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Alan Pears

Playing carbon politics

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The carbon package offers a constructive path forward, despite the current scare campaign, writes Alan Pears.

When is a lie a lie in politics? Julia Gillard is under enormous pressure about a semantic issue: whether a three-year fixed price carbon permit scheme applying to about 500 entities is a tax or the first stage of an emissions trading scheme, negotiated by a minority government. Meanwhile, Tony Abbott can claim that individuals and small businesses will be harassed by ‘carbon police’, that industries will shut down and that many will experience massive costs, all with no basis in fact. Indeed, we all know that the Hazelwood or Yallourn power stations will shut down eventually under either a Tony Abbott or Julia Gillard-led government.

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Media can run with lead articles about the scale of impacts on industries being far higher than that estimated by Treasury, based on ‘gut feelings’ of people from within the affected industries, or selective quotes from carefully qualified consultancy studies, the detail of which no one bothers to read. At the same time, powerful vested interests can manipulate our media with impunity.

This is a serious challenge to the governance of our society.

Government Clean Energy Future package
The government’s carbon package shows the value of a range of people with constructive intent negotiating a path forward. The outcome is much better than was developed behind closed doors by the Rudd government with its bureaucrats and consultants.

The package combines a price signal on emission of carbon dioxide and an important structural change to income tax. The large increase in the tax threshold is an equitable alternative that encourages greater workforce participation without slashing worker rights.

The package links ‘direct action’ measures to the carbon price and very (indeed, overly) generous compensation. Importantly, it does not lock us into a weak 2020 abatement target. It creates floor and ceiling prices to reduce risk for investors in abatement and limits use of international permits. It also includes a range of review mechanisms to allow adjustment where assumptions underlying the package prove incorrect, and in response to stronger global action.

Lastly, it gives us time to work out how to ensure that voluntary abatement action can be properly treated under the trading scheme. In the package, the government commits to treat household voluntary action as additional by factoring it into the levels of future targets (section 3.3.1). Unfortunately this won’t be enough to satisfy carbon accountants and the ACCC. And voluntary action by local and state governments and business must also be additional if they are to be empowered to lead on abatement.

The emphasis on renewable energy is welcome, with billions of dollars allocated to drive innovation and cost reduction. But energy efficiency is still seriously underdone: the foreword, from the Prime Minister, treasurer and climate change minister, does not mention energy efficiency (our most cost-effective abatement option) once.

Later in the package it’s mentioned that the Clean Energy Finance Corporation will also support energy efficiency. Other measures add up to $1.5 million of very worthwhile actions. But this is very modest compared with resources allocated elsewhere.

And, while the government has committed to expedite a national energy efficiency scheme, there are no guarantees it will implement it or set a meaningful target (see below).

The real energy war
The energy supply sector has used the carbon price to justify massive compensation. But the carbon price is really a relatively small factor in the perfect storm facing the conventional energy sector. On one hand, if it is to deliver reliable energy, it has to invest massively, leading to large increases in energy prices. On the other hand, it faces a wave of non-traditional competitors that can be rolled out rapidly and which attack the most profitable areas of revenue. And energy consumers are increasingly seeking to insure themselves against future energy price increases by adopting competing alternatives.

Consider two examples. In 2010, 384MW of additional photovoltaic capacity was installed, tripling Australia’s total capacity. By late May this year, another 275MW had been added. So by the end of 2011, 1000MW of PV power may be installed over two years, and this operates well on hot days. This undermines the most profitable operating times for power stations (including coal plant, which receives the ‘marginal’ price bid by the highest cost operating power station). So not only does PV undermine the case for network investment, but it also removes a disproportionately large chunk of profit. And it is being rolled out very fast.

On the demand side, there are many millions of inefficient low-voltage halogen lamps installed. We are just reaching the tipping point where LED and compact fluorescent lamps can provide enough light of good enough quality at an affordable price. Once supermarkets start selling these products, the impacts on demand will be significant. Replacing 10 million halogens reduces potential demand by up to 500 megawatts, plus the reduction in cooling needed to offset the heat they generate.

There are many more factors at work, such as tightening building codes, phase-out of electric hot water, radical efficiency improvements in TVs and so on.

The electricity industry has traditionally used its enormous political and financial power to block competitors. For example, the energy market rules were designed and used to block cogeneration and energy efficiency. But energy price increases and the climate issue mean that politicians are under increasing pressure to support alternatives. So past strategies will no longer work. The challenge is to become part of a sustainable energy future.

