Chapter 2
Key provisions of the bill and issues raised
Key provisions of the bill
2.1 The provisions of the Energy Efficiency Opportunities (Repeal) Bill
2014
(the bill) will terminate the EEO Program in its entirety. Section 2 of the
bill states that the provisions will operate retrospectively to 29 June 2014,
in order to close
the Program, ceasing all obligations under it, as of that date.
Issues raised
2.2
The committee received 21 submissions, including from high energy-using
businesses, industry bodies and other stakeholders. Submissions were evenly
divided between those in support of the bill and those in opposition. As
previously stated,
the committee did not receive a submission from the Department of Industry or the
Department of Environment. The following sections summarise the major points
raised in submissions, either supporting or opposing the bill. A number of
submissions also suggested reforms to the EEO Program, while some highlighted
other initiatives proposed by the government (such as the Emissions Reduction
Fund), which was argued would more effectively achieve energy savings.
Support for the bill
2.3
The 11 submissions received in support of the bill were authored by
high-energy-using businesses and the industry associations that represent them.
Reasons given in support of the bill essentially reflected those outlined in
the bill's Explanatory Memorandum and Regulation Impact Statement (RIS),
as summarised in Chapter 1.[1]
Redundancy of
the EEO Program and high energy costs as the primary driver of energy
efficiency
2.4
All submissions received in support of the bill argued that high—and
increasing—energy prices have motivated and equipped industry to identify
and implement energy efficiency opportunities. They understand that the profitability
of high-energy using businesses was very directly and significantly affected by
the effectiveness of internal processes designed to achieve this efficiency. For
example, the Australian Industry Greenhouse Network argued that energy
efficiency investment was 'a business decision and not an area for government
intervention'.[2]
In its view:
...investment in energy efficiency is fundamentally a business
decision, which is impacted by a wide range of considerations. In an
environment of rising energy costs, examining the cost-effective use of energy
is an indispensable part of business management, which both large energy
producers and large energy users undertake as a matter of course.[3]
2.5
Likewise, Rio Tinto Alcan Bauxite and Alumina suggested that strong
incentives already exist for large industrial energy users to manage energy at
existing sites and design and construct energy efficient projects. Furthermore,
it noted that, independent of government laws and regulations, commercial
realities drive energy intensive businesses.[4]
2.6
Adding to this point, a number of submissions highlighted that the
energy market in Australia was now significantly different from when the EEO
Program commenced in 2006, with Australian industry currently facing some of
the highest energy prices in the world.[5]
2.7
Noting its involvement in the development of the EEO Program, the
Minerals Council of Australia was of the view that the Program was now
unnecessary.
It argued that '[t]o the extent that the prescriptions laid out in the [Energy
Efficiency Opportunities Act 2006] had a benefit, the intervention has run
its course'.[6] In support of this view, it pointed to the following evidence:
...[I]n the Government's own survey of the scheme, conducted by
ACIL Tasman in 2013, businesses listed energy costs (72 per cent) and cost
reduction strategies (80 per cent), rather than the EEO program (32 per cent)
as the main driver of energy efficiency initiatives in their operations. The
main barrier to converting opportunities into projects was the availability of
capital (70 per cent) rather than any perceived lack of importance of energy
efficiency to the firm (10 per cent).[7]
2.8
In this context, some submitters contended that the Program had become
redundant, merely duplicating and complicating existing business processes
focused on reducing energy costs. As one submission argued:
Businesses must consider several factors in determining how
to invest limited capital, and energy costs have formed a significant part of
the decision-making process in the last ten years...[The EEO Program] requires
reporting and evidence based on these decisions, but not the investment in
energy saving; that is driven by market forces. As such [the EEO Program] effectively
duplicates a business-as-usual process. On paper, energy savings may appear to
be due to this government program, but it is market and cost pressure that has
achieved efficiency gains.[8]
2.9
Related to the point above, some submissions suggested that the
purported success of the EEO Program could be questioned on the basis that it
was not possible to demonstrate a clear and direct link between the Program and
actual energy savings achieved by industry. For example, Chevron Australia submitted
the following:
Chevron Australia has long argued that in reporting energy savings,
firms should be able to differentiate between those savings realised [through]
the firm's internal practices and those which had been identified only because
of the existence of the EEO [Program]. Such a differentiation would enable a
transparent assessment of the true value of the EEO [Program] to be made.
