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Environmental Economics Seminar Series
Department of the Environment, Sport and Territories, 1996
ISBN 0 642 24878 8
George Wilkenfeld and Associates,
Energy Policy and Planning Consultants, Sydney
The level of energy efficiency in most segments of the Australian economy is well short of the economic optimum, and there are many opportunities to supply energy services at far lower economic and environmental cost. Energy use in these market segments may respond to more cost-reflective energy pricing (assuming governments can bring themselves to impose it), but for the most part opportunities for greater efficiency will only be realised through programs of selective intervention in the market.
This paper reviews the effectiveness of programs which governments and utilities in Australia have adopted to encourage greater energy efficiency in the residential sector. They include information programs, minimum performance standards and financial incentives. The programs most likely to deliver significant and cost-effective increases in efficiency and reductions in greenhouse gas emissions are those which bear directly on appliance characteristics, rather than those which target the other main determinants of residential sector energy use, such as householder preference and behaviour or dwelling thermal performance.
The programs with the widest impact appear to be those where householders are not asked to consume less energy services, but to modify their choices at the time they make investment decisions.
In 1990, the residential sector accounted for about 46 million tonnes, or 16.6 per cent of Australia's emissions of energy-related CO2 from fossil fuel combustion (GWA 1994; bunkers excluded). The residential sector also contributes to CH4 emissions associated with the mining of coal for electricity generation, and - less directly - to CH4 emissions associated with natural gas leakage.
To put it in perspective, the fossil fuel-related CO2 emissions from the residential sector are about half as much again as those from Australia's entire car fleet or from its stock of non-residential buildings (ie the 'commercial-institutional sector'). The electricity-intensity of the residential sector is second only to that of the commercial-institutional, and - in Australia at least - electricity is by far the most greenhouse gas-intensive energy form.
Table 1 summarises the contribution of individual end uses to residential energy consumption and associated greenhouse gas emissions in Australia in 1990. Electricity accounts for 43 per cent of residential sector energy but 73 per cent of CO2 emissions (85 per cent if wood is excluded), so electric end uses are the obvious targets for energy efficiency programs. About half of all electricity use in the residential sector provides water heating, space heating or cooking: end uses where many lower-CO2, and in many cases lower-cost substitutes, such as natural gas or direct solar thermal energy, are available.
TABLE 1 - End use shares of residential energy consumption and associated CO2 emissions, Australia 1990
The electricity-intensity of space heating is considerably lower than any other residential end use, because of the already high share of natural gas and wood. This limits the scope for greenhouse gas reductions from energy efficiency programs which target the thermal performance of houses. The greatest potential for greenhouse gas reductions (through both greater efficiency and fuel substitution) lies in water heating, and (through greater efficiency alone) in the major all-electric end uses: refrigeration, major appliances and cooking.
The residential sector has a high potential for cost-effective reductions in greenhouse gas emissions for a number of reasons. Electricity (and, to a lesser extent, gas) prices to householders have historically been cross-subsidised by other consumers. Consequently, the electricity share of residential energy use is high, and the investment in energy efficiency is lower than if the full costs of supply had been signalled (this includes only internalised costs, not environmental externalities). The cross-subsidy is gradually decreasing, but so slowly that the impact on customer perceptions and behaviour is still very low.
The residential energy market is distorted for other reasons as well, and householders do not appear to be responding fully even to the level of energy prices which they face. Research suggests that they discount the value of future energy savings they might expect from investments in energy efficiency, at a rate far higher than the interest rate at which they could borrow to make those investments (ABARE 1991).
The most prevalent sources of market failure are lack of information on the energy implications of investments and on the comparative energy consumption of alternative products and practices, and imperfect capital markets. Householders need to raise the full costs of their investments in energy efficiency and bear all the risks of the investment not performing as envisaged, or of moving house and not being able to recover the full cost of built -in efficiency investments from the next owner or tenant. However, if householders choose (usually by default) to invest in energy supply then they raise the capital through their energy bill payments and effectively share the risk with other present and potential energy consumers.
These market distortions would remain even if energy prices became fully cost-reflective, although they may be somewhat reduced. If it is a policy objective that a significant proportion of the potential for cost-effective increases in energy efficiency (as identified in earlier studies) should be realised, then external interventions, or 'programs', are needed in order to overcome the barriers and compensate for distortions in the residential energy market. These programs need to be designed to address specific market barriers, and also particular end uses of energy. There is little point in directing limited program resources to energy uses which account for relatively small amounts of greenhouse gas emissions, or to programs whose effect is small and/or uncertain.
