Energy efficiency at risk under the emissions reduction fund (ERF)

Energy efficiency at risk under the ERF

By Neil Salisbury

As published in WME, November 2014

The government’s commercial building plan under the Emissions Reduction Fund has raised a number of questions for companies principally around the benefits of participation.

A number of reverse auction programs around the world, China’s wind concession program, India’s PAT scheme, Brazil’s PROIFNA Scheme and the UKs NFFO program have experienced a lack of participation due to high upfront project costs, real or perceived uncertainty and a real or perceived over-complication of the process. The Emissions Reduction Fund (ERF) design very much follows a traditional reverse auction process with the added complication of not having a visible benchmark price.

The release of the Commercial Building draft determination (Carbon Credits (Carbon Farming Initiative) Methodology (Commercial Buildings) Determination 2014) has raised a number of questions by organisations on the opportunities under the ERF; the likely carbon savings that can be achieved; the cost benefit of bidding into the ERF; and should they participate in the scheme.

There is no doubt that energy efficiency still remains an untapped resource, with the recent IEA World Energy Outlook referring to the global energy efficiency market as ‘an invisible powerhouse’ worth at least US$310 billion per year. And for commercial buildings in Australia, there are still vast opportunities – a ClimateWorks report (2010) outlines that energy consumption from existing buildings will still represent the large majority of the total energy used by buildings in 2020.

While the commercial buildings exposure draft very much follows the NSW Energy Savings Scheme (EES) method, it utilises the NABERS energy ratings and tools for commercial buildings to quantify emissions reductions and energy savings from energy efficiency activities undertaken as part of a commercial buildings ERF project.

In this context, we can explore a typical energy efficiency project that has been undertaken under the NSW EES, to determine their viability under the proposed ERF.

For example, a commercial lighting upgrade project that replaces existing T8 fluorescents and halogens with LED fixtures.

The capital cost of the lighting upgrade project to replace the T8s and halogens with LEDs would be ≈$198,800 excluding the energy savings certificate (ESC) discount; generating 2679 ESCs and achieving an energy saving of 151 MWh/year. The payback without the ESC discount would be around 8.8 years and with the ESC discount around 6.5 years.

Under an ERF scenario, the project will generate approximately 131 tCO-e, and assuming a bid price of $20/ tCO-e (which is higher that some initial estimates on typical bid prices under the ERF), it will achieve a payback of 7.9 years. Now this does not take into account any ancillary costs associated with bidding into the ERF. Therefore offering a marginal net incentive of the capital required to deliver the project. Now this is unlikely deliver a price per unit of reduction that acts as sufficient incentive for projects to ‘get them over the line’.

In addition, we would subsequently need to aggregate a number of other projects to submit a bid, given that its does not meet the threshold requirements. Even if we aggregate say 16 similar projects, the overall return to the project proponent is negligible, especially if the bid prices are closer $10/ tCO-e. Interestingly, if these projects occur in Tasmania or South Australia the returns will be even lower, due to the relatively low emission intensity in those states.

While we are unlikely to see the price point being high enough to change behaviors and reduce some of the barriers to greater adoption of energy efficiency, it is possible that energy projects already earmarked for upgrades or retrofits could be bid into the ERF. Where, the project proponents have completed the feasibility, arranged the finances and the business case stacks-up without the ERF. The level of uptake from this group will depend on, how onerous the process is, and the level of monitoring and verification required.

Therefore, commercial building proponents need to determine if the ERF provides sufficient incentive to deliver a price per unit of reduction to get their projects over the line. They also need to understand if their energy efficiency projects will actually generate sufficient carbon savings, in addition to understanding the bid process, monitoring and verification requirements.