission calls repeatedly in the draft report on governments in Australia to subject energy efficiency programs and standards, existing and proposed, to more rigorous, independent analysis.

The PC rejects calls for a national energy efficiency target (NEET) where firms failing to meet efficiency goals are penalised or have to purchase credits in a market for energy efficiency certificates. The Commission says it has major reservations about both the NEET principle and the scheme's practicality. "The introduction of an emissions trading scheme or a carbon tax would be a more direct and better targeted way of using prices to reduce greenhouse gas emissions," it adds.

Looking at the problem of the residential sector ignoring cost-effective energy efficiency improvements, the Commission observes that appliance sellers are much better informed than buyers about the energy efficiency of products, that there is little incentive for the market to supply information, that many energy-consuming products are bought by landlords and builders who do not themselves benefit from greater energy efficiency and that the reduction in costs is often so small that householders do not consider it worth pursuing even when they are provided with relevant information.

Remove retail price caps

The Productivity Commission's draft energy efficiency report re-iterates its recommendations from its recently-published review of national competition policy that electricity retail price caps should be removed in Australia as soon as effective market competition can be established -- and that governments and regulatory agencies should explore opportunities to improve the efficacy of price setting for network service providers.

The PC says market reform has led to more efficient pricing of gas and electricity, and it points out that average retail power prices fell by 14.6 percent in real (inflation-adjusted) terms between 1994 and 2004. "Yet electricity prices still do not fully reflect the costs of supply because of regulation of retail prices and network tariffs, imperfect competition among generators and the unaccounted environmental externalities associated with energy use."

The Commission says the absence of interval metering for electricity consumption by residential and small business customers has limited the use of more cost-reflective pricing methods. "As a result, the electricity supply industry faces muted incentives to invest and energy users have little incentive to modify their demand."

However, it warns that any proposed mandated roll-out of interval meters should be subject to a comprehensive benefit/cost assessment.

No to levies for subsidies

The Productivity Commission rejects propositions that governments should introduce levies to raise revenue to subsidise the uptake of energy efficiency improvements. Asking users of energy derived from fossil fuels to contribute to such a levy would have "serious drawbacks," the Commission says, because it would unduly penalise those already achieving high levels of energy efficiency and because there is no necessary nexus between the appropriate level of taxes and funding needs, as can be found for example in the fuel excise paid by truck operators to fund road repairs. "The risk is that such levies would be more distortionary and have higher administration and compliance costs than existing broad-based taxes," the PC argues.

Queensland's soaring power demand

Over the past 10 years Queensland has experienced a 53 percent increase in electricity consumption and its peak power load is growing at eight percent a year, the State Government says in its revised infrastructure plan for the south-east region that includes Brisbane and the Gold Coast.

Premier Peter Beattie and Deputy Premier and Treasurer Terry Mackenroth have announced that, in addition to the $3.4 billion to be spent on energy networks in south-east Queensland over the next five years, the Government expects a further $10 billion to be outlayed on transmission and distribution beyond 2010. Current and proposed expenditure by the State-owned transmission company, Powerlink, is forecast to amount to $1.7 billion between now and 2015.

This capex forecast does not include the cost of building new power generation plant -- the Government points out that $4.7 billion has been spent on new generation capacity in the State since 1998. It says it expects a "significant proportion" of the estimated $12 billion to be spent on 10,000 MW of new generation plant in the national electricity market between now and 2015 will occur in Queensland, with almost 2,000 MW of currently proposed developments planned for the State.

The Government says the State-wide surge in power demand flows from new energy-intensive industry development, population growth, increases in disposable income leading to purchase of more energy appliances and increasing use of residential sector air-conditioning as a consequence of poor housing design.

Keith Orchison

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