This means energy retailers need to own and operate cogeneration systems hosted by industries and sell energy services to customers, as Origin is already beginning to do. Retailers and network operators need to treat customers as partners, not passive victims to be exploited. Governments and regulators need to focus on the public interest, not maintaining the viability of the existing energy industry. And we all need to confront the reality that past poor business decisions and arrogance will come back to bite some industry participants. They will go down fighting hard, and aggressively seeking ‘compensation’ for their poor judgements, based on the well-worn argument that ‘they’re too big to be allowed to fail’.

It’s also interesting to note that, in the Australian Energy Market Commission’s recent review of expected energy price increases, 60% of Victoria’s expected 27% price increase (that is, 16% price increase) over the next three years is due to increasing retailer charges. Apparently the extraordinarily high rate of customer churn (changing from one retailer to another) is adding major administrative and marketing costs for retailers. Indeed, Victorian households will be paying more for the privilege of being harassed by aggressive salespeople offering no real benefits than we will pay for the carbon price!
Government and regulators claim this high churn shows we have a successful market. I suggest it shows we have a serious market failure, as reflected in the high rates of consumer complaints and the (now visible) extra cost. Other states can look forward to similar waste of money as their retail markets become more ‘competitive’.

The increased VEET target
Another interesting development is the recent doubling of the target for the Victorian Energy Efficiency Target to 5.4 million tonnes of abatement. This compares with Victoria’s annual greenhouse emissions of around 125 million tonnes. It sounds impressive, until you look at the fine print. The target is for ‘deemed’ abatement spread over the lives of the measures rewarded by the scheme. So it’s more like 0.5 million tonnes each year. More PR magic. Keep in mind, the Commonwealth government is looking at a similar national scheme, so we will need to carefully analyse any target they set.

Alan Pears has worked in the energy efficiency field for over twenty years as an engineer and educator. He is Adjunct Professor at RMIT University and is co-director of environmental consultancy Sustainable Solutions.

Read the full article in ReNew 117

Alan Pears

Watching energy efficiency potential slip away

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Energy efficiency is still being overlooked as a primary method of greenhouse gas reductions, explains Alan Pears.

A recently released International Energy Agency study found that 2010 public expenditure on energy efficiency in Australia was the lowest of a sample of 18 countries. How can we afford not to invest in the most cost-effective abatement option that also enhances competitiveness? Look at the lost opportunities.

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In 2010 the star rating scales for several appliances were toughened­—but there was no public information campaign about the good news that appliances had improved efficiency beyond the existing scales. And first home buyer schemes continue to ignore the potential to target them towards smaller, more energy-efficient homes and installation of on-site renewables.

As we move towards the transition to digital TV, millions of old TVs are being discarded, and valuable resources lost, because governments have largely failed to establish large-scale recycling schemes. Government has run frequent TV advertisements warning people to get ready, yet they make no mention of the importance of choosing an energy efficient set-top box or new TV.

Since TV energy labelling was introduced in late 2009, a new generation of very efficient 7- to 8-star TVs has appeared. Not only are these more efficient than older flat screen units, but they are also more efficient than traditional cathode ray tube (CRT) TVs. But the old, inefficient flat screen products are still on the market, so informed choice of high efficiency products is not guaranteed.

This demonstrates how fragmented government action misses opportunities to capture energy efficiency potential and leaves us with millions of energy wasting items of equipment. What a lost opportunity.

In my last column I described my bemusement at the mixed signals coming from governments about sustainable energy policy. I think it’s now clear: sustainable energy policy is a low priority for governments. At the national level, the twin forces of the political need to reach budget surplus by 2012-13, combined with the ideological agenda that a carbon price will fix everything, means support for sustainable energy is expendable. In some states, the combination of climate scepticism, environmental politics and efforts to make budget savings have led to cutbacks, and have fuelled public attacks, presumably to justify reduced assistance to sustainable energy. In NSW the government has even attempted to apply retrospective change to PV legislation—setting a dangerous precedent. Recent state and commonwealth budget statements have confirmed serious cutbacks. Things are looking bleak.

Are PVs high cost abatement?

Recently we have seen intensive attacks on subsidies for PVs as ‘middle class welfare’ and ‘high cost abatement’. There’s no doubt policymakers haven’t done well on PV policy. But it has worked both ways. The industry’s development has been hampered by ‘stop-start’ policy. Most states have chosen the more complex and less attractive net feed-in tariff over a gross feed-in tariff. On the other hand, many of the subsidies have been very generous.

But we need to put this into context. Governments have chosen to continue poorly targeted first home buyers grants that drive up house prices and reward those who build large inefficient homes as well as those who want modest sustainable homes. Industries such as car manufacturers and aluminium smelters have been treated generously. We also need to remember that the Howard government introduced, then doubled PV rebates as a blatant vote chasing strategy. Labor matched them as an election commitment. Similarly, states introduced feed-in tariffs to win votes.