Unless such differentiated reporting is allowed, the energy and cost savings
reported under the EEO [Program] should not be equated with the success of the
program.[9]
2.10
Others argued that the Program ignored the fact that businesses made
decisions about whether to implement energy efficiency opportunities by taking
into account the combined cost of a range of inputs—not just energy efficiency.
The Australian Industry Greenhouse Network, for example, maintained that:
As a general rule, higher energy efficiency equals better
performance and profitability, but this does not mean that every opportunity to
invest in energy efficiency can, or should, be realised. If
improving energy efficiency is foregone in favour of more cost-effective
opportunities in other areas, this is a rational decision in the best interests
of the business. It is not a reflection of market or information failure for a
company not to prioritise investment in energy use, but rather it reflects a
rational, context-driven perspective that it will seek to maximise return on
investment.[10]
Burdensome compliance costs to business and government
2.11
The second major issue highlighted by all submissions in support of the
bill was that the costs of complying with the EEO Program were serving as an
additional burden on industry, duplicating and unnecessarily complicating
existing business processes.
2.12
For example, Brickworks Limited, one of Australia's largest
manufacturers, noted that compliance with the EEO Program was actually hampering
efforts
to pursue its own 'highly successful energy efficiency innovation program':
In order to comply with the EEO program legislation,
Brickworks must undertake expensive annual energy audits of all of its plants
to identify energy efficiency opportunities. Brickworks must then report its
findings publically, and include information on project costs, paybacks and the
quantum of energy savings. The annual report must then be signed off by the Brickworks
Board. There is no obligation to actually implement the energy efficiency
opportunities identified in the audits. This process means Brickworks must
retain a full time staff member, as well as spend time moulding its own energy
efficiency monitoring—conducted by specialist staff at plant and kiln level—to
ensure it complies.[11]
2.13
The Australian Industry Greenhouse Network noted that a number of its
members had reported that the administrative and implementation costs of
compliance with the Program were in the order of several million dollars for
some businesses and yet no investments had been made as a result of
participating in the Program that would not have otherwise been made.[12]
2.14
The submission from Major Energy Users Inc. further demonstrated how the
EEO Program reporting requirements could be burdensome on participating
businesses:
Few projects are implemented specifically for improving
energy efficiency although many can result in achieving this outcome. Further,
many of the projects that are implemented are small in size and often
integrated with other activities or driven by reasons other than for energy
efficiency, even though they do deliver greater efficiency. This makes
accessing data and costs specifically for energy efficiency outcomes often quite
complex and time consuming.[13]
2.15
In a similar vein, Kwinana Industries Council noted:
The requirement for external reporting is therefore simply an
additional cost burden on industry created by the bureaucrats, otherwise
referred to as red tape. The cost of red tape on industry is onerous, and
because industry provides the reports, they have to be read, assessed and
reported on by the bureaucrats. Often the focus on the effect of red tape is
directed at business, but there is an opportunity to focus on the cost of
self-imposed red tape on government as well.[14]
2.16
In essence, the business cost of compliance with the Act operates as an
economic debit offset against the existing benefits accrued by businesses.
They constantly implement economically viable energy efficiency initiatives
identified as part of their own internal continuous improvement processes.
2.17
Several submissions reiterated the point made by Kwinana Industries
Council that the government, too, faced increased costs in administering a
scheme that, in their view, was no longer necessary.[15]
Opposition to the bill
2.18
The committee received 10 submissions opposing the bill and in favour of
retaining the EEO Program. These submissions primarily came from relevant research
institutes and stakeholders, including those who were involved in the design of
the EEO Program and/or provided consultancy services to businesses
participating in
the Program. They disputed a number of the claims made in the bill's Explanatory
Memorandum and RIS, instead contending that the EEO Program directly provided
significant energy and financial savings to industry, as well as other
benefits,
and would continue to do so in the future.