The first large scale residential sector energy efficiency programs in Australia were implemented in the early 1980s. The Commonwealth and some of the States established energy policy agencies during the mid 1970s, in the wake of the 'first oil crisis' in 1973, and the 'second oil crisis' of 1979 increased public awareness of the need to use energy more efficiently. The National Energy Conservation Program, set up in 1979, initially concentrated on the conservation of liquid fuels, particularly for transport, but in 1981 a Commonwealth tax concession for insulation (since discontinued) was offered to first home buyers (GWA et al 1993).
General information programs inform householders about how energy is used in the home and what they can do to use it more efficiently. The first large scale program of this type aimed at the residential sector was the Electricity Conservation Awareness Program (ECAP) run by the Energy Authority of NSW in 1982. This was an emergency measure designed to achieve immediate reductions in electricity use, in response to the failure and withdrawal from service for several months of three large generators at Liddell power station.
The information was organised by end use - eg how to save energy in cooking, in space heating and in the use of electrical appliances - and disseminated via the full range of media including television, press, brochures and electricity bill inserts. In the following years, other State energy agencies and most electricity and gas suppliers began to produce and distribute similar information, to the extent that it is now freely and universally available. Perhaps the largest scale general information program to date was the Energy Guide booklet, which the Commonwealth distributed to every Australian household in 1991, as a first stage of the Government's Greenhouse Response Strategy.
These programs encourage and enable people to make the most energy-efficient choices at the time of purchasing an appliance, or designing, purchasing, building or renovating a house. They
provide specific information on the relative energy efficiency and sometimes the relative costs of models on the market or alternative construction practices, so that choices can be based on life cycle costs rather than initial cost alone. There are three main examples of specific information programs in the residential sector.
This program was introduced by regulation in NSW and Victoria in 1986-87, after several years of attempts by the Commonwealth and State governments to negotiate voluntary labelling with the appliance industry. It commenced with refrigerators and freezers, and has expanded since to dishwashers, room air conditioners, clothes washers and clothes dryers. As part of the National Greenhouse Response Strategy, it is now being made mandatory in all States, but this will make little difference as the program has effectively operated nationally since the late 1980s. The labels carry efficiency ratings of between one and six stars, as well as kWh per year values.
This program evolved from a Victorian gas utility initiative of the early 1980s, and since 1988 has been managed on a national basis by the Australian Gas Association (AGA). The AGA comprises gas utilities as well as appliance manufacturers, and its technical approvals procedures allow it to make labelling effectively universal, although it has taken this step only recently. Gas storage water heaters, instantaneous water heaters, space heaters and central heaters all carry labels with star ratings, similar in design to the electric appliance label, but different in colour.
The first of these, developed in the early 1980s, was the Five Star Design Rating, which was awarded to house designs or completed houses which met specified criteria for insulation, materials, glazing, shading and orientation. House energy rating schemes (HERS) which allow assessment on a continuous scale rather than on a pass/fail basis proliferated in the early 1990s, under the sponsorship of State or Territory energy agencies and local councils. None of these have so far achieved widespread use. A national HERS program is currently being developed, to establish a degree of consistency between rating schemes and to set technical standards.
Some decision makers do not respond to general or even specific information programs for one or more of the following reasons:
One effective way to address these barriers is to set minimum energy performance standards (MEPS). Mandatory house insulation is a form of MEPS. In 1991, Victoria amended its building regulations to require specified levels of wall and ceiling insulation in all new houses. In December 1992 the Australian Capital Territory made the insulation of walls and inaccessible ceiling spaces mandatory for new houses. A more flexible approach to energy performance standards for houses would be to prescribe minimum HERS ratings; the Victorian government is currently considering allowing this as an alternative way of meeting the performance level implicit in the insulation standard.
MEPS for certain electric appliances is currently under consideration. A study commissioned by the Australian and New Zealand Minerals and Energy Council of Ministers (ANZMEC) recommended MEPS for refrigerators, freezers, electric storage water heaters and clothes dryers (GWA 1993). The MEPS levels recommended for refrigerators and freezers are 'low level' in that over half the models on the market today already meet them, so MEPS would eliminate the least efficient. The MEPS levels recommended for water heaters are 'high level' in that manufacturers would have to introduce new, more highly insulated products in order to meet them. These recommendations were subject to rigorous cost-benefit analysis, to establish with reasonable confidence that likely increases in average product price would be more than matched by the net present value (discounted at an appropriate rate) of projected energy savings. In other words, the 'no regrets' principle in the NGRS (1992) was applied.
