Abolition of the Victorian Energy Efficiency Target

In brief

The Victorian State Government has announced the closure of the Victorian Energy Efficiency Target Scheme at the end of 2015, which will remove the annual obligation of large energy retailers to surrender energy efficiency certificates, as well as the financial benefits provided by the scheme for implementing energy efficiency improvements. Partner Grant Anderson and Lawyer Albert Yu report.

Overview of the Victorian Energy Efficiency Target Scheme

The Victorian Energy Efficiency Target Scheme (the VEET Scheme) was established by the Victorian Energy Efficiency Target Act 2007 (Vic) (the VEET Act) and commenced on 1 January 2009. The VEET Scheme is administered by the Essential Services Commission of Victoria (the ESC). Its objects are to reduce greenhouse gas emissions, to encourage the efficient use of electricity and gas, and to encourage investment, employment and technology development in industries that supply goods and services that reduce the use of electricity and gas by consumers.¹  

The VEET Act provides that the VEET Scheme is to continue in three-year phases until 31 December 2029. The scheme is currently in its second three-year phase, which will end on 31 December 2014. 

For each three-year phase, except for the first one (which ended on 31 December 2011), regulations are required to set the VEET Scheme target (ie the amount of carbon dioxide equivalent of greenhouse gases that are to be reduced by greenhouse gas reduction activities).² In the current three-year phase, this target is 5.4 million tonnes of carbon dioxide equivalent of greenhouse gas emissions.³  

Responsibility for meeting the greenhouse gas reduction target is imposed on large electricity and gas retailers that operate in the Victorian market (ie electricity or gas retailers who have 5000 or more customers in Victoria and who purchase that electricity or gas in the national electricity market or the Victorian gas market⁴). Accordingly, such retailers are subject to a greenhouse gas reduction liability based on the share of the greenhouse gas reduction target that is attributed to them, and must then surrender the number of energy efficiency certificates that is commensurate with their greenhouse gas reduction liability or else pay a shortfall penalty.⁵  

Energy efficiency certificates can be created as a result of undertaking prescribed energy efficiency activities.⁶ These activities include installing a high-efficiency refrigerator, a high-efficiency television or a high-efficiency pool pump.⁷ A person can only create energy efficiency certificates if they are accredited by the ESC under the VEET Act and are either the energy customer in respect of whom the prescribed activity is undertaken, or a person to whom that customer has assigned the right to create the certificates.⁸ Once created, energy efficiency certificates can be traded.⁹ Typically third party 'aggregators' will contract with the energy customer to undertake the energy efficiency activity in exchange for (among other things) the right to create the resultant energy efficiency certificates. The aggregator will then sell them to Victorian energy retailers who will surrender the certificates to acquit their greenhouse gas reduction liability under the VEET Scheme. 

Abolition of the VEET Scheme

Following press reports earlier this year that a Government report had found that the VEET Scheme should be closed by 2015 due to its costs to the Victorian economy,¹⁰ the Victorian Government announced on 21 May 2014 that it has decided to close the VEET Scheme at the end of 2015.¹¹ The Government's decision to close the scheme was based on the findings of the Government's review of the VEET Scheme. The findings of the review include the following:¹²

• It is estimated that only eight million tonnes of greenhouse gas abatement is attributed to the VEET Scheme as of 31 December 2012, compared to the 16.7 million tonnes of greenhouse gas abatement that was anticipated.
• For residential customers who have participated in the scheme, the benefits from participation, namely the decrease in their personal electricity consumption, significantly outweigh the network and retail costs incurred as a result of the VEET Scheme. However, for all non-participants who share the costs of the scheme, the costs of the VEET Scheme outweigh the benefits.  
• Although the benefits accrued by participating customers outweigh the costs incurred by non-participating customers, the benefits to participating customers represent a transfer from the energy supply chain through a loss of profits, particularly by electricity generators.
• During the first two phases of the VEET Scheme, low-cost energy efficiency activities (such as lighting and standby power controllers) have dominated, which means that low income households have particularly benefited from the scheme. However, as those low cost activities reach their saturation point, the costs of participating in the scheme may rise and consequently deter low income households from participating, causing the scheme to have a regressive effect on customers.
• To date, the VEET Scheme has delivered a net cost to the economy of $177.6 million.

As a consequence, the Victorian Government has decided, consistently with the review's recommendations, that the VEET Scheme should be closed on 31 December 2015, with there being a one-year transitional period after the end of the current three-year phase on 31 December 2014.

Next steps

To ensure the orderly and responsible closure of the VEET Scheme, the Government will continue the VEET Scheme until the end of 2015, rather than only until the end of 2014 when the second three-year phase ends. The VEET Scheme target for the one-year transitional period will be 2 million tonnes of carbon dioxide equivalent of greenhouse gas emissions. Otherwise, the VEET Scheme will operate on a 'business as usual' basis until the end of 2015.

As the VEET Scheme is established by the VEET Act, legislation will be required to effect the Government's decision to close the scheme. It appears likely that, rather than repealing the VEET Act in its entirety (which would mean that entities that breach the scheme requirements before 1 January 2016 may not be subject to the ESC's enforcement powers under the VEET Act after 31 December 2015), the VEET Act will be amended in such a way as to provide for the one-year transitional period, close the scheme on 31 December 2015, and retain the provisions relating to the ESC's enforcement functions and powers. Presumably the Government will seek to have this legislation passed by the Parliament ahead of the next Victorian State election, which is due by 29 November 2014.