More recently, the PV rebate cost was shifted from consolidated revenue to a charge on energy retailers—presumably to make it easier to meet the government’s deficit reduction target. Now governments have been caught as energy prices skyrocket, largely because of failure to drive energy efficiency and distributed generation by the flawed energy market structure.

So PV policy can hardly be described as well planned and consistent.

However, the positive outcome of this ad-hoc shambles has been a transformation of the PV industry. It is now geared to deliver large-scale roll-out, while prices have come down significantly. Part of this is due to the high Australian dollar, but sales and installation have been streamlined and we have ridden the dramatic economies of scale of accelerating global production.

Government now faces a dilemma. If it cuts the PV subsidies, demand may crash and it will be seen as anti-renewables. At the same time, it will be undermining adoption of a very popular emission abatement technology. But if it keeps subsidies, what level of support is needed to keep demand high enough to build this important industry? Good question.

According to my calculations, an unsubsidised 1.5kW PV system is now close to being a zero or negative cost abatement option for a household if it can be financed at mortgage interest rates and its output either replaces daytime electricity (on a time of use tariff) or is paid for exports at that rate. With predicted increases in electricity prices, the financial case looks good.

But this doesn’t mean finance at this interest rate will be available, or that people will act ‘rationally’ and install them without subsidies. This is no different from the behaviour of industry, who had to be forced by legislation to even look for very cost-effective energy efficiency savings that deliver rates of return of 20-50% per annum or better. We are not very rational about future savings.

One option would be to mandate PV installation, for example on larger new homes and new apartment buildings. People building large homes are clearly not struggling to get a modest roof over their heads, and over the long term, it is a good investment for them. For apartments, the split incentive problem due to the disconnect between developer and occupant is a serious market failure.

A bank that looks rationally at the economics of PV would see that its revenue will cover any additional repayments, so it actually enhances the home buyer’s capacity to repay the mortgage. And it provides insurance against future energy price increases. So government could encourage or require banks to offer ‘bonus’ finance to cover a PV system on any new mortgage.

Incentives or subsidies could also be focused on installations in areas where electricity networks are under pressure, where powerline losses are high and where solar radiation is highest. There is also a case for low-income households to be entitled to installation of PV, with repayments delivered via a charge on council rates: this would help insulate them from increasing energy prices.

There are lots of creative policy options to take PV away from being a political football. Let’s hope government has enough imagination to find a constructive path forward instead of undermining the future of the PV industry.

Nuclear backtracking

The recent Japanese nuclear crisis has set back the plans of the nuclear industry to expand. We have seen again how a single nuclear accident can force the evacuation of large areas of valuable land for many years, while causing massive short term economic and social dislocation. Surely nuclear generators should be required to carry insurance against such an event? Of course, if they did, nuclear energy would be much more expensive and would simply fade away. Interesting, then, to see the Japanese government providing assistance to the power company that owns Fukushima.

Alan Pears has worked in the energy efficiency field for over twenty years as an engineer and educator. He is Adjunct Professor at RMIT University and is co-director of environmental consultancy Sustainable Solutions.

Read the full article in ReNew 116

Alan Pears

The national picture – issue 115

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Climate change programs have been cut to repair damaged infrastructure caused by extreme weather. Alan Pears challenges the econocrats this issue.

It has certainly been a wild summer of contrasts, with fires, floods and cyclones causing mayhem. But the Federal Government has the solution: a carbon price. In a remarkable decision, energy efficiency and renewable energy programs have been cut to fund repairs. Does this tell the sustainable energy industry it’s expendable? Does it encourage climate change denialists? Does it show that econocrats who believe price signals drive everything are winning in Canberra? Have the pragmatists just tidied up some politically risky programs without thinking about the signals they’re sending? Or is it policy on the run? I’m bemused.

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The complexity of carbon pricing impacts was highlighted recently for me when the New South Wales Government announced it would provide cheap black coal for privatised power stations. Some have suggested that this undermines emission abatement. But it’s not straightforward.

Before this announcement, it seemed likely that global coal price pressures would drive up black coal prices. So black coal plants would face both a carbon price and an increased coal price. Victorian brown coal plants would face only a carbon price impact 30% higher than black coal. So the overall outcome might well have made brown coal power stations cheaper to run than black coal.

And, at expected carbon prices, they would still be cheaper than gas and renewables at the margin, especially because gas prices are expected to trend towards much higher international prices when LNG export facilities are built on the east coast and compete for local gas.

So the New South Wales Government subsidy may undermine the financial viability of higher greenhouse impact brown coal power stations, while increasing the financial value of black coal plants.