Incentives programs offer householders or intermediaries acting on their behalf, such as builders or plumbers, discounts or other financial assistance for the purchase of certain types of equipment. Examples of such programs include the incentives paid by electricity utilities in New South Wales for the adoption of twin element off peak water heaters. Their objective is to preserve market share by preventing households from connecting to gas. Unfortunately this promotes the adoption of a technology with higher greenhouse gas emissions than any other means of heating water (given the coal-dominated electricity generation fuel mix on mainland Australia), but it demonstrates that such programs can be effective in the residential sector.
The Commonwealth Government has recently sponsored the establishment of a program to assist householders over the financing hurdles associated with the purchase of solar water heaters (EEA et al 1994). The program will centre on a credit card facility to be offered at the lower end of the commercial interest rate range. The facility will be useable by purchasers of solar and heat pump water heaters, and perhaps also other products such as compact fluorescent lamps or building insulation. Unlike electricity utility incentives for off peak water heaters, the program offers a loan rather than an actual purchase price subsidy, but this could make the difference between adoption and non-adoption by those already predisposed towards solar.
The projected impact on greenhouse gas emissions in 2000 and 2005 of all energy efficiency programs in the National Greenhouse Response Strategy (NGRS) was recently reviewed by the present author for the Commonwealth Department of Environment, Sport and Territories (GWA 1994).
TABLE 2 - Projected impact of residential sector energy programs on CO2 emissions, Australia 2000
Wherever detailed studies of energy efficiency program impacts have been undertaken, the general approach has been to project energy use, greenhouse gas emissions and energy service costs for the target market segment, with and without the program in place. The difference between the two sets of trend lines indicates the projected energy, greenhouse gas and cost savings for the target segment. Caution should be exercised in relating the impacts projected in separate studies to each other or to national greenhouse gas emissions projections, since assumptions and methodologies may differ.
Table 2 summarises the projected CO2 impacts of the residential sector energy efficiency programs in the NGRS. About half the total impacts are attributable to appliance energy labelling. However, these labelling impacts are accruing as a result of decisions taken in the mid 1980s, and the program has already reached close to its maximum effect. Any further large scale impacts will therefore need to come from other forces or programs, notably appliance standards (MEPS).
The wide range in some program estimates (eg general information and incentives) is due to uncertainty about the effect of programs already in place. The estimated impact of HERS is low because of the fact that insulation is already mandatory in the major space heating markets, so the most cost-effective measures which HERS could identify are already being taken up. Furthermore, the space heating end use which is the main target of HERS is dominated by gas and wood rather than electricity (see Table 1), so the fossil CO2 saving associated with each unit of energy saved is low.
There have been few systematic studies of the comparative costs per unit of energy or greenhouse gas savings achieved by specific residential sector programs. Cost-benefit analyses were undertaken prior to the implementation of mandatory insulation in Victoria (DITR 1986) and as part of ANZMEC's consideration of appliance MEPS (GWA 1993). Some estimates of the total costs of the electric appliance energy labelling program were made in the first review of that program (GWA et al , 1991).
On the basis of the limited data available, it is apparent that different approaches have different patterns of costs and benefits. General information programs impose costs on the information provider, and indirect costs on the information users (and on the other taxpayers or utility customers who ultimately bear the cost of producing and distributing the information, whether they benefit from it or not). However, there are no other costs imposed, since users may choose to ignore or make use of the information. Since the impacts of general information programs are near impossible to measure, the cost-benefit ratios cannot be estimated with any confidence. This means that to rely on general information programs as a greenhouse policy response is to accept uncertainty of impact and uncertainty of cost-effectiveness.
The impact of specific information programs may be measured through the use of survey techniques and other indicators. Awareness and comprehension of the information, the ratio of purchase decisions affected, and the extent of increased preference for higher efficiency products can all be estimated. Program costs include those borne by information providers and users (as for general information programs) as well as product testing and research costs, label fixing costs and any additional costs associated with producing the more efficient products and houses which are purchased or built as a result of the program's existence. Specific information programs therefore offer greater certainty of impact and of cost-effectiveness, provided the necessary evaluation efforts are made. Estimating the costs and benefits of incentives programs is of comparable complexity.
For standards programs, the minimum benefit from a given level of compliance (100 per cent or some lesser amount) can be estimated with reasonable confidence. If the actual monitored increase in energy efficiency is higher than would occur from the imposition of standards alone, research will be necessary to determine the reason, particularly if other programs such as labelling operate in parallel.