Evidence of additional energy
savings and net financial savings
2.19
Submissions in opposition to the bill highlighted that various reviews
of the EEO Program had found it to be both effective and successful in
achieving its stated objective.[16]
A number of submissions also noted that the Program had been recognised by
Maria van der Hoeven, Executive Director of the International Energy Agency, as
a 'leading-edge example of how best to reduce energy use and improve energy
management systems'.[17]
In particular, reference was often made to the 2013 ACIL Tasman Review and its
findings, outlined in Chapter 1, as well as its recommendation that the EEO
Program continue for a second cycle. In essence,
these submissions argued that there was strong evidence that businesses
participating in the EEO Program had achieved energy and financial savings in addition
to what they would have achieved without the Program and that these savings
outweighed
any compliance costs.
2.20
ClimateWorks Australia, a research institute, cited its own research to further
support the contention that the EEO Program had been successful:
In research conducted by ClimateWorks Australia on the energy
savings enabled by the Energy Efficiency Opportunities (EEO) program in its
first cycle and proposed second cycle, it was identified the program had been
successful in enabling an additional 35 PJ of energy savings in the industrial
sector compared to what would have occurred without the program. The results of
this analysis showed additional energy savings enabled by EEO account for
around 41% of all energy savings achieved in the sector, with additional energy
savings delivering a net annual financial savings of $291 million.[18]
Future energy and financial savings
to be gained
2.21
Many submissions opposing the bill highlighted findings in the ACIL Tasman
Review (and other reviews) that the EEO Program had not yet achieved an optimal
level of business management of energy efficiency and that future energy and
financial savings were attainable. For example, the Energy Efficiency Council argued
that '[w]hile many energy users have significantly improved their energy
management capability, the majority still have gaps in their core capabilities'.[19]
ClimateWorks Australia, citing its own research and the ACIL Tasman Review, submitted
that 'there is still considerable room for improvement in the majority of
companies in the EEO Program' and that 'in the absence of a replacement, there
is [a] risk that some of the energy related capabilities developed...will be
eroded before becoming fully embedded'.[20]
2.22
The point was made that increasing energy costs actually indicated an
ongoing need for the EEO Program, contrary to claims by industry and the
government that high energy costs were the primary driver for energy efficiency
savings.[21]
The Australian National University Energy Change Institute (ECI) and Climate
Change Institute (CCI) submitted that these claims ignore 'the fact that many
informational and organisational failures and skills gaps still exist':[22]
We maintain that reversion to previous behaviour will occur
if the EEO Program is not continued, and that because of the significant gains
already achieved, ongoing compliance costs will be relatively low. Gains in
present energy efficiency will cost less than delaying efficiency gains into
the future, when more expensive measures will be required to rapidly reduce emissions.[23]
2.23
Mr Alan Pears AM, an energy efficiency expert, maintained that energy
prices were only one factor affecting the pursuit of energy efficiency and that
it was wrong to assume businesses would 'optimally pursue energy efficiency in
its cost-benefit analysis'.[24]
Senvion, a wind energy supplier, similarly argued that the EEO Program was
still relevant in the context of rising energy prices:
[T]he ACIL Tasman review took rising energy prices into
account and found that the EEO could be expected to still deliver an additional
15 PJ of savings. Importantly this analysis assumed the introduction of a
carbon price, and given that this is not going ahead then further savings could
be expected. The policy has a healthy financial return ratio of 3.67,
indicating a strong return to Australian businesses that implemented savings identified
through the EEO [Program].[25]
2.24
Assuming industry would continue to find energy savings under the EEO
Program, a number of submissions queried the conclusions made in the RIS that
industry would save $17.7 million per year if the EEO Program were to be
repealed.[26]
For example, in his submission, Mr Pears rejected the findings of the modelling
set out in the bill's RIS, arguing that incorrect figures in the RIS were used to
justify this particular claim:
The [Explanatory Memorandum's] analysis of future costs and
benefits of EEO assumes that repeal will lead to no reduction in achievement of
energy savings, on the grounds that firms now have the capacity and the
incentive to continue to act at the present level. That is, continuing [the EEO
Program] will deliver ZERO additional energy savings relative to repeal while
ongoing compliance costs are expected to increase. ... No significant evidence is
provided in the [Explanatory Memorandum] to support this assumption.[27]