All Australian export businesses have had to cope with a large increase in the Australian dollar exchange rate, which is a far bigger problem than any carbon price would be. But how many exporters have received compensation? So why does a smaller environmental cost require generous compensation? There is a double standard here.

The way a carbon price will influence any business, household or government will be complex, because it has to compete with many other powerful forces. It will only be one element of a package of measures needed to deliver effective, equitable outcomes.

Carbon Farming Initiative—a step in the right direction?

I am keen to see the Federal Government treat voluntary abatement action appropriately by cancelling Kyoto permits to ensure it is ‘additional’—that is, it should count as global emission reduction instead of just making room under the Kyoto cap for others to emit more. It has been a challenge to get the government to acknowledge the importance of empowering Australians and mobilising voluntary abatement. So I was fascinated when the government recently announced its Carbon Farming Initiative.

The CFI sets an important precedent: the government will cancel Kyoto permits equivalent to certified additional abatement from activities within Kyoto covered sectors (as well as other activities outside Kyoto) in agriculture and forestry. All we need now is for them to apply the same approach to sustainable energy and waste management. Then we can get on with serious abatement instead of battling with econocrats.

Building code in hot water?

From May 2011, the new national 6 Star building regulations will be introduced—with variations in some states. Plumbing is being integrated into what becomes the National Construction Code. It will include not only building energy performance requirements, but also requirements on maximum lighting energy capacity and greenhouse gas emissions from hot water systems. This reflects recognition that, while building envelope performance is uniquely important because of its long life, high upgrade cost, and impacts on health and amenity, other aspects, particularly hot water and lighting, are major contributors to emissions.

Only hot water services that generate less than 100 grams of greenhouse gas per megajoule of heat delivered will be allowed. About eight litres of water heated from 20°C to 50°C (the legal delivery temperature) absorbs 1MJ. Most people interpret this to mean that resistive electric hot water services will not comply, although one-bedroom homes and ‘second’ hot water services of 50 litres or less storage capacity are exempt. This will presumably drive households towards gas, LPG, solar-electric (with at least 70% solar contribution), heat pump (with coefficient of performance of 3 or better), or solar-gas.

While superficially this looks like a sensible ‘performance-based’ approach to regulation, it creates some issues.
For hot water services with high fixed losses (e.g. storage units, shared hot water systems and homes with pumped ring mains), a product may meet the requirement at the ‘standard’ daily draw-offs (125 and 200 litres per day). But for water-efficient or small households, fixed losses may push actual average emissions above the 100 gram limit.

The exemption for small electric hot water services is problematic. A large proportion of apartments, units and granny flats have these units, while second units are typically installed in the largest homes, so substantial emissions may result. But there are situations where resistive hot water services can make practical, financial and environmental sense. Indeed, instantaneous electric hot water units can also avoid most standby losses.

We could require overall compliance with the 100 gram limit for appropriate delivered hot water volumes via either on-site technologies or the purchase of lifetime Renewable Energy Certificates at the time the system is purchased. This would be a comprehensive performance-based approach. The last of these options would encourage growth of the renewable energy industry by removing a lifetime’s worth of RECs from the market today for each hot water system, creating scarcity and driving the REC price higher. This is the opposite of past government approaches, issuing lifetime RECs for photovoltaics and solar hot water, which drove REC prices down and damaged the broader renewable energy industry.

EEO mid-term report
The Energy Efficiency Opportunities program requires large Australian energy users to assess their energy use efficiency and report publicly on identified improvements and what they do about them. There has been some scepticism about the program: econocrats think energy intensive business is already efficient, while interventionists think you need to mandate action to get results.

But EEO is unusual. It mandates a very thorough assessment process, requires preparation of formal business cases and Board sign-off. It makes energy efficiency a corporate and reputation issue.

After two rounds of reporting, cost-effective (i.e. negative carbon cost) savings of 93 petajoules of energy had been identified (seven to nine million tonnes a year of emissions), of which over half were being implemented and only 10% were not to be pursued. Overall, savings of over 8% of assessed energy use have been identified.

A survey showed that the percentage of firms with good documentation and analysis of energy use had risen from 20% to 60%. Existence of barriers to energy efficiency declined markedly. Having no one responsible fell from 45% to under 5%, while lack of senior management engagement fell from 32% to 12%. At the same time, most of the measures identified and implemented delivered payback periods of under two years, so there are still lots of negative cost abatement options to be found.

This is very exciting. It shows that there are real barriers to energy efficiency, even in supposedly efficient energy intensive industries, and that carefully designed programs can change corporate culture and deliver significant outcomes.

Alan Pears has worked in the energy efficiency field for over twenty years as an engineer and educator. He is Adjunct Professor at RMIT University and is co-director of environmental consultancy Sustainable Solutions.