The direct costs of standards programs tend to be significantly lower than for information programs, since it is only necessary to communicate with a few equipment suppliers, not with many equipment purchasers. However, the costs borne by purchasers may be increased if the less efficient options excluded from the market also happen to be the cheapest to buy (although this is not necessarily so: for many products the correlation between energy efficiency and price is weak or non-existent). Cost-benefit analysis is particularly important in such instances, to ensure that total projected costs are matched or exceeded by total projected benefits. This type of analysis is complex, but no more so than cost-benefit analyses of energy supply investments or other public infrastructure options. If greenhouse policy requires a high degree of confidence in and demonstrability of emissions reductions, then minimum standards programs must play a prominent part.
None of the programs described in this paper have evolved spontaneously through the normal operation of the market. In almost every case, governments have taken the initiative, albeit sometimes in partnership with industry associations. The exception is gas energy labelling, although even there the AGA reacted to the mandatory implementation of electrical appliance labelling by overhauling and enhancing its own industry-managed program, as a pre-emptive measure to forestall greater government involvement.
Where the stimulus comes from government, the options for implementing a program are either regulatory, or 'voluntary' in the sense that governments put pressure on industry groups to behave exactly as if there were regulation, but without putting government to the trouble of regulating. Whether energy efficiency programs should be implemented 'voluntarily' in this way or through legislation has been elevated to a point of principle with some governments. The real issue is which option increases the effectiveness and cost-effectiveness of a program.
It would be a mistake to think that 'voluntary' implementation is somehow cheaper or more cost-effective. A degree of co-ordination and administration will be necessary for all programs (other than, perhaps, general information). In 'voluntary' programs these costs are expected to be borne by individual firms or industry associations (ie by equipment users in the end) who in these matters will probably not have the expertise or economies of scale of government (whose costs will be recovered from taxpayers or, through a system of levies, from the same pool of equipment users).
Furthermore, 'voluntary' programs introduce additional risks and uncertainty costs. Would-be participant firms cannot be sure that all their competitors will take part, so must devote additional resources to monitoring their actions. In many circumstances, firms will not participate at all without regulations: this was the case with appliance energy labelling, which was delayed for over three years before it became clear that 'voluntary' implementation was not an option. The same issues have now been raised with regard to the implementation of MEPS.
The energy efficiency programs discussed in this paper are those which have been implemented or proposed in Australia, and do not by any means represent an exhaustive list of what is possible or cost-effective. None of them require, or assume a reduction in the consumption of useful energy, which is the most commonly used measure of the consumption of energy services. In fact, an assumption of continuing increase in useful energy capita is built in to nearly all forecasting in this field.
Some commentators have argued that the future rate of increase in consumption of energy services will be lower than in the past, and lower than most official models forecast (to the extent that they are sophisticated enough to forecast the consumption of energy services as distinct from the raw demand for energy). However, this is likely to be more a result of demographic changes such as the ageing of the population than of deliberate consumption decisions or changes in community values.
ABARE (1991) The issue of domestic energy market failure . Australian Bureau of Agricultural and Resource Economics Technical Paper 91.5, October 1991
DITR (1986) Report on thermal insulation regulations for new dwellings in Victoria - Draft for discussion. Department of Industry, Technology and Resources, Melbourne 1986
EEA et al (1994) Solar and Heat Pump Hot Water Systems: Considerations for Proposed Financing Program Economic and Energy Analysis Pty Ltd, George Wilkenfeld and Associates et al., for Energy Research and Development Corporation, Canberra, February 1994 (ERDC 215)
GWA (1991) Greenhouse gas emissions from the Australian energy system: the impact of energy efficiency and substitution. George Wilkenfeld and Associates with Energetics and Enersonics, for Energy Research and Development Corporation, Canberra, February 1991 (ERDC 22)
GWA (1991) Review of residential appliance energy labelling . George Wilkenfeld and Associates, with Test Research and Artcraft Research, for State Electricity Commission of Victoria, September 1991 (2 vols)
GWA (1993) Benefits and Costs of Implementing Minimum Energy Performance Standards for Household Electrical Appliances in Australia George Wilkenfeld and Associates, with Lawrence Berkeley Laboratory, for State Electricity Commission of Victoria, July 1993 (3 vols)
GWA (1994) Australia's National Greenhouse Response Strategy: Projected impact of response actions on greenhouse gas emissions from the energy sector in 1999-2000 and 2004-05. George Wilkenfeld and Associates for Department of Environment, Sport and Territories, Canberra, August 1994
GWA et al (1993) Evaluation of the National Energy Management Program George Wilkenfeld and Associates, Economic and Energy Analysis et al. for Department of Primary Industries and Energy (summary & 2 vols), November 1993
NGRS (1992) National Greenhouse Response Strategy Canberra, December 1992