2.25
Further, some submissions noted that the RIS appeared to inflate the
compliance costs used in the modelling it produced.[28]
However, Mr Pears suggested that '[t]his higher cost of compliance seems to be
coincident with broadening of
the scheme to include electricity generators and new development projects'. He
argued that this may 'unfairly distort perceptions of compliance costs for the
majority of participants' as '[t]he lifetime value of savings during design and
construction of
new developments is likely to be much larger than for existing businesses'.[29]
Benefits other than energy
efficiency savings
2.26
Some submissions that rejected the proposal to terminate the EEO Program
highlighted the benefits that the Program had delivered, and would continue to
deliver, to participants beyond energy efficiency savings.[30]
Many of these benefits related to improvements in the internal processes, structures,
and tools utilised by a participating business, which in turn resulted in
better productivity, work culture, communication, safety, management
effectiveness, product quality, and so on. Mr Pears also highlighted the
benefits of the public reporting requirement under the EEO Program, both to the
businesses themselves, as well as to shareholders and the public.[31]
Proposals to reform the EEO Program
2.27
A number of submissions suggested that the EEO Program should be
reformed, rather than repealed, with a view to reducing compliance costs. A
common theme in these proposals was to amend the Program to support a path for
companies
to opt out during the 2nd cycle provided they had developed
satisfactory energy management practices.[32]
Other suggestions included, creating more flexible reporting mechanisms and
requirements,[33]
and requiring the implementation of projects that fall within agreed payback
parameters.[34]
Support for alternative measures
2.28
Some submissions suggested that it was actually a lack of capital,
particularly in adverse economic circumstances, that prevented high energy-using
businesses from investing in energy efficiency opportunities and that the EEO
Program did not address this.[35]
On this basis, it was argued that the government's proposed Emissions Reduction
Fund would be a more appropriate policy measure to motivate industry, beyond
existing drivers, to reduce energy costs. It was claimed that this would
encourage investment in what would otherwise be discretionary projects.[36]
2.29
However, a submission from WWF-Australia, a conservation organisation, expressed
concern that 'projects that may have occurred under the EEO program without
government funding—because their paybacks were sufficiently attractive
to businesses—will now be funded under the proposed [Emissions Reduction Fund]'.[37]
Committee view
2.30
The committee acknowledges the benefits and successes of the EEO Program
to date. The ACIL Tasman Review indicated that it was likely that industry made
additional energy savings because of the Program. However, the same review
highlighted that quantifying the exact figure was both exceedingly difficult
and contentious.[38]
The Program was introduced at a time when energy prices were much lower and
many businesses had not yet established rigorous processes for identifying
energy efficiency opportunities. Industry today faces a vastly different
regulatory environment, significantly higher energy prices, and is increasingly
equipped with internal processes to identify energy efficiency savings.
2.31
The main point of contention between those in support of the bill and
those opposing it was whether the EEO Program had directly resulted in
additional energy efficiency savings for participants and would continue to do
so in the future. This is
a complex debate giving rise to very different perspectives on the merits or otherwise
of the Program. However, it is clear to the committee that any future gains to
be made under the Program, if they exist, are much smaller and will reduce over
time.
In these circumstances, the committee is of the view that the burden of
compliance costs on industry under the Program must be addressed as a priority.
Feedback from industry strongly supports this course of action and is reflected
in the bill's RIS,
the ACIL Tasman Review, and all submissions received in support of the bill.
2.32
The committee highlights that businesses may still access energy
efficiency information under the EEO Program until it becomes out of date.
Further, if the government's proposed Emissions Reduction Fund is successfully
implemented, businesses will be supported to overcome barriers to investment in
energy efficiency opportunities, rather than just being forced to identify
them.
2.33
In the current climate of high energy prices and following eight years
of improved energy efficiencies in the industry, the committee is confident
that repealing the EEO Program is both cost-effective and the best policy.
Should energy prices decline in the future, industry will be well-equipped to
maintain its existing energy efficiencies and continue to use internal
processes to identify energy efficiency opportunities.
Recommendation
2.34
The committee recommends that the bill be passed.
Senator Sean Edwards
Chair
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